Notes to Consolidated Financial Statements
Note 1. Business
Global Eagle Entertainment Inc. is a Delaware corporation headquartered in Los Angeles, California. Global Eagle (together with its subsidiaries, “Global Eagle”, or the “Company”) is a leading provider of media and satellite-based connectivity to fast growing, global mobility markets across air, land and sea. Global Eagle offers a fully integrated suite of rich media content and seamless connectivity solutions that cover the globe. As of December 31, 2019, the Company’s business was comprised of two operating segments: Media & Content and Connectivity, with the Connectivity segment encompassing the operations of the former Aviation Connectivity and Maritime & Land Connectivity segments. See Note 16. Segment Information for further discussion on the Company’s reportable segments.
Media & Content
The Media & Content segment selects, manages, provides lab services and distributes wholly-owned and licensed media content, video and music programming, advertising, applications and video games to the airline, maritime and other “away from home” non-theatrical markets.
The Media & Content operations commenced on January 31, 2013, when the Company acquired 86% of the issued and outstanding shares of Advanced Inflight Alliance AG (“AIA”) in January 2013. Prior to January 31, 2013, the Company was known as Global Eagle Acquisition Corp. (“GEAC”), which was formed in February 2011 to effect a merger, capital stock exchange, asset acquisition or similar business combination with one or more businesses. Upon completion of the business combination with Row 44, Inc. (“Row 44”) and AIA, the Company changed its name from Global Eagle Acquisition Corp. to Global Eagle Entertainment Inc. In addition, the Company purchased substantially all the assets of Post Modern Edit, LLC and related companies (“PMG”) in July 2013 and completed the stock acquisition of the U.K. parent of the Travel Entertainment Group Equity Limited and subsidiaries (“IFES”) in October 2013. In 2013, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA’s shares to 94%, and in April 2014, the Company acquired the remaining outstanding shares in AIA.
Connectivity
The Connectivity operating segment provides its customers, including their passengers and crew, with (i) Wi-Fi connectivity via C, X, 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. The Connectivity segment operations commenced when the Company acquired all of the outstanding shares of common stock of Row 44 pursuant to a business combination transaction that closed on January 31, 2013 in which the Company acquired Row 44 and 86% of the issued and outstanding shares of AIA. The acquisition of Emerging Markets Communication (“EMC”) added maritime and land-based connectivity operations to the segment upon the consolidation of the Company’s prior Maritime & Land Connectivity segment with its prior Aviation Connectivity segment in the second quarter of 2017.
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 consolidated financial statements.
Basis of Presentation
Liquidity and Management’s Plan
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern, requires that an entity’s management evaluate whether there are relevant conditions and events that in aggregate initially indicate that it will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued, and therefore raise substantial doubt about the entity’s ability to continue as a going concern. The Company has evaluated factors described below, including historical losses and negative cash flows from operations, government and industry-imposed travel restrictions in the aviation and maritime industries the Company services, ability to maintain and meet debt covenants in future periods, and the Company’s ability to satisfy existing debt obligations and
paydown past due accounts payable over the next year, and concluded that the factors have raised substantial doubt about the company’s ability to continue as a going concern.
Our customers in the airline, cruise ship and other maritime industries, have been heavily impacted by the COVID-19 pandemic, through travel restrictions, government and business-imposed shutdowns or other operating issues resulting from the pandemic. We continue to analyze the potential impacts of the conditions and events arising from the ongoing COVID-19 pandemic. However, at this time, it is not possible to determine the magnitude of the overall impact of the COVID-19 pandemic on our business. As such, the impact could have a material adverse effect on our overall business, financial condition, liquidity, results of operations, and cash flows.
Due to the Company’s operating performance in recent years and upcoming liquidity needs combined with the impact of the COVID-19 outbreak in 2020 on the Company’s business and customers, the Company’s management identified certain conditions and potential impacts from those conditions , which, considered in the aggregate, raise substantial doubt about its ability to continue as a going concern, including:
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Ongoing reduction in revenue due to aviation and maritime industry shutdowns and restrictions;
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Potential loss of customers and decreased services provided;
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Working capital deficit and past due accounts payable;
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Overall fixed cost of satellite-based connectivity that is not considered to be sustainable;
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High cost of debt and required interest payments that is not considered to be sustainable;
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Potential inability to timely service the Company’s debt and comply with covenants in the agreements governing the indebtedness in future periods, or obtain additional borrowings and facilities on commercially reasonable terms;
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Inability to timely file the Company’s periodic reports with the U.S. Securities and Exchange Commission, which could result in debt covenant violations;
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Potential inability to deliver substantially all of the financial results forecast in the fiscal 2020 budget;
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Potential delisting of Company stock due to Nasdaq minimum market capitalization rules; and
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Inability to dispose of all or a portion of its 49% interest in WMS.
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As of December 31, 2019, the Company had $506.0 million aggregate principal amount in senior secured term loans (the “Term Loans”) outstanding under our senior secured credit agreement (the “2017 Credit Agreement”). In addition, we had $43.3 million drawn under the 2017 Revolving Loans (excluding approximately $4.3 million in letters of credit outstanding thereunder), with remaining availability thereunder of approximately $37.4 million as of December 31, 2019; $178.0 million aggregate principal amount of outstanding Second Lien Notes, including $28.0 million of payment-in-kind (“PIK”) interest converted to principal since issuance; $82.5 million aggregate principal amount of 2.75% convertible senior notes due 2035; and other debt outstanding of $23.7 million. On February 28, 2020, as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company further leveraged the balance sheet, and drew down the remaining $41.8 million under the Revolving Credit Facility with a corresponding increase in cash on hand. Following the Drawdown, the Company has no remaining borrowing under the Revolving Credit Facility.
A substantial amount of the Company's cash requirements are for debt service obligations. The Company has generated operating losses in each of the years ended December 31, 2018 and 2019. Additionally, the Company has incurred net losses and had negative cash flows from operations for each of these years primarily as a result of significant cash interest payments arising from the Company's substantial debt balance. Net cash used in operations was $8.9 million for the year ended December 31, 2019 which included cash paid for interest of $56.6 million. Working capital deficiency increased by $42.9 million, to $63.3 million as of December 31, 2019, compared to $20.4 million as of December 31, 2018. The Company's current forecast indicates it will continue to incur net losses and generate negative cash flows from operating activities as a result of the Company's indebtedness and significant related interest expense. At December 31, 2019, the Company had debt maturities totaling $15.7 million, $29.9 million and $623.3 million in 2020, 2021 and 2022, respectively.
Additionally, the Company’s failure to comply with the covenants in the 2017 Credit Agreement and the securities purchase agreement governing our Second Lien Notes due June 30, 2023 (as amended, the “Second Lien Notes”), which include covenants requiring us to timely file our audited and unaudited financial statements, could result in an event of default on our debt. On April 15, 2020, the Company entered into the Tenth Amendment to the Credit Agreement and obtained a waiver until May 14, 2020 related to timely filing our audited financial statements for the year-end December 31, 2019. Furthermore, the Company’s substantial indebtedness may limit cash flow available to invest in the ongoing needs of the business and subjects the Company to various reporting and financial covenants that we may be unable to comply with. If the Company is unable to satisfy the future period
financial covenants or obtain a waiver or an amendment from the lenders, or take other remedial measures, the Company will be in default under the credit facilities, which would enable lenders thereunder to accelerate the repayment of amounts outstanding and exercise remedies with respect to the collateral. If the Company’s lenders under our credit facilities demand immediate payment, we will not have sufficient cash to repay such indebtedness. In addition, a default under our credit facilities or the lenders exercising their remedies thereunder could trigger cross-default provisions in our other indebtedness and certain other operating agreements. Failure to meet our borrowing conditions under our revolving credit facility could materially and adversely impact our liquidity.
The Company’s management has plans in-place to address the substantial doubt about the Company’s ability to continue as a going concern. Mitigating actions that are being implemented include:
•Reduction of overall workforce to match revenue streams;
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Temporary salary reductions for all employees, including executive officers;
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Deferral of annual merit increases;
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Relocation of worldwide operating facilities to reduce ongoing costs;
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Renegotiation of satellite lease terms, bandwidth terminations and payment deferrals;
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Negotiation of studio rate reductions and airline relief packages;
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Restructure and amend debt covenants with our lenders;
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Accelerate WMS dividend payments;
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Continue to pursue the disposition of the Company’s 49% interest in WMS; and
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Apply for all eligible global government and other initiatives available to businesses or employees impacted by the COVID-19 pandemic, primarily through payroll and wage subsidies and deferrals.
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In addition, the Company’s management is pursuing actions to maximize cash available to meet the Company’s obligations as they become due in the ordinary course of business, including (i) executing additional substantial reductions in expenses, capital expenditures and overall costs; and (ii) accessing alternative sources of capital, in order to generate additional liquidity. These actions are intended to mitigate those conditions which raise substantial doubt of the Company’s ability to continue as a going concern for a period within 12 months following May 14, 2020. While the Company continues to work toward completing these items and taking other actions to create additional liquidity, there is no assurance that the Company will be able to create the required liquidity. The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability to achieve forecasted results, its ability to conserve cash, its ability to obtain necessary waivers from Lenders and other equity Stakeholders to achieve sufficient cash interest savings therefrom and its ability to complete other liquidity-generating transactions. Based on the uncertainty of achieving these actions the Company’s management has determined that the substantial doubt about the Company’s ability to continue as a going concern for a period of 12 months following May 14, 2020 remains unalleviated. The consolidated financial statements do not include any adjustments that might result from this uncertainty.
If the Company is unable to complete any of the actions described in the paragraph above, or otherwise generate incremental liquidity, or if there are material adverse developments in our business, results of operations or liquidity, we may be forced to further reduce or delay our business activities and capital expenditures, sell material assets, seek additional capital or be required to file for bankruptcy court protection. We cannot provide assurance that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all.
Additionally, the covenants in the Company’s senior secured credit facilities include a requirement that we receive an opinion from our auditors in connection with our year-end audit that is not subject to a “going concern” or like qualification or exception. On April 15, 2020, the Company entered into the Tenth Amendment to the Credit Agreement and obtained a waiver related to obtaining a “going concern” or like qualification or exception in the report of the Company’s independent registered public accounting firm for the Company’s year-end December 31, 2019 financial statements. We cannot be assured that we will be able to obtain additional covenant waivers or amendments in the future which may have a material adverse effect on the Company’s results of operations or liquidity.
Reverse Stock Split
On April 15, 2020, the Board of Directors approved a reverse stock split of the Company’s outstanding and authorized shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the number of the Company’s issued and outstanding shares of common stock was decreased from 92,944,935 to 3,717,797, all with a par value of
$0.0001. The effective date of the Reverse Stock Split was April 16, 2020. The Reverse Stock Split affects all stockholders uniformly and will not alter any stockholder’s percentage interest in the Company’s common stock, except for adjustments that may result from the treatment of fractional shares as follows: (i) no fractional shares will be issued as a result of the Reverse Stock Split; and (ii) stockholders who would have been entitled to a fractional share as a result of the Reverse Stock Split will instead receive a cash payment from the transfer agent in an amount equal to the fractional share multiplied by the closing price of our common stock the day before the Reverse Stock Split became effective. All relevant share and per share amounts presented in these financial statements, have been adjusted for this Reverse Stock Split.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements of prior years and the accompanying notes to conform to the current year presentation. Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned and controlled subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The results of acquired businesses are included in the consolidated financial statements from the date of acquisition. Any investments in affiliates over which the Company has the ability to exert significant influence but does not control and with respect to which it is not the primary beneficiary are accounted for using the equity method. The Company has two such equity affiliates.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue (allocated on the basis of the relative selling price of deliverables) and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, the assigned value of acquired assets and assumed and liabilities associated with business combinations, legal settlements, valuation of media content library and equipment inventory, useful lives and impairment of property, plant and equipment, intangible assets, goodwill and other assets, the fair value of the Company’s equity-based compensation awards and convertible debt instruments, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014- 09” or “Topic 606”) and all related amendments and applied the concepts to all contracts which were not completed as of January 1, 2018, using the modified retrospective method, recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of accumulated deficit for reporting periods beginning after January 1, 2018, are presented under Topic 606.
The Company recorded a net reduction to an opening accumulated deficit of $0.9 million as of January 1, 2018, due to the cumulative impact of adopting Topic 606, with the impact primarily related to the capitalization of contract costs previously expensed and the recognition of deferred revenue as of December 31, 2017, through accumulated deficit relating to time-based software licenses offset by the deferral of revenues for usage-based licenses that were previously recognized upfront. Applying Topic 606 resulted in a net increase of $4.1 million to revenue, for the twelve months ended December 31, 2018, comprised of a net decrease of $1.4 million in licensing and services revenue and a net increase of $5.5 million in equipment revenue. The impact to cost of goods sold for the twelve months ended December 31, 2018, was a net decrease of $1.2 million, comprised of a net decrease of $1.3 million in licensing and services cost of sales, partially offset by a net increase of $0.2 million in equipment cost of sales.
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 (see further discussion in Note 3. Revenue Recognition).
Deferred revenue consists substantially of amounts received from customers in advance of the Company’s performance service period and of fees deferred for future support services. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in a majority of arrangements is straight line over the remaining contractual term.
The Company’s revenue is principally derived from the following segments:
Media & Content
The Company curates and manages the licensing of content to the airline, maritime, and non-theatrical industries globally and provides associated services, such as technical services, delivery of digital media advertising, the encoding of video and music products, development of graphical interfaces or the provision of materials. Media & Content licensing revenue is principally generated through the sale or license of media content, video and music programming, applications and video games to customers in the aviation, maritime and non-theatrical markets.
Licensing Revenues
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Film, Audio, and Television licensing - The Company selects, procures, manages, and distributes video and audio programming, and provides similar applications to the airline, maritime and other “away from home” non-theatrical markets. The Company delivers content compatible with Global Eagle systems as well as compatible with a multitude of third-party in-flight entertainment (“IFE”) systems. The Company acquires non-theatrical licenses from major Hollywood, independent and international film and television producers and distributors, and licenses the content to airlines, maritime companies, non-theatrical customers, and other content service providers. In addition to the content licenses, the Company provides the content literature for the seat-back inflight magazine, trailers for the website, and metadata for the Inflight Entertainment systems (“IFE systems”). Revenue recognition is dependent on the nature of the customer contract. Content licenses to customers are typically categorized into usage-based or flat fee-based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures revenue is recognized upon the available date of the license, typically at the beginning of each cycle, or straight-line over the license period.
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Games and applications licensing - The Company produces games customized to suit the in-flight environment. The Company acquires multi-year licenses from reputable game publishers to adapt third-party-branded games and concepts for in-flight use. The Company also licenses applications for use on airline customer’s IFE systems. These applications allow airlines the ability to present information and products to its customers (i.e., passengers) such as their food and beverage menu offerings, magazine content, and flight locations. Games and applications licenses are operated under usage or flat fee-based fee structures. Revenue recognition is dependent on the nature of the customer contract. Content licenses to customers are typically categorized into usage-based or flat fee-based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat fee-based structures revenue is recognized upon the available date of the license, typically at the beginning of each cycle, or straight-line over the license period.
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Services Revenues
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Advertising Services - The Company sells airline advertisement spots to customers through the use of insertion orders which normally range between one and six months. The Company typically prices advertisements based on a total guaranteed number of impressions within a predetermined play cycle for the advertisement. Pricing is also dependent on the type of advertisement (e.g., pop-up, banner, etc.) and on which media platform it will be displayed (e.g., airport lounge or in-flight entertainment system). The total number of impressions are estimated upfront, based on reported flight levels and passenger data supplied by airlines. The Company acquires these advertising distribution rights from airlines via supplier agreements. These supplier agreements with airlines are normally revenue-share arrangements which provide the Company with exclusive distribution rights of the airline advertising spots and can also include a minimum guarantee payment from the Company to the airline. These agreements with airlines are generally for one to three year terms. Revenue is recognized over time as the advertisements are played and/or when the committed advertisement impressions have been delivered, which is generally evenly throughout the term and often the Company continues to display the advertisement after the minimum number of impressions is met. When the Company enters into revenue-sharing arrangements with the airlines, the Company evaluates whether it is the principal or
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agent in the arrangement with the airline. When the Company is considered the principal, the Company reports the underlying revenue on a gross basis in its Consolidated Statements of Operations, and records these revenue-sharing payments to the airline in service costs. In circumstances where the Company acts as an agent in the arrangement, the associated revenues are recorded net.
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Lab Services - The Company addresses a variety of technical customer needs relating to content regardless of the particular IFE system being used. Content acquired from studios and producers is normally provided to the Company in certain languages, aspect ratios, and file sizes. The Company’s customers (e.g., airlines) have IFE systems requiring certain aspect ratios and file sizes. In addition, the customers request additional languages for their global passenger base. These technical services include encoding, editing and metadata services, as well as language subtitle and dubbing services, and are generally performed in-house in the Company’s technical facilities (collectively considered “Lab Services”). Lab Services are typically priced on a flat fee per month, ad hoc basis, or included in the content pricing. Revenue is recognized when the Lab Services performance obligation is complete, and the underlying content has been accepted by and is available to the customer, typically on the license available date of the respective content.
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Ad Hoc Services - The Company may perform additional non-recurring implementation, configuration, interactive development or other ad hoc services connected with the games and applications delivery. These services include embedding of customer logo(s) and population of content within applications (e.g., food and beverage content within the Company’s eMealMenu application).
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Connectivity
Aviation Services Revenue. Services revenue for Connectivity includes satellite-based Internet services and related technical and network operational support and management services and live television. The connectivity services provide airlines with the capability to provide its passengers’ wireless access to the Internet, which allows passengers to web-surf, email, text, and access live television. The connectivity experience also permits passengers to enjoy inflight entertainment, such as streaming for non-live television, and movies and video-on-demand, delivered through a web-based framework for an initial “landing page”. The revenue is recognized over time as control is transferred to the customer (i.e. the airline), which occurs continuously as customers receive the bandwidth/ connectivity services.
Aviation Equipment Revenue. Equipment revenue is recognized when control passes to the customer, which is at the later of shipment of the equipment to the customer or obtaining the Supplemental Type Certificates (“STC”), as applicable. In determining whether an arrangement exists, the Company ensures that a binding arrangement is in place, such as a purchase order or a fully executed customer-specific agreement. The Company can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon specifications in the contract, accordingly customer acceptance is a formality that does not affect the entity’s determination of when the customer has obtained control of good or service. In certain cases where the Company sells its equipment to an aviation customer on a stand-alone basis, it may charge a fee for obtaining STCs from the relevant aviation regulatory body, which permits the Company’s equipment to operate on certain model/type of aircraft. An STC is highly interrelated with the Connectivity services as it is often required for new equipment and/or for new types of aircrafts prior to the airlines installing the equipment. When an STC is required it would not be sold separately as it has no value to the customer without the equipment and vice versa. As such, in such circumstances, the Company does not consider an STC separate from the equipment. To the extent that the Company contracts to charge STC fees in equipment-only sales, the Company will record these fees as revenue at the later of shipment of the equipment to the customer or obtaining the STC, as applicable.
Maritime and Land Service Revenue - The Maritime business provides satellite telecommunications services (“connectivity services”) through the Company’s private network that utilizes very small aperture terminal (“VSAT”) satellite technology for cruise ships and ferries, commercial shipping companies, yachts, and offshore drilling platforms. The technology enables voice and data capabilities to customers with ocean-going vessels or ocean-based environments. For certain cruise ship customers, the Company also offers maritime live television services (“TV services”). The service offerings cover a wide range of end-to-end network service combinations for customers’ point-to-point and point-to-multipoint telecommunications needs. These offerings range from simple connections to customized private network solutions through a network that uses “multiple channel per carrier” or “single channel per carrier” technology with bandwidth satellite capacity and fiber optic infrastructure. The business also offers teleport services through its proprietary teleports located in Germany and the US. In conjunction with the Connectivity services, the Company also provides equipment as part of the service for which the Company retains ownership of the equipment throughout the term of the service. Revenue is recognized over time in accordance with the transfer of control, which is continuously as the customer receives the bandwidth/ connectivity services. Certain of the Company’s contracts involve a revenue sharing or reseller
arrangement to distribute the connectivity services. The Company assesses these services under the principal versus agent criteria and determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.
Maritime and Land Installation Revenue - To service its marine and land-based customers, the Company operates a network of global field-support centers for installation and repair services. The Company has field support centers in several locations worldwide, several of which offer a spare parts inventory, a network operations center open 24/7, certified technicians, system integration and project management. These field centers provide third-party antenna and ship-based system integration, global installation support, and repair services. Revenue is recognized in accordance with the transfer of control, i.e., over-time as the installation services are provided based on labor hours incurred.
Maritime and Land Equipment Revenue - Equipment revenue is recognized when control passes to the customer, which is generally upon shipment or arrival/ acceptance at destination depending on the contractual arrangement with the customer. Maritime and land equipment is generally priced as a one-time upfront payment at its standalone selling price (“SSP”).
Significant Judgments
Judgment is required to determine the SSP for each distinct performance obligation under contracts where the Company provides multiple deliverables. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the SSP using information that may include adjusted market assessment approach, expected cost plus margin approach, or the residual approach.
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For the Media & Content business, management sets prices for each performance obligation using an adjusted market assessment approach when entering into contracts. Contract prices reflect the standalone selling price. As such, the Company uses the stated contract price for SSP allocation of the transaction price.
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For our Connectivity Services, we are able to establish SSP based on observable prices of services sold separately in comparable circumstances to similar customers. We use a single amount to estimate SSP when it has observable prices. If SSP is not directly observable, for example when pricing is highly variable, we use a range of SSP. We determine the SSP range using information that may include pricing practices or other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.
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For our Equipment Sales, we are not able to establish SSP based on observable prices of products sold separately in comparable circumstances to similar customers, therefore the Company uses a cost plus margin approach.
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Topic 606 requires the Company to estimate variable consideration. Service Level Agreement (“SLA”) or service issue/outage credits that are considered variable consideration (i.e., customer credits) and require estimation including the use of historical credit levels. These credits have historically not been material in the context of the customer contracts for the Maritime & Land or Media & Content businesses.
The contractual consideration used for allocation purposes includes connectivity, equipment and services, which may be based on a fixed monthly fee per aircraft or a variable fee based on the volume of connectivity activity, or a combination of both. Examples of variable consideration within our contracts include megabyte overages and revenue sharing arrangements.
We constrain our estimates to reduce the probability of a significant revenue reversal in future periods, allocate variable consideration to the identified performance obligations and recognize revenue in the period the services are provided. Our estimates are based on historical experience, anticipated future performance, market conditions and our best judgment at the time.
A significant change in one or more of these estimates could affect our estimated contract value. For example, estimates of variable revenue within certain contracts require estimation of the number of equipment purchased or megabytes that will be purchased over the contract term and the average revenue per connectivity session, which varies based on the connectivity options available to passengers on each airline. Estimated revenue under these contracts anticipates increases in take rates over time and assumes an average revenue per session consistent with our historical experience. Our estimated contract revenue may differ significantly from our initial estimates to the extent actual take rates differ from our historical experience.
We regularly review and update our estimates and recognize adjustments under the cumulative catch-up method. Any adjustments under this method are recorded as a cumulative adjustment in the period identified and revenue for future periods is recognized using the new adjusted estimate.
Cost of Sales
Media & Content
Cost of sales for Media & Content consist primarily of the costs to license or purchase media content, direct costs to service content for aviation, maritime and other non-theatrical markets, and advertising revenue-sharing payments to its customers. Included in the cost of sales, when applicable, is amortization expense associated with the purchase of film content libraries acquired in business combinations and, in the ordinary course of business, personnel, support and occupancy costs.
Connectivity
Cost of sales for Connectivity consists primarily of equipment fees paid to third-party manufacturers, royalty expense as a result of revenue-sharing arrangements, Internet connection, satellite charges and related network operational support costs, and other platform operating expenses, including depreciation of property and equipment and internally developed software, website development costs, hardware and services used to build and operate the Connectivity platform and personnel costs relating to information technology.
Sales and marketing
Sales and marketing expense primarily comprise of personnel costs, advertising costs, including promotional events and other brand building and product marketing expenses, corporate communications, certain professional fees, occupancy costs and travel expenses.
Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2019 and 2018 were not material.
Product Development
Product research and software development costs, other than certain internal-use software costs qualifying for capitalization, are expensed as incurred. Costs of computer software or websites developed or obtained for internal use that are incurred in the preliminary project and post-implementation stages are expensed as incurred. Certain costs of developing internal-use software incurred during the application and development stage, which include employee and outside consulting compensation and related expenses, costs of computer hardware and software, website development costs and costs incurred in developing additional features and functionality of the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized costs are generally amortized using the straight-line method over a three-year estimated useful life, beginning in the period in which the software is ready for its intended use. Unamortized amounts are included in Property, plant and equipment, net, in the Consolidated Balance Sheets.
The Company’s product development expenditures are focused on developing new products and services and obtaining STC as required by the FAA for each model/type of aircraft prior to providing Connectivity services. To the extent that the Company is contracted to obtain STC, and customers reimburse these costs, the Company will record these reimbursements directly against its product development expenses.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, Current operating lease liabilities, and Noncurrent operating lease liabilities in the Consolidated Balance Sheet. Finance leases are included in Property and equipment, Current maturities of long-term debt, and Long-term debt less current maturities in the Consolidated Balance Sheet.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The lease liability is measured as the present value of
the unpaid lease payments, and the right-of-use asset value is derived from the calculation of the lease liability. Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee. Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election is made upon adoption, per the provisions of the New Lease Standard. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company combines lease and nonlease components for all asset groups. The Company's lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant economic factors.
See Note 4. Leases for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements, as well as our various accounting policies for each lease type, both from lessee and lessor perspectives.
Stock-Based Compensation
Stock-based awards principally comprise of stock options, restricted stock units (“RSUs”), performance-based RSU (“PSU”) awards, and beginning in 2018, cash-settled stock appreciation rights, referred to as “phantom options”. Stock-based awards are generally issued to certain senior management personnel and non-employee directors. Stock-based compensation cost (other than phantom options) is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period, which is the vesting period, on a straight-line basis, net of actual forfeitures. Our phantom options are accounted for as liability awards and are re-measured at fair value each reporting period with compensation expense being recognized over the requisite service period.
The Company uses the Black-Scholes option pricing model and the Monte Carlo simulation to determine the grant date fair value of its stock options and phantom options, respectively, as well as the fair value at each reporting period. This model requires the Company to estimate the expected volatility and the expected term of the stock options, which are highly complex and subjective variables. The Company uses an expected volatility of its stock price during the expected life of the options that is based on the historical performance of the Company’s stock price. The expected term is computed using the simplified method as the Company’s best estimate given its lack of actual exercise history. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected exercise term of the stock option. The Company currently has no history or expectation of paying cash dividends on its common stock.
The grant date fair value of the time-vesting RSUs equals the closing price of the Company’s common stock on the grant date.
For PSU awards, the Company recognizes stock-based compensation expense over the requisite service period based on the grant date fair value of a unit multiplied by the number of units granted. The grant date fair value of a unit is computed using a Monte-Carlo simulation which uses a risk-free interest rate based on the U.S. Treasury rate on the date of grant commensurate with the term of the performance period.
Stock Repurchases
In March 2016 the Company’s Board of Directors authorized a stock repurchase program. Shares of the Company’s stock repurchased by the Company are accounted for when the transaction is settled. Repurchased shares held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from common stock at par value and from additional paid-in capital for the excess of cash paid over par value. If additional paid-in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the repurchased shares. The Company did not repurchase any shares of its common stock during the years ended December 31, 2019 and December 31, 2018. As of December 31, 2019, the remaining authorization under the stock repurchase plan was $44.8 million.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents.
Restricted Cash
The Company maintains certain letters of credit agreements with its customers that are secured by the Company’s cash for periods up to three years. As of December 31, 2019, and 2018, the Company had restricted cash of $0.5 million and $0.8 million, respectively.
Accounts Receivable, net
The Company extends credit to its customers. An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company’s customers to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness and changes in customer payment terms when making estimates of the collectability of the Company’s accounts receivable balances. If the Company determines that the financial condition of any of its customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off.
Inventories
Equipment inventory, which is classified as finished goods, is comprised of individual equipment parts and assemblies. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and net realizable value, based upon assumptions about future demand; and is charged to the provision for inventory, which is a component of cost of sales. At the point of the write-down recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
The Company generally is not directly responsible for warranty costs related to equipment it sells to its customers. The vendors that supply each of the individual parts, which comprise the assemblies sold by the Company to customers, are responsible for the equipment warranty directly to the customer.
Valuation of Long-Lived Assets
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. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, a significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows the Company expects to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Assets to be disposed of would be separately presented on the Consolidated Balance Sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized.
The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. Other than as stated in Content Library below, no impairment losses were recorded during the years ended December 31, 2019 and 2018.
Content Library
Content library represents minimum guaranteed amounts to acquire distribution rights. The Company capitalizes the amounts paid for the guarantees, and records an asset and liability for any remaining unpaid portion of the guarantee when the film is released for exploitation. Amounts owed in excess of the capitalized minimum guarantees are expensed when revenue from exploiting the film right have fully recouped the minimum guarantee based on the contractual royalty rates. The useful life of licensed film rights within the content library corresponds to the respective period over which the film rights will be licensed. Capitalized film rights are amortized ratably over their expected revenue streams and included in cost of sales. The Company anticipates that $3.6 million of its capitalized film costs will be amortized within the next 12 month. As of December 31, 2019, unamortized film costs for released films were not material due to the short duration of the exploitation period. Participations are accrued on an individual title basis and expensed in the proportion that the revenue is generated over the exploitation period. As of December 31, 2019, the Company expected to pay accrued participation liabilities of $13.9 million during the next 12 months. As of December 31, 2019, and 2018, the Company had minimum guarantee liabilities, current of $1.8 million and $1.1 million, respectively, which are included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets.
Content library is periodically tested for impairment, but no less than annually. The marketability of the individual film right can determine the fair value of such film and whether an impairment loss is necessary. If the fair value determined based on the estimated future cash flows for an individual film right is lower than its carrying amount as of the reporting date, an impairment loss is recognized in such period. For the years ended December 31, 2019 and 2018 the impairment charges for the content library were $0.2 million and $2.4 million, respectively, included in Cost of sales in the Consolidated Statements of Operations.
Property, Plant and Equipment, net
Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Depreciation is recorded on a straight-line basis over the underlying assets’ useful lives. The estimated useful life of technical and operating equipment is three to ten years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Buildings are depreciated on the straight-line method over 30 years. Repairs and maintenance costs are expensed as incurred.
The Company installs connectivity equipment under agreements entered into with its customers. The assets are recorded as Property, plant and equipment, net, on the Consolidated Balance Sheets. The Company begins depreciating the assets when they are ready for their intended use over a 5-7 year term which approximates the expected useful lives of the equipment.
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, and instead evaluates it for impairment at the reporting unit level annually as of December 31 of each fiscal year or when an event occurs, or circumstances change that indicates the carrying value may not be recoverable. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
The Company periodically analyzes whether any indicators of impairment have occurred. As part of these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price, to its net book value. The Company did not record any goodwill impairment during the years ended December 31, 2019 and 2018. See Note 6. Goodwill for details regarding the goodwill impairment losses.
Business Acquisitions
The Company accounts for acquisitions of businesses using the acquisition method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodologies, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values. Additionally, non-controlling interests in an acquired business, if any, are recorded at their acquisition date fair values. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.
The Company did not consummate any acquisitions during the years ended December 31, 2019 and 2018.
Investments in Equity Affiliates
Wireless Maritime Services, LLC (“WMS”)
The Company owns a 49% equity interest in WMS. The remaining 51% equity interest in WMS is owned by an unaffiliated U.S. company (the “WMS third-party investor”), which is the managing member of WMS and is responsible for its day-to-day management and operations. Certain matters, including determination of capital contributions and distributions and business plan revisions, require approval of WMS’s board of directors, which consists of five voting members, three of which are appointed by the WMS third-party investor and two of which are appointed by the Company. Profits and losses for any fiscal year are allocated between the Company and the WMS third-party investor in proportion to their respective ownership interests, after giving effect to any special allocations made pursuant to the WMS operating agreement. The excess of the fair value over the underlying equity in net assets of WMS is primarily comprised of amortizable intangible assets and nonamortizable goodwill. The Company’s carrying value in its investment in WMS has been adjusted for contributions, distributions and net income (loss) attributable to WMS, including the amortization of the cost basis difference associated with the amortizable intangible assets. During the fourth quarter of 2018, the Company recorded an impairment charge of $51.0 million relating to its WMS equity investment. See Note 8. Equity Method Investments for details regarding the impairment charge. No impairment charge was recorded on the WMS equity investment for the year ended December 31, 2019.
Santander Teleport S.L. (“Santander”)
The Company also owns an interest in a teleport in Santander, Spain, which provides various telecommunication services, including teleport and terrestrial services. The Company holds a 49% equity interest in Santander and the remaining 51% is held by an unaffiliated Spanish company (the “Santander third-party investor”). The Santander third-party investor is responsible for the day-to-day management and operations of Santander. Some matters—such as the determination of capital contributions, capital expenditures over budget and distributions—require approval of Santander’s board of directors, which consists of five voting members, three of which are appointed by the Santander third-party investor and two of which are appointed by the Company. Profits and losses for any fiscal year are allocated between the Company and the Santander third-party investor in proportion to their respective ownership interests. The carrying value of the Company’s investment in Santander approximated its fair value on the date its acquisition, adjusted for contributions, distributions, and net income (loss) attributable to Santander.
On a periodic basis, the Company assesses whether there are any indicators that the value of its investments may be impaired, in accordance with FASB Accounting Standards Codification (“ASC”) 323, Investment—Equity Method and Joint Ventures. When circumstances indicate there may have been a reduction in the value of an equity method investment, the Company evaluates the equity method investment and any advances made for impairment by estimating its ability to recover its investment from future expected cash flows. If management determines the loss in value is other than temporary, the Company recognizes an impairment charge to reflect the equity investment and any advances made at fair value. No impairment charges have been recorded for Santander for the years ended December 31, 2019 and 2018.
Derivative Financial Instruments
The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. The accounting for changes in the fair value of a derivative instrument depends upon whether the derivative has been formally designated as (and qualifies as part of) a hedging relationship under the applicable accounting standards and, further, on the type of hedging relationship. The Company’s derivatives that are not designated (and so do not qualify) as hedges are adjusted to fair value through current earnings.
The Company’s warrants issued in its initial public offering in 2011 to its non-sponsor shareholders (“Public SPAC Warrants”) and its contingently issuable shares issuable in partial consideration for its Sound Recording Settlements (as described in Note 11. Commitments and Contingencies qualify as derivatives. These derivatives are not designated (and do not qualify) as hedges. As a result, the Company accounts for such derivatives as liability instruments that are adjusted to fair value at each reporting period. Changes in fair value of such derivatives are recognized in earnings.
Results Per Share
Basic loss per common share is computed using the weighted-average number of common shares outstanding during the 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 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. Common shares to be issued upon the exercise of warrant instruments classified as liabilities are included in the calculation of diluted loss per share when dilutive.
Foreign Currency Translation
The Company translates the assets and liabilities of its non-U.S.-dollar-functional-currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets. The Company’s subsidiaries that use the U.S. dollar as their functional currency re-measure monetary assets and liabilities at exchange rates in effect at the end of each period, and re-measure inventories, property and nonmonetary assets and liabilities at historical rates.
Income Taxes
Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the Company’s position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits (UTBs) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company recognizes both accrued interest and penalties associated with uncertain tax positions as a component of Income tax (benefit) expense in the Consolidated Statements of Operations.
In December 2017, the United States enacted new U.S. federal tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.
The Tax Act also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). BEAT provisions do not apply to the Company in 2019 and 2018. The Company will continue to assess the facts in order to determine when the provisions become applicable. The GILTI provisions are fully offset by current year losses.
Fair Value Measurements
The carrying amounts of the Company’s cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair market value due to the short-term nature of these investments. Certain assets for the Company are recorded at their fair value, using the fair value hierarchy, on a recurring basis, and other assets and liabilities including goodwill and intangible assets are subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review.
Adoption of New Accounting Pronouncements
On January 1, 2019, the Company adopted ASC 842, Leases (“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 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 the following: (i) whether any expired or existing contracts as of the adoption date are or contain a lease, (ii) lease classification for any expired or existing leases as of the adoption date, and (iii) 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 $23.0 million and associated operating lease liabilities of $25.9 million primarily relating to real estate leases. See Note 4. 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.
On January 1, 2018, the Company adopted ASU 2014-09, Revenue From Contracts With Customers (Topic 606), and all related amendments and applied the concepts to all contracts using the modified retrospective method, recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings. See Note. 3 Revenue Recognition.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which clarifies the accounting for implementation costs in cloud computing arrangements. The update effectively aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2019, with early adoption permitted. The Company early adopted the guidance, effective July 1, 2018, and elected to apply the prospective transition approach. The Company capitalized $0.2 million of implementation costs incurred in a cloud computing arrangement service contract during the year ended December 31, 2019.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which identifies, evaluates and improves areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The ASU is effective for the Company beginning January 1, 2021, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which is intended to increase stakeholder awareness in the amendments of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and to expedite the improvement process. ASU No. 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. ASU No. 2019-12 as well as ASU NO 2016-13 are effective for the Company beginning January 1, 2020, with early adoption permitted. Management does not believe this standard will have a material impact on its consolidated financial statements. (See below for additional information on ASU 2016-13.)
In November 2019, the FASB issued ASU No. 2019-8, Compensation - Stock Compensation(Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer, which expedites the improvement process of the amendments and increase stakeholder awareness in ASU 2018-07, Compensation - Stock Compensation (Topic 718); Improvements to Nonemployee Share-Based Payment Accounting. The ASU is effective for the Company beginning January 1, 2020, with early adoption permitted. Management does not believe this standard will have a material impact on its consolidated financial statements.
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 does not believe this standard will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures for fair value measurements. The ASU is effective for the Company beginning after January 1, 2020, with early adoption permitted. Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). This update requires measurement and recognition of expected versus incurred credit losses for financial assets held. The Company will adopt ASU 2016-13, effective in the first quarter of 2020 by applying the guidance at the adoption date with any cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Our financial assets in-scope of the new credit losses standard primarily relate to our receivables, net balance, which we currently expect the transition adjustment to result in an insignificant adjustment to the opening balance of retained earnings.
Note 3. Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method and applied it to contracts which were not completed as of January 1, 2018.
The following table represents a disaggregation of the Company’s revenue from contracts with customers for the twelve months ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
Media & Content
|
|
|
|
|
Licensing & Services
|
|
$
|
311,079
|
|
|
$
|
315,409
|
|
Total Media & Content
|
|
311,079
|
|
|
315,409
|
|
|
|
|
|
|
Connectivity
|
|
|
|
|
Aviation Services
|
|
$
|
124,884
|
|
|
$
|
120,130
|
|
Aviation Equipment
|
|
54,159
|
|
|
30,518
|
|
Maritime & Land Services
|
|
156,199
|
|
|
170,688
|
|
Maritime & Land Equipment
|
|
10,556
|
|
|
10,349
|
|
Total Connectivity
|
|
345,798
|
|
|
331,685
|
|
|
|
|
|
|
Total revenue
|
|
$
|
656,877
|
|
|
$
|
647,094
|
|
Contract Assets and Liabilities
Aviation connectivity contracts involve performance obligations primarily relating to the delivery of equipment and services. Equipment is delivered upfront with payment due upon delivery. Services are rendered to the customer over time and are typically paid for upfront or as the services are delivered. Aviation connectivity revenue is allocated based upon SSP. The primary method used to estimate the SSP is the expected cost-plus margin approach. When 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 following table summarizes the significant changes in the balance for contract assets during the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
Contract Assets
|
Balance as of December 31, 2018
|
|
$
|
4,696
|
|
Increase in contract assets primarily due to revenue recognized in excess of billings
|
|
9,734
|
|
Balance as of December 31, 2019
|
|
$
|
14,431
|
|
|
|
|
Current contract assets
|
|
$
|
4,399
|
|
Non-current contract assets
|
|
10,032
|
|
Balance as of December 31, 2019
|
|
$
|
14,431
|
|
The Company may invoice upfront for services recognized over time or for contracts in which it has unsatisfied performance obligations. Contract payment terms are generally 30 to 45 days. When the timing of invoicing differs from the timing of revenue recognition, the Company determines its contracts to include a financing component when the contractual term is for more than a year.
The following table summarizes the significant changes in the balance for contract liabilities, included within “Other non-current liabilities” in our consolidated balance sheet, during the year ended December 31, 2019 (in thousands):
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|
|
|
|
|
|
|
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
|
|
(8,054
|
)
|
Increase due to cash received, excluding amounts recognized as revenue during the period
|
|
11,911
|
|
Balance as of December 31, 2019
|
|
$
|
12,403
|
|
|
|
|
Deferred revenue, current
|
|
$
|
12,317
|
|
Deferred revenue, non-current
|
|
86
|
|
Balance as of December 31, 2019
|
|
$
|
12,403
|
|
As of December 31, 2019, the Company had $968.5 million of remaining performance obligations, which it also refers to as total backlog. The Company expects to recognize approximately 23% of its remaining performance obligations as revenue in 2020 approximately 18% in 2021, 15% by 2022, and the remaining balance thereafter.
$8.1 million and $6.5 million of services revenue was recognized during the years ended December 31, 2019 and 2018, respectively, and was included in the deferred revenue balances at the beginning of the respective period.
Accounts Receivable, net
The Company extends credit to its customers from time to time. The Company maintains an allowance for doubtful accounts for estimated losses resulting from its customers’ inability to make required payments. Management analyzes the age of customer balances, historical bad debt experience, customer creditworthiness and changes in customer payment terms when making estimates of the collectability of its accounts receivable balances. If management determines that the financial condition of any of its customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off.
Accounts receivable consist of the following (in thousands):
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|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
Accounts receivable, gross
|
$
|
94,995
|
|
|
$
|
103,301
|
|
Less: Allowance for doubtful accounts
|
(6,776
|
)
|
|
(5,678
|
)
|
Accounts receivable, net
|
$
|
88,219
|
|
|
$
|
97,623
|
|
Movements in the balance for allowance for doubtful accounts for the twelve months ended December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Beginning balance
|
$
|
5,678
|
|
|
$
|
8,680
|
|
Additions charged to statements of operations
|
4,616
|
|
|
1,227
|
|
Less: Bad debt write offs
|
(3,518
|
)
|
|
(4,229
|
)
|
Ending balance
|
$
|
6,776
|
|
|
$
|
5,678
|
|
Capitalized Contract Costs
Certain of the Company’s sales incentive programs meet the requirements to be capitalized as incremental costs of obtaining a contract. The Company recognizes an asset for the incremental costs if it expects the benefit of those costs to be longer than one year and amortize those costs over the expected customer life. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less.
Additionally, the Company capitalizes assets associated with costs incurred to fulfill a contract with a customer. For example, the Company capitalizes the costs incurred to obtain necessary STC or other customer-specific certifications for its aviation, maritime and land customers.
The following table summarizes the significant changes in the contract assets balances during the period ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
Costs to Obtain
|
|
Costs to Fulfill
|
|
Total
|
Balance as of December 31, 2018
|
$
|
234
|
|
|
$
|
4,011
|
|
|
$
|
4,245
|
|
Capitalization during the year
|
300
|
|
|
2,290
|
|
|
2,590
|
|
Amortization during the year
|
(147
|
)
|
|
(1,045
|
)
|
|
(1,192
|
)
|
Balance as of December 31, 2019
|
$
|
387
|
|
|
$
|
5,256
|
|
|
$
|
5,643
|
|
Contract assets are included within Other non-current assets on the Company’s Consolidated Balance Sheets.
Practical Expedients, Policy Elections and Exemptions
In circumstances where shipping and handling activities occur subsequent to the transfer of control, the Company has elected to treat shipping and handling as a fulfillment activity rather than a service to the customer.
The Company has made a policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (e.g., sales, use, value added, and some excise taxes).
The Company applies a practical expedient to expense costs as incurred for incremental costs to obtain a contract when the amortization period would have been one year or less and did not evaluate contracts of one year or less for variable consideration.
Note 4. Leases
Our leasing operations consist of various arrangements, where we act either (i) as the lessee (primarily related to our corporate and regional offices, teleport co-location arrangements and satellite bandwidth capacity leases), or (ii) as the lessor (for our owned equipment rented to connectivity customers). The foregoing table summarizes the impact of ASC 842 adoption on the Company’s condensed consolidated balance sheet as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Change in Accounting Policy --
as of December 31, 2019
|
|
As reported
|
|
ASC 842 Impact
|
|
Legacy GAAP
|
ASSETS
|
Right-of-use assets, net
|
|
|
|
|
|
Operating leases(1)(4)
|
$
|
28,261
|
|
|
$
|
(28,261
|
)
|
|
$
|
—
|
|
Finance lease(2)(4)
|
10,926
|
|
|
(10,926
|
)
|
|
—
|
|
Total Right-of-Use Assets
|
39,187
|
|
|
(39,187
|
)
|
|
—
|
|
Net lease investment -- other non-current assets(3)(4)
|
1,508
|
|
|
(1,508
|
)
|
|
—
|
|
Total Lease Assets
|
$
|
40,695
|
|
|
$
|
(40,695
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
Property and equipment, net(4)
|
$
|
—
|
|
|
$
|
(1,408
|
)
|
|
$
|
(1,408
|
)
|
|
|
|
|
|
|
LIABILITIES
|
Operating lease liabilities(1) -- current portion
|
$
|
8,319
|
|
|
$
|
(8,319
|
)
|
|
$
|
—
|
|
-- long-term
|
23,636
|
|
|
(23,636
|
)
|
|
—
|
|
Finance lease liabilities(2) -- current portion
|
2,297
|
|
|
(2,297
|
)
|
|
—
|
|
-- long-term
|
16,666
|
|
|
(16,666
|
)
|
|
—
|
|
Total Lease Liabilities
|
$
|
50,918
|
|
|
$
|
(50,918
|
)
|
|
$
|
—
|
|
(1) This includes arrangements for: (i) corporate and regional office operating leases, (ii) teleport co-location operating leases, and (iii) satellite bandwidth operating leases.
(2) This refers to the satellite bandwidth capacity arrangement assessed as a finance lease during the year ended December 31, 2019. The right-of-use asset balance as of December 31, 2019 included the unamortized lease incentive of $0.9 million and unamortized unfavorable contract liability of $6.7 million.
(3) This includes customer equipment arrangements classified as sales-type leases as of December 31, 2019. In addition, the Company elected the practical expedient which allows the use of hindsight in determining the lease term.
(4) All existing arrangements as of January 1, 2019 were not re-assessed as allowed under our ASC 842 implementation. Any new arrangements or modifications to existing contracts after January 1, 2019 adoption date are subject to lease assessment or re-assessment in accordance with ASC 842’s new accounting model.
The following describes the nature of our various leasing arrangements and the impact to our statement of operations for the twelve months ended December 31, 2019:
Real Estate Operating 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, and it 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 cost. The Company has elected to separate the lease and non-lease components.
The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total lease expense for the twelve months ended December 31, 2019 was $6.0 million.
The Company’s leases have remaining lease terms of one year to 10.0 years. Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of 12 months or less, the Company has made an accounting policy election to not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet. Total lease expense recorded for these short-term leases is immaterial for the twelve months ended December 31, 2019.
Teleport Co-Location Operating Leases (as a Lessee)
The Company engages certain bandwidth providers for teleport co-location services to deliver bandwidth to our network. These co-location service agreements typically include provisions for physical rack space at a third-party teleport facility. We
have determined that the space provided for our equipment constitutes an operating lease. The Company has elected to separate the lease and non-lease components.
These leases have remaining lease terms of one year to 9.0 years as of December 31, 2019. The Company records lease expense on a straight-line basis over the lease term as part of cost of sales -- licensing and services. Total lease cost recorded for the twelve months ended December 31, 2019 was $1.2 million.
Satellite Bandwidth Operating & Finance Leases (as a Lessee)
The Company maintains agreements with satellite service providers to provide for satellite bandwidth capacity. The Company evaluates these arrangements for embedded leases when the Company has the right to control the use of a significant portion of the identified asset. The Company has elected to separate the lease and non-lease components.
Bandwidth Operating Leases
During the year ended December 31, 2019, the Company recorded right-of-use assets and lease liabilities for certain bandwidth capacity arrangements meeting the operating lease classification. These leases have remaining lease terms of one year to 2.0 years as of December 31, 2019. The Company records lease expense on a straight-line basis over the lease term as part of cost of sales -- licensing and services. Total lease cost recorded for the twelve months ended December 31, 2019 was $0.8 million.
For leases with a term of 12 months or less, the Company has made an accounting policy election to not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet. Total lease expense recorded for a short-term lease relating to our satellite bandwidth capacity agreement is $0.9 million for the twelve months ended December 31, 2019.
Bandwidth Finance Lease
During the quarter ended June 30, 2019, the Company modified an existing arrangement for bandwidth capacity that provided us with the right to control a significant portion of the identified asset. The modified agreement met the criteria of finance lease classification.
This finance lease has a remaining lease term of 6.5 years as of December 31, 2019. The Company records amortization of right-of-use assets and interest accretion on finance lease liabilities as part of cost of sales -- licensing and services and interest expense, net, respectively. The following table provides the components of the finance lease cost for the twelve months ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
Amount
|
Amortization of right-of-use asset, net of lease incentive and contract liability credits
|
|
$
|
981
|
|
Interest accretion on finance lease liabilities
|
|
938
|
|
Total lease cost
|
|
$
|
1,919
|
|
Other Arrangements (as a Lessee)
The Company leases certain computer software and equipment facilities under finance leases that expire on various dates through 2022, for which the outstanding lease liability balance was assessed as not material as of December 31, 2019.
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. We account for existing equipment lease transactions as operating leases. We recognize lease payments for operating leases as licensing and services revenue in our consolidated statement of operations on a straight-line basis over the lease term.
We assess new equipment lease arrangements or modifications to existing equipment lease arrangements for operating or sales-type lease classification. The Company’s lease terms may give our customer’s options to extend the lease or have automatic renewals, the Company includes these terms when it is reasonably certain that the customer will exercise that option. 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. We allocate the total consideration in a contract assessed with a sales-type lease using the expected cost-plus margin and residual methods for the lease and non-lease components, respectively. The Company’s lease term includes any option to extend the lease when it is reasonably certain to be exercised based on consideration of all relevant economic factors.
The service revenues (with embedded operating equipment leases) and recognized revenues on sales-type equipment leases in which the Company acts as the lessor for the year ended December 31, 2019 is presented in the following table (in thousands):
|
|
|
|
|
|
Amount
|
Bandwidth service and equipment revenues(1)
|
$
|
117,339
|
|
Earned revenues on sales-type leases at commencement(2)
|
1,711
|
|
Total Licensing and Service Revenues -- Maritime and Land Connectivity
|
$
|
119,050
|
|
(1) This is presented as part of Revenues -- Licensing and services in our consolidated statement of operations, and includes the equipment lease component that is embedded in the overall bandwidth service arrangement. Since we adopted the practical expedient to not separate the lease and non-lease components as allowed with the ASC 842 implementation as of January 1, 2019, we will continue to classify existing embedded equipment arrangements as operating leases, to the extent unmodified.
(2) This includes the equipment lease revenues recognized at commencement date of the customer equipment arrangements classified as sales-type leases. As equipment leasing is a standard component in our connectivity business model, we present equipment revenues relating to these sales-type leases on a gross basis, and recognize a corresponding cost of sales equal to the net book value of the leased equipment. Interest income component is considered immaterial.
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, as well as supplemental cash flow information for the twelve months ended December 31, 2019 (in thousands):
|
|
|
|
|
|
Amount
|
Supplemental cash flow information:
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
7,027
|
|
Cash paid for amounts included in the measurement of finance lease liabilities
|
$
|
2,192
|
|
Right-of-use-assets obtained in exchange for operating lease obligations
|
$
|
9,564
|
|
Right-of-use-assets obtained in exchange for finance lease obligations
|
$
|
20,218
|
|
Weighted average remaining lease term:
|
|
Real estate operating leases
|
7.10 years
|
|
Teleport co-location operating leases
|
4.90 years
|
|
Satellite capacity operating leases
|
1.50 years
|
|
Satellite capacity finance lease
|
6.50 years
|
|
Weighted average IBR:
|
|
Real estate operating leases
|
8.17
|
%
|
Teleport co-location operating leases
|
8.90
|
%
|
Satellite capacity operating leases
|
7.49
|
%
|
Satellite capacity finance lease
|
8.30
|
%
|
Maturity Analysis
Undiscounted Cash Flows and Reconciliation to Consolidated Balance Sheet
The following table reflects a summary of the undiscounted cash flows on an annual basis and reconciliation to the Company’s lease assets and liabilities as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Lessee
|
|
As a Lessor
|
Years Ending December 31,
|
Real Estate
|
|
Satellite Capacity
|
|
Satellite Capacity
|
|
Teleport
Co-Location
|
|
Total
|
|
Equipment Held by Customers
|
Lease Classification
|
Operating
|
|
Finance
|
|
Operating
|
|
Operating
|
|
|
Sales-Type
|
2020
|
$
|
5,227
|
|
|
$
|
3,758
|
|
|
$
|
2,131
|
|
|
$
|
1,702
|
|
|
$
|
12,818
|
|
|
$
|
469
|
|
2021
|
4,962
|
|
|
3,758
|
|
|
791
|
|
|
1,554
|
|
|
11,065
|
|
|
464
|
|
2022
|
4,652
|
|
|
3,758
|
|
|
—
|
|
|
1,241
|
|
|
9,651
|
|
|
386
|
|
2023
|
3,651
|
|
|
3,758
|
|
|
—
|
|
|
561
|
|
|
7,970
|
|
|
258
|
|
2024
|
3,655
|
|
|
3,758
|
|
|
—
|
|
|
550
|
|
|
7,963
|
|
|
223
|
|
Thereafter
|
10,974
|
|
|
5,640
|
|
|
—
|
|
|
966
|
|
|
17,580
|
|
|
—
|
|
Total Future Lease Payments
|
33,121
|
|
|
24,430
|
|
|
2,922
|
|
|
6,574
|
|
|
67,047
|
|
|
1,800
|
|
Less: Imputed interest
|
(9,232
|
)
|
|
(5,467
|
)
|
|
(155
|
)
|
|
(1,275
|
)
|
|
(16,129
|
)
|
|
(292
|
)
|
Present Value of Lease Liabilities
|
$
|
23,889
|
|
|
$
|
18,963
|
|
|
$
|
2,767
|
|
|
$
|
5,299
|
|
|
$
|
50,918
|
|
|
|
Net Investment in Sales-Type Leases
|
|
|
|
|
|
|
|
|
|
|
$
|
1,508
|
|
The following is a schedule of future minimum lease payments for our 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
|
|
Maritime & Land MRC’s
The following is a schedule of future monthly recurring charges (“MRCs”) arising from our contractual arrangements with Maritime & Land Connectivity customers as of December 31, 2019 (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2020
|
$
|
80,459
|
|
2021
|
38,595
|
|
2022
|
7,680
|
|
2023 and thereafter
|
2,944
|
|
Total Maritime and Land Monthly Recurring Charges
|
$
|
129,678
|
|
The following is a schedule of future MRCs arising from our contractual arrangements with Maritime and 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 Maritime and Land Monthly Recurring Charges
|
$
|
151,850
|
|
The book value of the equipment held by customers under operating leases, which are classified as “Equipment” in Note 5 - Property & Equipment, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Equipment
|
|
|
|
Gross balance
|
$
|
57,369
|
|
|
$
|
57,162
|
|
Accumulated depreciation
|
(30,692
|
)
|
|
(27,987
|
)
|
Net Book Value
|
$
|
26,677
|
|
|
$
|
29,175
|
|
5. Property and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Leasehold improvements
|
$
|
11,319
|
|
|
$
|
6,579
|
|
Furniture and fixtures
|
2,683
|
|
|
2,147
|
|
Equipment (1)
|
157,259
|
|
|
151,953
|
|
Computer equipment
|
16,993
|
|
|
18,561
|
|
Computer software (1)(2)
|
51,939
|
|
|
38,475
|
|
Automobiles
|
301
|
|
|
293
|
|
Buildings
|
7,088
|
|
|
8,005
|
|
Albatross (aircraft)
|
456
|
|
|
447
|
|
Satellite transponders
|
70,100
|
|
|
62,306
|
|
Construction in-progress (2)
|
1,499
|
|
|
11,847
|
|
Total property, plant, and equipment
|
319,637
|
|
|
300,613
|
|
Accumulated depreciation (1) (2)
|
(174,342
|
)
|
|
(124,036
|
)
|
Property, plant and equipment, net
|
$
|
145,295
|
|
|
$
|
176,577
|
|
|
|
(1)
|
Includes equipment & computer software acquired under finance leases of $1.2 million and $1.0 million as December 31, 2019 and 2018, net of and related accumulated amortization of $0.9 million and $1.0 million as of December 31, 2019 and 2018, respectively.
|
|
|
(2)
|
Includes internally developed software of $39.0 million and $33.4 million and related accumulated amortization of $27.8 million and $19.3 million as of December 31, 2019 and 2018, respectively. Amortization expense for the years ended December 31, 2019 and 2018 was $8.5 million and $7.9 million, respectively. There were no impairment losses during the years ended December 31, 2019 and 2018. During the years ended December 31, 2019 and 2018, the Company capitalized software development costs totaling $5.7 million and $10.0 million, respectively.
|
Depreciation expense for property, plant and equipment, including software amortization expense and amortization of assets under capital leases, for the years ended December 31, 2019 and 2018 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Consolidated Statement of Operations Classification:
|
|
|
|
Cost of sales
|
$
|
36,971
|
|
|
$
|
42,535
|
|
Sales and marketing
|
3,450
|
|
|
3,553
|
|
Product development
|
3,181
|
|
|
3,257
|
|
General and administrative
|
13,070
|
|
|
12,560
|
|
Total
|
$
|
56,672
|
|
|
$
|
61,905
|
|
Note 6. Goodwill
The changes in the carrying amounts of goodwill by reporting unit are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation Connectivity
|
|
Maritime & Land Connectivity
|
|
Media & Content
|
|
Total
|
Balance as of December 31, 2017
|
$
|
54,037
|
|
|
$
|
22,130
|
|
|
$
|
83,529
|
|
|
$
|
159,696
|
|
Foreign currency translation
|
(15
|
)
|
|
—
|
|
|
(119
|
)
|
|
(134
|
)
|
Balance as of December 31, 2018
|
54,022
|
|
|
22,130
|
|
|
83,410
|
|
|
159,562
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
45
|
|
|
45
|
|
Balance as of December 31, 2019
|
$
|
54,022
|
|
|
$
|
22,130
|
|
|
$
|
83,455
|
|
|
$
|
159,607
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
98,022
|
|
|
$
|
209,130
|
|
|
$
|
83,455
|
|
|
$
|
390,607
|
|
Accumulated impairment loss
|
(44,000
|
)
|
|
(187,000
|
)
|
|
—
|
|
|
(231,000
|
)
|
Balance as of December 31, 2019, net
|
$
|
54,022
|
|
|
$
|
22,130
|
|
|
$
|
83,455
|
|
|
$
|
159,607
|
|
There was no goodwill impairment recognized in the years ended December 31, 2019 and 2018.
Note 7. 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, 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.
Intangible assets, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Weighted Average Useful Lives
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Existing technology - software
|
5.2 years
|
|
$
|
36,799
|
|
|
$
|
30,487
|
|
|
$
|
6,312
|
|
Developed technology
|
8.0 years
|
|
7,317
|
|
|
5,716
|
|
|
1,601
|
|
Customer relationships
|
8.7 years
|
|
138,358
|
|
|
91,124
|
|
|
47,234
|
|
Backlog
|
3.0 years
|
|
18,300
|
|
|
18,300
|
|
|
—
|
|
Other
|
5.1 years
|
|
1,249
|
|
|
913
|
|
|
336
|
|
Total
|
|
|
$
|
202,023
|
|
|
$
|
146,540
|
|
|
$
|
55,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Weighted Average Useful Lives
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
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
|
|
The Company expects to record amortization of the intangible assets as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2020
|
$
|
22,262
|
|
2021
|
13,824
|
|
2022
|
7,907
|
|
2023
|
6,890
|
|
2024
|
4,230
|
|
Thereafter
|
370
|
|
Total
|
$
|
55,483
|
|
The Company recorded amortization expense of $28.6 million and $38.4 million, and for the years ended December 31, 2019 and 2018, respectively.
Note 8. Equity Method Investments
The Company owns 49% interests in WMS and in Santander. During the fourth quarter of 2018, in accordance with ASC 323, the Company completed an assessment of the recoverability of its equity method investments. During the year ended December 31, 2018, the carrying value of its interest in the WMS joint venture exceeded the estimated fair value of its interest, which management concluded was other than temporary, and accordingly recorded an impairment charge of $51.0 million relating to its WMS equity investment.
During the fourth quarter of 2019, following the assessment of the recoverability of its equity method investments, the Company determined that the fair value of its investments in WMS and Santander exceeded their respective carrying values and accordingly recorded no impairment charge.
Following is the summarized financial information for such equity method investments on an aggregated basis as of and for the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Current assets
|
$
|
50,588
|
|
|
$
|
40,224
|
|
Non-current assets
|
25,370
|
|
|
26,115
|
|
Current liabilities
|
26,593
|
|
|
15,880
|
|
Non-current liabilities
|
2,207
|
|
|
2,581
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Revenue
|
$
|
147,329
|
|
|
$
|
132,087
|
|
Operating expenses
|
117,768
|
|
|
109,024
|
|
Net income
|
29,561
|
|
|
23,063
|
|
The carrying values of the Company’s equity interests in WMS and Santander as of December 31, 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Carrying value in the Company’s equity method investments
|
$
|
78,886
|
|
|
$
|
83,135
|
|
As of December 31, 2019, there was an aggregate difference of $55.8 million between the carrying amounts (inclusive of the impact of the impairment losses) 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 9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Accounts payable
|
$
|
94,679
|
|
|
$
|
96,105
|
|
Content license and royalties
|
42,411
|
|
|
38,946
|
|
Accrued legal settlements
|
4,011
|
|
|
6,969
|
|
Accrued payroll obligations
|
6,807
|
|
|
7,578
|
|
Other accrued expenses
|
31,022
|
|
|
27,458
|
|
Total
|
$
|
178,930
|
|
|
$
|
177,056
|
|
Note 10. Financing Arrangements
The following table sets forth the summary of the Company’s outstanding indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Senior secured term loan facility, due January 2023(+)
|
$
|
506,037
|
|
|
$
|
478,125
|
|
Senior secured revolving credit facility, due January 2022(+)(1)
|
43,315
|
|
|
54,015
|
|
2.75% convertible senior notes, due February 2035(2)
|
82,500
|
|
|
82,500
|
|
Second lien notes, due 2023(3)
|
178,034
|
|
|
158,450
|
|
Other debt(4)
|
23,685
|
|
|
1,707
|
|
Unamortized bond discounts, fair value adjustments and issue costs, net
|
(60,509
|
)
|
|
(65,186
|
)
|
Total carrying value of debt
|
773,062
|
|
|
709,611
|
|
Less: current portion, net
|
(15,678
|
)
|
|
(22,673
|
)
|
Total non-current
|
$
|
757,384
|
|
|
$
|
686,938
|
|
|
|
(+)
|
This facility is a component of the 2017 Credit Agreement.
|
|
|
(1)
|
As of December 31, 2019, the available balance under our $85.0 million revolving credit facility is $37.4 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 December 31, 2019, we had outstanding letters of credit of $4.3 million under the 2017 Credit Agreement. The Company expects to draw on the 2017 Revolving Loans from time to time to fund its working capital needs and for other general corporate purposes.
|
|
|
(2)
|
The principal amount outstanding of the Convertible Notes as set forth in the above table was $82.5 million as of December 31, 2019. The carrying amount, net of debt issuance costs and associated discount, was $71.1 million and $70.4 million as of December 31, 2019 and 2018, respectively.
|
(3) The principal amount outstanding of the Second Lien Notes as set forth in the foregoing table was $178.0 million as of December 31, 2019 and includes approximately $19.6 million of PIK interest converted to principal during the year ended December 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 Consolidated Balance Sheets within “Additional paid-in capital”.
(4) As of December 31, 2019, Other debts primarily consisted of (i) $3.4 million remaining financed amount for transponder purchases (payable in April 2020); and (ii) $19.0 million of finance lease liability relating to an assessed right-of-use over a satellite bandwidth capacity (refer to Note 4. Leases for further details).
Senior Secured Credit Agreement (2017 Credit Agreement)
On January 6, 2017, the Company entered into a senior secured credit agreement (“2017 Credit Agreement”) that provides for aggregate principal borrowings of up to $585 million, consisting of a $500 million term-loan facility (the “2017 Term Loans”) maturing January 6, 2023 and a $85 million revolving credit facility (the “2017 Revolving Loans”) maturing January 6, 2022. The Company used the proceeds of borrowings under the 2017 Credit Agreement to repay the then outstanding balance under a former EMC credit facility assumed in the EMC Acquisition and terminated the former credit facility assumed from EMC. In connection with this January 2017 refinancing, the Company recorded a loss on extinguishment of debt in the amount of $14.4 million during the first quarter of 2017.
The 2017 Term Loans initially bore interest on the outstanding principal amount thereof at a rate per annum equal to (i) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) plus 6.00% or (ii) the Base Rate (as defined in the 2017 Credit Agreement) plus 5.00% or (iii) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) for each Interest Period (as defined in the 2017 Credit Agreement) plus 6.00%. The 2017 Credit Agreement initially required quarterly principal payments equal to 0.25% of the original aggregate principal amount of the 2017 Term Loans, with such payments reduced for prepayments in accordance with the terms of the 2017 Credit Agreement. The 2017 Revolving Loans initially bore interest at a rate per annum equal to (i) the Base Rate plus 5.00% or (ii) the Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus 6.00% until the delivery of financial statements for the first full fiscal quarter ending after the date of the 2017 Credit Agreement (“Closing Date”). After the delivery of those financial statements, 2017 Revolving Loans bear interest at a rate based on the Base Rate, Eurocurrency Rate or EURIBOR (each as defined in the 2017 Credit Agreement) plus an interest-rate spread thereon that varies based on the Consolidated First Lien Net Leverage Ratio (as defined in the 2017 Credit Agreement). The spread thereon initially ranged from 4.50% to 5.00% for the Base Rate and 5.50% to 6.00% for the Eurocurrency Rate and EURIBOR.
The 2017 Credit Agreement also provides for the issuance of letters of credit in the amount equal to the lesser of $15.0 million and the aggregate amount of the then-remaining revolving loan commitment. As of December 31, 2019, the Company had outstanding letters of credit of $4.3 million under the 2017 Credit Agreement.
Certain of the Company’s subsidiaries are guarantors of its obligations under the 2017 Credit Agreement. In addition, the 2017 Credit Agreement is secured by substantially all of the Company’s tangible and intangible assets, including a pledge of all of the outstanding capital stock of substantially all of the Company’s domestic subsidiaries and 65% of the shares or equity interests of foreign subsidiaries, subject to certain exceptions.
Covenant Compliance Under 2017 Credit Agreement
The 2017 Credit Agreement contains various customary restrictive covenants that limit the Company’s ability to, among other things: create or incur liens on assets; make any investments, loans or advances; incur additional indebtedness, engage in mergers, dissolutions, liquidations or consolidations; engage in transactions with affiliates; make dispositions; and declare or make dividend payments. The 2017 Credit Agreement requires the Company to maintain compliance with a maximum consolidated first lien net leverage ratio, as set forth in the 2017 Credit Agreement. In addition, the 2017 Credit Agreement contains representations and warranties as to whether a material adverse effect on the Company has occurred since January 6, 2017, the closing date of the 2017 Credit Agreement. One of the conditions to drawing on the revolving credit facility is confirmation that the representations and warranties in the 2017 Credit Agreement are true on the date of borrowing, and if the Company is unable to make that confirmation, including that no material adverse effect has occurred, the Company will be unable to draw down further on the revolver.
As of December 31, 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. On April 15, 2020, the Company entered into the Tenth Amendment to the Credit Agreement and obtained a waiver related to obtaining a “going concern” or like qualification or exception opinion for the Company’s the year-end December 31, 2019 financial statements. Given the uncertainty of the COVID-19 impact on the Company’s results of operations and liquidity subsequent to December 31, 2019, we do not expect to remain in compliance with all financial covenants in the second half of 2020. We cannot be assured that we will be able to obtain additional covenant waivers or amendments in the future which may have a material adverse effect on the Company’s results of operations or liquidity.
Amendments and Waivers under the 2017 Credit Agreement
On July 19, 2019, the Company entered into an amendment of its senior secured credit agreement and security agreement, which, among other things, increased the borrowing capacity of the existing senior secured term loan due in 2023 (the “Term Loan”) by $40.0 million, reduced scheduled principal repayments over the next six quarters by an aggregate amount of approximately $25.3 million and provided additional stock pledges (including the remaining 35% of the equity interests of first-tier foreign subsidiaries that was previously not pledged) as collateral. As of December 31, 2019, approximately 75% of our total consolidated assets are subject to lien under this 2017 Credit Agreement Amendment.
In relation to the 2017 Credit Agreement Amendment, we incurred total issuance costs of $3.5 million, of which $1.6 million was assessed to be eligible for capitalization and will be amortized over the remaining term of the 2017 Credit Agreement. The remaining $1.9 million was immediately recognized as expense during the quarter ended September 30, 2019. Net of fees and expenses, the 2017 Credit Agreement Amendment is expected to result in approximately $60 million of incremental liquidity until the end of 2020.
The Company further amended the 2017 Credit Agreement on July 19, 2019 and March 8, 2018 in connection with the Searchlight investment.
2.75% Convertible Senior Notes due 2035
In February 2015, the Company issued an aggregate principal amount of $82.5 million of convertible senior notes due 2035 (the “Convertible Notes”) in a private placement. The Convertible Notes were issued at par, pay interest semi-annually in arrears at an annual rate of 2.75% and mature on February 15, 2035, unless earlier repurchased, redeemed or converted pursuant to the terms of the Convertible Notes. In certain circumstances and subject to certain conditions, the Convertible Notes are convertible at an initial conversion rate of 2.1563 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $463.75 per share), subject to adjustment. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2034, only if one or more of the following conditions has been satisfied: (1) during any calendar quarter beginning after March 31, 2015 if the closing price of the Company’s common stock equals or exceeds 130% of the respective conversion price per share during a defined period at the end of the previous quarter, (2) during the five consecutive business day period immediately following any five consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if specified corporate transactions occur, or (4) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date. On or after November 15, 2034, until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes at any time, regardless of the foregoing circumstances.
On February 20, 2022, February 20, 2025 and February 20, 2030 or if the Company undergoes a “fundamental change” (as defined in the indenture governing the Convertible Notes (the “Indenture”)), subject to certain conditions, a holder will have the option to require the Company to repurchase all or a portion of its Convertible Notes for cash at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date. If the Company’s common stock ceases to be listed or quoted on Nasdaq, this would constitute a “fundamental change,” as defined in the Indenture, and the holders of the Convertible Notes would have the right to require the Company to repurchase all or a portion of its convertible notes at a repurchase price equal to 100% of the principal amount of its convertible notes to be repurchased. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) or if the Company delivers a redemption notice prior to February 20, 2022, the Company will, in certain circumstances, increase the conversion rate for a holder that converts its Convertible Notes in connection with such make-whole fundamental change or redemption notice, as the case may be.
The Company may not redeem the Convertible Notes prior to February 20, 2019. The Company may, at its option, redeem all or part of the Convertible Notes at any time (i) on or after February 20, 2019 if the last reported sale price per share of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption and (ii) on or after February 20, 2022 regardless of the sale price condition described in clause (i), in each case, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Upon conversion of any Convertible Note, the Company shall pay or deliver to the converting noteholder cash, shares of common stock or a combination of cash and shares of its common stock, at the Company’s election.
The Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component of $69.5 million was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component was calculated to be $13.0 million and represents the conversion option which was determined by deducting the fair value of the liability component from the principal amount of the notes. This difference represents a debt discount that is amortized to interest expense over the term of the Convertible Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the direct transaction costs (the “issuance costs”) related to the Convertible Notes, the Company allocated the total amount of issuance costs incurred to the liability and equity components based on their relative values. The Company recorded issuance costs of $1.8 million and $0.3 million to the liability and equity components, respectively. Issuance costs, including fees paid to the initial purchasers who acted as intermediaries in the placement of the Convertible Notes, attributable to the liability component are presented in the Consolidated Balance Sheets as a direct deduction from the carrying amount of the debt instrument and are amortized to interest expense over the term of the Convertible Notes in the Consolidated Statements of Operations. The issuance costs attributable to the equity component are netted with the equity component and included within Additional paid-in capital in the Consolidated Balance Sheets. Interest expense related to the amortization expense of the issuance costs associated with the liability component was not material during the twelve months ended December 31, 2019.
As of December 31, 2019, and 2018, the outstanding principal on the Convertible Notes was $82.5 million, and the outstanding Convertible Notes balance, net of debt issuance costs and discount associated with the equity component, was $71.1 million and $70.4 million, respectively.
Searchlight Investment
Second Lien Notes due June 2023 and Warrants
On March 27, 2018 (the “Closing Date”) the Company issued to Searchlight II TBO, L.P. (“Searchlight”) $150.0 million in aggregate principal amount of its Second Lien Notes, and to Searchlight II TBO-W L.P. warrants to acquire an aggregate of 722,631 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), at an exercise price of $0.25 per share (the “Penny Warrants”), and warrants to acquire an aggregate of 520,000 shares of Common Stock at an exercise price of $39.25 per share (the “Market Warrants” and, together with the Penny Warrants, the “Warrants”), for an aggregate price of $150.0 million.
The Second Lien Notes mature on June 30, 2023. Interest on the Second Lien Notes will initially be payable in kind (compounded semi-annually) at a rate of 12.0% per annum. Interest will automatically convert to accruing cash pay interest at a rate of 10.0% per annum upon the earlier of (i) March 15, 2021 and (ii) the last day of the most recently ended fiscal quarter of the Company for which financial statements have been delivered for which the Company’s “total net leverage ratio” has decreased to 3.39 to 1.0. The Company’s “total net leverage ratio” is as defined in the purchase agreement relating to the Second Lien Notes
(the “Purchase Agreement”), and uses a “Consolidated EBITDA” definition from the Purchase Agreement that is different than the “Adjusted EBITDA” figure that the Company publicly report to its investors.
Each of the Company’s subsidiaries that guarantee the Company’s obligations under its 2017 Credit Agreement also guarantee the Second Lien Notes (the “Guarantors”) pursuant to a guaranty agreement (the “Guaranty”). The Second Lien Notes and the guarantees thereof are subordinated in right of payment to the obligations of the Company and the Guarantors under the 2017 Credit Agreement and are secured by the same assets securing the obligations of the Company and the Guarantors under the 2017 Credit Agreement on a second lien basis, subject to the terms of an intercreditor and subordination agreement (the “Intercreditor Agreement”) among the Company, the Guarantors, the Administrative Agent and the collateral agent.
Prior to the third anniversary of the Closing Date, the Company may redeem the Second Lien Notes at a price equal to 100.0% of the principal amount of the Second Lien Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to (but excluding) the date of redemption. Thereafter, each Note will be redeemable at 105.0% of the principal amount thereof from the third anniversary of the Closing Date until (and excluding) the fourth anniversary of the Closing Date, at 102.5% of the principal amount thereof from the fourth anniversary of the Closing Date until (and excluding) the fifth anniversary of the Closing Date, and thereafter at 100.0% of the principal amount thereof, plus, in each case, accrued and unpaid interest thereon, if any, to (but excluding) the redemption date. Upon a “change of control” (as defined in the Purchase Agreement), the Company must offer to purchase the Second Lien Notes at a price in cash equal to 101% of the principal amount of such Second Lien Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of purchase.
The Purchase Agreement contains affirmative and negative covenants of the Company and its subsidiaries consistent with those in the 2017 Credit Agreement (including limitations on the amount of first lien indebtedness that may be incurred) and contains customary events of default, upon the occurrence and during the continuance of which the majority holders of the Second Lien Notes may declare all obligations under the Second Lien Notes to become immediately due and payable. There are no financial “maintenance covenants” in the purchase agreement for the Second Lien Notes.
On the Closing Date, the Company and the Guarantors entered into a security agreement with the Collateral Agent (the “Security Agreement”). Under the Security Agreement, each of the Company and the Guarantors granted and pledged to the Collateral Agent, to secure the payment and performance in full of all of the obligations under the Notes, a security interest in substantially all of its respective assets, and all proceeds and products and supporting obligations in respect thereof, subject to customary limitations, exceptions, exclusions and qualifications, and the Security Agreement is subject to the terms of the Intercreditor Agreement.
Searchlight is not permitted to transfer its Second Lien Notes before January 1, 2021, except to its controlled affiliates.
On July 19, 2019, concurrently with entering into the 2017 Credit Agreement Amendment, the Company also entered into a second amendment to the securities purchase agreement and amendment to security agreement (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 to extend through maturity of the Second Lien Notes.
The Warrants
The Warrants vest and are exercisable at any time and from time to time after the Vesting Date (as defined below) until on or prior to the close of business on the tenth anniversary of the Closing Date. The Warrants vest and become exercisable on January 1, 2021 (the “Vesting Date”), if the average of the 45-day volume-weighted average price (“VWAP”) of the Company’s common stock (as reported by Nasdaq) is at or above (i) $100.00, in the case of the Penny Warrants, and (ii) $60.00, in the case of the Market Warrants, in each case for 45 consecutive trading days at any time following the Closing Date. The VWAP condition in respect of the Market Warrants was satisfied in July 2018.
The holders of the Warrants cannot exercise the Warrants if and to the extent, as a result of such exercise, either (i) such holder’s (together with its affiliates) aggregate voting power on any matter that could be voted on by holders of the Common Stock would exceed 19.9% of the maximum voting power outstanding or (ii) such holder (together with its affiliates) would beneficially own more than 19.9% of the Company’s then outstanding common stock, subject to customary exceptions in connection with public sales or the consummation of a specified liquidity event described in the Warrants.
The Warrants also include customary anti-dilution adjustments.
Pursuant to the terms of a Warrant holders Agreement between the Company and Searchlight II TBO-W L.P., entered into on the Closing Date, the Company increased the size of its board of directors (the “Board”) by two members, and appointed each of Eric Zinterhofer and Eric Sondag as Class III directors (as such term is used in the Company’s certificate of incorporation) of the Board, with a term expiring in 2020. For so long as Searchlight and its controlled affiliates beneficially own at least 25% of the number of Penny Warrants issued on the Closing Date (and/or the respective shares of the Company’s common stock issued in connection with the exercise of the Penny Warrants), Searchlight shall have the right to nominate a number (rounded up to the nearest whole number) of individuals for election to its Board equal to the product of the following (such individuals, the “Searchlight Nominees”):
|
|
•
|
the number of directors then serving on the Board, multiplied by
|
|
|
•
|
a fraction, the numerator of which is the total number of outstanding shares of the Company’s common stock underlying the Penny Warrants beneficially owned by Searchlight (after giving effect to the exercise of the Penny Warrants) and the denominator of which is the sum of (A) the total number of outstanding shares of the Company’s common stock plus (B) the number of shares of the Company’s common stock underlying the Penny Warrants that have not yet been exercised;
|
Searchlight will not be entitled to nominate more than one individual to the Board if it beneficially owns less than 50% of the Penny Warrants (or the underlying shares of common stock) issued or issuable on the Closing Date. In no event will Searchlight be entitled to nominate more than two individuals to the Board.
Searchlight’s rights to Board representation terminate if Searchlight and its affiliates have an employee, member or partner (other than a limited partner who is an investor in Searchlight) who is a director or executive officer of a competitor of the Company, or if Searchlight has a portfolio company that is a competitor of the Company.
Stock Buy-back Restriction
Until the earlier of (i) the date on which Searchlight no longer beneficially owns at least 25% of the number of Market Warrants issued on the Closing Date (and/or the respective shares of Common Stock issued in connection with the exercise of the Market Warrants) and (ii) January 1, 2021, without the prior consent of Searchlight, the Company will not directly or indirectly redeem, purchase or otherwise acquire any equity securities of the Company for a consideration per share (plus, in the case of any options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) greater than the market price (as defined in the Warrants) per share of common stock immediately prior to the earlier of (x) the announcement of such acquisition or (y) such acquisition.
Warrant Transfer Restrictions
Searchlight is not permitted to transfer its Warrants prior to January 1, 2021, except to its controlled affiliates or in connection with certain tender offers, exchange offers, mergers or similar transactions. The Warrants and the underlying shares of common stock are freely transferable by Searchlight on and after January 1, 2021.
Registration Rights
Searchlight has customary shelf, demand and piggyback registration rights with respect to the common stock (including shares of common stock underlying the Warrants) that it holds, including demand registrations and underwritten “shelf takedowns,” subject to specified restrictions, thresholds and the Company’s eligibility to use a registration statement on Form S-3.
Participation Rights
Until the earlier of (i) the fifth anniversary of the Closing Date and (ii) the date Searchlight no longer holds at least 50% of the Penny Warrants (or the respective shares of common stock underlying such Penny Warrants), Searchlight has participation rights with respect to issuances of common equity securities by the Company, subject to exceptions. These rights entitle Searchlight to opt to participate in future issuances by the Company of common equity or common equity-linked securities, subject to customary exceptions.
Standstill
Until the earlier of (i) the 18-month anniversary of the Closing Date and (ii) the date on which Searchlight owns less than 10% of the outstanding common stock (directly or on an as-exercised basis), neither Searchlight nor its affiliates may (unless invited by the Company’s Board) (a) acquire any voting equity securities or material assets of the Company if Searchlight (together
with its affiliates) would beneficially hold in the aggregate more than 9.9% of the Company’s Convertible Notes or 9.9% of the Company’s common stock, (b) acquire all or a material part of the Company or its subsidiaries, (c) make, or in any way participate in any “proxy contest” or other solicitation of proxies, (d) form, join or in any way participate in a “group” (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) with respect to any voting securities of the Company or any of its subsidiaries, (e) seek to influence or control the Company’s management or policies, (f) directly or indirectly enter into any discussions, negotiations, arrangements or understandings with any other person with respect to any of the foregoing activities, (g) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection any of the foregoing activities or (h) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing.
Other Debt
With the acquisition of Travel Entertainment Group Equity Limited and subsidiaries (“IFES”) on October 18, 2013, the Company assumed a $1.1 million mortgage maturing in October 2032 that bears interest at a rate equal to 1.75% per annum. Interest is paid on a monthly basis. There was no accrued interest owing on the mortgage as of December 31, 2019 and 2018. As of December 31, 2019, and 2018, there was $0.6 million and $0.7 million due on the principal amount of the mortgage, respectively.
In connection with the EMC Acquisition, the Company assumed approximately $1.1 million of finance lease obligations. The Company also entered into an additional $1.0 million finance lease obligation during 2016 and $0.5 million during 2019. These leases expire at various dates through 2022. As of December 31, 2019, and 2018, the Company had $0.7 million and $0.9 million of finance lease obligations, respectively, included in Other debt.
The aggregate contractual maturities of all borrowings due subsequent to December 31, 2019, are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2020
|
$
|
15,678
|
|
2021
|
29,854
|
|
2022
|
73,272
|
|
2023
|
623,299
|
|
2024
|
3,197
|
|
Thereafter
|
88,271
|
|
Total
|
$
|
833,571
|
|
Recent Events
On February 28, 2020, as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, we further leveraged our balance sheet, and drew down the remaining $41.8 million under our Revolving Credit Facility with a corresponding increase in our cash on hand. Following the Drawdown, we have no remaining borrowing under the Revolving Credit Facility.
Amendments to Credit Agreement
On April 7, 2020, the Company entered into an Eighth Amendment to Senior Secured Credit Agreement among the Company, the guarantors party thereto, the lenders party thereto and Citibank, N.A., as administrative agent, which modified the Senior Secured Credit Agreement with respect to the following terms:
|
|
•
|
the affirmative financial reporting covenant has been modified, effective March 31, 2020, to extend the delivery deadline, solely with respect to such financial statements to be provided for the fiscal year ended December 31, 2019 and such accompanying report and opinion from such independent registered public accounting firm, to April 9, 2020.
|
The Eighth Amendment to Senior Secured Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.18.
On April 9, 2020, the Company entered into a Ninth Amendment to Senior Secured Credit Agreement among the Company, the guarantors party thereto, the lenders party thereto and Citibank, N.A., as administrative agent, which modified the Senior secured Credit Agreement with respect to the following terms:
|
|
•
|
the affirmative financial reporting covenant has been modified, to extend the delivery deadline, solely with respect to such financial statements to be provided for the fiscal year ended December 31, 2019 and such accompanying report and opinion from such independent registered public accounting firm, to April 16, 2020.
|
The Ninth Amendment to Senior Secured Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.19.
First Lien Amendment
On April 15, 2020, the Company entered into a Tenth Amendment to Senior Secured Credit Agreement (the “First Lien Amendment”) among the Company, the guarantors party thereto, the lenders party thereto and Citibank, N.A., as administrative agent, which modified the Senior secured Credit Agreement with respect to the following terms:
• The deadline for delivery of audited consolidated annual financial statements of the Company for the fiscal year ended December 31, 2019 has been extended from April 16, 2020 until May 14, 2020 (as such deadline may be extended from time to time by an order of the U.S. Securities Exchange Commission), and such financial statements may be subject to a “going concern” qualification.
• The deadline for delivery of unaudited consolidated quarterly financial statements of the Company for fiscal quarter ended March 31, 2020 has been extended from the date that is 45 days after the end of such fiscal quarter until June 29, 2020 (as such deadline may be extended from time to time by an order of the U.S. Securities Exchange Commission).
|
|
•
|
The deadline for delivery of a consolidated budget for fiscal year 2020 in respect of such fiscal year has been extended from 120 days after the end of the 2019 fiscal year until June 1, 2020.
|
• The Company will not be required to comply with the maximum consolidated first lien net leverage ratio for the test period ended on March 31, 2020.
In addition, pursuant to the First Lien Amendment, the Lenders consented to the Second Lien Amendment (described below) and to the transactions contemplated thereby. The First Lien Amendment was conditioned upon the Company being current on all interest on the loans that was due and payable immediately prior to giving effect to the First Lien Amendment, and includes the following additional covenants with respect to the Company:
• The Company has agreed to furnish to advisors of the Lenders (on a “professional eyes only” basis) a rolling thirteen-week budget cash flow forecast on a consolidated basis for the Company and its subsidiaries, and a material variance report for the prior week as compared to the applicable previously furnished forecast, with such forecast to be updated every four weeks and the material variance report to be distributed on a weekly basis.
• The Company has agreed to maintain undrawn revolving commitments plus cash and cash equivalents of the Company and its subsidiaries in an aggregate amount of not less than $17.5 million.
• Senior management and certain advisors of the Company will be available to participate in such conference calls as the advisors of the Lenders may request to discuss the financial results and financial condition of the Company and its subsidiaries, and provide such other information regarding the financial results, financial condition and business affairs of the Company and its subsidiaries as the advisors of the Lenders may reasonably request.
• Within five business days of the effective date of the First Lien Amendment, the Company will establish an independent committee of its board of directors, consisting of at least three members, each of whom is a Qualified Independent Director (as defined below), for the purpose of exploring financing, recapitalization, strategic transactions and other similar opportunities and transactions for the Company and its subsidiaries. Authorization by such independent committee will be required in connection with the Company’s or its applicable subsidiaries’ entering into any such financing, recapitalization, strategic transaction or other similar opportunity or transaction.
The First Lien Amendment to Senior Secured Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.20.
Second Lien Amendment
In addition, on April 15, 2020, the Company entered into a Third Amendment to Securities Purchase Agreement (the “Second Lien Amendment”) among the Company, the guarantors party thereto, and each purchaser party thereto. The Second Lien
Amendment amends the Securities Purchase Agreement, dated as of March 8, 2018, by and among the Company, Searchlight II TBO, L.P., Searchlight II TBO-W, L.P., and Cortland Capital Market Services LLC, as collateral agent, and modified this Purchase Agreement, including with respect to the following terms:
• The deadline for delivery of audited consolidated annual financial statements of the Company for the fiscal year ended December 31, 2019 has been extended from the date that is 120 days after the end of such fiscal year until the date that is 30 days after May 14, 2020 (as such deadline may be extended from time to time by an order of the U.S. Securities Exchange Commission), and such financial statements may be subject to a “going concern” qualification.
• The deadline for delivery of unaudited consolidated quarterly financial statements of the Company for fiscal quarter ended March 31, 2020 has been extended from the date that is 60 days after the end of such fiscal quarter until the date that is 15 days after June 29, 2020 (as such deadline may be extended from time to time by an order of the U.S. Securities Exchange Commission).
• The deadline for delivery of a consolidated budget for fiscal year 2020 in respect of such fiscal year has been extended from 120 days after the end of the 2019 fiscal year until June 1, 2020. Pursuant to the Second Lien Amendment, the noteholders consented to the First Lien Amendment and to the transactions contemplated thereby.
The Second Lien Amendment to Senior Secured Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.22.
Note 11. Commitments and Contingencies
Movie License and Internet Protocol Television (“IPTV”) Commitments
In the ordinary course of business, the Company has long-term commitments, such as license fees and guaranteed minimum payments owed to content providers. In addition, the Company has 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 the Company to the licensor.
The following is a schedule of future unconditional minimum commitments under movie and IPTV arrangements as of December 31, 2019 (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2020
|
$
|
36,534
|
|
2021
|
6,304
|
|
2022
|
2,913
|
|
Total minimum payments
|
$
|
45,751
|
|
Satellite Capacity Commitments
The Company maintains agreements with satellite service providers to provide for satellite capacity. The Company expenses these satellite fees in the month the service is provided as a charge to licensing and services cost of sales.
In connection with the EMC Acquisition, the Company assumed several contractual commitments for satellite services. During the third quarter of 2016, EMC entered into an amendment to its existing service agreement with one of its satellite service providers. Under this amendment, the amount of committed satellite bandwidth was significantly increased, and the Company’s total contract commitment was increased by $40 million.
The following is a schedule of future unconditional minimum satellite costs as of December 31, 2019 (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2020
|
$
|
78,668
|
|
2021
|
48,748
|
|
2022
|
34,527
|
|
2023
|
33,033
|
|
2024
|
33,033
|
|
Thereafter
|
58,353
|
|
Total minimum payments
|
$
|
286,362
|
|
Other Commitments
In the normal course of business, the Company enters into future purchase commitments with some of its connectivity vendors to secure future inventory for its airlines customers and the development pertaining to engineering and antenna projects. At December 31, 2019, the Company also had outstanding letters of credit in the amount of $4.3 million, which was issued under the letter of credit facility under the 2017 Credit Agreement. See Note 10. Financing Arrangements.
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated. The Company recorded accruals for loss contingencies when 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, the Company’s 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 the Company’s consolidated financial position, results of operations or cash flows. Some of the Company’s legal proceedings as well as other matters that its 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, the Company 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, the Company paid approximately $18.0 million in cash and issued approximately 72,000 shares of our common stock to settle lawsuits and other claims. Under the settlement agreement with UMG, the Company paid UMG an additional $5.0 million in cash in March 2017 and agreed to issue 20,000 additional shares of our common stock when and if our closing price of our common stock exceeds $250.00 per share and 16,000 additional shares of our common stock when and if the closing price of our common stock exceeds $300.00 per share.
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In 2016, the Company received notices from several other music rights holders and associations acting on their behalf regarding potential claims that the Company 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 the Company discusses in the following paragraph), the Company believes that a loss relating to these matters is probable, but the Company believes that it is unlikely to be material and therefore have accrued an immaterial amount for these loss contingencies. If initiated however, the Company intends 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. On December 3, 2019, the case was dismissed with prejudice pursuant to a settlement agreement with BMG for an aggregate payment of $5.5 million, to be paid over time, as follows: $0.5 million within 14 days of the execution of the settlement agreement; $1.5 million on or before each of December 31, 2019, June 30, 2020, and June 30, 2021; and $0.5 million on or before June 30, 2022. The Company has an accrual for this legal settlement in the amount of $3.5 million as of December 31, 2019.
|
|
•
|
SwiftAir Litigation. On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44 and Southwest Airlines for breach of contract, quantum meruit, unjust enrichment and several other contract- and tort/statutory-based claims 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 portal on Southwest Airlines so that SwiftAir could market a destination deal product to Southwest Airlines’ passengers. In 2013, after Southwest Airlines decided not to proceed further with the destination deal product, Row 44 terminated its contract with SwiftAir. In its lawsuit, SwiftAir seeks approximately $9.0 million in monetary damages (plus punitive and other extra-contractual damages) from Row 44 and Southwest Airlines. In 2017, the court granted Row 44’s motion for summary judgment as to SwiftAir’s tort/statutory-based claims. In January 2018, the court granted Row 44’s motions in limine that limited SwiftAir’s contract damages claims against Row 44 to nominal damages. Southwest Airlines however remained exposed to all of SwiftAir’s compensatory damages claims. On September 9, 2019, following a three-week trial, the jury returned a full defense verdict in favor of Row 44 and Southwest Airlines. On October 1, 2019, the Court entered judgment against SwiftAir; notice of entry of judgment was given on October 10, 2019. On October 15, 2019, Row 44 filed its memorandum of costs and it intends to file a motion for attorneys’ fees and non-statutory costs and expenses.
|
|
|
•
|
On October 25 and 28, 2019, SwiftAir filed motions for a new trial and judgment notwithstanding the verdict, respectively, which were set for hearing on December 6, 2019. Row 44 filed a motion for attorneys’ fees and costs, which was also set for hearing on December 6, 2019. At that December 6, 2019 hearing, the trial court denied SwiftAir’s motions and took Row 44’s motion for attorneys’ fees and costs under submission. On March 2, 2020, the trial court granted Row 44’s motion in the amount of $2.2 million for fees and $0.1 million for costs. SwiftAir filed a Notice of Appeal as to both Row 44 and Southwest Airlines; its opening brief on appeal will be due 40 days after the Reporter’s Transcript is completed. Separately, Southwest Airlines has sought indemnification from Row 44 in connection with its defense of SwiftAir’s claim (and for any loss that it may face). Row 44 provided partial indemnity until the trial court granted its motion for summary adjudication on certain issues in June 2017, at which time it ceased paying for any of Southwest’s attorneys’ fees. The Company intends to vigorously defend against any claims in this matter. The Company does not believe that a material loss relating to this matter is probable, and due to the speculative nature of SwiftAir’s potential post-trial motions and appeal (and its damages claims), the Company is currently unable to estimate the amount of any potential loss; as such, the Company has not accrued any amount for this loss contingency.
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In addition, from time to time, the Company will 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 the Company has not recorded any contingency accrual. Additionally, the Company has determined that other legal matters are likely not material to our financial statements, and as such have not discussed those matters above. Although the Company cannot predict with certainty the ultimate resolution of these speculative and immaterial matters, based on our current knowledge, the Company does not believe that the outcome of any of these matters will have a material adverse effect on our financial statements.
Note 12. 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. During the year ended December 31, 2019, WMS approved a deemed dividend to the Company totaling $14.2 million, resulting in a full offset of the $7.4 million loan balance and the remainder as cash distribution.
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. The Company purchased approximately $4.6 million and $5.3 million for the year ended December 31, 2019 and December 31, 2018, respectively, from Santander for their Teleport services and related network operations support services. As of December 31, 2019 and December 31, 2018, the Company owed Santander approximately $1.3 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.
Amended and Restated Registration Rights Agreement
When we consummated our business combination in January 2013 with Row 44 and Advanced Inflight Alliance AG, we entered into an amended and restated registration rights agreement with PAR Investment Partners, L.P. (“PAR”), entities affiliated with Putnam Investments, Global Eagle Acquisition LLC (the “Sponsor”) and a current member of our board of directors (“Board of Directors” or “Board”), Harry E. Sloan and our then Board member, Jeff Sagansky, both of whom were affiliated with the Sponsor. Under that agreement, we agreed to register the resale of securities held by such parties (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.
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.
According to a Schedule 13G/A filed on February 7, 2018, and a Schedule 13D/A filed on June 6, 2019, respectively, neither Putnam Investments nor PAR hold more than 5% of our outstanding common stock, and as such each has ceased to be a related party. Furthermore, Mr. Sagansky ceased being a related party on June 24, 2019 when he retired from our Board. Mr. Sloan continues to be a related party.
Amendment to Second Lien Notes
Concurrently with entering into the 2017 Credit Agreement Amendment, the Company entered into a second amendment to the securities purchase agreement and amendment to security agreement (the “Second Lien Amendment”), which amended that certain securities purchase agreement, by and among the Company, Searchlight II TBO, L.P., Searchlight II TBO-W, L.P., and the other parties thereto relating to the Second Lien Notes, to, among other things, remove 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, add collateral for the Second Lien Notes consistent with the additional collateral provided under the 2017 Credit Agreement and modify the prepayment premium schedule to extend through maturity of the Second Lien Notes.
Due from WMS
During the years ended December 31, 2019 and 2018, sales to WMS were approximately $0.5 million and $0.8 million for the Company’s services provided to WMS for WMS’s onboard cellular equipment under the terms of the WMS operating agreement and an associated master services agreement with WMS. These sales are included in Revenue in the Consolidated Statements of Operations. As of December 31, 2019, and 2018, the Company had a balance due from WMS of $0.1 million and $0.2 million, respectively, included in Accounts receivable, net in the Consolidated Balance Sheets.
Note 13. Equity Transactions
Common Stock
On April 15, 2020, the Board of Directors approved a reverse stock split of the Company’s outstanding and authorized shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the number of the Company’s issued and outstanding shares of common stock was decreased from 92,944,935 to 3,717,797, all with a par value of $0.0001. The effective date of the Reverse Stock Split was April 16, 2020. The Reverse Stock Split affects all stockholders uniformly and will not alter any stockholder’s percentage interest in the Company’s common stock, except for adjustments that may result from the treatment of fractional shares as follows: (i) no fractional shares will be issued as a result of the Reverse Stock Split; and (ii) stockholders who would have been entitled to a fractional share as a result of the Reverse Stock Split will instead receive a cash payment from the transfer agent in an amount equal to the fractional share multiplied by the closing price of our common stock the day before the Reverse Stock Split became effective. All share and per share amounts presented in these financial statements, have been adjusted for this Reverse Stock Split.
Issuance of Common Stock
In August 2016, the Company issued approximately 72,000 shares of its common stock as partial consideration for the Sound Recording Settlements. The Company is obligated to issue an additional 20,000 shares of its common stock to UMG in connection with the litigation when and if the share price of the Company’s common stock exceeds $250.00 per share and an additional 16,000 shares of its common stock when and if the closing price exceeds $300.00 per share (together, the “Supplemental Shares”) at any time in the future if the share price reaches these price thresholds. In lieu of issuing the Supplemental Shares of the Company’s common stock upon exceeding the respective share price thresholds, the Company may pay the equivalent in cash at its sole discretion. If the Company were to experience a liquidation event, as defined in the settlement documentation, and if the equivalent liquidation price per share at that time exceeds one or both of the share price thresholds, the Company is obligated to pay the equivalent liquidation price per share in cash in lieu of issuing the Supplemental Shares. See Note 11. Commitments and Contingencies for a further description of the Sound Recording Settlements.
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 440,000 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 282,812 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 83,914 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 260,000 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 80,000 the number of shares of the Company’s common stock authorized for issuance thereunder.
Stock Repurchase Program
In March 2016, the Company’s Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $50.0 million of its common stock. Under the stock repurchase program, the Company 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 the Company repurchases its 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. The Company measures all potential buybacks against other potential uses of capital that may arise from time to time. The repurchase program does not obligate the Company to repurchase any specific number of shares, and may be suspended or discontinued at any time. The Company expects to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. The Company did not repurchase any shares of its common stock during the years ended December 31, 2019 and 2018. As of December 31, 2019, the remaining authorization under the stock repurchase plan was $44.8 million.
Stock-Based Awards
EMC Employment Inducement Awards
In connection with the EMC Acquisition, the Company granted certain EMC employees, in the aggregate, nonqualified stock options to purchase 2,904 shares of the Company’s common stock and 2,950 restricted stock units as employment inducement awards. The exercise price per share of the nonqualified stock options was equal to the closing price of the Company’s stock on the EMC Acquisition Date. The options are subject to continuous employment and vested with respect to one-fourth of the underlying shares on July 27, 2017, with the remainder vesting monthly on a pro rata basis thereafter over the next three years until fully vested. Subject to continuous employment through each vesting date, the restricted stock units will vest in four equal installments, with the first installment vested on July 27, 2017 and the remaining installments vesting annually thereafter.
Stock Options
The exercise price of stock option awards granted is generally equal to the per share closing price of the common stock on the date the options were granted. Employee stock option grants generally have five- and seven- year terms (depending on when they were issued) and employee stock options generally vest over a four-year period, with 1/4th on the anniversary of the vesting commencement date and 1/36th monthly thereafter, over the remaining three-year period.
Stock options granted to members of the Company’s Board of Directors have five- and seven- year terms (depending on when they were issued) and vest 25% per quarter during the calendar year. In 2018, the Board’s Compensation Committee determined that it would only issue stock options (vesting in full on the earlier of the next annual meeting of stockholders and the 12-month anniversary of the grant date) as part of its director compensation program. Certain members of the Board who commenced service during 2018 received fully vested stock options following commencement of service in order to compensate them for a partial year of service for which they were not previously compensated. The stock options granted to members of the Board during 2018 have a seven-year term. Certain stock option awards, including the stock options granted to members of the Board in 2018, have accelerated vesting provisions in the event of a change in control or termination without cause within a certain period following a change in control.
The fair values of stock options issued were determined on the grant date using the Black-Scholes option pricing model and the following weighted assumptions for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Common stock price on grant date
|
$
|
0.65
|
|
|
$
|
2.69
|
|
Expected life (in years)
|
4.75
|
|
|
4.75
|
|
Risk-free interest rate
|
1.75
|
%
|
|
2.76
|
%
|
Expected stock volatility
|
82
|
%
|
|
64
|
%
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Fair value of stock options granted
|
$
|
0.42
|
|
|
$
|
1.47
|
|
There was no significant intrinsic value of options exercised during the years ended December 31, 2019 and 2018.
Stock option activity for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Balance unexercised at January 1, 2019
|
211
|
|
|
$
|
168.25
|
|
|
3.34
|
|
$
|
—
|
|
Granted
|
55
|
|
|
$
|
16.25
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
(94
|
)
|
|
$
|
183.50
|
|
|
|
|
|
Balance unexercised at December 31, 2019
|
172
|
|
|
$
|
111.25
|
|
|
4.18
|
|
$
|
—
|
|
Exercisable at December 31, 2019
|
95
|
|
|
$
|
174.00
|
|
|
2.32
|
|
$
|
—
|
|
Vested and expected to vest after December 31, 2019
|
172
|
|
|
$
|
111.25
|
|
|
4.18
|
|
$
|
—
|
|
The following is a summary of the Company’s stock options outstanding at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
Number Outstanding
(in thousands)
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
(in thousands)
|
|
Weighted Average Exercise Price
|
$338.50 - $338.50
|
4
|
|
|
0.42
|
|
$
|
338.50
|
|
|
4
|
|
|
$
|
338.50
|
|
$328.75 - $328.75
|
8
|
|
|
0.21
|
|
$
|
328.75
|
|
|
8
|
|
|
$
|
328.75
|
|
$326.75 - $326.75
|
—
|
|
|
0.32
|
|
$
|
326.75
|
|
|
—
|
|
|
$
|
326.75
|
|
$312.75 - $312.75
|
9
|
|
|
0.59
|
|
$
|
312.75
|
|
|
9
|
|
|
$
|
312.75
|
|
$200.75 - $231.25
|
6
|
|
|
1.37
|
|
$
|
228.50
|
|
|
6
|
|
|
$
|
229.00
|
|
$73.00 - $155.50
|
61
|
|
|
2.58
|
|
$
|
132.25
|
|
|
52
|
|
|
$
|
139.00
|
|
$66.25 - $66.25
|
27
|
|
|
5.43
|
|
$
|
66.25
|
|
|
14
|
|
|
$
|
66.25
|
|
$62.50 - $62.50
|
2
|
|
|
4.95
|
|
$
|
62.50
|
|
|
1
|
|
|
$
|
62.50
|
|
$17.75 - $58.75
|
1
|
|
|
5.97
|
|
$
|
55.75
|
|
|
—
|
|
|
$
|
58.75
|
|
$16.25 - $16.25
|
55
|
|
|
7.06
|
|
$
|
16.25
|
|
|
—
|
|
|
$
|
—
|
|
|
173
|
|
|
4.17
|
|
$
|
111.25
|
|
|
95
|
|
|
$
|
174.00
|
|
Restricted Stock Units (“RSU”)
Under the 2013 Equity Plan and 2017 Omnibus Plan, the Company’s time vesting RSU awards to employees generally vest annually on each anniversary of the grant date and generally over a four-year term. The time-vesting RSUs granted to non-employee directors in 2016 and 2015 cliff-vest on the 12-month anniversary from the grant date. The grant date fair value of the time-vesting RSUs generally equals the closing price of the Company’s common stock on the grant date.
Under the 2017 Omnibus Plan, beginning on June 25, 2018, the Compensation Committee of the Company’s Board of Directors (the “Committee”) granted new RSU awards (“KBL RSUs”) to the Company’s key business leaders with time-based vesting conditions that differ from the time-based vesting conditions in previous RSU awards. These KBL RSU awards (along with the KBL PSU and $100 and $200 Goal Stock Options discussed below) were sized as multi-year grants and are intended to replace the Company’s traditional annual refresher equity program. Except in the case of the Company’s Executive Chairman, these KBL RSUs generally vest as follows: (i) 50% of the RSUs will vest on the second anniversary of the vesting commencement date, (ii) 25% of the RSUs will vest on the third anniversary of the vesting commencement date and (iii) 25% of the RSUs will vest on the fourth anniversary of the vesting commencement date, subject to the recipient’s continuous service through each applicable vesting date.
The KBL RSUs granted to the Company’s Executive Chairman generally vest with respect to 25% of the RSUs on each of March 27, 2019, March 27, 2020, March 27, 2021 and March 27, 2022, subject to his continuous service as either an employee of the Company or a member of the Company’s Board through each applicable vesting date.
During the years ended December 31, 2019 and 2018, the Committee also granted 29,333 RSUs and 135,667 RSUs, respectively, to certain employees. The 2018 grants vest as detailed above for the 2017 Omnibus Plan.
RSU activity during the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Intrinsic Value (in thousands)
|
Balance nonvested at January 1, 2019
|
237
|
|
|
$
|
75.75
|
|
|
$
|
13,185
|
|
Granted
|
29
|
|
|
$
|
21.75
|
|
|
|
Vested
|
(57
|
)
|
|
$
|
84.75
|
|
|
|
Forfeited
|
(47
|
)
|
|
$
|
72.75
|
|
|
|
Balance nonvested at December 31, 2019
|
162
|
|
|
$
|
63.50
|
|
|
$
|
2,031
|
|
Vested and expected to vest at December 31, 2019
|
161
|
|
|
$
|
63.25
|
|
|
$
|
2,015
|
|
The total fair value of RSUs vested during the years ended December 31, 2019 and 2018 was $1.4 million and $2.2 million and, respectively.
Performance-Based Restricted Stock Units (“PSU”)
Under the 2013 Equity Plan, in October 2016, the Committee issued performance-based PSU awards, which give the recipient the right to receive Company common stock based on the Company’s total stockholder return relative to the Russell 2000 index during the three-year period beginning from date of grant and ending on the third anniversary of the grant date.
Under the 2017 Omnibus Plan, beginning on June 25, 2018, the Committee granted new PSU awards (“KBL PSUs”) to key business leaders with time- and performance-based vesting conditions that differ from those conditions applicable to previous PSU awards. Except in the case of our Executive Chairman, these KBL PSUs generally vest as follows: (i) 50% of the PSUs will vest on the second anniversary of the vesting commencement date, (ii) 25% of the PSUs will vest on the third anniversary of the vesting commencement date and (iii) 25% of the PSUs will vest on the fourth anniversary of the vesting commencement date, subject to the recipient’s continuous service through each vesting date, and provided that the Company’s volume-weighted average price per share of common stock (“VWAP”) equals or exceeds $100.00 for 45 consecutive trading days at any time on or prior to the fifth anniversary of the grant date.
The KBL PSUs granted to our Executive Chairman generally vest with respect to 25% of the PSUs on each of March 27, 2019, March 27, 2020, March 27, 2021 and March 27, 2022, subject to his continuous service as either an employee of the Company or a member of the Company’s Board through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $100.00 for 45 consecutive trading days at any time on or prior to June 25, 2023.
The compensation expense recognized for the awards is based on the grant date fair value of a unit that is determined using Monte-Carlo simulation multiplied by the number of units granted. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of units greater or less than the number of units granted. In general, participants vest in their PSU awards at the end of the performance period with continuous employment or service during the period.
During the year ended December 31, 2019, the Company granted 14,667 PSUs with a weighted-average grant date fair value of $12.25 per unit and using a risk-free rate of 2.15%. As of December 31, 2019, there were 64,886 unvested PSUs outstanding. During the year ended December 31, 2018, the Company granted 67,833 PSUs with a weighted-average grant date fair value of $50.25 per unit and using a risk-free rate of 2.75%. As of December 31, 2018, there were 85,590 nonvested PSUs outstanding.
Phantom Stock Options
Our stock-based awards also include cash-settled stock options referred to as “phantom options”. Our phantom options are accounted for as liability awards and are re-measured at fair value using the Monte-Carlo simulation each reporting period with compensation expense being recognized over the requisite service period. The Company has, however, reserved the right to later settle all or a portion of the phantom options in shares of its common stock as opposed to cash.
During 2018, the Company granted two types of phantom options, which the Company refers to as the “$100 Goal Stock Options” and the “$200 Goal Stock Options.”
|
|
•
|
$100 Goal Stock Options. The $100 Goal Stock Options have a five-year term, are subject to both time-based and performance-based vesting conditions and, except in the case of the Company’s Executive Chairman, generally vest and become exercisable as follows: (i) 50% of the Stock Options will vest on the second anniversary of the vesting commencement date, (ii) 25% of the Stock Options will vest on the third anniversary of the vesting commencement date and (iii) 25% of the Stock Options will vest on the fourth anniversary of the vesting commencement date, subject to the recipient’s continuous service through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $100.00 for 45 consecutive trading days at any time on or prior June 25, 2023. The $100 Goal Stock Options granted to the Company’s Executive Chairman generally vest and become exercisable as follows: (i) 50% of the Stock Options were vested at grant on June 25, 2018, (ii) 25% of the Stock Options will vest on March 27, 2019 and (iii) 25% of the Stock Options will vest on March 27, 2020, subject to the continuous service of the Executive Chairman as either an employee of the Company or a member of the Company’s Board through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $100.00 for 45 consecutive trading days at any time on or prior to the fifth anniversary of the grant date.
|
|
|
•
|
$200 Goal Stock Options. The $200 Goal Stock Options have a seven-year term, are subject to both time-based and performance-based vesting conditions and, except in the case of the Company’s Executive Chairman, generally vest and become exercisable as follows: (i) 50% of the Stock Options will vest on the second anniversary of the vesting commencement date and (ii) 50% of the Stock Options will vest on the third anniversary of the vesting commencement date, subject to the recipient’s continuous service through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $200.00 for 45 consecutive trading days at any time on or prior to June 25, 2025. The $200 Goal Stock Options granted to the Company’s Executive Chairman generally vest and become exercisable as follows: (i) 50% of the Stock Options were vested at grant on June 25, 2018, (ii)25% of the Stock Options will vest on March 27, 2019 and (iii) 25% of the Stock Options will vest on March 27, 2020, subject to the continuous service of the Executive Chairman as either an employee of the Company or a member of the Company’s Board through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $200.00 for 45 consecutive trading days at any time on or prior to the seventh anniversary of the grant date.
|
|
|
•
|
Exercise Price. The exercise price for all of the Stock Options equals the Company’s Nasdaq closing price on the grant date.
|
During the year ended December 31, 2019, the Company granted 53,768 phantom options with a weighted-average grant date fair value of $9.25 per unit. As of December 31, 2019, there were 228,081 unvested phantom options outstanding. During the year ended December 31, 2018, the Company granted 270,630 phantom options with a weighted-average grant date fair value of $26.75 per unit, of which 18,472 were canceled prior to December 31, 2018, due to employee departures. As of December 31, 2018, there were 238,965 nonvested phantom options outstanding.
As of December 31, 2019, the aggregate estimated fair value of our cash-settled phantom stock options was $0.8 million for which the vested portion recognized as a liability in our consolidated balance sheet was $0.5 million.
Stock-Based Compensation Expense
Stock-based compensation expense related to all employee and, where applicable, non-employee stock-based awards was as follows for the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Consolidated Statement of Operations Classification:
|
|
|
|
Cost of sales
|
$
|
278
|
|
|
$
|
547
|
|
Sales and marketing
|
271
|
|
|
498
|
|
Product development
|
332
|
|
|
753
|
|
General and administrative
|
5,462
|
|
|
11,019
|
|
Total
|
$
|
6,343
|
|
|
$
|
12,817
|
|
As of December 31, 2019, the Company had approximately $8.3 million of unrecognized employee related stock-based compensation, which it expects to recognize over a weighted-average period of approximately 2.02 years.
Public SPAC Warrants
The Public SPAC Warrants expired on January 31, 2018. Prior to their expiration, the Company accounted for its 6,173,228 Public SPAC Warrants as derivative liabilities in the Consolidated Balance Sheets. During the year ended December 31, 2018 the Company recorded less than $0.1 million in Change in fair value of derivatives in the Consolidated Statements of Operations as a result of the remeasurement of these warrants at the respective balance sheet dates.
Warrants Repurchase Program
During the year ended December 31, 2014, the Board of Directors authorized the Company to repurchase Public SPAC Warrants for an aggregate purchase price, payable in cash and/or shares of common stock, of up to $25.0 million (inclusive of prior warrant purchases). In August 2015, the Board of Directors increased this amount by an additional $20.0 million. As of December 31, 2019, $16.7 million remained available for warrant repurchases under this authorization. The amount the Company spends (and the number of Public SPAC Warrants repurchased) varies based on a variety of factors including the warrant price. The Company did not repurchase any warrants during the years ended December 31, 2019 or 2018.
Searchlight Warrants
On March 27, 2018 (the “Searchlight Closing Date”), the Company issued to Searchlight warrants to acquire an aggregate of 722,631 shares of common stock at an exercise price of $0.25 per share (the “Searchlight Penny Warrants”), and warrants to acquire an aggregate of 520,000 shares of common stock at an exercise price of $39.25 per share (the “Searchlight Market Warrants” and, together with the Searchlight Penny Warrants, the “Searchlight Warrants”), for an aggregate price of $150.0 million.
The Searchlight Warrants vest and are exercisable at any time and from time to time after the Vesting Date (as defined below) until on or prior to the close of business on the tenth anniversary of the Searchlight Closing Date. The Searchlight Warrants vest and become exercisable on January 1, 2021 (the “Vesting Date”), if the average of the 45-day volume-weighted average price (“VWAP”) of the Company’s common stock (as reported by Nasdaq) is at or above (i) $100.00, in the case of the Searchlight Penny Warrants, and (ii) $60.00, in the case of the Searchlight Market Warrants, in each case for 45 consecutive trading days at any time following the Searchlight Closing Date. The VWAP condition in respect of the Searchlight Market Warrants was satisfied in July 2018.
The holders of the Searchlight Warrants cannot exercise the Searchlight Warrants if and to the extent, as a result of such exercise, either (i) such holder’s (together with its affiliates) aggregate voting power on any matter that could be voted on by holders of the common stock would exceed 19.9% of the maximum voting power outstanding or (ii) such holder (together with its affiliates) would beneficially own more than 19.9% of our then outstanding common stock, subject to customary exceptions in connection with public sales or the consummation of a specified liquidity event described in the Searchlight Warrants.
The Searchlight Warrants also include customary anti-dilution adjustments.
Until the earlier of (i) the date on which Searchlight no longer beneficially owns at least 25% of the number of the Searchlight Market Warrants issued on the Searchlight Closing Date (and/or the respective shares of common stock issued in connection with the exercise of the Searchlight Market Warrants) and (ii) January 1, 2021, without the prior consent of Searchlight, the Company will not directly or indirectly redeem, purchase or otherwise acquire any equity securities of the Company for a consideration per share (plus, in the case of any options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) greater than the market price (as defined in the Searchlight Warrants) per share of common stock immediately prior to the earlier of (x) the announcement of such acquisition or (y) such acquisition.
Searchlight is not permitted to transfer the Searchlight Warrants prior to January 1, 2021, except to its controlled affiliates or in connection with certain tender offers, exchange offers, mergers or similar transactions. The Searchlight Warrants and the underlying shares of common stock are freely transferable by Searchlight on and after January 1, 2021.
Searchlight has customary shelf, demand and piggyback registration rights with respect to the common stock (including shares of common stock underlying the Searchlight Warrants) that it holds, including demand registrations and underwritten “shelf takedowns,” subject to specified restrictions, thresholds and the Company’s eligibility to use a registration statement on Form S-3.
Until the earlier of (i) the fifth anniversary of the Searchlight Closing Date and (ii) the date Searchlight no longer holds at least 50% of the Searchlight Penny Warrants (or the respective shares of common stock underlying such Searchlight Penny Warrants), Searchlight has participation rights with respect to issuances of common equity securities by the Company, subject to exceptions. These rights entitle Searchlight to opt to participate in future issuances by the Company of common equity or common equity-linked securities, subject to customary exceptions.
Note 14. Employee Benefit Plans
The Company has one defined contribution plan under Section 401(k) of the Internal Revenue Code (“401(k)”) covering full-time domestic employees who meet certain eligibility requirements, the Global Eagle Entertainment Retirement Plan (“GEE 401(k) Plan”). During January of 2018, the Company transferred the Emerging Markets Communications Volume Submitter Defined Contribution Plan (the “EMC 401(k) Plan”) into the GEE 401(k) Plan.
Under the GEE 401(k) Plan, eligible employees may defer up to 100% of their eligible compensation on either a pre-tax or after-tax Roth 401(k) basis, or up to the annual maximum allowed by the Internal Revenue Service (“IRS”). The Company may, but is not obligated to, match a portion of the employee contributions up to a defined maximum. For the years ended December 31, 2019 and 2018, the Company recognized a total expense of $2.3 million and $2.3 million, respectively, for matching contribution for both 401(k) plans.
Note 15. Income Taxes
United States and foreign income (loss) from operations before income taxes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
United States
|
$
|
(166,326
|
)
|
|
$
|
(239,989
|
)
|
Foreign
|
22,409
|
|
|
6,458
|
|
Loss before income taxes
|
$
|
(143,917
|
)
|
|
$
|
(233,531
|
)
|
The income tax provision based on the income (loss) from operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Current provision (benefit):
|
|
|
|
Federal
|
$
|
(2,046
|
)
|
|
$
|
289
|
|
State
|
(174
|
)
|
|
211
|
|
Foreign
|
15,679
|
|
|
10,473
|
|
Total current provision
|
13,459
|
|
|
10,973
|
|
Deferred benefit:
|
|
|
|
Federal
|
9
|
|
|
(6,924
|
)
|
State
|
10
|
|
|
(331
|
)
|
Foreign
|
(3,952
|
)
|
|
(650
|
)
|
Total deferred benefit
|
(3,933
|
)
|
|
(7,905
|
)
|
Total income tax provision (benefit)
|
$
|
9,526
|
|
|
$
|
3,068
|
|
Income taxes differ from the amounts computed by applying the federal income tax rate of 21% for 2019 and 2018. A reconciliation of this difference is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Income tax benefit at federal statutory rate
|
$
|
(30,223
|
)
|
|
$
|
(49,042
|
)
|
State income tax, net of federal benefit
|
(164
|
)
|
|
(185
|
)
|
Permanent items
|
766
|
|
|
633
|
|
Change in fair value of financial instruments
|
(224
|
)
|
|
(4
|
)
|
Forfeited foreign net operating losses
|
42,541
|
|
|
—
|
|
Stock-based compensation
|
1,551
|
|
|
2,700
|
|
Tax credits
|
(124
|
)
|
|
(106
|
)
|
Other
|
535
|
|
|
(12,636
|
)
|
Uncertain tax positions
|
396
|
|
|
107
|
|
Withholding taxes
|
6,456
|
|
|
9,137
|
|
Rate differential
|
(350
|
)
|
|
6,657
|
|
Change in enacted tax rate
|
(132
|
)
|
|
54
|
|
Change in valuation allowance
|
(11,502
|
)
|
|
69,508
|
|
Income tax provision (benefit)
|
$
|
9,526
|
|
|
$
|
3,068
|
|
Significant factors impacting the 2019 effective tax rate include foreign withholding taxes, forfeited foreign net operating losses due to liquidations and valuation allowance on deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Goodwill
|
$
|
5,134
|
|
|
$
|
6,734
|
|
Allowances and reserves
|
2,016
|
|
|
1,469
|
|
Accrued liabilities
|
2,063
|
|
|
3,908
|
|
Inventories
|
2,120
|
|
|
1,839
|
|
Stock-based compensation
|
3,596
|
|
|
4,363
|
|
Interest expense carryover
|
38,615
|
|
|
23,877
|
|
Tax credits
|
2,860
|
|
|
2,225
|
|
Net operating losses
|
116,290
|
|
|
144,010
|
|
Right of use liability
|
13,519
|
|
|
—
|
|
Other
|
1,074
|
|
|
448
|
|
Total deferred tax assets
|
187,287
|
|
|
188,873
|
|
Less: valuation allowance
|
(152,987
|
)
|
|
(161,511
|
)
|
Net deferred tax assets
|
$
|
34,300
|
|
|
$
|
27,362
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
(9,387
|
)
|
|
$
|
(8,737
|
)
|
Right of use assets
|
(10,733
|
)
|
|
—
|
|
Intangible assets
|
(1,315
|
)
|
|
(7,149
|
)
|
Investments in affiliates
|
(15,675
|
)
|
|
(17,253
|
)
|
Debt costs
|
(1,589
|
)
|
|
(2,550
|
)
|
Total deferred tax liabilities
|
(38,699
|
)
|
|
(35,689
|
)
|
Net deferred tax liabilities
|
$
|
(4,399
|
)
|
|
$
|
(8,327
|
)
|
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company is currently under audit in certain foreign tax authorities. The audits are in varying stages of completion. With certain exceptions, as of December 31, 2019, the Company’s tax years from 2014 through 2019 are subject to examination by the tax authorities. The use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
As of December 31, 2019, the Company has recorded a valuation allowance of $136.6 million and $16.4 million against its domestic and certain foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of December 31, 2018, the valuation allowance on domestic and foreign deferred tax assets were $104.1 million and $57.4 million, respectively.
As of December 31, 2019, and 2018, the Company had federal NOL carry-forwards of $427.2 million and $374.5 million, respectively, and in addition, the Company had state NOL carry-forwards of $235.9 million and $161.2 million, respectively. In addition, the Company had foreign NOL carry-forward from various jurisdictions of $54.6 million and $220.1 million as of December 31, 2019 and 2018, respectively. The Company’s federal, state and foreign NOLs will begin to expire during the fiscal
years ending in December 31, 2027, 2023, and 2022 respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable.
The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be materially limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382.
Prior to the Tax Act, U.S. taxes were not provided for on cumulative earnings of the Company’s foreign subsidiaries as the Company had intended to invest the undistributed earnings indefinitely. However, as a result of the Tax Act, all of the accumulated earnings of its foreign subsidiaries were taxed for U.S. federal purposes. The Company has provisionally asserted that the $32.5 million earnings of its foreign subsidiaries will continue to be indefinitely reinvested. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional provisions for U.S. states not conforming to the federal Tax Act and foreign withholding taxes may be required. It is not practical to calculate the deferred taxes associated with these earnings because of the variability of multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax credits may be available to reduce federal income taxes in the event of distribution.
As of December 31, 2019, and 2018, the liability for income taxes associated with uncertain tax positions was $7.7 million and $7.9 million, respectively.
The net decrease in the liabilities during the year is primarily attributable to activity related to ongoing examinations by the Canada Revenue Agency regarding the taxability and presence of the subsidiary’s locations in Dubai and whether income derived from Dubai would have constituted taxable earnings subject to Canadian income tax. The net amounts of $7.2 million and $7.8 million as of December 31, 2019 and 2018, respectively, if recognized, would favorably affect the Company’s effective tax rate.
The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
7,942
|
|
|
$
|
8,728
|
|
Reversal of prior tax positions
|
(86
|
)
|
|
(786
|
)
|
Settlements
|
(196
|
)
|
|
—
|
|
Balance at end of year
|
$
|
7,660
|
|
|
$
|
7,942
|
|
The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2019 and 2018, the Company had accrued $6.4 million and $6.3 million, respectively, of interest and penalties related to uncertain tax positions, which are not included in the table above.
The following table summarizes the changes in the valuation allowance balance for the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
Amount
|
Balance at December 31, 2017
|
$
|
85,393
|
|
Increase in valuation allowance
|
76,118
|
|
Balance at December 31, 2018
|
161,511
|
|
Decrease in valuation allowance
|
(8,524
|
)
|
Balance at December 31, 2019
|
$
|
152,987
|
|
Note 16. Segment Information
The Company reports its operations through two operating segments—Media & Content and Connectivity. The CODM evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for the Company’s 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, although historical results may not be indicative of future results, as 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.
Revenue and contribution profit by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
Media & Content
|
|
|
|
Licensing & Services
|
$
|
311,079
|
|
|
$
|
315,409
|
|
Connectivity
|
|
|
|
Services
|
281,083
|
|
|
290,818
|
|
Equipment
|
64,715
|
|
|
40,867
|
|
Total
|
345,798
|
|
|
331,685
|
|
Total revenue
|
$
|
656,877
|
|
|
$
|
647,094
|
|
Cost of sales(1):
|
|
|
|
Media & Content
|
|
|
|
Licensing & Services
|
$
|
234,229
|
|
|
$
|
225,318
|
|
Connectivity
|
|
|
|
Services
|
240,375
|
|
|
255,546
|
|
Equipment
|
49,121
|
|
|
31,529
|
|
Total
|
289,496
|
|
|
287,075
|
|
Total cost of sales
|
$
|
523,725
|
|
|
$
|
512,393
|
|
Gross Margin:
|
|
|
|
Media & Content
|
$
|
76,850
|
|
|
$
|
90,091
|
|
Connectivity
|
56,302
|
|
|
44,610
|
|
Total Gross Margin
|
133,152
|
|
|
134,701
|
|
Other operating expenses
|
197,900
|
|
|
244,784
|
|
Loss from operations
|
$
|
(64,748
|
)
|
|
$
|
(110,083
|
)
|
|
|
(1)
|
Includes depreciation expense of $0.1 million (Media & Content) and $36.9 million (Connectivity) for the year ended December 31, 2019, and $0.4 million (Media & Content) and $42.2 million (Connectivity) for the year ended December 31, 2018.
|
The Company’s total assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Segment assets:
|
|
|
|
Media & Content
|
$
|
316,340
|
|
|
$
|
346,280
|
|
Connectivity
|
331,368
|
|
|
355,144
|
|
Total segment assets
|
647,708
|
|
|
701,424
|
|
Corporate assets
|
20,872
|
|
|
15,663
|
|
Total assets
|
$
|
668,580
|
|
|
$
|
717,087
|
|
Geographical revenue by segment as presented below is based on the billing location of the customer. Revenue from external customers was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Media & Content:
|
|
|
|
United States and Canada
|
$
|
67,121
|
|
|
$
|
64,763
|
|
Europe
|
50,196
|
|
|
58,855
|
|
Asia and Middle East
|
164,233
|
|
|
160,009
|
|
Other
|
29,529
|
|
|
31,782
|
|
Total
|
$
|
311,079
|
|
|
$
|
315,409
|
|
Connectivity:
|
|
|
|
United States
|
$
|
231,932
|
|
|
$
|
284,498
|
|
Europe
|
79,574
|
|
|
37,998
|
|
Africa, Middle East and Asia
|
20,433
|
|
|
6,991
|
|
Other
|
13,859
|
|
|
2,198
|
|
Total
|
$
|
345,798
|
|
|
$
|
331,685
|
|
Total revenue
|
$
|
656,877
|
|
|
$
|
647,094
|
|
The following table summarizes net property, plant and equipment by country (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Media & Content:
|
|
|
|
United States and Canada
|
$
|
625
|
|
|
$
|
1,093
|
|
United Kingdom
|
3,194
|
|
|
3,890
|
|
India
|
1,544
|
|
|
1,663
|
|
Other
|
706
|
|
|
172
|
|
Total
|
$
|
6,069
|
|
|
$
|
6,818
|
|
Connectivity:
|
|
|
|
United States
|
$
|
112,491
|
|
|
$
|
141,887
|
|
Germany
|
13,717
|
|
|
16,507
|
|
Other
|
3,745
|
|
|
5,405
|
|
Total
|
$
|
129,953
|
|
|
$
|
163,799
|
|
Corporate
|
|
|
|
United States
|
$
|
9,273
|
|
|
$
|
5,960
|
|
Total
|
$
|
9,273
|
|
|
$
|
5,960
|
|
Property, plant and equipment, net
|
$
|
145,295
|
|
|
$
|
176,577
|
|
Note 17. 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 which 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.
Due to the short-term nature, carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, and 2018, respectively (in thousands, except as presented in footnotes to the tables):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Quotes Prices in Active Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Contingently issuable shares(2)
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
305
|
|
Phantom stock options(3)
|
464
|
|
|
—
|
|
|
—
|
|
|
464
|
|
Total
|
$
|
769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for the Company’s acquisitions of WOI, RMG, navAero and masFlight assumed in business combinations for the year ended December 31, 2015.
|
|
|
(2)
|
In connection with the Sound Recording Settlements (as described below in Note 11. Commitments and Contingencies), the Company is obligated to issue to UMG (as defined in that Note) 20,000 shares of its common stock when and if the closing price of the Company's common stock exceeds $250.00 per share and an additional 16,000 shares of common stock when and if the closing price of the Company’s common stock exceeds $300.00 per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.
|
|
|
(3)
|
The Company’s cash-settled phantom stock options, granted during 2018, are accounted for as liability awards and are re-measured at fair value each reporting period with compensation expense being recognized over the requisite service period. As of December 31, 2019, the aggregate estimated fair value of the Company’s cash-settled phantom stock options was $0.8 million, for which the vested portion recognized as a liability in its Consolidated Balance Sheets was $0.5 million. The cash-settled phantom stock options are described in more detail in Note 13. Equity Transactions.
|
The following tables present the fair value roll-forward reconciliation of Level 3 assets and liabilities measured at fair value for the years ended December 31, 2019 and 2018, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom stock Options (Level 3)
|
|
Liability Warrants (Level 3)
|
|
Contingently Issuable Shares
(Level 3)
|
|
Earn-Out Liabilities (Level 3)
|
Balance, December 31, 2017
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
1,448
|
|
|
$
|
114
|
|
Fair value of cash-settled phantom stock options
|
1,564
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in value
|
—
|
|
|
(20
|
)
|
|
(77
|
)
|
|
—
|
|
Balance, December 31, 2018
|
1,564
|
|
|
—
|
|
|
1,371
|
|
|
114
|
|
Change in value
|
(1,100
|
)
|
|
—
|
|
|
(1,066
|
)
|
|
(114
|
)
|
Balance, December 31, 2019
|
$
|
464
|
|
|
$
|
—
|
|
|
$
|
305
|
|
|
$
|
—
|
|
The valuation methodology used to estimate the fair value of the financial instruments in the tables above is summarized as follows:
Earn-Out Liability. The earn-out liabilities are estimated using the income approach. Based on the respective purchase agreements, management estimated the present value of best case, base case, and worst case scenarios. The sum of the discounted weighted average probabilities was used to arrive at the fair value of the earn-out liability. The current and non-current portions of the earn-out liabilities are included in Accounts payable and accrued liabilities and Other non-current liabilities, respectively, on the Consolidated Balance Sheets. The change in value of these earn-out liabilities is included in General and administrative expenses in the Consolidated Statements of Operations.
Contingently Issuable Shares. The liabilities for these contingently issuable shares are included in Accounts payable and accrued liabilities on the December 31, 2019, Consolidated Balance Sheet. The fair values of these contingently issuable shares were determined using a quantitative put option method. The change in the fair value of the contingently issuable shares are included in change in fair value of derivatives in the December 31, 2019, Consolidated Statement of Operations.
The following table presents information about significant unobservable inputs related to Level 3 financial liabilities as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom Stock Options
|
|
Contingently Issuable Shares
|
|
Tranche 1
|
|
Tranche 2
|
|
|
Tranche 1
|
|
|
Tranche 2
|
|
Assumed liquidation company share price
|
N/A
|
|
N/A
|
|
|
$
|
250.00
|
|
|
$
|
300.00
|
|
Common stock price at December 31, 2019
|
$
|
12.50
|
|
$
|
12.50
|
|
|
$
|
12.50
|
|
|
$
|
12.50
|
|
Exercise price
|
$
|
100.00
|
|
$
|
200.00
|
|
|
N/A
|
|
|
N/A
|
|
Estimated term (in years)
|
3.5 - 6.6
|
|
3.5 - 5.5
|
|
|
23.32
|
|
|
24.74
|
|
Expected stock volatility
|
75.6% - 98.7%
|
|
79.6% - 98.7%
|
|
|
86.0
|
%
|
|
86.0
|
%
|
Risk free rate
|
1.60% - 1.83%
|
|
1.60% - 1.70%
|
|
|
N/A
|
|
|
N/A
|
|
Dividend yield
|
—
|
%
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Implied discount for lack of marketability (1)
|
N/A
|
|
N/A
|
|
|
32.3
|
%
|
|
32.3
|
%
|
|
|
(1)
|
A discount for lack of marketability was applied to the resulting values as the shares, when issued, may not initially be registered with the SEC.
|
Nonrecurring Fair Value Measurements. The Company measures its equity method investments at fair value on a nonrecurring basis, when they are deemed to be other-than-temporarily impaired, using Level 3 unobservable inputs. Based on our non-controlling 49% interest, and having no direct comparable publicly-listed competitor to WMS, management concluded that utilizing the income approach, specifically the discounted cash flow method, would be the most reasonable method of assessing the fair value of WMS. During the year ended December 31, 2018, the Company recorded an impairment charge of $51.0 million relating to its WMS equity investment after determining that the carrying value of its interest in the WMS joint venture exceeded the estimated fair value of its interest. The net carrying value of our WMS equity investment as of December 31, 2019 amounted to $76.1 million. See Note 8. Equity Method Investments.
The following table shows the carrying amounts of the Company’s long-term debt in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Carrying Amount (7)
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Senior secured term loan facility, due January 2023 (+)(1)
|
$
|
485,166
|
|
|
$
|
454,168
|
|
|
$
|
455,292
|
|
|
$
|
473,344
|
|
Senior secured revolving credit facility, due January 2022 (+)(2)
|
43,315
|
|
|
43,315
|
|
|
54,015
|
|
|
54,015
|
|
2.75% convertible senior notes due 2035 (1) (3)
|
71,126
|
|
|
37,125
|
|
|
70,419
|
|
|
49,064
|
|
Second lien notes, due 2023 (4) (5)
|
149,772
|
|
|
99,922
|
|
|
128,178
|
|
|
112,230
|
|
Other debt (6)
|
23,683
|
|
|
23,685
|
|
|
1,707
|
|
|
1,707
|
|
|
$
|
773,062
|
|
|
$
|
658,215
|
|
|
$
|
709,611
|
|
|
$
|
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 the quoted prices of the instrument in an over-the-counter market.
|
|
|
(2)
|
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments. The Company expect to draw on the 2017 Revolving Loans from time to time to fund its 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 Consolidated Balance Sheets within “Additional paid-in capital” (see Note 13. Equity Transactions). The principal amount outstanding of the Convertible Notes was $82.5 million as of December 31, 2019, and the carrying amounts in the above 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 above table was $178.0 million as of December 31, 2019, and includes approximately $28.0 million of payment-in-kind (“PIK”) interest converted to principal since debt issuance. 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 Consolidated Balance Sheets within “Additional paid-in capital” (see Note 10. 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 and is classified as Level 3 financial instruments. As of December 31, 2019, Other debts primarily consisted of: (i) $3.4 million financing for transponder purchases and (ii) $19.0 million of finance lease liability relating to an assessed right-of-use over a satellite bandwidth capacity (refer to Note 4. Leases for details).
|
|
|
(7)
|
The carrying amounts at December 31, 2019 and 2018 are presented net of $60.5 million and $65.2 million of unamortized bond discounts and issuance costs, respectively.
|
Draw Down of the Revolving Credit Facility. On February 28, 2020, in an abundance of caution regarding the uncertainty related to the COVID-19 pandemic, as of the time of filing for this 10-K we have fully drawn down the available capacity under the revolving credit facility, with a corresponding increase in our cash on hand.
Note 18. Concentrations
Concentrations of Credit and Business Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable.
At December 31, 2019 and 2018, the Company’s cash and cash equivalents were maintained primarily with major U.S. financial institutions and foreign banks. Deposits with these institutions at times exceed the federally insured limits, which potentially subjects the Company to concentration of credit risk. The Company has not experienced any losses related to these balances and believes that there is minimal risk. Of its cash and cash equivalents as of December 31, 2019, approximately $10.5 million was held by its foreign subsidiaries. If these funds were repatriated for use in the Company’s U.S. operations, the Company 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 the Company after repatriation. In the event the Company elects to repatriate any of these funds, the Company believes it has sufficient net operating losses for the foreseeable future to offset any repatriated income. As a result, the Company does not expect any such repatriation would create a tax liability in the U.S. or have a material impact on its effective tax rate.
A substantial portion of the Company’s revenue is generated through arrangements with Southwest Airlines. The Company may not be successful in renewing these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The percentage of revenue generated through the customer representing more than 10% of consolidated revenue is as follows:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Southwest Airlines as percentage of Total Revenue
|
21
|
%
|
|
18
|
%
|
Southwest Airlines as percentage of Total Connectivity Revenue
|
38
|
%
|
|
35
|
%
|
No other customer accounted for revenue greater than 10% for the two years presented. Accounts receivable from Southwest Airlines represented 17% and 16% of total accounts receivable at December 31, 2019 and 2018, respectively.
Note 19. Net Results Per Share
Basic (loss) income per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the 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 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. Common stock to be issued upon the exercise of warrant instruments classified as a liability is not included in the calculation of diluted loss per share because 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):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Net income (loss) (Numerator):
|
|
|
|
Net loss
|
$
|
(153,443
|
)
|
|
$
|
(236,599
|
)
|
Net loss attributable to Global Eagle Entertainment, Inc. common stockholders for basic and diluted EPS
|
$
|
(153,443
|
)
|
|
$
|
(236,599
|
)
|
Net loss for dilutive EPS
|
$
|
(153,443
|
)
|
|
$
|
(236,599
|
)
|
Shares (Denominator):
|
|
|
|
Weighted average common shares outstanding - basic
|
3,697
|
|
|
3,653
|
|
Weighted average common shares outstanding - diluted
|
3,697
|
|
|
3,653
|
|
Net loss per share:
|
|
|
|
Basic
|
$
|
(41.50
|
)
|
|
$
|
(64.77
|
)
|
Diluted
|
$
|
(41.50
|
)
|
|
$
|
(64.77
|
)
|
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):
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Employee stock options
|
163
|
|
|
234
|
|
Restricted stock units (including performance stock units)
|
175
|
|
|
136
|
|
Public SPAC Warrants(1)
|
—
|
|
|
21
|
|
Convertible notes
|
178
|
|
|
178
|
|
Contingently issuable shares(2)
|
36
|
|
|
36
|
|
Searchlight Market Warrants(3)
|
397
|
|
|
397
|
|
Searchlight Penny Warrants(3)
|
552
|
|
|
552
|
|
|
|
(2)
|
In connection with a Sound Recording Settlement, the Company is obligated to issue 20,000 shares of its common stock when and if the closing price of its common stock exceeds $250.00 per share, and 16,000 shares of its common stock when and if the closing price of its common stock exceeds $300.00 per share. See Note 11. Commitments and Contingencies.
|
|
|
(3)
|
On March 27, 2018, the Company issued $150 million in aggregate principal amount of its Second Lien Notes to Searchlight, combined with two sets of warrants to acquire the Company’s common stock . For further details, see Note 10. Financing Arrangements.
|
Note 20. Quarterly Financial Data (Unaudited)
The following quarterly Consolidated Statements of Operations for the years December 31, 2019 and 2018 are unaudited, and have been prepared on a basis consistent with the Company’s audited consolidated annual financial statements, and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Mar. 31, 2018
|
|
June 30, 2018
|
|
Sept. 30, 2018
|
|
Dec. 31, 2018
|
|
Mar. 31, 2019
|
|
June 30, 2019
|
|
Sept. 30, 2019
|
|
Dec. 31, 2019
|
Revenue
|
$
|
156,497
|
|
|
$
|
165,962
|
|
|
$
|
164,027
|
|
|
$
|
160,608
|
|
|
$
|
166,619
|
|
|
$
|
157,467
|
|
|
$
|
169,889
|
|
|
$
|
162,902
|
|
Cost of sales
|
118,496
|
|
|
126,731
|
|
|
128,569
|
|
|
138,597
|
|
|
134,194
|
|
|
124,217
|
|
|
131,873
|
|
|
133,441
|
|
Gross margin
|
38,001
|
|
|
39,231
|
|
|
35,458
|
|
|
22,011
|
|
|
32,425
|
|
|
33,250
|
|
|
38,016
|
|
|
29,461
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
9,654
|
|
|
10,877
|
|
|
8,989
|
|
|
8,104
|
|
|
8,249
|
|
|
7,365
|
|
|
6,675
|
|
|
6,470
|
|
Product development
|
8,358
|
|
|
9,872
|
|
|
7,477
|
|
|
7,033
|
|
|
6,979
|
|
|
6,125
|
|
|
6,740
|
|
|
6,808
|
|
General and administrative
|
38,285
|
|
|
29,799
|
|
|
31,620
|
|
|
34,959
|
|
|
27,980
|
|
|
27,161
|
|
|
28,275
|
|
|
26,008
|
|
Provision for (gain from) legal settlements
|
516
|
|
|
(141
|
)
|
|
(509
|
)
|
|
1,451
|
|
|
508
|
|
|
25
|
|
|
5,555
|
|
|
(1,669
|
)
|
Amortization of intangible assets
|
10,747
|
|
|
10,357
|
|
|
9,447
|
|
|
7,889
|
|
|
7,799
|
|
|
7,800
|
|
|
6,778
|
|
|
6,269
|
|
Total operating expenses
|
67,560
|
|
|
60,764
|
|
|
57,024
|
|
|
59,436
|
|
|
51,515
|
|
|
48,476
|
|
|
54,023
|
|
|
43,886
|
|
Income (loss) from operations
|
(29,559
|
)
|
|
(21,533
|
)
|
|
(21,566
|
)
|
|
(37,425
|
)
|
|
(19,090
|
)
|
|
(15,226
|
)
|
|
(16,007
|
)
|
|
(14,425
|
)
|
Interest expense, net
|
(15,597
|
)
|
|
(19,755
|
)
|
|
(20,048
|
)
|
|
(20,818
|
)
|
|
(21,277
|
)
|
|
(22,329
|
)
|
|
(23,881
|
)
|
|
(22,224
|
)
|
Income from equity method investments(1)
|
1,161
|
|
|
428
|
|
|
2,022
|
|
|
(49,921
|
)
|
|
2,129
|
|
|
2,517
|
|
|
3,130
|
|
|
2,204
|
|
Change in fair value of derivatives
|
564
|
|
|
(655
|
)
|
|
(196
|
)
|
|
384
|
|
|
938
|
|
|
—
|
|
|
(6
|
)
|
|
134
|
|
Other income (expense), net
|
438
|
|
|
(673
|
)
|
|
(588
|
)
|
|
(194
|
)
|
|
(179
|
)
|
|
(105
|
)
|
|
(202
|
)
|
|
(18
|
)
|
Income (loss) before income taxes
|
(42,993
|
)
|
|
(42,188
|
)
|
|
(40,376
|
)
|
|
(107,974
|
)
|
|
(37,479
|
)
|
|
(35,143
|
)
|
|
(36,966
|
)
|
|
(34,329
|
)
|
Income tax expense (benefit)
|
(4,709
|
)
|
|
3,722
|
|
|
2,852
|
|
|
1,203
|
|
|
130
|
|
|
3,317
|
|
|
4,308
|
|
|
1,771
|
|
Net income (loss)
|
$
|
(38,284
|
)
|
|
$
|
(45,910
|
)
|
|
$
|
(43,228
|
)
|
|
$
|
(109,177
|
)
|
|
$
|
(37,609
|
)
|
|
$
|
(38,460
|
)
|
|
$
|
(41,274
|
)
|
|
$
|
(36,100
|
)
|
Net income (loss) per share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(10.50
|
)
|
|
$
|
(12.50
|
)
|
|
$
|
(11.75
|
)
|
|
$
|
(29.75
|
)
|
|
$
|
(10.25
|
)
|
|
$
|
(10.50
|
)
|
|
$
|
(11.25
|
)
|
|
$
|
(9.75
|
)
|
Diluted
|
$
|
(10.50
|
)
|
|
$
|
(12.50
|
)
|
|
$
|
(11.75
|
)
|
|
$
|
(29.75
|
)
|
|
$
|
(10.25
|
)
|
|
$
|
(10.50
|
)
|
|
$
|
(11.25
|
)
|
|
$
|
(9.75
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
3,632
|
|
|
3,642
|
|
|
3,656
|
|
|
3,674
|
|
|
3,673
|
|
|
3,690
|
|
|
3,709
|
|
|
3,715
|
|
Diluted
|
3,632
|
|
|
3,642
|
|
|
3,656
|
|
|
3,674
|
|
|
3,673
|
|
|
3,690
|
|
|
3,709
|
|
|
3,715
|
|
|
|
(1)
|
During the fourth quarter of 2018, the Company completed an assessment of the recoverability of its equity method investments and determined that the carrying value of its interest in WMS exceeded the estimated fair value of its interest and accordingly, recorded an impairment loss of $51.0 million. See Note 8. Equity Method Investments.
|
|
|
(2)
|
Quarterly and year-to-date computations of net income (loss) per common share amounts are calculated independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year.
|
Note 21. Subsequent Events
Draw Down on the Revolving Credit Facility
On February 28, 2020, as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, we further leveraged our balance sheet, and drew down the remaining $41.8 million under our Revolving Credit Facility with a corresponding increase in our cash on hand. Following the Drawdown, we have no remaining borrowing under the Revolving Credit Facility.
Adoption of Shareholder Rights Plan
On March 19, 2020, our Board adopted a stockholder rights plan, as set forth in a Rights Agreement between the Company and American Stock Transfer and Trust Company, LLC (the “Rights Agreement”), and issued the rights contemplated thereby (the “Rights”) on March 30, 2020. The Rights Plan is intended to promote the fair and equal treatment of all of our stockholders and ensure that no person or group can gain control of us through open market accumulation or other tactics without paying a control premium and potentially disadvantaging the interest of all stockholders. The Rights Plan ensures that our Board has sufficient time to exercise its fiduciary duties to make informed judgments about the actions of third parties that may not be in the best interests of us and our stockholders.
In general terms, the Rights will become exercisable if a person or group becomes the beneficial owner of 20% or more of the Company’s outstanding Common Stock. Stockholders who beneficially owned 20% or more of Global Eagle’s outstanding common stock prior to the issuance of this press release will not trigger the exercisability of the Rights so long as they do not acquire beneficial ownership of any additional shares of common stock at a time when they still beneficially own 20% or more of such common stock, subject to certain exceptions as described in the Rights Plan. In the event that the Rights become exercisable due to the triggering ownership threshold being crossed, each Right will entitle its holder to purchase a number of shares of Common Stock or equivalent securities having a market value at that time of twice the Right’s purchase price. The Rights Agreement is attached to this Annual Report on Form 10-K as Exhibit 4.14.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows employers to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020, through the end of the calendar year. In addition, the CARES Act provides for various grants, loans and other financial support for certain companies that are affected by the COVID-19 pandemic. We are currently evaluating the impact of this legislation on our consolidated financial position, results of operations, and cash flows. It is possible that further regulatory guidance under the CARES Act will be forthcoming. There is no assurance that any sources of financings under the CARES Act will be available to us on favorable terms or at all.
The COVID-19 pandemic is having a significant negative impact on the Company’s financial performance. The pandemic is ongoing and dynamic in nature and, to date, the travel industry has experienced temporary closures in key regions globally. The extent of the COVID-19 pandemic’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the issue, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. The Company’s management is assessing goodwill and long-lived assets for impairment on an ongoing basis as a result of a significant decline in the Company’s market capitalization subsequent to the year ended December 31, 2019, which they believe is driven by investor uncertainty around the Company’s liquidity position, and lower than expected projected financial results in its Media & Content, Aviation Connectivity, Maritime & Land Connectivity reporting units stemming from the COVID-19 pandemic, management has determined that an impairment triggering event occurred in the fiscal quarter ended March 31, 2020. Given these indicators, the Company’s management has determined there is a higher degree of risk in achieving the Company’s financial projections for each reporting unit and as such, decreased projected operating performance and increased the discount rate, which will reduce the fair value of each reporting unit when compared to their respective carrying values. In addition, the extent to which the COVID-19 pandemic will impact the Company’s operations or financial results is uncertain as management is unable to accurately predict the severity and the duration of the pandemic. As a result of these changing factors and uncertainties, the Company continues to evaluate its estimates that have a material adverse impact on the results of operations. As of the filing of Form 10-K on May 14, 2020, a significant goodwill impairment in the first quarter of 2020 is possible. However, we are unable to estimate the magnitude of a potential impairment in our reporting units and potential impairment of our long-lived assets.
Although, the Company’s management is unable to determine with any degree of accuracy the length and severity of the pandemic, they do expect it will have a material adverse impact on the Company’s consolidated financial position, consolidated results of operations, and consolidated cash flows in the first quarter of fiscal 2020. The extent and duration of the pandemic remains uncertain and may impact consumer purchasing activity if disruptions continue throughout the year which could continue to impact the Company. Due to the developing pandemic, the results of the first quarter ending March 31, 2020 and the full fiscal year ending December 31, 2020 could be impacted in ways management is not able to predict today, including, but not limited to, non-cash write-downs and impairments; unrealized gains or losses related to investments; foreign currency fluctuations; and collections of accounts receivables. Additionally, payments to certain vendors have not been made in accordance with payment terms. To date, no critical vendors have stopped providing goods or services. However, there is no assurance that this will continue. If a critical vendor were to discontinue doing business with us this could have a material adverse impact on the Company’s results. Management is continuing to monitor the potential impact of the COVID-19 pandemic.
The Company is also implementing a number of other measures to help mitigate the operating and financial impact of the pandemic, including: (i) temporary salary reductions for all employees, including our executive officers; (ii) deferral of annual merit increases; (iii) accelerate WMS dividend payments; and (iv) working globally with country management teams to maximize our participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic. In addition, the Company’s management has a number of other mitigating actions it is pursuing, including (i) executing additional substantial reductions in expenses, capital expenditures and overall costs; and (ii) accessing alternative sources of capital, in order to generate additional liquidity.
Reverse Stock Split
On November 6, 2019, we received a letter from the Listing Qualifications staff (the “Staff”) of Nasdaq that, based upon our non-compliance with the minimum $1.00 bid price requirement for continued listing on The Nasdaq Capital Market required to maintain continued listing under the Nasdaq listing rules (the “Bid Price Rule”), our common stock would be subject to delisting from Nasdaq unless we timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”). In accordance with Nasdaq’s procedures, we timely appealed Nasdaq’s determination by requesting a hearing before the Panel to seek continued listing of our common stock. The hearing was held on December 5, 2019.
On December 16, 2019, the Panel granted the Company’s request for continued listing of the Company’s common stock on The Nasdaq Capital Market pursuant to an initial extension through April 15, 2020 or, in certain circumstances, through May 4, 2020. On March 17, 2020, we received notification that the Panel granted a further extension through May 4, 2020 in which to regain compliance with the Bid Price Rule in light of the extreme volatility in financial markets resulting from COVID-19.
On April 13, 2020, we received another letter from the Staff notifying us that we were not in compliance with Nasdaq Listing Rule 5550(b)(2) (the “MVLS Rule”) for continued listing on The Nasdaq Capital Market, because the market value of our listed securities was less than $35 million for the previous 30 consecutive business days.
On April 15, 2020, the Board of Directors approved a reverse stock split of the Company’s outstanding and authorized shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the number of the Company’s issued and outstanding shares of common stock was decreased from 92,944,935 to 3,717,797, all with a par value of $0.0001. The effective date of the Reverse Stock Split was April 16, 2020. The Reverse Stock Split affects all stockholders uniformly and will not alter any stockholder’s percentage interest in the Company’s common stock, except for adjustments that may result from the treatment of fractional shares as follows: (i) no fractional shares will be issued as a result of the Reverse Stock Split; and (ii) stockholders who would have been entitled to a fractional share as a result of the Reverse Stock Split will instead receive a cash payment from the transfer agent in an amount equal to the fractional share multiplied by the closing price of our common stock the day before the Reverse Stock Split became effective. All amounts presented in these financial statements, have been adjusted for this Reverse Stock Split.
On April 30, 2020, we were notified that we had regained compliance with the Bid Price Rule; however, we remain non-compliant with the MVLS Rule. Under the Nasdaq listing rules, we have until October 12, 2020 to regain compliance with the MVLS Rule by demonstrating that the market value of our listed securities is $35 million or more for a minimum of 10 consecutive business days. If we do not regain compliance with the MVLS Rule by the required date, we may appeal for an extension to regain compliance with no assurance that we will be successful in obtaining the extension. If we do not regain compliance by October 12, 2020 or by the extended compliance date, if applicable, Nasdaq would delist our common stock from The Nasdaq Capital Market.
On April 10, 2019, S&P Global downgraded the Company’s credit rating by two notches from B- to CCC, and on April 10, 2020 they downgraded the Company an additional notch to CCC-. On April 6, 2020 Moody’s downgraded the Company’s credit rating one notch from B3 to Caa2.
ITEM 16. FORM 10-K SUMMARY
None.