Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
FOR THE TRANSITION PERIOD FROM __________ TO ________

COMMISSION FILE NUMBER 001-35176

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12539591&doc=20
GLOBAL EAGLE ENTERTAINMENT INC.

(Exact name of registrant as specified in its charter)
Delaware
 
27-4757800
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
6100 Center Drive, Suite 1020
 
 
Los Angeles, California
 
90045
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (310) 437-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
(Outstanding as of November 6, 2018)
COMMON STOCK, $0.0001 PAR VALUE
 
91,695,768

SHARES*

* Excludes 3,053,634 shares held by a wholly-owned subsidiary of the registrant.


Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
ITEM 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 
ITEM 1A.
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 6.
 
 
 
 
 
 



Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS


1

Table of Contents


GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)

 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
31,731

 
$
48,260

Restricted cash
801

 
3,608

Accounts receivable, net
99,678

 
113,545

Inventories
38,381

 
28,352

Prepaid expenses
16,141

 
13,486

Other current assets
17,261

 
20,923

TOTAL CURRENT ASSETS:
203,993

 
228,174

Content library
7,143

 
8,686

Property, plant and equipment, net
182,777

 
195,029

Goodwill
159,610

 
159,696

Intangible assets, net
92,210

 
122,582

Equity method investments
135,975

 
137,299

Other non-current assets
12,439

 
9,118

TOTAL ASSETS
$
794,147

 
$
860,584

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
167,135

 
$
205,036

Deferred revenue
10,892

 
6,508

Current portion of long-term debt
20,946

 
20,106

Other current liabilities
9,137

 
7,785

TOTAL CURRENT LIABILITIES:
208,110

 
239,435

Deferred revenue, non-current
1,116

 
1,079

Long-term debt
666,493

 
598,958

Deferred tax liabilities
7,776

 
16,247

Other non-current liabilities
30,573

 
30,340

TOTAL LIABILITIES
914,068

 
886,059

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
STOCKHOLDERS’ DEFICIT:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 94,742,764 and 93,834,805 shares issued, 91,689,130 and 90,781,171 shares outstanding, at September 30, 2018 and December 31, 2017, respectively
10

 
10

Treasury stock, 3,053,634 shares at September 30, 2018 and December 31, 2017
(30,659
)
 
(30,659
)
 Additional paid-in capital
811,906

 
779,565

 Subscriptions receivable
(597
)
 
(578
)
 Accumulated deficit
(900,281
)
 
(773,791
)
 Accumulated other comprehensive loss
(300
)
 
(22
)
TOTAL STOCKHOLDERS’ DEFICIT
(119,921
)
 
(25,475
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
794,147

 
$
860,584

* See Note 2. Basis of Presentation and Summary of Significant Accounting Policies.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Licensing and services
$
157,604

 
$
143,610

 
$
460,560

 
$
433,400

Equipment
6,423

 
7,927

 
25,927

 
26,471

Total revenue
164,027

 
151,537

 
486,487

 
459,871

Cost of sales:
 
 
 
 
 
 
 
Licensing and services
123,126

 
105,830

 
357,523

 
317,624

Equipment
5,443

 
7,121

 
15,859

 
23,956

Total cost of sales
128,569

 
112,951

 
373,382

 
341,580

Gross margin
35,458

 
38,586

 
113,105

 
118,291

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
8,989

 
9,332

 
29,499

 
30,376

Product development
7,477

 
11,328

 
25,536

 
26,921

General and administrative
31,620

 
39,129

 
100,384

 
109,372

Provision for legal settlements
(509
)
 
310

 
(134
)
 
785

Amortization of intangible assets
9,447

 
10,981

 
30,367

 
32,849

Goodwill impairment

 

 

 
78,000

Total operating expenses
57,024

 
71,080

 
185,652

 
278,303

Interest expense, net
(20,048
)
 
(18,164
)
 
(55,399
)
 
(43,935
)
Loss on extinguishment of debt

 

 

 
(14,389
)
Income from equity method investments
2,022

 
1,770

 
3,611

 
3,911

Change in fair value of derivatives
(196
)
 
196

 
(287
)
 
2,672

Other (expense) income, net
(588
)
 
(123
)
 
(936
)
 
38

Loss before income taxes
(40,376
)
 
(48,815
)
 
(125,558
)
 
(211,715
)
Income tax expense
2,852

 
4,153

 
1,865

 
10,993

Net loss
$
(43,228
)
 
$
(52,968
)
 
$
(127,423
)
 
$
(222,708
)
 
 
 
 
 
 
 
 
Net loss per share – basic and diluted
$
(0.47
)
 
$
(0.59
)
 
$
(1.40
)
 
$
(2.57
)
Weighted average shares outstanding – basic and diluted
91,408

 
89,194

 
91,101

 
86,710

* See Note 2. Basis of Presentation and Summary of Significant Accounting Policies.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(43,228
)
 
$
(52,968
)
 
$
(127,423
)
 
$
(222,708
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation adjustments
(79
)
 
217

 
(278
)
 
226

Other comprehensive income (loss)
(79
)
 
217

 
(278
)
 
226

Comprehensive income (loss)
$
(43,307
)
 
$
(52,751
)
 
$
(127,701
)
 
$
(222,482
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



4

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT (UNAUDITED)
(In thousands)

 
Common Stock
 
 Treasury Stock
 
Additional
 
Subscriptions
 
Accumulated
 
Accumulated Other
 
Total
 
Shares
 
Amount
 
Shares
 
 Amount
 
Paid-in Capital
 
Receivable
 
Deficit
 
Comprehensive Loss
 
Stockholders’ Deficit
Balance at December 31, 2017
93,835

 
$
10

 
(3,054
)
 
$
(30,659
)
 
$
779,565

 
$
(578
)
 
$
(773,791
)
 
$
(22
)
 
$
(25,475
)
Adoption of ASC 606 - Cumulative Adjustment

 

 

 

 

 

 
933

 

 
933

Equity warrants issued in connection with Second Lien Notes

 

 

 

 
24,196

 

 

 

 
24,196

Restricted stock units vested and distributed, net of tax
908

 

 

 

 
(401
)
 

 

 

 
(401
)
Stock-based compensation

 

 

 

 
8,546

 

 

 

 
8,546

Interest income on subscription receivable

 

 

 

 

 
(19
)
 

 

 
(19
)
Net loss

 

 

 

 

 

 
(127,423
)
 

 
(127,423
)
Tax benefit related to the exercise of stock option

 

 

 

 

 

 

 

 

Comprehensive loss, net of tax

 

 

 

 

 

 
 
 
(278
)
 
(278
)
Balance at September 30, 2018
94,743

 
10

 
(3,054
)
 
(30,659
)
 
811,906

 
(597
)
 
(900,281
)
 
(300
)
 
(119,921
)


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents
GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)


 
Nine Months Ended September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(127,423
)
 
$
(222,708
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization of property, plant, equipment and intangibles
74,517

 
65,739

Amortization of content library
9,515

 
11,420

Non-cash interest expense, net
14,782

 
4,274

Change in fair value of derivatives
287

 
(2,672
)
Stock-based and deferred compensation
9,785

 
4,000

Impairment of goodwill

 
78,000

Loss on disposal of fixed assets
403

 
473

Loss on extinguishment of debt

 
14,389

Earnings from equity method investments
(3,611
)
 
(3,911
)
Distributions from equity method investments

 
4,900

Provision (recovery of) for bad debts
(313
)
 
3,399

Deferred income taxes
(8,722
)
 
(1,598
)
Other
(975
)
 
(2,198
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
8,459

 
3,169

Inventories
(14,088
)
 
(7,787
)
Prepaid expenses and other current assets
5,167

 
6,020

Content library
(7,665
)
 
(11,537
)
Other non-current assets
(1,634
)
 
(247
)
Accounts payable and accrued liabilities
(34,378
)
 
(13,236
)
Deferred revenue
4,604

 
(829
)
Other current liabilities
1,825

 
(472
)
NET CASH USED IN OPERATING ACTIVITIES
(69,465
)
 
(71,412
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(33,523
)
 
(62,667
)
Settlement of EMC Working Capital

 
1,250

NET CASH USED IN INVESTING ACTIVITIES
(33,523
)
 
(61,417
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of Second Lien Notes and equity warrants
150,000

 

Proceeds from issuance of debt, net of $15,000 discount

 
485,000

Issuance costs
(6,968
)
 
(19,296
)
Repayments of indebtedness
(10,218
)
 
(419,454
)
Repayment of revolving credit facility
(80,585
)
 

Borrowings on revolving credit facility
31,600

 
78,115

Payment of contingent consideration

 
(1,429
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
83,829

 
122,936

Effects of exchange rate changes on cash and cash equivalents
(177
)
 
273

Net decrease in cash and cash equivalents
(19,336
)
 
(9,620
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD1
51,868

 
68,678

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD1
$
32,532

 
$
59,058

 
 
 
 
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 


6

Table of Contents



Purchase consideration for equipment included in accounts payable
$
3,576

 
$
14,390

Distributions from equity method investee to offset demand promissory note
4,900

 

Conversion of PIK interest on our Second Lien Notes to additional principal
8,450

 

Release of restricted cash held in escrow for EMC Acquisition

 
15,483

Issuance of common stock for EMC acquisition

 
25,000


1 September 30, 2017 figures have been recast to include the impact of the adoption of ASU 2016-18. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


7

Table of Contents



GLOBAL EAGLE ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1.    Business

Global Eagle Entertainment Inc. is a Delaware corporation headquartered in Los Angeles, California. Global Eagle (together with its subsidiaries, “Global Eagle” or the “Company”, “we”, “us” or “our”) is a leading provider of media and satellite-based connectivity to fast-growing, global mobility markets across air, land and sea. Global Eagle offers a fully integrated suite of rich media content and seamless connectivity solutions that cover the globe. As of September 30, 2018, our business comprises two operating segments: Media & Content and Connectivity. See Note 13. Segment Information for further discussion of the Company’s reportable segments.

Media & Content
    
The Media & Content operating segment selects, manages, provides lab services and distributes wholly owned and licensed media content, video and music programming, advertising, applications and video games to the airline, maritime and other “away from home” non-theatrical markets.

Connectivity

The Connectivity operating segment provides its customers, including their passengers and crew, with (i) Wi-Fi connectivity via L, C, Ka and Ku-band satellite transmissions that enable access to the Internet, live television, on-demand content, shopping and travel-related information and (ii) operational solutions that allow customers to improve the management of their internal operations.


Note 2.    Basis of Presentation and Summary of Significant Accounting Policies

The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements.

Basis of Presentation

In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company's audited consolidated financial statements for the year ended December 31, 2017, and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's interim unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2018. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the full 2018 fiscal year. The consolidated balance sheet as of December 31, 2017 has been derived from the Company's audited balance sheet included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on April 2, 2018 (the "2017 Form 10-K").

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete audited financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the 2017 Form 10-K.

These interim unaudited condensed consolidated financial statements have been prepared on the basis of the Company having sufficient liquidity to fund its operations for at least the next twelve months from the issuance of these financial statements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 205-40 (“ASC Topic 205-40”), Presentation of Financial Statements—Going Concern. The Company’s principal sources of liquidity have historically been its debt and equity issuances and its cash and cash equivalents (which cash and cash equivalents amounted to $31.7 million as of September 30, 2018, and $48.3 million as of December 31, 2017, respectively). The Company’s internal


8


plans and forecasts indicate that it will have sufficient liquidity to continue to fund its business and operations for at least the next twelve months in accordance with ASC Topic 205-40.

The assessment by the Company’s management that the Company will have sufficient liquidity to continue as a going concern is based on its completion on March 27, 2018 of the issuance of its second lien notes due June 30, 2023 (the “Second Lien Notes”) (as discussed in Note 8. Financing Arrangements) which provided net cash proceeds of approximately $143.0 million (of which the Company subsequently used a portion thereof to pay down the then full outstanding principal amount, approximately $78.0 million, of its $85 million senior secured revolving credit facility (the “2017 Revolving Loans”)) and on underlying estimates and assumptions, including that the Company: (i) timely files its periodic reports with the SEC; (ii) services its indebtedness and complies with the covenants (including the financial reporting covenants) in the agreements governing its indebtedness; and (iii) remains listed on The Nasdaq Stock Market (“Nasdaq”), including maintaining a minimum stock price pursuant to Nasdaq’s listing rules.

If the Company is unable to satisfy the covenants and obligations contained in its senior secured credit agreement dated January 6, 2017 (as amended, the “2017 Credit Agreement”), the securities purchase agreement governing its Second Lien Notes, or the indenture governing its 2.75% convertible senior notes due 2035 (the “Convertible Notes”), in each case, or obtain waivers thereunder (if needed), then the debtholders and noteholders could have the option to immediately accelerate the outstanding indebtedness, which the Company may not be able to repay. In addition, if the Company is unable to remain in compliance with Nasdaq’s listing requirements, then Nasdaq could determine to delist the Company’s common stock from Nasdaq, which would in turn constitute a “fundamental change” under the terms of the indenture governing the Convertible Notes. This would give the convertible noteholders the option to require the Company to repurchase all or a portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount thereof. In this event, the Company may not be able to repurchase the tendered notes.

The events in the foregoing paragraph, if they occurred, could materially and adversely affect the Company’s operating results, financial condition, liquidity and the carrying value of the Company’s assets and liabilities. The Company intends to satisfy its current and future debt service obligations with its existing cash and cash equivalents and through accessing its 2017 Revolving Loans. However, the Company may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under its existing debt instruments in the event of an acceleration event or repurchase event (as applicable). In any such event, funds from external sources may not be available on acceptable terms, if at all.

Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements of the prior year and the accompanying notes to conform to the current year presentation. Effective January 1, 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) and as a result we reclassified the presentation of our statement of cash flows for the nine months ended September 30, 2017 to conform with the new restricted cash guidance. Refer to sub-section titled Adoption of New Accounting Pronouncements below in this Note.

Revenue Recognition

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09” or “Topic 606”) and all related amendments and applied the concepts to all contracts which were not completed as of January 1, 2018 using the modified retrospective method, recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of accumulated deficit. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting policies.    

We recorded a net reduction to an opening accumulated deficit of $0.9 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the capitalization of contract costs previously expensed and the recognition of deferred revenue as of December 31, 2017 through accumulated deficit relating to time-based software licenses offset by the deferral of revenues for usage-based licenses that were previously recognized upfront. Applying Topic 606 resulted in a net increase of $0.5 million and $0.2 million to revenue, for the three and nine months ended September 30, 2018, respectively. The impact to cost of goods sold for the three and nine months ended September 30, 2018 was a net decrease of $0.5 million and $1.3 million, respectively, primarily relating to revenues in our Media & Content segment as a result of applying Topic 606.

The Company accounts for a contract with a customer when an approved contract exists, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of substantially all of the


9


consideration is probable. Revenue is recognized as the Company satisfies performance obligations by transferring a promised good or service to a customer.

The Company’s revenue is principally derived from the following sources:

Media & Content

The Company curates and manages the licensing of content to the airline, maritime, and non-theatrical industries globally and provides associated services, such as technical services, delivery of digital media advertising, the encoding of video and music products, development of graphical interfaces and the provision of materials. Media & Content licensing and service revenue is principally generated through the sale or license of media content and the associated management services, video and audio programming, applications and video games to customers in the aviation, maritime and non-theatrical markets.

Licensing Revenues

Film, Audio, and Television licensing - The Company selects, procures, manages, and distributes video and audio programming, and provides similar applications to the airline, maritime and other “away from home” non-theatrical markets. The Company delivers content compatible with Global Eagle systems as well as compatible with a multitude of third-party in-flight entertainment (“IFE”) systems. The Company acquires non-theatrical licenses from major Hollywood, independent and international film and television producers and distributors, and licenses the content to airlines, maritime companies, non-theatrical customers, and other content service providers. In addition to the content licenses, the Company provides the content literature for seat-back inflight magazines, trailers for the airlines’ website, and metadata for the Inflight Entertainment systems (“IFE systems”). Revenue recognition is dependent on the nature of the customer contract. Content licenses to customers are typically categorized into usage-based or flat-fee based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures revenue is recognized upon the available date of the license, which is typically at the beginning of each cycle, or straight-line over the license period.
 
Games and applications licensing - The Company produces games customized to suit the in-flight environment. The Company acquires multi-year licenses from game publishers to adapt third-party-branded games and concepts for in-flight use. The Company also licenses applications for use on airline customers’ IFE systems. These applications allow airlines the ability to present information and products to its customers (i.e., passengers) such as their food and beverage menu offerings, magazine content, and flight locations. Games and applications licenses are operated under usage or flat-fee based fee structures. Revenue recognition is dependent on the nature of the customer contract. Content licenses to customers are typically categorized into usage-based or flat-fee based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures revenue is recognized upon the available date of the license, which is typically at the beginning of each cycle, or straight-line over the license period.

Services Revenues

Advertising Services - The Company sells airline advertisement spots to customers through the use of insertion orders with terms typically ranging between one and six months. The Company typically prices advertisements based on a total guaranteed number of impressions within a predetermined play cycle for the advertisement. Pricing is also dependent on the type of advertisement (e.g., pop-up, banner, etc.) and the type of media platform on which the advertisement will be displayed (e.g., airport lounge or IFE system). The total number of impressions are estimated upfront, based on reported flight levels and passenger data supplied by airlines. The Company acquires these advertising distribution rights from airlines via supplier agreements. These supplier agreements with airlines are normally revenue-share arrangements which provide the Company with exclusive distribution rights for the airline advertising spots and can also include a minimum guarantee payment from the Company to the airline. These agreements with airlines are generally for one to three year terms. Revenue is recognized over time as the advertisements are played and/or when the committed advertisement impressions have been delivered, which is generally spread evenly throughout the term and often the Company continues to display the advertisement after the minimum number of impressions is met. When the Company enters into revenue-sharing arrangements with the airlines, the Company evaluates whether it is the principal or agent in the


10


arrangement with the airline. When the Company is considered the principal, it reports the underlying revenue on a gross basis in its Consolidated Statements of Operations and records these revenue-sharing payments to the airline in service costs. When the Company acts as an agent in the arrangement, the associated revenues are recorded net.

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 provided to the Company in specific languages, aspect ratios, and file sizes, whereas the Company’s customers (e.g., airlines) have IFE systems that may require different aspect ratios and file sizes, and they request content in various languages for their global passenger base. The Company’s technical services include encoding, editing and metadata services, as well as language subtitle and dubbing services, and are generally performed in-house in the Company’s technical facilities (collectively, “Lab Services”). Lab Services are typically priced on a flat fee per month, ad hoc basis, or included in the content pricing. Revenue is recognized when the Lab Services performance obligation is complete and the underlying content has been accepted by and made available to the customer, both of which typically occur on the license available date of the respective content.

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).

Connectivity
    
Aviation Services Revenue - Aviation services revenue for Connectivity includes satellite-based Internet services and related technical and network operational support and management services and live television. The connectivity services provide airlines with the capability to provide its passengers wireless access to the Internet, enabling them to web-surf, email, text, and access live television. The connectivity experience also permits passengers to enjoy inflight entertainment, such as streaming for non-live television, movies and video-on-demand, delivered through a web-based framework from an initial “landing page”. The revenue is recognized over time as control is transferred to the customer (i.e., the airline), which occurs continuously as customers receive the bandwidth/connectivity services.

Aviation Equipment Revenue - Aviation equipment revenue is recognized when control passes to the customer, which occurs at the later of shipment of the equipment to the customer and obtaining the Supplemental Type Certificate (“STC”) from the relevant aviation regulatory body. In determining whether an arrangement exists, the Company ensures that a binding arrangement is in place, such as a purchase order or a fully executed customer-specific agreement. The Company generally believes the acceptance clauses in its contracts are perfunctory and will recognize revenue upon shipment provided that all other criteria have been met, including delivery of the STCs. In certain cases where the Company sells its equipment to an aviation customer on a stand-alone basis, it may charge a fee for obtaining STCs from the relevant aviation regulatory body, which permits the Company’s equipment to operate on certain model/type of aircraft. An STC is highly interrelated with the connectivity services as it is often required for new equipment and/or for new types of aircrafts prior to the airlines installing the equipment. When an STC is required, it would not be sold separately as it has no value to the customer without the equipment and vice versa. As such, in such circumstances, the Company does not consider an STC separate from the equipment. To the extent that the Company contracts to charge STC fees in equipment-only sales, the Company will record these fees as revenue at the later of shipment of the equipment to the customer and obtaining the STC.

Maritime and Land Service Revenue - The Maritime business provides satellite telecommunications services (“connectivity services”) through the Company’s private network that utilizes very small aperture terminal (“VSAT”) satellite technology for cruise ships and ferries, commercial shipping companies, yachts, and offshore drilling platforms. The technology enables voice and data capabilities to customers with ocean-going vessels or ocean-based environments. For certain cruise ship customers, the Company also offers maritime live television services. The service offerings cover a wide range of end-to-end network service combinations for customers’ point-to-point and point-to-multipoint telecommunications needs. These offerings range from simple connections to customized private network solutions through a network that uses “multiple channel per carrier” or “single channel per carrier” technology with bandwidth satellite capacity and fiber optic infrastructure. The business also offers teleport services through its proprietary teleports located in Germany and the US. In conjunction with its connectivity services, the Company also provides equipment to the customer. As part of this service, 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.


11


The Company assesses these services under the principal versus agent criteria and has determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.

Maritime and Land Installation Revenue - To service its marine and land-based customers, the Company operates a network of global field support centers for installation and repair services. The Company has field support centers in several locations worldwide, several of which offer a spare parts inventory, a network operations center that is open 24/7, certified technicians, system integration and project management. These field support centers provide third-party antenna and ship-based system integration, global installation support, and repair services. Revenue is recognized in accordance with the transfer of control, i.e., over-time as labor hours are incurred in the provision of installation services.

Maritime and Land Equipment Revenue - Maritime and Land equipment revenue is recognized when control passes to the customer, which, depending on the contractual arrangement with the customer, is generally upon shipment or arrival/acceptance at destination. Maritime and land equipment is generally priced as a one-time upfront payment at its standalone selling price (“SSP”).

Significant Judgments

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation under contracts where the Company provides multiple deliverables. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the SSP using information that may include the adjusted market assessment approach, expected cost plus margin approach, or the residual approach. For the Media & Content segment, management sets prices for each performance obligation using an adjusted market assessment approach when entering into contracts. Contract prices reflect the standalone selling price. As such, the Company uses the stated contract price for SSP allocation of the transaction price.

Topic 606 requires the Company to estimate variable consideration. Service Level Agreement (“SLA”) or service issue/outage credits 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 non-aviation businesses within the Connectivity segment or for the Media & Content segment.

Valuation of Goodwill and Intangible Assets
    
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination, and allocates the purchase price of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor contracts. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on projected financial information of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible liabilities are amortized into cost of sales ratably over their expected related revenue streams over their useful lives.
  
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company does not amortize goodwill but evaluates it for impairment at the reporting unit level annually during the fourth quarter of each fiscal year (as of December 31 of that quarter) or when an event occurs or circumstances change that indicates the carrying value may not be recoverable. During the first quarter of 2017, the Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. Under that guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the quantitative assessment (“Step 1”) remained unchanged versus the prior accounting standard. However, the requirement under the prior standard to complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

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. During 2018, we voluntarily changed our annual impairment assessment date from October 1 to December 31 for all of our reporting units which represents a change in the method of applying an accounting principle. This change was made to improve alignment of impairment testing procedures with year-end financial reporting, our annual business planning and budgeting process and the multi-year strategic forecast, which is a key component of the annual impairment tests. Accordingly, management considers


12


this accounting change preferable. This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements.

Income Taxes

Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurred, along with a corresponding increase or charge to income.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the Company’s position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company recognizes both accrued interest and penalties associated with uncertain tax positions as a component of Income tax (benefit) expense in the condensed consolidated statements of operations.

In December 2017, the United States enacted new U.S. federal tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.

The Tax Act also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign-derived intangible income (“FDII”). Many of these provisions, including the tax on GILTI, the BEAT and the deduction for FDII will not begin to apply to the Company until taxes are assessed on its 2018 fiscal year. As such, the Company is continuing to assess the impact these provisions may have on the Company’s future earnings.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

We have estimated the impacts of the Tax Act in accordance with SAB 118. As of September 30, 2018, we have estimated an income tax benefit impact of $4.6 million for the year ended December 31, 2017, reflecting the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent, and are expecting no tax impact related to the estimated repatriation toll charge of $17.2 million, which was fully offset by our net operating loss generated in 2017. As of September 30, 2018, our management is continuing to evaluate the effects of the Tax Act provisions, but we do not expect a material positive or negative impact to our 2017 tax positions.
    
Fair Value Measurements

The accounting guidance for fair value establishes a framework for measuring fair value and establishes a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

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


13


liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The assets and liabilities that are fair valued on a recurring basis are described below and contained in the following tables. In addition, on a non-recurring basis, the Company may be required to record other assets and liabilities at fair value. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write-downs resulting from impairment of assets.

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018, and December 31, 2017, respectively (dollar values in thousands, other than per-share values):

 
September 30, 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 (3)
1,755

 

 

 
1,755

Phantom Stock options (4)
1,240

 

 

 
1,240

Total
$
3,109

 
$

 
$

 
$
3,109


 
December 31, 2017
 
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

Liability Warrants (2)
20

 

 

 
20

Contingently issuable shares (3)
1,448

 

 

 
1,448

Total
$
1,582

 
$

 
$

 
$
1,582


(1)
Represents aggregate earn-out liabilities assumed in business combinations for the year ended December 31, 2015.

(2)
Includes 6,173,228 Public SPAC Warrants (as defined below) outstanding at December 31, 2017, which expired on January 31, 2018 and are no longer exercisable.

(3)
In connection with the Sound-Recording Settlements (as described below in Note 9. Commitments and Contingencies), the Company is obligated to issue to UMG (as defined in that Note) 500,000 shares of its common stock when and if the closing price of the Company's common stock exceeds $10.00 per share and an additional 400,000 shares of common stock when and if the closing price of the Company’s common stock exceeds $12.00 per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.

(4)
Our cash-settled phantom stock options, granted during the three months ended June 30, 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 September 30, 2018, the aggregate estimated fair value of our cash-settled phantom stock options was $10.2 million for which the vested portion recognized as a liability in our condensed consolidated balance sheet was $1.2 million. The cash-settled phantom stock options are described in more detail in Note 11. Common Stock, Share-Based Awards and Warrants.

Public SPAC Warrants. The Company’s publicly-traded warrants (the “Public SPAC Warrants”) issued in the Company’s initial public offering in 2011 (which were recorded as derivative warrant liabilities) expired on January 31, 2018 and are no longer exercisable. For the nine months ended September 30, 2018 and 2017, the Company recorded income of less than $0.1 million and expense of $0.3 million, respectively, due to the change in the fair value of these warrants. The change in value of these Public SPAC Warrants is included in the change in fair value of derivatives in the condensed consolidated statements of operations.



14


The following table presents the fair value roll-forward reconciliation of Level 3 assets and liabilities measured at fair value basis for the nine months ended September 30, 2018 (in thousands):

 
Liability Warrants
 
Contingently Issuable Shares
 
Earn-Out Liabilities
 
Phantom stock options
Balance as of December 31, 2017
$
20

 
$
1,448

 
$
114

 
$

Change in value
(20
)
 
307

 

 
1,240

Balance as of September 30, 2018
$

 
$
1,755

 
$
114

 
$
1,240


The following table shows the carrying amounts and the fair values of our long-term debt in the condensed consolidated financial statements at September 30, 2018 and December 31, 2017, respectively (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Carrying Amount(7)
 
Fair Value
 
Carrying Amount (7)
 
Fair Value
Senior secured term loan facility, due January 2023 (+)(1)
$
481,250

 
$
494,484

 
$
490,625

 
$
486,945

Senior secured revolving credit facility, due January 2022 (+)(2)
29,015

 
29,015

 
78,000

 
78,000

2.75% convertible senior notes due 2035 (1) (3)
82,500

 
61,215

 
82,500

 
43,313

Second Lien Notes, due June 2023(4) (5)
158,450

 
133,856

 

 

Other debt (6)
3,329

 
3,329

 
9,075

 
9,075

 
$
754,544

 
$
721,899

 
$
660,200

 
$
617,333


(+)     This facility is a component of the 2017 Credit Agreement.
  
(1)
The estimated fair value is classified as Level 2 financial instrument and was determined based on the quoted prices of the instrument in a similar over-the-counter market.

(2)
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments. In the second quarter of 2018, we used a portion of the proceeds of the issuance of our Second Lien Notes to repay the then full outstanding $78 million principal balance on our 2017 Revolving Loans. Subsequently, during the third quarter of 2018 we borrowed approximately $29.0 million on the 2017 Revolving Loans. We expect to draw on the 2017 Revolving Loans from time to time to fund our working capital needs and for other general corporate purposes.
 
(3)
The fair value of the 2.75% Convertible Notes is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at $13.0 million, and is included in the condensed consolidated balance sheets within “Additional paid-in capital” (see Note 11. Common Stock, Stock-Based Awards and Warrants). The principal amount outstanding of the Convertible Notes was $82.5 million as of September 30, 2018, and the carrying amounts in the foregoing table reflect this outstanding principal amount net of debt issuance costs and discount associated with the equity component.

(4)
The principal amount outstanding of the Second Lien Notes, due June 2023 as set forth in the foregoing table was $158.5 million as of September 30, 2018, and is not the carrying amount of the indebtedness (i.e. outstanding principal amount net of debt issuance costs and discount associated with the equity component and includes approximately $8.5 million of payment-in-kind (“PIK”) interest converted to principal during the three months ended September 30, 2018). The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital” (see Note 8. Financing Arrangements).

(5)
The fair value of the Second Lien Notes was determined based on a Black-Derman-Toy interest rate Lattice model. The key inputs of the valuation model contain certain Level 3 inputs.

(6)
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments.

(7)
The carrying amounts presented above at September 30, 2018 and December 31, 2017 exclude $67.1 million and $41.1 million of unamortized bond discounts and issuance costs, respectively.

Adoption of New Accounting Pronouncements

On January 1, 2018, we adopted ASU 2014-09 and all related amendments and applied the concepts to all contracts using the modified retrospective method, recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings. The 2017 comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods. See Note. 3 Revenue.



15


In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which requires that a statement of cash flows explains the change during the period in cash, cash equivalents, and amounts generally described as restricted cash. Amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the standard effective January 1, 2018 and as a result, we reclassified the presentation of our statement of cash flows for the nine months ended September 30, 2017 for restricted cash balances. For the nine months ended September 30, 2017, adopting the standard resulted in an increase to our beginning-of-period and end-of-period cash, cash equivalents and restricted cash of $18.0 million and $1.0 million in the condensed consolidated statements of cash flows, respectively. In addition, removing the change in restricted cash from operating and investing activities in the condensed consolidated statements of cash flows resulted in a increase of $16.4 million and $0.6 million in our cash used in operating activities and cash used in investing activities, respectively, for the nine months ended September 30, 2017.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Prior GAAP standards prohibited the recognition of those tax effects until the asset had been sold to an outside party. We adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends Accounting Standards Codification 230, Statement of Cash Flows, the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs. We adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In August 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. We early adopted the guidance, effective July 1, 2018 and elected to apply the prospective transition approach. We did not capitalize any implementation costs incurred in a cloud computing arrangement service contract during the three and nine months ended September 30, 2018.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update requires most lease assets and lease liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements. In July 2018, the FASB issued new guidance (ASU 2018-11, Leases (Topic 842): Targeted Improvements) allowing for an optional transition method enabling adopters to initially apply the new lease requirements at the effective date, and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Under this adoption method, comparative periods would no longer need to be restated. We will adopt ASU 2016-02, including certain practical expedients, effective in the first quarter of 2019 applying the optional transition method. We are continuing to evaluate the impact of this standard on our condensed consolidated financial statements. We anticipate the adoption of the standard will result in a material increase in the assets and liabilities on our consolidated balance sheet but we do not anticipate the adoption will have a material impact on our consolidated statement of operations.

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. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements (“ASU 2018-09”), which provides clarification and corrections for unintended application of guidance, and makes improvements to several topics in the FASB’s Accounting Standards Codification. While most of the amendments are effective immediately upon release of the ASU, some will become


16


effective for annual periods beginning after December 15, 2018. We are currently evaluating the potential impact of adopting the applicable guidance on our consolidated 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. The ASU is effective for the Company beginning January 1, 2019, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance, including early adoption, on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act. The ASU is effective for the Company beginning January 1, 2019, with early adoption permitted. We intend to adopt the ASU effective January 1, 2019. Management does not believe this standard will have a material impact on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The ASU is effective for the Company beginning January 1, 2020, with early adoption permitted. Management continues to evaluate the impact of this standard on our condensed consolidated financial statements.

    
Note 3.    Revenue

On January 1, 2018, we adopted ASU 2014-09 using the modified retrospective method and applied it to contracts which were not completed as of January 1, 2018. The following table presents the effect of the adoption of ASU 2014-09 on our consolidated balance sheet as of September 30, 2018 (in thousands):



17


 
September 30, 2018
 
Without ASC 606 Adoption
 
Effect of Change Increase/ (Decrease)
 
As Reported
 
 
 
 
 
 
 Cash and cash equivalents
$
31,731

 

 
$
31,731

 Restricted cash
801

 

 
801

 Accounts receivable, net
101,258

 
(1,580
)
 
99,678

 Inventories
38,381

 

 
38,381

 Prepaid expenses
16,141

 

 
16,141

 Other current assets
17,261

 

 
17,261

 TOTAL CURRENT ASSETS
205,573

 
(1,580
)
 
203,993

 Content library
7,143

 

 
7,143

 Property, plant and equipment
182,777

 

 
182,777

 Goodwill
159,610

 

 
159,610

 Intangible assets, net
92,210

 

 
92,210

 Equity method investments
135,975

 

 
135,975

 Other non-current assets
8,733

 
3,706

 
12,439

 TOTAL ASSETS
$
792,021

 
2,126

 
$
794,147

 
 
 
 
 
 
 Accounts payable and accrued liabilities
$
168,974

 
(1,839
)
 
$
167,135

 Deferred revenue
11,204

 
(312
)
 
10,892

 Current portion of long-term debt
20,946

 

 
20,946

 Other current liabilities
9,137

 

 
9,137

 TOTAL CURRENT LIABILITIES
210,261

 
(2,151
)
 
208,110

 Deferred revenue, non-current
1,116

 

 
1,116

 Long-term debt
666,493

 

 
666,493

 Deferred tax liabilities
7,776

 

 
7,776

 Other non-current liabilities
30,573

 

 
30,573

 TOTAL LIABILITIES
916,219

 
(2,151
)
 
914,068

 
 
 
 
 
 
 Preferred stock

 

 

 Common stock
10

 

 
10

 Treasury stock
(30,659
)
 

 
(30,659
)
 Additional paid-in capital
811,906

 

 
811,906

 Subscriptions receivable
(597
)
 

 
(597
)
Prior year accumulated deficit
(773,791
)
 
933

 
(772,858
)
Current year retained deficit
(130,767
)
 
3,344

 
(127,423
)
 Accumulated other comprehensive loss
(300
)
 

 
(300
)
 TOTAL STOCKHOLDERS' DEFICIT
(124,198
)
 
4,277

 
(119,921
)
 TOTAL LIABILTIES & STOCKHOLDERS' DEFICIT
$
792,021

 
2,126

 
$
794,147



The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statements of operations for the three months ended September 30, 2018 (in thousands, except per share amounts):



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Three Months Ended September 30, 2018
 
Without ASC 606 Adoption
 
Effect of Change Increase/ (Decrease)
 
As Reported
Revenue:
 
 
 
 
 
Licensing and services
$
158,713

 
(1,109
)
 
$
157,604

Equipment
4,772

 
1,651

 
6,423

Total revenue
163,485

 
542

 
164,027

Cost of Sales
 
 
 
 
 
Cost of sales:
 
 
 
 
 
Licensing and services
123,623

 
(497
)
 
123,126

Equipment
5,408

 
35

 
5,443

Total cost of sales
129,031

 
(462
)
 
128,569

Gross Margin
34,454

 
1,004

 
35,458

Operating expenses:
 
 
 
 
 
Sales and marketing
8,979

 
10

 
8,989

Product development
7,597

 
(120
)
 
7,477

General and administrative
31,612

 
8

 
31,620

Provision for legal settlements
(509
)
 

 
(509
)
Amortization of intangible assets
9,447

 

 
9,447

Goodwill impairment

 

 

Total operating expenses
57,126

 
(102
)
 
57,024

Loss from operations
(22,672
)
 
1,106

 
(21,566
)
Other income (expense):
 
 


 
 
Interest expense, net
(20,048
)
 

 
(20,048
)
Income from equity method investments
2,022

 

 
2,022

Change in fair value of derivatives
(196
)
 

 
(196
)
Other expense, net
(588
)
 

 
(588
)
Loss before income taxes
(41,482
)
 
1,106

 
(40,376
)
Income tax expense
2,852

 

 
2,852

Net loss
$
(44,334
)
 
1,106

 
$
(43,228
)
 
 
 
 
 
 
Net loss per share – basic and diluted
(0.49
)
 
 
 
(0.47
)
Weighted average shares outstanding – basic and diluted
$
91,408

 
 
 
$
91,408


The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statements of operations for the nine months ended September 30, 2018 (in thousands, except per share amounts):



19


 
Nine Months Ended September 30, 2018
 
Without ASC 606 Adoption
 
Effect of Change Increase/ (Decrease)
 
As Reported
Revenue:
 
 
 
 
 
Licensing and services
$
461,931

 
(1,371
)
 
$
460,560

Equipment
24,365

 
1,562

 
25,927

Total revenue
486,296

 
191

 
486,487

Cost of Sales
 
 


 
 
Cost of sales:
 
 


 
 
Licensing and services
358,862

 
(1,339
)
 
357,523

Equipment
15,794

 
65

 
15,859

Total cost of sales
374,656

 
(1,274
)
 
373,382

Gross Margin
111,640

 
1,465

 
113,105

Operating expenses:
 
 


 
 
Sales and marketing
29,477

 
22

 
29,499

Product development
27,439

 
(1,903
)
 
25,536

General and administrative
100,382

 
2

 
100,384

Provision for legal settlements
(134
)
 

 
(134
)
Amortization of intangible assets
30,367

 

 
30,367

Goodwill impairment

 

 

Total operating expenses
187,531

 
(1,879
)
 
185,652

Loss from operations
(75,891
)
 
3,344

 
(72,547
)
Other income (expense):
 
 


 
 
Interest expense, net
(55,399
)
 

 
(55,399
)
Income from equity method investments
3,611

 

 
3,611

Change in fair value of derivatives
(287
)
 

 
(287
)
Other expense, net
(936
)
 

 
(936
)
Loss before income taxes
(128,902
)
 
3,344

 
(125,558
)
Income tax expense
1,865

 

 
1,865

Net loss
$
(130,767
)
 
3,344

 
$
(127,423
)
 
 
 
 
 
 
Net loss per share – basic and diluted
$
(1.44
)
 
 
 
$
(1.40
)
Weighted average shares outstanding – basic and diluted
91,101

 
 
 
91,101



The following table represents a disaggregation of our revenue from contracts with customers for the three and nine months ended September 30, 2018 and 2017 (in thousands):



20


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Media & Content
 
 
 
 
 
 
 
Licensing & Services
$
80,649

 
$
71,348

 
$
239,020

 
$
222,294

Total Media & Content
80,649

 
71,348

 
239,020

 
222,294

 
 
 
 
 
 
 
 
Connectivity
 
 
 
 
 
 
 
Aviation Services
$
31,113

 
$
27,028

 
$
89,862

 
$
84,661

Aviation Equipment
3,464

 
6,127

 
17,773

 
19,845

Maritime & Land Services
45,842

 
45,234

 
131,678

 
126,445

Maritime & Land Equipment
2,959

 
1,800

 
8,154

 
6,626

Total Connectivity
83,378

 
80,189

 
247,467

 
237,577

 
 
 
 
 
 
 
 
Total revenue
$
164,027

 
$
151,537

 
$
486,487

 
$
459,871

    
Contract Assets and Liabilities

Aviation connectivity contracts involve performance obligations primarily relating to the delivery of connectivity equipment and connectivity services. The connectivity equipment can be provided at a discount and is delivered upfront while the connectivity services are rendered and paid over time. Revenue is allocated based upon the SSP methodology. Where the SSP exceeds the revenue allocation, the revenue to which the Company is entitled is contingent on performing the ongoing connectivity services and the Company records a contract asset accordingly. The balance as of September 30, 2018 and December 31, 2017 of contract contingent revenue was not material.

For some customer contracts we may invoice upfront for services recognized over time or for contracts in which we have unsatisfied performance obligations. Payment terms and conditions vary by contract type, although terms generally include payment terms of 30 to 45 days. In the above circumstances where the timing of invoicing differs from the timing of revenue recognition, we have determined our contracts do not include a significant financing component.

The following table summarizes the significant changes in the contract liabilities balances during the period to September 30, 2018 (in thousands);

 
 
 
 
Contract Liabilities
Balance as of December 31, 2017
 
$
7,587

Adjustments as a result of cumulative catch-up adjustment
 
(118
)
Revenue recognized that was included in the contract liability balance at the beginning of the period
 
(4,084
)
Increase due to cash received, excluding amounts recognized as revenue during the period
 
8,623

Balance as of September 30, 2018
 
$
12,008

 
 
 
Deferred revenue, current
 
$
10,892

Deferred revenue, non-current
 
1,116

 
 
$
12,008


As of September 30, 2018, we had $1.1 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 7% of our remaining performance obligations as revenue in 2018, approximately 23% in 2019, 16% by 2020 and the remaining balance thereafter.



21



Accounts Receivable, net

We extend credit to our customers from time to time. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’ inability to make required payments. Management analyzes the age of customer balances, historical bad debt experience, customer creditworthiness and changes in customer payment terms when making estimates of the collectability of our accounts receivable balances. If we determine that the financial condition of any of our customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off.

Accounts receivable consist of the following (in thousands):

 
September 30,
 
December 31,
 
2018
 
2017
Accounts receivable, gross
$
104,471

 
$
122,225

Less: Allowance for doubtful accounts
(4,793
)
 
(8,680
)
Accounts receivable, net
$
99,678

 
$
113,545


Movements in the balance for bad debt reserve and sales allowance for the nine months ended September 30, 2018 and 2017 are as follows (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Beginning balance
$
8,680

 
$
10,091

(Recovery) additions charged to statements of operations
(313
)
 
3,399

Less: Bad debt write offs
(3,574
)
 
(1,295
)
Ending balance
$
4,793

 
$
12,195


Capitalized Contract Costs

Certain of our sales incentive programs meet the requirements to be capitalized as incremental costs of obtaining a contract. We recognize an asset for the incremental costs if we expect the benefit of those costs to be longer than one year and amortize those costs over the expected customer life. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less.

Additionally, we capitalize assets associated with costs incurred to fulfill a contract with a customer. For example, we capitalize the costs incurred to obtain necessary STC or other customer-specific certifications for our aviation, maritime and land customers.

The following table summarizes the significant changes in the contract assets balances during the period ended September 30, 2018 (in thousands);

 
Contract Assets
 
Costs to Obtain
 
Costs to Fulfill
 
Total
Balance as of December 31, 2017
$

 
$

 
$

Increases as a result of cumulative catch-up adjustment
120

 
810

 
930

Capitalization during period

 
2,864

 
2,864

Amortization
(22
)
 
(66
)
 
(88
)
Balance as of September 30, 2018
$
98

 
$
3,608

 
$
3,706




22


Contract assets are included within Other current assets on our condensed consolidated balance sheet.
    
Practical Expedients, Policy Elections and Exemptions

In circumstances where shipping and handling activities occur subsequent to the transfer of control, we have elected to treat shipping and handling as a fulfillment activity rather than a service to the customer.
    
We have made a policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (e.g., sales, use, value added, and some excise taxes).

We apply a practical expedient to expense costs as incurred for incremental costs to obtain a contract when the amortization period would have been one year or less and did not evaluate contracts of one year or less for variable consideration.

Note 4.    Property, Plant and Equipment, net

Property, plant and equipment, net consisted of the following (in thousands):

 
September 30, 2018
 
December 31, 2017
Leasehold improvements
$
6,778

 
$
6,869

Furniture and fixtures
2,145

 
2,187

Equipment
157,874

 
128,046

Computer equipment
15,193

 
10,661

Computer software
35,777

 
31,518

Automobiles
290

 
311

Buildings
7,971

 
6,744

Albatross (Company-owned aircraft)
447

 
447

Satellite transponders
62,306

 
79,097

Construction in-progress
4,332

 
3,370

Total property, plant and equipment
293,113

 
269,250

Accumulated depreciation
(110,336
)
 
(74,221
)
Property, plant and equipment, net
$
182,777

 
$
195,029


Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Cost of sales
$
10,019

 
$
7,666

 
$
29,576

 
$
21,259

Sales and marketing
917

 
703

 
2,764

 
2,165

Product development
872

 
1,687

 
2,396

 
2,838

General and administrative
3,227

 
1,954

 
9,413

 
7,260

Total depreciation expense
$
15,035

 
$
12,010

 
$
44,149

 
$
33,522



Note 5.    Goodwill
    
Prior to the Company’s acquisition of Emerging Markets Communications (“EMC”) on July 27, 2016 (the “EMC Acquisition”), the Company’s business consisted of two operating segments: Content and Connectivity. Following the EMC Acquisition, the acquired EMC business became our then third operating segment called Maritime & Land Connectivity, and we renamed our other two segments to be Media & Content and Aviation Connectivity. However, in the second quarter of 2017, our chief executive officer, who is our chief operating decision maker (our “CODM”), determined to reorganize our business


23


from three operating segments back into two operating segments—Media & Content and Connectivity. We continue to have three separate reporting units for purposes of our goodwill impairment testing.

The changes in the carrying amount of goodwill by segment were as follows (in thousands):
 
Aviation Connectivity Reporting Unit
 
Maritime & Land Connectivity Reporting Unit
 
Media & Content Reporting Unit
 
Total
Balance as of December 31, 2017
 
 
 
 
 
 
 
Gross carrying amount
$
98,037

 
$
209,130

 
$
83,529

 
$
390,696

Accumulated impairment loss
(44,000
)
 
(187,000
)
 

 
(231,000
)
Balance at December 31, 2017, net
54,037

 
22,130

 
83,529

 
159,696

Foreign currency translation adjustments
(15
)
 

 
(71
)
 
(86
)
Balance as of September 30, 2018
$
54,022

 
$
22,130

 
$
83,458

 
$
159,610

 
 
 
 
 
 
 
 
Balance as of September 30, 2018
 
 
 
 
 
 
 
Gross carrying amount
98,022

 
209,130

 
83,458

 
390,610

Accumulated impairment loss
(44,000
)
 
(187,000
)
 

 
(231,000
)
Balance at September 30, 2018, net
$
54,022

 
$
22,130

 
$
83,458

 
$
159,610


Goodwill Impairments

For the quarter ended March 31, 2017, the Company identified a triggering event due to a significant decline in the market capitalization of the Company. Accordingly, the Company assessed the fair value of its three reporting units as of March 31, 2017 and recorded a goodwill impairment charge of $78.0 million related to its Maritime & Land Connectivity reporting unit. This impairment was primarily due to lower than expected financial results of the reporting unit during the three months ended March 31, 2017 due to delays in new maritime installations, slower than originally estimated execution of EMC Acquisition-related synergies and other events that occurred in the first quarter of 2017. Given these indicators, the Company then determined that there was a higher degree of uncertainty in achieving its financial projections for this unit and as such, increased its discount rate, which reduced the fair value of the unit.
 
For the quarter ended December 31, 2017, we again identified a triggering event due to a further decline in our market capitalization, which we believe was driven by investor uncertainty around our liquidity position and our then delinquent SEC filing status. Consequently, we performed another assessment of the fair value of our three reporting units as of December 31, 2017. In performing that reassessment, we adjusted the assumptions used in the impairment analysis and increased the discount rate used in the impairment model, which negatively impacted the fair value of the Maritime & Land Connectivity and Aviation Connectivity reporting units. Following this analysis, we determined that the fair value of the Media & Content reporting unit exceeded its carrying value, while the fair values of the Maritime & Land Connectivity and Aviation Connectivity reporting units were below their carrying values. As such, we recorded impairment charges of $45.0 million and $44.0 million in our Maritime & Land Connectivity and Aviation Connectivity reporting units, respectively, during the fourth quarter of 2017. The key assumptions underlying our valuation model used for accounting purposes, as described above, were updated to reflect the delays in realizing anticipated EMC Acquisition-related synergies that impacted both the Maritime & Land Connectivity and Aviation Connectivity reporting units. Additionally, network expansion to meet current and anticipated new customer demand caused a step-up in bandwidth costs in our Maritime & Land and Aviation Connectivity reporting units.

Our total goodwill impairment recorded for the full year ended December 31, 2017 was $167.0 million.

During 2018, we voluntarily changed our annual impairment assessment date from October 1 to December 31 for all of our reporting units which represents a change in the method of applying an accounting principle. This change was made to improve alignment of impairment testing procedures with year-end financial reporting, our annual business planning and budgeting process and the multi-year strategic forecast, which is a key component of the annual impairment tests. Accordingly, management considers


24


this accounting change preferable. This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements.

Our Maritime & Land Connectivity reporting unit, which is included in our Connectivity segment, had negative carrying amounts of assets. As of September 30, 2018, remaining goodwill allocated to this reporting unit was $22.1 million.



25


Note 6.    Intangible Assets, net

As a result of historical business combinations, the Company acquired finite-lived intangible assets that are primarily amortized on a straight-line basis and the values of which approximate their expected cash flow patterns. The Company’s finite-lived intangible assets have assigned useful lives ranging from 2.0 to 10.0 years (weighted average of 7.1 years).

Intangible assets, net consisted of the following (dollars in thousands):

 
 
 
September 30, 2018
 
Weighted Average Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Definite life:
 
 
 
 
 
 
 
Existing technology -- software
5.2 years
 
$
42,299

 
$
26,768

 
$
15,531

Developed technology
8.0 years
 
7,317

 
4,573

 
2,744

Customer relationships
8.1 years
 
166,616

 
98,402

 
68,214

Backlog
3.0 years
 
18,300

 
13,217

 
5,083

Other
5.1 years
 
2,391

 
1,753

 
638

Total
 
 
$
236,923

 
$
144,713

 
$
92,210


 
 
 
December 31, 2017
 
Weighted Average Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Definite life:
 
 
 
 
 
 
 
Existing technology -- software
4.8 years
 
$
42,999

 
$
20,209

 
$
22,790

Existing technology -- games
5.0 years
 
12,331

 
12,125

 
206

Developed technology
8.0 years
 
7,317

 
3,887

 
3,430

Customer relationships
7.9 years
 
170,716

 
85,160

 
85,556

Backlog
3.0 years
 
18,300

 
8,642

 
9,658

Other
4.5 years
 
2,746

 
1,804

 
942

Total
 
 
$
254,409

 
$
131,827

 
$
122,582


We expect to record amortization of intangible assets as follows (in thousands):

Year ending December 31,       
Amount
2018 (remaining three months)
$
8,072

2019
28,647

2020
22,263

2021
13,824

2022
7,907

Thereafter
11,497

Total
$
92,210



26


    

We recorded amortization expense of $9.4 million and $11.0 million for the three months ended September 30, 2018 and 2017, respectively, and $30.4 million and $32.8 million for the nine months ended September 30, 2018 and 2017, respectively.

Note 7.    Equity Method Investments

In connection with the EMC Acquisition, the Company acquired 49% equity interests in each of its Wireless Maritime Services, LLC (“WMS”) and Santander Teleport S.L. (“Santander”) joint ventures (which equity interests EMC owned at the time of the EMC Acquisition). These investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income of WMS and Santander in Income from equity method investments in our condensed consolidated statements of operations.

Following is the summarized balance sheet information for these equity method investments on an aggregated basis as of September 30, 2018 and December 31, 2017 (in thousands):

 
September 30, 2018
 
December 31, 2017
Current assets
$
41,615

 
$
35,859

Non-current assets
24,229

 
21,009

Current liabilities
16,228

 
15,151

Non-current liabilities
2,769

 
1,056


Following is the summarized results of operations information for these equity method investments on an aggregated basis for the three and nine months ended September 30, 2018 and 2017 (in thousands):    

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
35,690

 
$
36,696

 
$
100,596

 
$
104,141

Net income
7,440

 
6,658

 
17,538

 
17,636


The carrying values of the Company’s equity interests in WMS and Santander as of September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Carrying value in our equity method investments
$
135,975

 
$
137,299


As of September 30, 2018 there was an aggregate difference of $113.2 million between the carrying amounts of these investments and the amounts of underlying equity in net assets in these investments. The difference was determined by applying the acquisition method of accounting in connection with the EMC Acquisition and is being amortized ratably over the life of the related acquired intangible assets. The weighted-average life of the intangible assets at the time of the EMC Acquisition in total was 14.9 years.

Note 8.    Financing Arrangements

A summary of our outstanding indebtedness as of September 30, 2018 and December 31, 2017 is set forth below (in thousands):



27


 
September 30, 2018
 
December 31, 2017
Senior secured term loan facility, due January 2023(+)
$
481,250

 
$
490,625

Senior secured revolving credit facility, due January 2022(+)(1)
29,015

 
78,000

2.75% convertible senior notes due 2035(2)
82,500

 
82,500

Second Lien Notes, due June 2023(3)
158,450

 

Other debt
3,329

 
9,075

Unamortized bond discounts, fair value adjustments and issue costs, net
(67,105
)
 
(41,136
)
Total carrying value of debt
687,439

 
619,064

Less: current portion, net
(20,946
)
 
(20,106
)
Total non-current
$
666,493

 
$
598,958


(+) This facility is a component of the 2017 Credit Agreement.

(1) In the second quarter of 2018, we used a portion of the proceeds of the issuance of our Second Lien Notes to repay the then full outstanding $78 million principal balance on our 2017 Revolving Loans. Subsequently, during the third quarter of 2018 we borrowed approximately $29.0 million on the facility. We expect to draw on the 2017 Revolving Loans from time to time to fund our working capital needs and for other general corporate purposes.

(2) The principal amount outstanding of the Convertible Notes as set forth in the foregoing table was $82.5 million as of September 30, 2018, and is not the carrying amount of this indebtedness (i.e., outstanding principal amount net of debt issuance costs and discount associated with the equity component). The carrying amount was $70.2 million and $69.7 million as of September 30, 2018 and December 31, 2017, respectively.

(3) The principal amount outstanding of the Second Lien Notes as set forth in the foregoing table was $158.5 million as of September 30, 2018, and is not the carrying amount of the indebtedness (i.e. outstanding principal amount net of debt issuance costs and discount associated with the equity component and includes approximately $8.5 million of PIK interest converted to principal during the three months ended September 30, 2018). The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital”.

Senior Secured Credit Agreement (2017 Credit Agreement)

On January 6, 2017, we entered into a senior secured credit agreement (“2017 Credit Agreement”) that provides for aggregate principal borrowings of up to $585 million, consisting of a $500 million term-loan facility (the “2017 Term Loans”) maturing January 6, 2023 and a $85 million revolving credit facility (the “2017 Revolving Loans”) maturing January 6, 2022. We used the proceeds of borrowings under the 2017 Credit Agreement to repay the then outstanding balance under a former EMC credit facility assumed in the EMC Acquisition and terminated the former credit facility assumed from EMC. In connection with this January 2017 refinancing, we recorded a loss on extinguishment of debt in the amount of $14.5 million during the first quarter of 2017.

The 2017 Term Loans initially bore interest on the outstanding principal amount thereof at a rate per annum equal to (i) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) plus 6.00% or (ii) the Base Rate (as defined in the 2017 Credit Agreement) plus 5.00%. Pursuant to various amendments with our lenders in 2017, the 2017 Term Loans now bear interest on the outstanding amount thereof at a rate per annum equal to (i) the Eurocurrency Rate plus 7.50% or (ii) the Base Rate plus 6.50%

The 2017 Revolving Loans initially bore interest at a rate per annum equal to (i) the Base Rate plus 5.00% or (ii) the Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus 6.00% until the delivery of financial statements for the first full fiscal quarter ending after January 6, 2017, which was the closing date of the 2017 Credit Agreement. Following delivery of those financial statements, the 2017 Revolving Loans were to bear interest at a rate based on the Base Rate, Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus an interest-rate spread thereon that varied based on the Consolidated First Lien Net Leverage Ratio (as defined in the 2017 Credit Agreement) that ranged from 4.50% to 5.00% for the Base Rate and 5.50% to 6.00% for the Eurocurrency Rate and EURIBOR. Pursuant to various amendments with our lenders in 2017, the 2017 Revolving Loans then bore interest at a rate per annum equal to (i) the Base Rate plus 6.50% or (ii) the Eurocurrency Rate or EURIBOR plus 7.50% until the delivery of financial statements for the fiscal quarter ending March 31, 2018.  We have delivered those financial statements and the spread now varies based on the Consolidated First Lien Net Leverage Ratio ranging from 6.00% to 6.50% for the Base Rate and 7.00% to 7.50% for the Eurocurrency Rate and EURIBOR. 

The 2017 Credit Agreement initially required quarterly principal payments equal to 0.25% of the original aggregate principal amount of the 2017 Term Loans.  Following a May 2017 amendment to the 2017 Credit Agreement, the 2017 Credit Agreement required the next eight quarterly principal payments following that amendment to equal 0.625% of the original aggregate principal


28


amount of the 2017 Term Loans.  Thereafter, all quarterly principal payments will equal 1.25% of the original aggregate principal amount of the 2017 Term Loans. 

The 2017 Credit Agreement also provides for the issuance of letters of credit in the amount equal to the lesser of $15.0 million and the aggregate amount of the then-remaining revolving loan commitment. As of September 30, 2018, we had outstanding letters of credit of $5.8 million under the 2017 Credit Agreement.

Certain of our subsidiaries are guarantors of our obligations under the 2017 Credit Agreement. In addition, the 2017 Credit Agreement is secured by substantially all of our tangible and intangible assets, including a pledge of all of the outstanding capital stock of substantially all of our domestic subsidiaries and 65% of the shares or equity interests of foreign subsidiaries, subject to certain exceptions.

The 2017 Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things: create or incur liens on assets; make any investments, loans or advances; incur additional indebtedness, engage in mergers, dissolutions, liquidations or consolidations; engage in transactions with affiliates; make dispositions; and declare or make dividend payments. The 2017 Credit Agreement requires us to maintain compliance with a maximum consolidated first lien net leverage ratio defined in the 2017 Credit Agreement. Under the maximum leverage ratio covenant, we are required to maintain as of the last day of each fiscal quarter a ratio of Consolidated First Lien Net Debt (as defined in the 2017 Credit Agreement) to Consolidated EBITDA (as defined in the 2017 Credit Agreement) for the trailing four quarters that is no greater than 4.5 to 1 through the fiscal quarter ending June 30, 2019, after which period the permitted Leverage Ratio steps down through the maturity date of the 2017 Credit Agreement as set forth therein. The “Consolidated EBITDA” definition from the 2017 Credit Agreement is different than the “Adjusted EBITDA” figure that we publicly report to our investors. As of September 30, 2018, we were in compliance with the Leverage Ratio, and based on our current projections, we expect to remain in compliance with the Leverage Ratio for at least the next 12 months.

Under the 2017 Credit Agreement, the “non-call” period (during which a premium will apply to any prepayments of the 2017 Term Loans) ends on June 30, 2020.

One of the conditions to drawing on the 2017 Revolving Loans is confirmation that the representations and warranties in the 2017 Credit Agreement are true on the date of borrowing, and if we are unable to make that confirmation, including that no material adverse effect on our business has occurred, we will be unable to draw down further on the revolver.

2.75% Convertible Senior Notes due 2035