ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, “Global Eagle Entertainment,” “Global Eagle,” the “Company,” “our,” “we,” or “us” and similar terms include Global Eagle Entertainment Inc. and its subsidiaries, unless the context indicates otherwise.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to our expected Adjusted EBITDA, revenue and margin growth in future periods, our aviation-connectivity installations in future periods, the impact of Boeing 737 MAX aircraft grounding on our financial performance, our business and financial-performance outlook, industry, business strategy, plans the potential sale of certain businesses and assets, business and M&A integration activities, operating-expense and cost structure improvements and reductions and our ability to execute and realize the benefits of our cost-savings plans, international expansion, future technologies, future operations, financial covenant compliance, margins, profitability, future efficiencies, liquidity, ability to generate positive cash flow from operating activities, and other financial and operating information. The words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this Form 10-Q.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:
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our ability to timely remediate material weaknesses in our internal control over financial reporting; the effect of those weaknesses on our ability to report and forecast our operations and financial performance; and the impact of our remediation efforts (and associated management time and costs) on our liquidity and financial performance;
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our ability to maintain effective disclosure controls and internal control over financial reporting;
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our ability to execute on our operating-expense and cost-structure realignment plan and realize the benefits of those initiatives;
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our ability to sell certain businesses and/or assets on favorable terms or at all, and our ability to realize the anticipated benefits from any such sales;
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the timing and conditions surrounding the return to service of the Boeing 737 MAX aircraft;
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our ability to properly implement the new leasing standard (ASC 842);
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our dependence on the travel industry;
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future acts or threats of terrorism;
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our ability to obtain new customers and renew agreements with existing customers;
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our customers’ solvency, inability to pay and/or delays in paying us for our services;
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our ability to retain and effectively integrate and train key members of senior management;
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our ability to recruit, train and retain highly skilled technical employees;
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negative external perceptions that damage our reputation among potential customers, investors, employees, advisors and vendors;
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our ability to receive the anticipated cash distributions or other benefits from our investment in the Wireless Maritime Services joint venture;
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customer attrition due to direct arrangements between satellite providers and customers;
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our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited;
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the effect of a variety of complex U.S. and foreign tax laws and regimes due to the global nature of our business;
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our ability to continue to be able to make claims for e-business and multimedia tax credits in Canada;
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our exposure to foreign currency risks;
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the effect of the United Kingdom’s referendum to withdraw from the European Union;
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our dependence on our existing relationship and agreement with Southwest Airlines;
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our need to invest in and develop new broadband technologies and advanced communications and secure networking systems, products and services and antenna technologies as well as their market acceptance;
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increased demand by customers for greater bandwidth, speed and performance and increased competition from new technologies and market entrants;
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our reliance on “sole source” service providers and other third parties for key components and services that are integral to our product and service offerings;
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the potential need to materially increase our investments in product development and equipment beyond our current investment expectations;
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our ability to expand our international operations and the risks inherent in our international operations, especially in light of current trade and national-security disputes between the United States and China (which may adversely impact our ability to conduct business in that market);
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service interruptions or delays, technology failures, damage to equipment or software defects or errors and the resulting impact on our reputation and ability to attract, retain and serve our customers;
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equipment failures or software defects or errors that may damage our reputation or result in claims in excess of our insurance or warranty coverage;
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satellite failures or degradations in satellite performance;
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our ability to integrate businesses or technologies we have acquired or may acquire in the future;
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increased on-board use of personal electronic devices and content accessed and downloaded prior to travel and our ability to compete as a content provider against “over the top” download services and other companies that offer in-flight entertainment products;
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pricing pressure from suppliers and customers in our Media & Content segment and a reduction in the aviation industry’s use of intermediary content service providers (such as us);
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a reduction in the volume or quality of content produced by studios, distributors or other content providers or their refusal to license content or other rights upon terms acceptable to us;
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a reduction or elimination of the time between our receipt of content and it being made available to the rental or home viewing market (
i.e
., the “early release window”);
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increased competition in the in-flight entertainment (“IFE”) and in-flight connectivity (“IFC”) system supply chain;
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our ability to plan expenses and forecast revenue due to the long sales cycle of many of our Media & Content segment’s products;
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the refusal of content providers to license content to us, operational complexity and increased costs or reducing content that we offer due to challenges maintaining and tracking our music content licenses and rights related thereto, which could cause a decline in customer retention or inability to win new business;
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our use of fixed-price contracts for satellite bandwidth and potential cost differentials that may lead to losses if the market price for our services declines relative to our committed cost;
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our use of fixed-price contracts in our Media & Content segment that may lead to losses in the future if the market price for our services declines relative to our committed cost;
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our ability to develop new products or enhance those we currently provide in our Media & Content segment;
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our ability to successfully implement a new enterprise resource planning system;
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the effect on our business and customers due to disruption of the technology systems utilized in our business operations;
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our ability to protect our intellectual property;
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the effect of cybersecurity attacks, data or privacy breaches, data or privacy theft, unauthorized access to our internal systems or connectivity or media and content systems, or phishing or hacking, especially in light of recently publicized security incidents affecting our industry and our systems;
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the costs to defend and/or settle current and potential future civil intellectual property lawsuits (including relating to music and other content infringement) and related claims for indemnification;
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changes in regulations and our ability to obtain regulatory approvals to provide our services or to operate our business in particular countries or territorial waters;
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compliance with U.S. and foreign regulatory agencies, including the Federal Aviation Administration (“FAA”), the U.S. Department of Treasury’s Office of Foreign Asset Control (“OFAC”), Federal Communications Commission (“FCC”), and Federal Trade Commission (“FTC”) and their foreign equivalents in the jurisdictions in which we and our customers operate;
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regulation by foreign government agencies that increases our costs of providing services or requires us to change services:
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changes in government regulation of the Internet, including e-commerce or online video distribution;
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our ability to comply with trade, export, anti-money laundering and anti-bribery practices and data protection laws, especially the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the General Data Protection Regulation;
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changes in foreign and domestic civil aviation authorities’ orders, airworthiness directives, or other regulations that restrict our customers’ ability to operate aircraft on which we provide services;
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our (along with our directors’ and officers’) exposure to civil stockholder litigation relating to our investor disclosures and the related costs of defending and insuring against such litigation;
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uninsured or underinsured costs associated with stockholder litigation and any uninsured or underinsured indemnification obligations with respect to current and former executive officers and directors;
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limitations on our cash flow available to make investments due to our substantial indebtedness and our ability to generate sufficient cash flow to make payments thereon, comply with our reporting and financial covenants, or fund our operations;
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our ability to repay the principal amount of our bank debt, second lien notes due June 30, 2023 (the “Second Lien Notes”) and/or 2.75% convertible senior notes due 2035 (the “Convertible Notes”) at maturity, to raise the funds necessary to settle conversions of our Convertible Notes or to repurchase our Convertible Notes upon a fundamental change or on specified repurchase dates or due to future indebtedness;
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the conditional conversion of our Convertible Notes;
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the effect on our reported financial results of the accounting method for our Convertible Notes;
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the impact of the fundamental change repurchase feature and change of control repurchase feature of the securities purchase agreement governing our Second Lien Notes on our price or potential as a takeover target;
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the dilution or price depression of our common stock that may occur as a result of the conversion of our Convertible Notes and/or Searchlight warrants;
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our ability to meet the continued listing requirements of The Nasdaq Stock Market (“Nasdaq”), in particular given our recent history of delinquent periodic filings with the U.S. Securities and Exchange Commission (“SEC”) and our receipt of a notice from Nasdaq that our stock price does not meet the minimum $1.00 per share stock price requirement pursuant to Nasdaq rules;
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conflicts between our interests and the interests of our largest stockholders;
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volatility of the market price of our securities;
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anti-takeover provisions contained in our charter and bylaws;
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the dilution of our common stock if we issue additional equity or convertible debt securities; and,
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other risks and factors listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 18, 2019 (the “2018 Form 10-K”).
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The forward-looking statements herein speak only as of the date the statements are made as of the filing date of this Form 10-Q. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Overview of the Company
We are a leading provider of media and satellite-based connectivity to fast-growing, global mobility markets across air, sea and land. Our principal operations and decision-making functions are located in North America, South America and Europe. We have two operating segments: Media & Content and Connectivity.
We generate revenue primarily through licensing and related services from our Media & Content segment and from the delivery of satellite-based Internet service and content to the aviation, maritime and land markets and the sale of equipment from our Connectivity segment. Our chief operating decision maker regularly analyzes revenue and profit on a segment basis, and our results of operations and pre-tax income or loss on a consolidated basis in order to understand the key business metrics driving our business.
For the
six months ended June 30,
2019
and
2018
, we reported revenue of
$324.1
million and
$322.5
million, respectively. For the
six months ended June 30,
2019
and
2018
, one airline customer, Southwest Airlines, Inc. (“Southwest Airlines”) accounted for
20%
and
18%
, respectively, of our total revenue.
Opportunities, Challenges and Risks
We believe our operating results and performance are driven by various factors that affect the commercial travel industry and the mobility markets serving hard-to-reach places on land, sea and in the air. These include general macroeconomic trends affecting the mobility markets, such as travel and maritime trends affecting our target user base, regulatory changes, competition and the rate of customer adoption of our services as well as factors that affect Wi-Fi Internet service providers in general. Growth in our overall business is principally dependent upon the number of customers that purchase our services, our ability to negotiate favorable economic terms with our customers and partners and the number of travelers who use our services. Growth in our margins is dependent on our ability to manage the costs associated with implementing and operating our services, including the costs of licensing, procuring and distributing content, equipment and satellite bandwidth service. Our ability to attract and retain customers is highly dependent on our ability to timely implement our services and continually improve our network and operations as technology changes and we experience increased network capacity constraints.
Media & Content Segment
The growth of our Media & Content segment is dependent upon a number of factors, including the growth of IFE systems (including both seatback installed and Wi-Fi IFE systems), our customers’ demand for content and games across global mobility markets, the general availability of content to license from our studio partners, pricing from our competitors and our ability to manage the underlying economics of content licensing by studio. Also, as mobility connectivity services become less costly and capable of faster speeds, the availability of “over the top” services like Netflix represents a potential source of future competition for our Media & Content segment. We believe that customer demand for content and games will continue to grow in the foreseeable future and we intend to capitalize on this opportunity, but our ability to do so in part depends on our ability to harness passenger data and analytics in order to improve and customize our offerings.
Connectivity Segment
In our Connectivity segment, the use of our connectivity equipment on our customers’ aircraft is subject to regulatory approvals, such as a Supplemental Type Certificate, or “STC,” that are imposed by agencies such as the Federal Aviation Administration (“FAA”), the European Aviation Safety Agency (“EASA”) and the Civil Aviation Administration of China (“CAAC”). The costs to obtain and/or validate an STC can be significant and vary by plane type and customer location. We have STCs to operate our equipment on several plane types, including The Boeing Company’s (“Boeing”) 737, 757, 767 and 777 aircraft families, and for the Airbus SE (“Airbus”) A320 aircraft family. While we believe we will be successful in obtaining STC approvals in the future as needed, there is a risk that the applicable regulatory agencies do not approve or validate an STC on a timely basis, if at all, which could negatively impact our growth, relationships and ability to sell our connectivity services. To partially address the risk and costs of obtaining STCs in the future, we signed an agreement with Boeing to offer our connectivity equipment on a “line-fit basis” for Boeing’s 737 and 787 models, and our connectivity equipment became available on a line-fit basis in August 2017 as an option on Boeing 737 airplanes. We are also pursuing line-fit initiatives with other aircraft manufacturers, such as Airbus, in the near term. As a result, we expect to continue to incur significant product development expenses in the foreseeable future as we invest in these long-term line-fit opportunities, which we believe will improve our long-term ability to onboard our connectivity equipment on new plane types in a more scalable and cost-effective manner.
Our Connectivity segment is dependent on satellite-capacity providers for satellite bandwidth and certain equipment and servers required to deliver the satellite stream, rack space at the supplier's data centers to house the equipment and servers and network operations service support. Through our acquisition of Emerging Markets Communications (“EMC”) on July 27, 2016 (the “EMC Acquisition”), we expanded the number of our major suppliers of satellite capacity and became a party to an agreement with Intelsat S.A. We also purchase radomes, satellite antenna systems and rings from key suppliers. Any interruption in supply from these important vendors could have a material impact on our ability to sell equipment and/or provide connectivity services to our customers. In addition, some of our satellite-capacity providers (many of whom are well capitalized) are now entering our markets and have begun competing with our service offerings, which has challenged our business relationships with them and created additional competition in our industry.
The growth of our Connectivity segment is dependent upon a number of factors, including the rates at which we increase the number of installed connectivity systems for new and existing customers, customer demand for connectivity services and the prices at (and pricing models under) which we can offer them, government regulations and approvals, customer adoption, take rates (or overall usage of our connectivity services by end-users), the general availability and pricing of satellite bandwidth globally, pricing pressures from our competitors, general travel industry trends, new and competing connectivity technologies, our ability to manage the underlying economics of connectivity services on a global basis and the security of those systems. The regulatory grounding of Boeing’s 737 MAX aircraft type (“MAX aircraft”) during 2019, which was necessitated by flight incidents beyond our control and unrelated to passenger connectivity systems, imposes certain risks for us. Prior to the grounding, MAX aircraft represented approximately 1% of our total Connectivity service revenue.
The success of our business depends, in part, on the secure and uninterrupted performance of our information technology systems. An increasing number of companies have disclosed cybersecurity breaches, some of which have involved sophisticated and highly targeted attacks on their computer networks. Despite our efforts to prevent, detect and mitigate these threats, including continuously working to install new, and upgrade our existing, information technology systems and increasing employee awareness around phishing, malware, and other cyber risks, there is no guarantee that such measures will be successful in protecting us from a cyber-attack. We will respond to any reported cybersecurity threats as they are identified to us and work with our suppliers, customers and experts to quickly mitigate any threats, but we believe that cybersecurity risks are inherent in our industries and sectors and will continue to represent a significant reputational and business risk to our Connectivity segment’s growth and prospects, and those of our overall industries and sectors.
Our cost of sales, the largest component of our operating expenses, varies from period to period, particularly as a percentage of revenue, based upon the mix of the underlying equipment and service revenue that we generate. Cost of sales also varies period-to-period as we acquire new customers to grow our Connectivity segment. During 2019, we have continued to increase our investment in satellite capacity over North America and the Middle East to facilitate the growth of our existing and new connectivity customer base, which has included purchases of satellite transponders. Depending on the timing of our satellite expenditures, our cost of sales as a percentage of our revenue may fluctuate from period to period.
A substantial amount of our Connectivity segment’s revenue is derived from Southwest Airlines, a U.S. based airline. Our contract with Southwest Airlines provides for a term of services through 2025, and includes a commitment from Southwest for live television services. We have continued to install our connectivity systems on additional Southwest Airlines aircraft. Under the contract, we committed to deploy increased service capacity (and our patented technology) to deliver a significantly enhanced passenger experience. We utilize a “monthly recurring charge” revenue model with Southwest Airlines that provides us with long-term revenue visibility. The contract also provides for additional rate cards for ancillary services and the adoption of a fleet management plan.
We plan to further expand our connectivity operations internationally to address opportunities in non-U.S. markets. As we expand our business further internationally in places such as the Middle East, Europe, Asia Pacific and Latin America, we will continue to incur significant incremental upfront expenses associated with these growth opportunities.
Material Weaknesses
We expect to continue to expend significant time and resources remediating material weaknesses in our internal control over financial reporting. These weaknesses relate to our entity level control environment, financial statement closing and reporting process, intercompany process, business combinations, inventory, content library, internally developed software, long lived assets,
goodwill impairment, accounts payable and accrued liabilities, revenue processes, license fee accruals, income taxes, payroll, treasury, and information technology processes.
We are strongly committed to addressing these material weaknesses, which we believe will strengthen our business as we continue to work on, enhance and implement our remediation plan. However, we are uncertain as to our timing to complete the remediation, the extent to which such efforts will deplete our cash reserves and our ability to succeed in the remediation. If we are unable to establish and maintain effective internal control over financial reporting, we may not be able to detect and prevent a material misstatement in our financial statements, and we may be unable to timely file our periodic SEC reports or identify and forecast certain business trends and certain aspects of our financial performance, which could negatively impact our ability to focus on and achieve our business objectives. See Item 9A: Controls and Procedures of our 2018 Form 10-K for a discussion of our material weaknesses and remediation efforts.
Future Strategic Initiatives
Potential Sales of Certain Business or Assets
As part of 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 (“MEG”) business unit. Based on the preliminary level of interest, we retained a financial advisor in April 2019 to evaluate offers for these non-aviation components of our Connectivity business. We expect to conclude our evaluation during the third quarter. We are also considering the sale of certain joint venture interests, consistent with our strategy to reduce leverage and focus our resources.
Key Components of Consolidated Statements of Operations
There have been no material changes to the key components of our condensed consolidated statements of operations as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Form 10-K.
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our 2018 Form 10-K. There were no other material changes to our critical accounting policies during the
six
months ended
June 30, 2019
.
Recent Accounting Pronouncements
RESULTS OF OPERATIONS
The following tables set forth our results of operations for the periods presented. The information in the tables below should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Form 10-Q. The period-to-period comparisons of financial results in the tables below are not necessarily indicative of future results.
Unaudited Condensed Consolidated Statement of Operations Data (in thousands)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2019
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2018
|
2019
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2018
|
Revenue
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$
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157,467
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|
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$
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165,962
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$
|
324,086
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$
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322,459
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Operating expenses:
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Cost of sales
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124,217
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126,731
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258,411
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245,210
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|
Sales and marketing
|
7,365
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10,877
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15,614
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20,492
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|
Product development
|
6,125
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9,872
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13,104
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18,206
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General and administrative
|
27,161
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|
29,799
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55,141
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68,235
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Provision for (gain from) legal settlements
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25
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(141
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)
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533
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|
375
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|
Amortization of intangible assets
|
7,800
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10,357
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15,599
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20,920
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Total operating expenses (including cost of sales)
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172,693
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187,495
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358,402
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373,438
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Loss from operations
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(15,226
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)
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(21,533
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)
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(34,316
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)
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(50,979
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)
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Other expense
|
(19,917
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)
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(20,655
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)
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(38,306
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)
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|
(34,201
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)
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Loss before income taxes
|
(35,143
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)
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(42,188
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)
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(72,622
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)
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(85,180
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)
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Income tax expense (benefit)
|
3,317
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|
|
3,722
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|
3,447
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|
(987
|
)
|
Net loss
|
$
|
(38,460
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)
|
|
$
|
(45,910
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)
|
$
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(76,069
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)
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|
$
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(84,193
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)
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The following table provides, for the periods presented, the depreciation expense included in the above line items (in thousands):
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|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of sales
|
$
|
8,662
|
|
|
$
|
11,475
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|
|
$
|
17,596
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|
|
$
|
19,557
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|
Sales and marketing
|
912
|
|
|
1,065
|
|
|
1,914
|
|
|
1,830
|
|
Product development
|
772
|
|
|
967
|
|
|
1,607
|
|
|
1,629
|
|
General and administrative
|
3,378
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|
|
2,925
|
|
|
6,760
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|
|
6,099
|
|
Total
|
$
|
13,724
|
|
|
$
|
16,432
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|
|
$
|
27,877
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|
|
$
|
29,115
|
|
The following table provides, for the periods presented, the stock-based compensation expense included in the above line items (in thousands):
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|
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|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Cost of sales
|
$
|
89
|
|
|
$
|
80
|
|
$
|
116
|
|
|
$
|
260
|
|
Sales and marketing
|
34
|
|
|
98
|
|
87
|
|
|
291
|
|
Product development
|
112
|
|
|
139
|
|
180
|
|
|
450
|
|
General and administrative
|
2,092
|
|
|
1,913
|
|
3,233
|
|
|
4,867
|
|
Total
|
$
|
2,327
|
|
|
$
|
2,230
|
|
$
|
3,616
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|
|
$
|
5,868
|
|
The following table provides, for the periods presented, our results of operations, as a percentage of revenue, for the periods presented:
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|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Revenue
|
100
|
%
|
|
100
|
%
|
100
|
%
|
|
100
|
%
|
Operating expenses:
|
|
|
|
|
|
|
Cost of sales
|
79
|
%
|
|
76
|
%
|
80
|
%
|
|
76
|
%
|
Sales and marketing
|
5
|
%
|
|
7
|
%
|
5
|
%
|
|
6
|
%
|
Product development
|
4
|
%
|
|
6
|
%
|
4
|
%
|
|
6
|
%
|
General and administrative
|
17
|
%
|
|
18
|
%
|
17
|
%
|
|
21
|
%
|
Amortization of intangible assets
|
5
|
%
|
|
6
|
%
|
5
|
%
|
|
6
|
%
|
Total operating expenses
|
110
|
%
|
|
113
|
%
|
111
|
%
|
|
116
|
%
|
Loss from operations
|
(10
|
)%
|
|
(13
|
)%
|
(11
|
)%
|
|
(16
|
)%
|
Other expense
|
(13
|
)%
|
|
(12
|
)%
|
(12
|
)%
|
|
(11
|
)%
|
Loss before income taxes
|
(22
|
)%
|
|
(25
|
)%
|
(22
|
)%
|
|
(26
|
)%
|
Income tax expense (benefit)
|
2
|
%
|
|
2
|
%
|
1
|
%
|
|
—
|
%
|
Net loss
|
(24
|
)%
|
|
(28
|
)%
|
(23
|
)%
|
|
(26
|
)%
|
Three Months Ended
June 30, 2019
and
2018
Operating Segments
Segment revenue, expenses and gross margin for the three months ended
June 30, 2019
and
2018
derived from our Media & Content and Connectivity operating segments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
Media & Content
|
|
|
|
Licensing and services
|
$
|
74,013
|
|
|
$
|
83,455
|
|
Connectivity
|
|
|
|
Services
|
71,116
|
|
|
72,973
|
|
Equipment
|
12,338
|
|
|
9,534
|
|
Total
|
83,454
|
|
|
82,507
|
|
Total revenue
|
$
|
157,467
|
|
|
$
|
165,962
|
|
Cost of Sales:
|
|
|
|
Media & Content
|
|
|
|
Licensing and services
|
$
|
57,604
|
|
|
$
|
58,456
|
|
Connectivity
|
|
|
|
Services
|
58,704
|
|
|
63,848
|
|
Equipment
|
7,909
|
|
|
4,427
|
|
Total
|
66,613
|
|
|
68,275
|
|
Total cost of sales
|
$
|
124,217
|
|
|
$
|
126,731
|
|
Gross margin:
|
|
|
|
Media & Content
|
$
|
16,409
|
|
|
$
|
24,999
|
|
Connectivity
|
16,841
|
|
|
14,232
|
|
Total gross margin
|
33,250
|
|
|
39,231
|
|
Other operating expenses
|
48,476
|
|
|
60,764
|
|
Loss from operations
|
$
|
(15,226
|
)
|
|
$
|
(21,533
|
)
|
Revenue
Media & Content
Media & Content operating segment revenue for the three months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Licensing and Services
|
$
|
74,013
|
|
|
$
|
83,455
|
|
|
(11
|
)%
|
Media & Content Licensing and Services Revenue
Media & Content licensing and services revenue decreased by
$9.4 million
, or
11%
, to
$74.0 million
for the three months ended
June 30, 2019
, compared to
$83.5 million
for the three months ended
June 30, 2018
. The decrease was driven by a significant drop in our (i) aviation content service provisioning (“CSP”) revenues, including lab and distribution services, and the (ii) related sales of digital media products, including games & apps (such as our proprietary eMeal Menu, eReader and eShopping). Specifically, our media & content results were impacted by the following:
|
|
•
|
Aviation client wins and losses
: Revenues increased by $4.5 million due to contract wins with certain leading global airlines. This increase was offset by a decrease of $6.8 million attributed to lost revenue from other CSP airline partners mostly operating within the EMEA region.
|
|
|
•
|
Repricing and volume changes
: Revenues decreased by $1.8 million due to repricing of our long-haul contracts with certain CSP airline partners operating within the Asia-Pacific and Americas’ markets. In addition, our distribution service revenues decreased by $3.4 million due to fewer titles offered for the quarter and a $1.1 million decline in games & apps revenues due to lower volume with various global airline partners. Revenues also declined by $0.8 million as a result of our airline partners’ content refresh cycle.
|
Connectivity
Connectivity operating segment revenue for the three months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Services
|
$
|
71,116
|
|
|
$
|
72,973
|
|
|
(3
|
)%
|
Equipment
|
12,338
|
|
|
9,534
|
|
|
29
|
%
|
Total
|
$
|
83,454
|
|
|
$
|
82,507
|
|
|
1
|
%
|
For purposes of our discussions within this MD&A section, we use the Maritime, Enterprise and Government (“MEG”) grouping name, which is a broader business unit encompassing the same entities rolling into the Maritime & Land reporting unit as discussed in
Note 5. Goodwill
.
Connectivity Services Revenue
Services revenue from our Connectivity operating segment decreased by
$1.9 million
, or
3%
, to
$71.1 million
for the three months ended
June 30, 2019
, compared to
$73.0 million
for the three months ended
June 30, 2018
, mainly due to the offsetting effects of the following:
|
|
•
|
Aviation expanded revenue streams
: a $1.2 million increase in our Aviation connectivity revenues is due to: (i) introduction of repair station services, (ii) impact of new CSP airline partners and (iii) increased wifi service offerings, including at major airports in the U.S.; and,
|
|
|
•
|
MEG contract repricing and losses
: a $3.1 million decrease in our MEG connectivity revenues due to: (i) contract renegotiations on major customers in the cruise-line business, (ii) shrinkage in our yacht business (including contract repricing), and (iii) contract losses in certain of our enterprise and government customers.
|
Connectivity Equipment Revenue
Equipment revenue from our Connectivity operating segment increased by
$2.8 million
, or
29%
, to
$12.3 million
for the three months ended
June 30, 2019
, compared to
$9.5 million
for the three months ended
June 30, 2018
. The increase in equipment revenue was primarily due to the following:
|
|
•
|
Aviation equipment shipments
: a $2.0 million increase in our Aviation equipment revenue was primarily due to equipment shipments for major aviation customers; and,
|
|
|
•
|
Maritime equipment activations
: a $0.8 million increase in our MEG equipment revenues due to equipment activations during the quarter for a contract won at the beginning of 2019.
|
Cost of Sales
Media & Content
Media & Content operating segment cost of sales for the three months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Licensing and services
|
$
|
57,604
|
|
|
$
|
58,456
|
|
|
(1
|
)%
|
Media & Content cost of sales decreased by
$0.9 million
, or
1%
, to
$57.6 million
for the three months ended
June 30, 2019
, compared to
$58.5 million
for the three months ended
June 30, 2018
. Notwithstanding the overall
11%
decrease in revenues, the cost of sales as a percentage of Media & Content revenues increased to
78%
for the three months ended
June 30, 2019
, compared to
70%
for the three months ended
June 30, 2018
. This was primarily attributable to increased pricing pressure, mix of contents consumed and one-time items, which resulted in a decline in our gross margin by 8%.
Connectivity
Cost of sales for our Connectivity operating segment for the three months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Services
|
$
|
58,704
|
|
|
$
|
63,848
|
|
|
(8
|
)%
|
Equipment
|
7,909
|
|
|
4,427
|
|
|
79
|
%
|
Total
|
$
|
66,613
|
|
|
$
|
68,275
|
|
|
(2
|
)%
|
Connectivity services cost of sales decreased by
$5.1 million
, or
8%
, to
$58.7 million
for the three months ended
June 30, 2019
, compared to
$63.8 million
for the three months ended
June 30, 2018
, mainly due to the offsetting effects of the following:
|
|
•
|
Aviation license and bandwidth cost increase
: a $5.4 million increase in our Aviation cost of sales due to: (i) higher license fees to content providers and (ii) higher costs related to increased satellite capacity to support most recent wins in our aviation business; and,
|
|
|
•
|
Maritime bandwidth cost decrease
: a $10.6 million decrease in our MEG cost of sales is due to lower satellite bandwidth and communication costs in our cruise and yacht connectivity businesses as the Company continues to negotiate more favorable rates with our satellite vendors.
|
As a percentage of Connectivity services revenue, Connectivity service cost of sales decreased to
83%
during the three months ended
June 30, 2019
, compared to
87%
for the three months ended
June 30, 2018
. This decrease is a reflection of our continued efforts to re-negotiate existing bandwidth arrangements with satellite vendors for more favorable rates.
Connectivity equipment cost of sales increased by
$3.5 million
, or
79%
, to
$7.9 million
for the three months ended
June 30, 2019
compared to
$4.4 million
for the three months ended
June 30, 2018
, mainly due to the following:
|
|
•
|
Aviation equipment cost increase
: a $2.9 million increase in our Aviation cost of sales refers to the cost of equipment deliveries for major customers; and,
|
|
|
•
|
Maritime equipment cost increase
: $0.5 million increase in our MEG cost of sales mainly represents the cost of equipment activations during the current quarter for a contract won at the beginning of 2019.
|
As a percentage of Connectivity equipment revenue, Connectivity equipment cost of sales increased as a percentage of Connectivity Equipment revenue to
64%
during the three months ended
June 30, 2019
, compared to
46%
for the three months ended
June 30, 2018
. The increase in cost as a percentage of revenue was primarily driven by Company’s strategy to sell certain of our equipment at a discount in order to gain market share.
Other Operating Expenses
Other operating expenses for the three months ended
June 30, 2019
and
2018
were as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Sales and marketing
|
$
|
7,365
|
|
|
$
|
10,877
|
|
|
(32
|
)%
|
Product development
|
6,125
|
|
|
9,872
|
|
|
(38
|
)%
|
General and administrative
|
27,161
|
|
|
29,799
|
|
|
(9
|
)%
|
Provision for (gain from) legal settlements
|
25
|
|
|
(141
|
)
|
|
(118
|
)%
|
Amortization of intangible assets
|
7,800
|
|
|
10,357
|
|
|
(25
|
)%
|
Total
|
$
|
48,476
|
|
|
$
|
60,764
|
|
|
(20
|
)%
|
Sales and Marketing
Sales and marketing expenses decreased by
$3.5 million
, or
32%
, to
$7.4 million
for the three months ended
June 30, 2019
, compared to
$10.9 million
for the three months ended
June 30, 2018
. The decrease can be attributed to a $1.9 million decrease in employee cost due to headcount reduction. The remaining $1.7 million decrease was due to: (i) lower professional services relating to outside marketing consultants, and (ii) reduction in travel and entertainment expenses.
Product Development
Product development expenses decreased by
$3.7 million
, or
38%
, to
$6.1 million
for the three months ended
June 30, 2019
, compared to
$9.9 million
for the three months ended
June 30, 2018
. The decrease can be attributed to a $2.3 million decrease in employee cost due to headcount reduction. The remaining $1.3 million decrease was due to: (i) lower professional services from reduction in outside consultants, and (ii) reduction in travel and entertainment expenses.
General and Administrative
General and administrative costs decreased by
$2.6 million
, or
9%
, to
$27.2 million
during the three months ended
June 30, 2019
, compared to
$29.8 million
for the three months ended
June 30, 2018
. The decrease can be attributed to: (i) $1.6 million decrease in employee cost resulting from headcount reduction, and (ii) lower professional and outside services costs by $1.1 million, including reductions in advisory services, audit fees, legal fees and outside contractors.
These decreases in our functional non-segment costs, including sales and marketing, product development and general & administration, are positive reflections of our operating expense savings initiatives, which started in 2018 and included the simplification of our management structure and global footprint consolidation.
Provision for Legal Settlements
The provision for legal settlements in the three months ended
June 30, 2019
and
June 30, 2018
remained flat. See
Note 10. Commitments and Contingencies
to our unaudited condensed consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a summary of our ongoing litigation and other legal claims.
Amortization of Intangible Assets
Amortization expense decreased
$2.6 million
, or
25%
, to
$7.8 million
during the three months ended
June 30, 2019
, compared to
$10.4 million
for the three months ended
June 30, 2018
. The decrease was due to a portion of our acquired intangible assets from prior acquisitions becoming fully amortized during the period.
Other (Expense) Income, net
Other expense for the three months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Interest expense, net
|
$
|
(22,329
|
)
|
|
$
|
(19,755
|
)
|
|
13
|
%
|
Income from equity method investments
|
2,517
|
|
|
428
|
|
|
488
|
%
|
Change in fair value of derivatives
|
—
|
|
|
(655
|
)
|
|
(100
|
)%
|
Other expense, net
|
(105
|
)
|
|
(673
|
)
|
|
(84
|
)%
|
Total
|
$
|
(19,917
|
)
|
|
$
|
(20,655
|
)
|
|
(4
|
)%
|
Other expense, net decreased
$0.7 million
, or
4%
, to
$19.9 million
for the three months ended
June 30, 2019
, compared to other expense of
$20.7 million
for the three months ended
June 30, 2018
. This was driven primarily by higher income from our equity method investments of
$2.1 million
, offset by an increase in net interest expense of
$2.6 million
, or
13%
, attributed to the Second Lien Notes. In addition, other (expense) income, net, decreased by
$0.6 million
, due to fluctuations in foreign currency and decreased by $0.7 million as a result of changes in the fair value of the derivative liability which is driven by our stock price volatility.
Income Tax Expense
The Company recorded income tax provisions of $3.3 million and $3.7 million for the three months ended June 30, 2019 and 2018, respectively. The tax provision for the three months ended June 30, 2019 is primarily attributable to the effects of foreign tax rate differences, foreign withholding taxes and changes in valuation allowance. The tax provision during the three months ended June 30, 2018 was primarily attributable to the effects of foreign tax rate differences, foreign withholding taxes, changes in unrecognized tax benefits, and changes in valuation allowance.
Six-Months Ended
June 30, 2019
and
2018
Operating Segments
Segment revenue, expenses and gross margin for the six months ended
June 30, 2019
and
2018
derived from our Media & Content and Connectivity operating segments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
Media & Content
|
|
|
|
Licensing and services
|
$
|
154,023
|
|
|
$
|
158,369
|
|
Connectivity
|
|
|
|
Services
|
141,584
|
|
|
144,585
|
|
Equipment
|
28,479
|
|
|
19,505
|
|
Total
|
170,063
|
|
|
164,090
|
|
Total revenue
|
$
|
324,086
|
|
|
$
|
322,459
|
|
Cost of Sales:
|
|
|
|
Media & Content
|
|
|
|
Licensing and services
|
$
|
115,273
|
|
|
$
|
112,910
|
|
Connectivity
|
|
|
|
Services
|
124,304
|
|
|
121,885
|
|
Equipment
|
18,834
|
|
|
10,415
|
|
Total
|
143,138
|
|
|
132,300
|
|
Total cost of sales
|
$
|
258,411
|
|
|
$
|
245,210
|
|
Gross margin:
|
|
|
|
Media & Content
|
$
|
38,750
|
|
|
$
|
45,459
|
|
Connectivity
|
26,925
|
|
|
31,790
|
|
Total gross margin
|
65,675
|
|
|
77,249
|
|
Other operating expenses
|
99,991
|
|
|
128,228
|
|
Loss from operations
|
$
|
(34,316
|
)
|
|
$
|
(50,979
|
)
|
Revenue
Media & Content
Media & Content operating segment revenue for the six months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Licensing and services
|
$
|
154,023
|
|
|
$
|
158,369
|
|
|
(3
|
)%
|
Media & Content Licensing and Services Revenue
Media & Content licensing and services revenue decreased by
$4.3 million
, or
3%
, to
$154.0 million
for the six months ended
June 30, 2019
, compared to
$158.4 million
for the three months ended
June 30, 2018
. This decline was driven by a drop in our (i) aviation CSP revenues, including lab and distribution services, and the (ii) related sales of digital media products, including games & apps. Specifically, our media & content results were impacted by the following:
|
|
•
|
Aviation client wins and losses
: Revenues increased by $6.9 million due to contract wins with certain leading global airlines, which was offset by a decrease of $9.0 million of revenue attributed to recent losses with CSP airline partners operating within the EMEA region.
|
|
|
•
|
Repricing and volume changes
: Revenues decreased by $3.4 million due to fewer Hollywood content offerings for an Asian partner airline, which was offset by an increase of $2.4 million in revenue due to increases in content budgets for other global airline partners.
|
Connectivity
Connectivity operating segment revenue for the six months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Services
|
$
|
141,584
|
|
|
$
|
144,585
|
|
|
(2
|
)%
|
Equipment
|
28,479
|
|
|
19,505
|
|
|
46
|
%
|
Total
|
$
|
170,063
|
|
|
$
|
164,090
|
|
|
4
|
%
|
Connectivity Services Revenue
Services revenue from our Connectivity operating segment decreased by
$3.0 million
, or
3%
, to
$141.6 million
for the six months ended
June 30, 2019
, compared to
$144.6 million
for the six months ended
June 30, 2018
, mainly due to the offsetting effects of the following:
|
|
•
|
Aviation expanded revenue stream and volume
: a $3.1 million increase in our Aviation connectivity revenues due to: (i) introduction of repair station stream services, and (ii) growth from new CSP airline partners; offset by,
|
|
|
•
|
MEG contract repricing and losses
: a $6.1 million decrease in our MEG connectivity revenues due to: (i) contract renegotiation for two (2) major customers in the cruise-line business, (ii) shrinkage in our yacht business, and (iii) contract losses in certain of our enterprise customers.
|
Connectivity Equipment Revenue
Equipment revenue from our Connectivity operating segment increased by
$9.0 million
, or
46%
, to
$28.5 million
for the six months ended
June 30, 2019
, compared to
$19.5 million
for the six months ended
June 30, 2018
. The increase in equipment revenue was primarily due to the following:
|
|
•
|
Aviation equipment shipments
: a $8.5 million increase in our Aviation equipment revenue was primarily due to an increase in equipment shipments for major aviation customers, when compared to the prior year six months ended June 30; and,
|
|
|
•
|
Maritime equipment activations
: a $0.5 million increase in MEG equipment revenues due to equipment activations during the current year for a contract won at the beginning of 2019.
|
Cost of Sales
Media & Content
Media & Content operating segment cost of sales for the six months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Licensing and services
|
$
|
115,273
|
|
|
$
|
112,910
|
|
|
2
|
%
|
Media & Content cost of sales increased by
$2.4 million
, or
2%
, to
$115.3 million
for the six months ended
June 30, 2019
, compared to
$112.9 million
for the six months ended
June 30, 2018
. The cost of sales as a percentage of Media & Content revenues was at
75%
and
71%
for the six months ended
June 30, 2019
and March 31, 2018. The increase can be attributed to a $2.2 million increase in audio cost.
Connectivity
Cost of sales for our Connectivity operating segment for the six months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Services
|
$
|
124,304
|
|
|
$
|
121,885
|
|
|
2
|
%
|
Equipment
|
18,834
|
|
|
10,415
|
|
|
81
|
%
|
Total
|
$
|
143,138
|
|
|
$
|
132,300
|
|
|
8
|
%
|
Connectivity services cost of sales increased by
$2.4 million
, or
2%
, to
$124.3 million
for the six months ended
June 30, 2019
, compared to
$121.9 million
for the six months ended
June 30, 2018
, mainly due to the offsetting effects of the following:
|
|
•
|
Aviation bandwidth cost increase
: a $10.5 million increase in Aviation cost of sales is due to higher cost for our satellite bandwidth capacity costs; and,
|
|
|
•
|
Maritime bandwidth cost decrease
: a $8.5 million decrease in our MEG segment due to lower satellite bandwidth and communication costs in our cruise and yacht connectivity businesses, including a favorable lease re-pricing for one of our satellite vendors.
|
As a percentage of Connectivity services revenue, Connectivity service cost of sales increased to
88%
during the six months ended
June 30, 2019
, compared to
84%
for the six months ended
June 30, 2018
. This was a result of the offsetting effects of: (i) our increased investment in satellite network capacity to support increased bandwidth requirements of existing customers and to fulfill new customer installations during the quarter, and offset partially by (ii) our continued efforts to re-negotiate existing bandwidth arrangements with satellite vendors for more favorable rates.
Connectivity equipment cost of sales increased by
$8.4 million
, or
81%
, to
$18.8 million
for the six months ended
June 30, 2019
compared to
$10.4 million
for the six months ended
June 30, 2018
, due to the offsetting effects of the following:
|
|
•
|
Aviation equipment cost increase
: a $9.0 million increase in our Aviation cost of sales refers to the cost of equipment deliveries for our major customers; and,
|
|
|
•
|
Maritime equipment cost decrease
: a $0.6 million decrease in our MEG cost of sales due to lower inventory cost.
|
As a percentage of Connectivity equipment revenue, Connectivity equipment cost of sales increased to
66%
during the six months ended
June 30, 2019
, compared to
53%
for the three months ended
June 30, 2018
. The 13% increase in equipment cost as a percentage of revenue was primarily driven by the Company’s strategy to sell certain of our aviation equipment at a discount.
Other Operating Expenses
Other operating expenses for the six months ended
June 30, 2019
and
2018
were as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Sales and marketing
|
$
|
15,614
|
|
|
$
|
20,492
|
|
|
(24
|
)%
|
Product development
|
13,104
|
|
|
18,206
|
|
|
(28
|
)%
|
General and administrative
|
55,141
|
|
|
68,235
|
|
|
(19
|
)%
|
Provision for (gain from) legal settlements
|
533
|
|
|
375
|
|
|
42
|
%
|
Amortization of intangible assets
|
15,599
|
|
|
20,920
|
|
|
(25
|
)%
|
Total
|
$
|
99,991
|
|
|
$
|
128,228
|
|
|
(22
|
)%
|
Sales and Marketing
Sales and marketing expenses decreased by
$4.9 million
, or
24%
, to
$15.6 million
for the six months ended
June 30, 2019
, compared to
$20.5 million
for the six months ended
June 30, 2018
. The decrease can be attributed to: (i) $1.8 million decrease in employee cost due to headcount reduction, (ii) lower professional services by $1.1 million due to a reduction in outside marketing consultants, (iii) a $1.3 million reduction in travel and entertainment expenses, and (iv) $0.8 million decline in advertising expenses, all consistent with our cost reduction initiatives.
Product Development
Product development expenses decreased by
$5.1 million
, or
28%
, to
$13.1 million
for the six months ended
June 30, 2019
, compared to
$18.2 million
for the six months ended
June 30, 2018
. The decrease can be attributed to: (i) a $2.6 million decrease in employee cost due to headcount reduction, (ii) lower professional services by $1.6 million due to reduction in outside consultants, and (iii) a $0.8 million reduction in facilities expenses.
General and Administrative
General and administrative costs decreased by
$13.1 million
, or
19%
, to
$55.1 million
during the six months ended
June 30, 2019
, compared to
$68.2 million
for the six months ended
June 30, 2018
. The decrease can be attributed to: (i) a $5.3 million decrease in employee cost resulting from headcount reduction, (ii) lower professional services by $9.6 million due to reduction in outside consultants, (iii) a $1.1 million reduction in travel and entertainment expenses, offset by a $1.2 million increase in other general and administrative expenses which was primarily severance and employee costs.
These decreases are positive indicators of our operating expense savings initiatives, which started in 2018 and included simplification of our management structure and global footprint consolidation.
Provision for Legal Settlements
The provision for legal settlements in the six months ended
June 30, 2019
and
June 30, 2018
remained flat. See
Note 10. Commitments and Contingencies
to our unaudited condensed consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a summary of our ongoing litigation and other legal claims.
Amortization of Intangible Assets
Amortization expense decreased
$5.3 million
, or
25%
, to
$15.6 million
during the six months ended
June 30, 2019
, compared to
$20.9 million
for the six months ended
June 30, 2018
. The decrease was due to a portion of our acquired intangible assets from prior acquisitions becoming fully amortized during the period.
Other (Expense) Income, net
Other expense for the six months ended
June 30, 2019
and
2018
was as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Change
|
Interest expense, net
|
$
|
(43,606
|
)
|
|
$
|
(35,352
|
)
|
|
23
|
%
|
Income from equity method investments
|
4,646
|
|
|
1,589
|
|
|
192
|
%
|
Change in fair value of derivatives
|
938
|
|
|
(91
|
)
|
|
(1,131
|
)%
|
Other expense, net
|
(284
|
)
|
|
(347
|
)
|
|
(18
|
)%
|
Total
|
$
|
(38,306
|
)
|
|
$
|
(34,201
|
)
|
|
12
|
%
|
Other expense, net increased by
$4.1 million
, or
12%
, to
$38.3 million
for the six months ended
June 30, 2019
, compared to other expense of
$34.2 million
for the six months ended
June 30, 2018
. The increase was driven by an increase in interest expense of
$8.3 million
, or
23%
, during the six months ended
June 30, 2019
, mainly as a result of an increase in borrowings and accretion on our debt discount. This was offset by an increase of
$3.1 million
in income from our equity method investments and a $1.0 million change in the fair value of derivatives which is driven by our stock price volatility.
Income Tax Expense
The Company recorded an income tax provision of $3.4 million and an income tax benefit of $1.0 million for the six months ended June 30, 2019 and 2018, respectively. The tax provision during the six months ended June 30, 2019 was primarily attributable to foreign tax rate differences, foreign withholding taxes, basis difference in convertible debt, and effects of permanent differences. The tax benefit during the six months ended June 30, 2018 was primarily attributable to the realizable benefit against the Company’s deferred tax liabilities that can be reduced by the U.S. federal indefinite life net operating loss and interest expense carryover that are no longer subject to expiration pursuant to the Tax Cuts and Jobs Act of 2017.
During the six months ended June 30, 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.
Financial Condition, Liquidity and Capital Resources
Selected financial data for the periods presented below were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Cash and cash equivalents
|
$
|
10,853
|
|
|
$
|
39,154
|
|
Total assets
|
702,929
|
|
|
717,087
|
|
Current portion of long-term debt
|
17,005
|
|
|
22,673
|
|
Long-term debt
|
713,281
|
|
|
686,938
|
|
Total stockholders’ deficit
|
$
|
(300,530
|
)
|
|
$
|
(226,335
|
)
|
Current Financial Condition
The following reflects the financial condition of our business and operations as of
June 30, 2019
as well as material developments relating thereto through the date of filing of this Form 10-Q.
As of
June 30, 2019
, our principal sources of liquidity were our cash and cash equivalents (unrestricted) of approximately
$10.9 million
and the available capacity under in our loans under our revolving credit facility (the “2017 Revolving Loans”) availability of approximately $38.9 million, for a total liquidity of approximately $49.8 million. In addition, we had approximately
$1.2 million
of restricted cash (which amount is excluded from the
$10.9 million
of cash and cash equivalents noted in the table above), which was attached to the letters of credit between our subsidiaries and certain customers. Our cash is invested primarily in cash and money market funds in banking institutions in the U.S., Canada and Europe and to a lesser extent in Asia Pacific. Our total debt balance increased from
$709.6 million
at
December 31, 2018
to
$730.3 million
at
June 30, 2019
. This was primarily driven by the financing of our operating losses and purchase of satellite transponders.
As of
June 30, 2019
, we had
$448.7 million
aggregate principal amount, net of discounts, in senior secured term loans (the “2017 Term Loans”) outstanding under our senior secured credit agreement (the “2017 Credit Agreement”);
$42.4 million
drawn under the 2017 Revolving Loans (excluding approximately
$3.7 million
in letters of credit outstanding thereunder) with remaining availability thereunder of approximately $38.9 million as of
June 30, 2019
;
$168.0 million
aggregate principal amount of outstanding Second Lien Notes, which amount includes
$9.5 million
of payment-in-kind (“PIK”) interest converted to principal during the six months ended
June 30, 2019
;
$82.5 million
aggregate principal amount of 2.75% convertible senior notes due 2035; and other debt outstanding of
$29.8 million
. 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. Please see
Note 8. Financing Arrangements
to our unaudited condensed consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a tabular presentation of our indebtedness.
On July 19, 2019, we entered into the 2017 Credit Agreement Amendment, which, among other things, upsized the Term Loans by $40 million, reduced scheduled principal repayments over the next six quarters by an aggregate amount of approximately $26 million and provided additional stock pledges (including the remaining 35% of the equity interests of first tier foreign subsidiaries that were previously not pledged) as collateral. Net of fees and expenses, the 2017 Credit Agreement Amendment will result in approximately $61.0 million of incremental liquidity over the next 18 months, of which approximately $54.0 million will be realized within the next twelve months. Concurrently with entering into the 2017 Credit Agreement Amendment, we also entered into the Second Lien Amendment relating to the Second Lien Notes, which, among other things, removed the ability to make any cash interest payments under the Second Lien Notes so long as such payments are prohibited by the terms of the 2017 Credit Agreement, added collateral for the Second Lien Notes consistent with the additional collateral provided under the 2017 Credit Agreement and modified the prepayment premium schedule.
Our cash flows from operating activities are significantly affected by our investments in operations, including working capital and corporate infrastructure to support our ability to generate revenue and conduct operations through cost of services, product development, sales and marketing, and general and administrative activities. Net cash provided by and used in operations was
$2.0 million
and
$42.8 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Working capital deficiency increased to $70.2 million as of June 30, 2019 due to a net loss of $76.1 million for the first half of 2019.
Cash used in investing activities has historically been, and is expected to continue to be, impacted significantly by our investments in our platform, our infrastructure and equipment for our business offerings and resources to remediate material weaknesses.
During the
six
months ended
June 30, 2019
, we had additional borrowings from our revolver credit facility as well as borrowings in lieu of future potential dividend distribution from Wireless Maritime Services, LLC (an equity investment). In the
six
months ended
June 30, 2019
, cash provided by financing activities was used to fund our operating losses as our operating and investing cash flows were negatively impacted by incremental working capital needs and additional capital expenditures as we continued to restructure our operations and ramp up our business for both new customer wins and volume and capacity growth with our existing customers, while ensuring to comply with the recurring repayment terms of our revolving credit facility.
As of
June 30, 2019
, our consolidated unrestricted cash balance was approximately
$10.9 million
, of which approximately
$7.1 million
was held by our non-U.S. subsidiaries. If we decide to repatriate our non-U.S. cash holdings, we may incur a tax liability under U.S. tax laws on any amount that we repatriate into the U.S. 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 U.S. tax owed on repatriated income. As a result, we do not expect any such repatriation would create a tax liability in the U.S. or have a material impact on our effective tax rate.
We expect that the Amendment, our available cash balances, available capacity under the 2017 Revolving Loans and cash flows from operations (including the impact of increased revenue from new contract wins) will provide sufficient liquidity to fund our current obligations and projected working capital and capital expenditure requirements for at least the next 12 months. To strengthen our current liquidity position and to fund our ongoing operations and/or enable us to invest in new business opportunities, we have implemented cost reduction initiatives and/or may raise additional funds through asset sales, commercial financings, new revolving and term-loan facilities and the issuance of bonds, debentures and equity and equity-linked securities (in public or private offerings). However, market conditions, our future financial performance, and our history of delays in filing our periodic SEC reports, among other factors, may make it difficult or impossible for us to access debt or equity sources of capital, on favorable terms or at all, should we determine in the future to raise additional funds through these methods.
On February 22, 2019, we announced that we have been implementing an operating expense savings initiative, which includes global footprint consolidation, simplification of our management structure, additional cost controls, IT programs that will increase efficiency and automation, and other operating expense reductions. In connection with this initiative, on February 5, 2019, we committed to reduce our global workforce by approximately 15% and communicated this determination to our employees on February 20, 2019. The changes to our workforce will vary by country, based on legal requirements and required consultations with works councils and other employee representatives, as appropriate. We estimate that we will generate approximately $20 million in annual savings and will incur total expenses relating to the workforce reduction of approximately $4.5 million, all of which represents cash expenditures relating to severance and transition-related expenses. We recorded substantially all of this amount in the first quarter of 2019, with the remainder to follow in the second and third quarters of 2019.
On April 10, 2019, S&P Global downgraded the Company’s credit rating by two notches from B- to CCC. On July 1, 2019, Moody’s upgraded the Company’s credit rating to B3.
Our assessment that we will have sufficient liquidity to continue as a going concern for at least the next 12 months is based on access to the remaining availability under our 2017 Revolving Loans (which availability as of June 30, 2019 was $38.9 million), and on underlying estimates and assumptions, including that we: (i) timely service our indebtedness and comply with the covenants (including the financial reporting covenants) in the agreements governing our indebtedness; and (ii) remain listed on Nasdaq, including by maintaining a minimum $1.00 per-share stock price requirement pursuant to Nasdaq’s listing rules.
Since March 26, 2019, our common stock has been trading below the minimum bid price of $1.00 per share required by Nasdaq’s listing rules. On May 9, 2019, we received a letter (“Notice”) from Nasdaq’s Listing Qualifications staff indicating that, based on the closing bid price of our common stock for the 30 trading days prior to our receipt of the Notice, we no longer met Nasdaq’s minimum bid price requirement. The Notice does not result in the immediate delisting of our common stock from Nasdaq. In accordance with Nasdaq rules, we have 180 calendar days from the date of the Notice in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we (i) meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) provide written notice to Nasdaq of our intent to cure the deficiency
during this second compliance period, including by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that we will not be eligible for the additional compliance period and our common stock will be subject to delisting. We would then be entitled to appeal the determination to a Nasdaq Listing Qualifications Panel and request a hearing.
We will consider our available options to regain compliance. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements. A delisting of our common stock from Nasdaq would constitute a “fundamental change” under the terms of the indenture governing the Convertible Notes. This would give the holders of the Convertible Notes the option to require us 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, we may not able to repurchase such tendered notes.
If we are unable to service our indebtedness or satisfy the covenants (including the financial reporting covenants) in the agreements governing our indebtedness (or obtain additional waivers (if needed)), our lenders and noteholders have the option to immediately accelerate all outstanding indebtedness, which we may not have the ability to repay. We intend to satisfy our current debt service obligations with our existing cash and cash equivalents and through accessing our 2017 Revolving Loans. In the event of an acceleration event or repurchase event (such as would be triggered in the event that we are delisted from Nasdaq in the future), we may not have sufficient funds and may be unable to arrange for additional financing on acceptable terms, or at all, to pay the amounts due under our existing debt instruments.
Cash and Cash Equivalents
Our cash and cash equivalents are maintained at several financial institutions. Deposits held may exceed the amount of insurance provided on such deposits. Generally, our deposits may be redeemed upon demand and are maintained with a financial institution of reputable credit and, therefore, bear minimal credit risk. As of
June 30, 2019
, and
December 31, 2018
, approximately
$7.1 million
and
$17.7 million
of our cash and cash equivalents, respectively, were held by our foreign subsidiaries.
Sources and Uses of Cash—
Six Months Ended
June 30, 2019
and
2018
A summary of our cash flow activities for the
six
months ended
June 30, 2019
and
2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
Net cash provided by/(used in) operating activities
|
$
|
1,972
|
|
|
$
|
(42,827
|
)
|
Net cash used in investing activities
|
(13,442
|
)
|
|
(24,472
|
)
|
Net cash (used in)/provided by financing activities
|
(16,659
|
)
|
|
58,320
|
|
Effects of exchange rate changes on cash, cash equivalents and restricted cash
|
199
|
|
|
(96
|
)
|
Net decrease in cash, cash equivalents and restricted cash
|
(27,930
|
)
|
|
(9,075
|
)
|
Cash, Cash Equivalents and Restricted Cash at January 1
|
39,955
|
|
|
51,868
|
|
Cash, Cash Equivalents and Restricted Cash at June 30
|
$
|
12,025
|
|
|
$
|
42,793
|
|
Cash Flows Provided by/(Used in) Operating Activities
Six Months Ended June 30,
2019
Net cash provided by our operating activities of
$2.0 million
primarily reflects a decrease in accounts receivable due to improvement in our collection efforts, offset by our net loss of
$76.1 million
during the period, which included net non-cash charges of
$60.1 million
primarily related to depreciation and amortization expenses of
$43.5 million
and other items netting to a charge of
$16.6 million
.
The remainder of our sources of cash used in operating activities was a result of positive net cashflows of
$12.9 million
resulting from changes in working capital balances, predominantly driven by advanced billings made on aviation contracts won recently, and negotiated longer payment terms for one of our satellite bandwidth capacity arrangements.
Six Months Ended June 30, 2018
Net cash used in our operating activities of $42.8 million primarily reflects our net loss of $84.2 million during the period, which included net non-cash charges of $59.2 million primarily related to depreciation and amortization expenses of $50.0 million and other items netting to a charge of $9.2 million.
The remainder of our sources of cash used in operating activities was as a result of net cash outflows of $17.9 million resulting from changes in working capital balances, predominantly driven by cash outflows due to a reduction in accounts payable balances as well as an increase in inventory due to additional equipment purchased for new customers and an increase in our content library. This was partially offset by cash inflows as a result of a decrease in accounts receivables due to improved collections.
Cash Flows Used in Investing Activities
Six Months Ended June 30,
2019
Net cash used in investing activities during the
six months ended June 30, 2019
of
$13.4 million
was due to purchases of property and equipment, principally relating to the purchase of expanded connectivity infrastructure to support our growth.
Six Months Ended June 30, 2018
Net cash used in investing activities during the six months ended June 30, 2018 of $24.5 million was due to purchases of property, and equipment, principally relating to the transponders purchased and expanding connectivity infrastructure.
Cash Flows Provided by/(Used in) Financing Activities
Six Months Ended June 30,
2019
Net cash used by financing activities of
$16.7 million
was primarily due to higher repayments over borrowings under our 2017 Revolving Loans and installment payments on additional transponder purchases during the first quarter of 2019 made through financing arrangements. We also had borrowings from related parties of
$7.4 million
during the 1st quarter, as further detailed in
Note 9. Related Party Transactions
. Further, we borrowed
$34.7 million
on the 2017 Revolving Loans which was offset by repayments of
$46.3 million
on the 2017 Revolving Loans, as well as additional repayments of indebtedness in the amount of
$9.4 million
.
Six Months Ended June 30, 2018
Net cash provided by financing activities of $58.3 million was primarily due to net proceeds of $143.0 million received in connection with the Searchlight investment. This was partially offset by the repayment in full of our senior secured revolving credit facility in the amount of $78.0 million and principal payments on our senior secured term loan facility and other debts of approximately $6.7 million.
Long-Term Debt
As of
June 30, 2019
and
December 31, 2018
, our long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Senior secured term loan facility, due January 2023
|
$
|
468,750
|
|
|
$
|
478,125
|
|
Senior secured revolving credit facility, due January 2022
|
42,415
|
|
|
54,015
|
|
Second lien notes, due June 2023
|
167,957
|
|
|
158,450
|
|
2.75% convertible senior notes due 2035
|
82,500
|
|
|
82,500
|
|
Other debt
|
29,847
|
|
|
1,707
|
|
Unamortized bond discounts, fair value adjustments and issue costs, net
|
(61,183
|
)
|
|
(65,186
|
)
|
Total carrying value of debt
|
730,286
|
|
|
709,611
|
|
Less: current portion, net
|
(17,005
|
)
|
|
(22,673
|
)
|
Total non-current
|
$
|
713,281
|
|
|
$
|
686,938
|
|
The aggregate contractual maturities of all borrowings as of
June 30, 2019
were as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019 (remaining six months)
|
$
|
11,133
|
|
2020
|
29,430
|
|
2021
|
25,041
|
|
2022
|
67,457
|
|
2023
|
575,500
|
|
Thereafter
|
82,908
|
|
Total
|
$
|
791,469
|
|
The previous table excludes future purchase commitments with some of our connectivity vendors to secure future inventory for our airline customers and commitments related to ongoing engineering and antenna projects. At
June 30, 2019
, we also had outstanding letters of credit in the amount of
$4.2 million
, of which
$3.7 million
was issued under the letter of credit facility under the 2017 Credit Agreement.
As market conditions warrant, we may from time to time seek to purchase or otherwise retire our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the documents governing our indebtedness, any purchase or retirement made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt. The amounts involved in any such transactions, individually or in the aggregate, may be material. Any such purchase may be with respect to a substantial amount of a particular class of debt, with the attendant reduction in the trading liquidity of such class. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.
Covenant Compliance Under the 2017 Credit Agreement
Under the 2017 Credit Agreement, we are subject to a financial-reporting covenant (“Financial Reporting Covenant”) and a maximum leverage ratio covenant (the “Leverage Ratio”), each of which is described in more detail in our 2018 Form 10-K, in addition to other customary covenants and restrictions set forth therein.
As of
June 30, 2019
, we were in compliance with all financial and non-financial covenants under the 2017 Credit Agreement, including the Financial Reporting and Leverage Ratio covenants, and based on our current projections, we expect to remain in compliance with such covenants for at least the next 12 months.
You should also refer to the section titled “Risks Related to Our Indebtedness” in Part I, Item 1A. Risk Factors in our 2018 Form 10-K, for an explanation of the consequences of our failure to satisfy these covenants.
Contractual Obligations
For a discussion of movie license and Internet protocol television commitments, minimum lease obligations, satellite capacity, and other contractual commitments as of
June 30, 2019
and for periods subsequent thereto, see
Note 10. Commitments and Contingencies
to the unaudited condensed consolidated financial statements (contained in Part I, Item 1 of this Form 10-Q) for a discussion.
Off -Balance Sheet Arrangements
As of
June 30, 2019
, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.