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 March 31, 2019
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=12908886&doc=12
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)
 
 
 
6080 Center Drive, Suite 1200
 
 
Los Angeles, California
 
90045
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (310) 437-6000
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class
 
Ticker
 
Name of exchange on which registered
Common Stock, $0.0001 par value
 
ENT
 
The NASDAQ Stock Market LLC
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
þ
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 May 9, 2019)
COMMON STOCK, $0.0001 PAR VALUE
 
92,367,593

SHARES


Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
ITEM 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 
ITEM 1A.
 
 
ITEM 5.
 
 
 
 
 
 
 
ITEM 6.
 
 
 
 
 
 



Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
 
March 31, 2019
 
December 31, 2018
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
20,813

 
$
39,154

Restricted cash
1,019

 
801

Accounts receivable, net
106,797

 
97,623

Inventories
34,233

 
34,649

Prepaid expenses
7,164

 
9,104

Other current assets
13,882

 
10,498

TOTAL CURRENT ASSETS:
183,908

 
191,829

Content library
5,232

 
6,966

Property and equipment, net
180,555

 
176,577

Right-of-use assets, net
21,939

 

Goodwill
159,587

 
159,562

Intangible assets, net
76,335

 
84,136

Equity method investments
85,230

 
83,135

Other non-current assets
22,070

 
14,882

TOTAL ASSETS
$
734,856

 
$
717,087

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
183,205

 
$
177,056

Deferred revenue
9,018

 
7,430

Current portion of long-term debt
38,190

 
22,673

Other current liabilities
10,322

 
5,032

TOTAL CURRENT LIABILITIES:
240,735

 
212,191

Deferred revenue, non-current
255

 
1,116

Long-term debt
692,328

 
686,938

Deferred tax liabilities
8,394

 
8,406

Other non-current liabilities
57,271

 
34,771

TOTAL LIABILITIES
998,983

 
943,422

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ DEFICIT:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 95,165,344 and 94,835,320 shares issued, 92,111,710 and 91,781,686 shares outstanding, at March 31, 2019 and December 31, 2018, respectively
10

 
10

Treasury stock, 3,053,634 shares at March 31, 2019 and December 31, 2018
(30,659
)
 
(30,659
)
Additional paid-in capital
814,072

 
814,488

Subscriptions receivable
(597
)
 
(597
)
 Accumulated deficit
(1,047,067
)
 
(1,009,458
)
 Accumulated other comprehensive income (loss)
114

 
(119
)
TOTAL STOCKHOLDERS’ DEFICIT
(264,127
)
 
(226,335
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
734,856

 
$
717,087

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 OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Licensing and services
$
150,478

 
$
146,526

Equipment
16,141

 
9,971

Total revenue
166,619

 
156,497

Cost of sales:
 
 
 
Licensing and services
123,269

 
112,414

Equipment
10,925

 
6,082

Total cost of sales
134,194

 
118,496

Gross margin
32,425

 
38,001

Operating expenses:
 
 
 
Sales and marketing
8,249

 
9,654

Product development
6,979

 
8,358

General and administrative
27,980

 
38,285

Provision for legal settlements
508

 
516

Amortization of intangible assets
7,799

 
10,747

Total operating expenses
51,515

 
67,560

Loss from operations
(19,090
)
 
(29,559
)
Other (expense) income:
 
 
 
Interest expense, net
(21,277
)
 
(15,597
)
Income from equity method investments
2,129

 
1,161

Change in fair value of derivatives
938

 
564

Other (expense) income, net
(179
)
 
438

Loss before income taxes
(37,479
)
 
(42,993
)
Income tax expense (benefit)
130

 
(4,709
)
Net loss
$
(37,609
)
 
$
(38,284
)
 
 
 
 
Net loss per share – basic and diluted
$
(0.41
)
 
$
(0.42
)
Weighted average shares outstanding – basic and diluted
91,831

 
90,792


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


4

Table of Contents

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

 
Three Months Ended March 31,
 
2019
 
2018
Net loss
$
(37,609
)
 
$
(38,284
)
Other comprehensive income:
 
 
 
Unrealized foreign currency translation adjustments
233

 

Other comprehensive income
233

 

Comprehensive loss
$
(37,376
)
 
$
(38,284
)

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



5

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
62

 

 

 

 
(50
)
 

 

 

 
(50
)
Stock-based compensation

 

 

 

 
3,644

 

 

 

 
3,644

Interest income on subscription receivable

 

 

 

 

 
(6
)
 

 

 
(6
)
Net loss

 

 

 

 

 

 
(38,284
)
 

 
(38,284
)
Balance at March 31, 2018
93,897

 
$
10

 
(3,054
)
 
$
(30,659
)

$
807,355

 
$
(584
)
 
$
(811,142
)
 
$
(22
)
 
$
(35,042
)
 
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, 2018
94,835

 
$
10

 
(3,054
)
 
$
(30,659
)
 
$
814,488

 
$
(597
)
 
$
(1,009,458
)
 
$
(119
)
 
$
(226,335
)
Restricted stock units vested and distributed, net of tax
330

 

 

 

 
(117
)
 

 

 

 
(117
)
Stock-based compensation

 

 

 

 
2,389

 

 

 

 
2,389

Net loss

 

 

 

 

 

 
(37,609
)
 

 
(37,609
)
Tax effect relating to the beneficial conversion feature of Second Lien Notes

 

 

 

 
(2,688
)
 

 

 

 
(2,688
)
Unrealized foreign currency translation adjustments

 

 

 

 

 

 

 
233

 
233

Balance at March 31, 2019
95,165

 
$
10

 
(3,054
)
 
$
(30,659
)
 
$
814,072

 
$
(597
)
 
$
(1,047,067
)
 
$
114

 
$
(264,127
)

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


6

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


 
Three Months Ended March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(37,609
)
 
$
(38,284
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization of property & equipment and intangibles
21,952

 
23,250

Amortization of content library
1,974

 
2,400

Non-cash interest expense, net
6,868

 
1,877

Change in fair value of derivatives
(938
)
 
(564
)
Stock-based compensation
1,289

 
3,644

Tax effect of Second Lien Notes’ beneficial conversion feature
(2,688
)
 

Loss (gain) on disposal of fixed assets
164

 
(525
)
Earnings from equity method investments
(2,129
)
 
(1,161
)
Provision for (recovery of) bad debts
393

 
(326
)
Deferred income taxes
(8
)
 
(7,230
)
Others
1,347

 
(325
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(9,567
)
 
10,068

Inventories
416

 
(5,246
)
Prepaid expenses and other current assets
(2,979
)
 
6,084

Content library
(647
)
 
(2,627
)
Other non-current assets
(7,310
)
 
1,255

Accounts payable and accrued liabilities
9,473

 
1,267

Deferred revenue
727

 
2,279

Other liabilities
9,041

 
210

NET CASH USED IN OPERATING ACTIVITIES
(10,231
)
 
(3,953
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(9,083
)
 
(15,244
)
NET CASH USED IN INVESTING ACTIVITIES
(9,083
)
 
(15,244
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of Second Lien Notes and equity warrants

 
150,000

Proceeds from borrowings on revolving credit facility
17,900

 

Repayment of revolving credit facility
(21,000
)
 

Issuance costs

 
(6,968
)
Repayments of indebtedness
(3,324
)
 
(3,414
)
Borrowings from related party
7,350

 

NET CASH PROVIDED BY FINANCING ACTIVITIES
926

 
139,618

Effects of exchange rate changes on cash and cash equivalents
265

 
30

Net (decrease) increase in cash, cash equivalents and restricted cash
(18,123
)
 
120,450

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD
39,955

 
51,868

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
21,832

 
$
172,320

SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchase consideration for equipment included in accounts payable
$
2,481

 
$

Conversion of PIK interest on our Second Lien Notes to additional principal
9,507

 

Financing of purchased satellite transponders
8,500

 


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


7

Table of Contents



GLOBAL EAGLE ENTERTAINMENT INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Overview

Global Eagle Entertainment Inc. is a Delaware corporation headquartered in Los Angeles, California. Global Eagle (together with its subsidiaries, “Global Eagle” or the “Company”, “we”, “us” or “our”) is a leading provider of media and satellite-based connectivity to fast-growing, global mobility markets across air, land and sea. Global Eagle offers a fully integrated suite of rich media content and seamless connectivity solutions that cover the globe.

Our Chief Executive Officer, the Company’s chief operating decision-maker (“CODM”), evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our two operating segments: (i) Media & Content, and (ii) Connectivity.

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

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

Basis of Presentation
In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company's audited consolidated financial statements for the year ended December 31, 2018, and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's interim unaudited condensed consolidated financial statements for the three months ended March 31, 2019. The results for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full 2019 fiscal year. The consolidated balance sheet as of December 31, 2018 has been derived from the Company's audited balance sheet included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on March 18, 2019 (the "2018 Form 10-K").

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete audited financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the 2018 Form 10-K.

These unaudited condensed consolidated financial statements have been prepared on the basis of the Company having sufficient liquidity to fund its operations for at least the next twelve months from the issuance of these financial statements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern. The Company’s principal sources of liquidity have historically been its debt and equity issuances and its cash and cash equivalents, which as of March 31, 2019 included cash and cash equivalents of approximately $20.8 million, and available borrowing capacity under our 2017 Revolving Loans (as defined below) of approximately $29.9 million, for a total available liquidity of approximately $50.7 million. The Company’s internal plans and forecasts indicate that it will have sufficient liquidity to continue to fund its business and operations for at least the next twelve months in accordance with ASC Topic 205-40. Please refer to Note 2. Basis of Preparation and Summary of Accounting Policies in our 2018 Form 10-K for additional details.

Revenue Recognition
The Company accounts for a contract with a customer when an approved contract exists, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of substantially all of the consideration is probable. Revenue is recognized as the Company satisfies performance obligations by transferring a promised good or service to a customer.

Our assessments regarding the timing of transfer of control and revenue recognition for each business segment are summarized below and further detailed in Note 2. Basis of Preparation and Summary of Accounting Policies — Revenue Recognition in our 2018 Form 10-K:


8



Media & Content – specific to the sale and/or licensing of media content and the related technical services, such as digital delivery of media advertising, encoding of video & music products, development of graphical interfaces and provision of materials, we consider control to have transferred when: (i) the content has been delivered, and (ii) the services required under the contract have been performed. Revenue recognition is dependent on the nature of the customer contract. Content licenses to customers are typically categorized into usage-based or flat fee-based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures, revenue is recognized upon the available date of the license, typically at the beginning of each cycle, or straight-line over the license period.

Connectivity – we provide satellite-based Internet services and related technical and network support services, as well as the physical equipment to enable connectivity. For Aviation, the revenue is recognized over time as control is transferred to the customer (i.e. the airline), which occurs continuously as customers receive the bandwidth/ connectivity services. Equipment revenue is recognized when control passes to the customer, which is at the later of shipment of the equipment to the customer or obtaining regulatory certification for the operation of such equipment, as applicable. For Maritime and Land, revenue is recognized over time as the customer receives the bandwidth/ connectivity services. Certain of the Company’s contracts involve a revenue sharing or reseller arrangement to distribute the connectivity services. The Company assesses these services under the principal versus agent criteria and determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.

The following table presents the disaggregation of the Company’s revenue from contracts with customers for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Media & Content -- Licensing and Services
$
80,010

 
$
74,915

Connectivity -- Aviation Services
31,241

 
29,325

Connectivity -- Aviation Equipment
14,060

 
7,598

Connectivity -- Maritime & Land Services
39,227

 
42,286

Connectivity -- Maritime & Land Equipment
2,081

 
2,373

Total Revenues
$
166,619

 
$
156,497


Contract Liabilities

Aviation connectivity contracts involve performance obligations primarily relating to the delivery of connectivity equipment and connectivity services. The connectivity equipment can be provided at a discount and is delivered upfront while the connectivity services are rendered and paid over time. Revenue is allocated based upon the SSP methodology. Where the SSP exceeds the revenue allocation, the revenue to which the Company is entitled is contingent on performing the ongoing connectivity services and the Company records a contract asset accordingly. The balance as of March 31, 2019 and December 31, 2018 of contract contingent revenue was not material.

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

The following table summarizes the significant changes in the contract liabilities balances during the quarter ended March 31, 2019 (in thousands):


9


 
Contract Liabilities
Balance as of December 31, 2018
$
8,546

Revenue recognized that was included in the contract liability balance at the beginning of the period
(3,497
)
Increase due to cash received, excluding amounts recognized as revenue during the period
4,224

Balance as of March 31, 2019
$
9,273

 
 
Deferred revenue, current
$
9,018

Deferred revenue, non-current
255

 
$
9,273


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

Adoption of New Accounting Pronouncements
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective method. The Company has presented financial results and applied its accounting policies for the period beginning January 1, 2019 under ASC 842, while prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to ASC 840. In connection with the adoption of ASC 842, the Company performed an analysis of contracts under ASC 840 to ensure proper assessment of leases (or embedded leases) in existence as of January 1, 2019. The Company elected the package of practical expedients permitted under ASC 842, which allows the Company not to reassess 1) whether any expired or existing contracts as of the adoption date are or contain a lease, 2) lease classification for any expired or existing leases as of the adoption date and 3) initial direct costs for any existing leases as of the adoption date. The most significant impact of applying ASC 842 was the recognition of right-of-use assets and lease liabilities for operating leases in its condensed consolidated balance sheet. On January 1, 2019, the Company recognized an initial operating right-of-use asset of $24.8 million and associated operating lease liabilities of $24.4 million. See Note 3. Leases for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of ASC 718 to include share-based payments granted to non-employees in exchange for goods and services. The guidance largely aligns the accounting for share-based payments to non-employees with the accounting for share-based payments to employees, with certain exceptions. We adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.



10


In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act. We adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements
In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, to provide clarifications on ASC 842 and to correct unintended application of the guidance. The amendments in this Update include the following items brought to FASB’s attention through those interactions with stakeholders: (i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (ii) presentation on the statement of cash flows—sales-type and direct financing leases; and (iii) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The ASU is effective for the Company beginning January 1, 2020, with early adoption permitted. Management continues to evaluate the impact of this standard on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. The new model is applicable to all financial instruments that are not accounted for at fair value through net income, thereby bringing consistency in accounting treatment across different types of financial instruments and requiring consideration of a broader range of variables when forming loss estimates. The ASU is effective for the Company beginning January 1, 2020, with early adoption permitted. Management continues to evaluate the impact of this standard on our condensed consolidated financial statements.

Note 3.    Leases

Our leasing operations consist of various arrangements, where we act either (i) as the lessee (mostly our corporate and regional offices on leased-facility model), or (ii) as the lessor (for our owned equipment rented to connectivity customers). Described below are the nature of these arrangements and financial statement impact:

Real Estate Leases (as a Lessee)
The Company has operating leases for office facilities throughout the United States and around the world. Upon inception of a contract, the Company evaluates if the contract, or part of the contract, contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases include both a right-of-use asset and a lease liability. The right-of-use asset represents the Company’s right to use the underlying asset in the lease. The right-of-use asset also includes prepaid lease payments. The lease liability represents the present value of the remaining lease payments discounted using the incremental borrowing rate (“IBR”). Maintenance and property tax expenses are accounted for on an accrual basis as variable lease costs. The Company has elected to combine lease and nonlease components, if applicable.

The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total rent expense for the three months ended March 31, 2019 was $1.6 million.

The Company’s leases have remaining lease terms of 1 year to 12 years. Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of twelve months or less, the Company does not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet.

The Company reviews the carrying value of its right-of-use assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the estimated future undiscounted cash flows, excluding financing costs. If the Company determines that an impairment exists, any related impairment loss is estimated based on fair values.

Equipment Held by Customers (as a Lessor)
The Company either sells or leases certain equipment (including antennas, modems and routers, among others) as part of the bandwidth service to our maritime and land connectivity customers. To the extent there are no changes to existing customer lease arrangements, we account for equipment transactions as operating leases and, hence, recorded the equipment cost as part of property and equipment. We recognize lease payments for operating leases as licensing & services revenue in our consolidated statement of operations on a straight-line basis over the lease term.


11



We assess any new arrangements or modifications to existing arrangements and determine the impact of the economic circumstances (and any changes thereto) to the lease classification of these equipment held by our connectivity customers. We recognize investments in leases for sales-type leases when the risk and rewards of ownership are not fully transferred to the customer due to our continued involvement with the equipment.

The income on operating leases and sales-type lease for the three-months ended March 31, 2019 is presented in the foregoing table (in thousands):
 
Three Months Ended March 31, 2019
Lease income from operating leases(1)
$
32,724

Earned income on sales-type leases(2)
185

Total Licensing & Service Revenues -- Maritime & Land Connectivity
$
32,909

(1) This is classified as Licensing and services revenue.
(2) This includes the customer equipment arrangement classified as sales-type lease as of March 31, 2019.

Other Arrangements (as a Lessee)
The Company leases certain computer software and equipment under finance leases that expire on various dates through 2020, for which the outstanding lease liability balance is assessed as insignificant as of March 31, 2019.

The Company also evaluates its satellite bandwidth arrangements for embedded leases when the Company has the right to control the use of a significant portion of the asset. The Company has entered into a lease arrangement for bandwidth capacity that will commence during the quarter ended June 30, 2019.

Impact on Financial Statements

The following table summarizes the impact of the adoption of ASC 842 on the Company’s condensed consolidated balance sheet and consolidated statement of operations, including both our real estate leases and a customer equipment arrangement meeting the sales-type lease classification (in thousands):
 
Impact of Change in Accounting Policy --
as of and for the quarter ended March 31, 2019
 
As reported
ASC 842 Impact
Legacy GAAP
Right-of-use assets, net
$
21,939

$
(21,939
)
$

Other non-current assets (net lease investment)(1)
333

(333
)

Property and equipment, net(2)

(148
)
(148
)
Lease liabilities -- Other current liabilities
4,197

(4,197
)

                       -- Other non-current liabilities
20,818

(20,818
)

Revenue - equipment(1)
333

(333
)

Cost of sales - equipment(1)
148

(148
)

(1) This includes the customer equipment arrangement classified as sales-type lease as of March 31, 2019, with net impact to our gross margin of $185,000.
(2) Since we elected to adopt the package of practical expedients with the ASC 842 implementation as of January 1, 2019, all existing customer equipment arrangements continue to be classified as operating leases, except as described in preceding footnote. Any new arrangements or changes/modifications to existing contracts after January 1, 2019 adoption date are subject to lease classification assessment in accordance with ASC 842’s new lease accounting model.

Supplemental Cash Flow Information, Weighted-Average Remaining Lease Term and Discount Rate

Because the rate implicit in each lease is not readily determinable, the Company uses its IBR to determine the present value of the lease payments. The following table discloses the weighted-average remaining lease term and IBR for our operating real estate leases, as well as supplemental cash flow information (in thousands):


12


 
Three Months Ended March 31, 2019
Supplemental cash flow information
 
Cash paid for amounts included in measurement of operating lease liabilities
$
1,436

Right-of-use-assets obtained in exchange for operating lease obligations
$

Weighted average remaining lease term -- operating leases
7.87 years

Weighted average IBR -- operating leases
9.68
%

Maturity Analysis

As Lessee -- Real Estate Operating Leases
The following table reflects undiscounted cash flows on an annual basis for the Company’s lease liabilities as of March 31, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining nine months)
$
3,643

2020
4,781

2021
4,727

2022
4,428

2023
4,023

Thereafter
15,106

Total Future Lease Payments
$
36,708

Less: Imputed interest
(11,693
)
Present value of Lease Liabilities
$
25,015


The following is a schedule of future minimum lease payments under operating leases as of December 31, 2018 (in thousands):
Years Ending December 31,
Amount
2019
$
4,941

2020
4,593

2021
4,359

2022
3,818

2023
3,541

Thereafter
13,115

Total minimum lease payments
$
34,367


As Lessor -- Maritime & Land Monthly Recurring Charges
The following is a schedule of future monthly recurring charges (“MRCs”) arising from our contractual arrangements with Maritime & Land Connectivity customers as of March 31, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining 9 months)
$
80,814

2020
51,332

2021
27,603

2022
4,497

2023
1,935

Total M&L Monthly Recurring Charges
$
166,181


The following is a schedule of future MRCs arising from our contractual arrangements with Maritime & Land Connectivity customers as of December 31, 2018 (in thousands):


13


Years Ending December 31,
Amount
2019
$
89,111

2020
34,885

2021
20,594

2022
4,864

2023
2,396

Total M&L Monthly Recurring Charges
$
151,850


The book value of the equipment held by customers under operating leases, which are classified as “Equipment” in Note 4 - Property & Equipment, follows:
 
March 31, 2019
December 31, 2018
Equipment
 
 
Gross balance
$
58,465

62,012

Accumulated depreciation
(24,511
)
(25,232
)
Net Book Value
$
33,954

$
36,780


Note 4.    Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Leasehold improvements
$
7,267

 
$
6,579

Furniture and fixtures
2,149

 
2,147

Equipment
156,283

 
156,029

Computer equipment
16,993

 
18,561

Computer software
42,917

 
38,475

Automobiles
303

 
293

Buildings
7,051

 
8,005

Albatross (Company-owned aircraft)
456

 
447

Satellite transponders
70,806

 
62,306

Construction in-progress
10,610

 
7,771

Total property and equipment
$
314,835

 
$
300,613

Accumulated depreciation
(134,280
)
 
$
(124,036
)
Property and equipment, net
$
180,555

 
$
176,577


Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Cost of sales
$
8,934

 
$
8,067

Sales and marketing
1,002

 
788

Product development
835

 
686

General and administrative
3,382

 
3,127

Total depreciation expense
$
14,153

 
$
12,668




14


Note 5.    Goodwill
    
We have three separate reporting units for purposes of our goodwill impairment testing. The changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
 
Aviation Connectivity
 
Maritime & Land Connectivity
 
Media & Content
 
Total
Balance as of December 31, 2018, net
54,022

 
22,130

 
83,410

 
159,562

Foreign currency translation adjustments

 

 
25

 
25

Balance at March 31, 2019, net
$
54,022

 
$
22,130

 
$
83,435

 
$
159,587


As of March 31, 2019, the cumulative impairment write-offs relating to our Aviation Connectivity and our Maritime & Land Connectivity reporting units were $44.0 million and $187.0 million, respectively.

The Company evaluates the recoverability of its long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. During the first quarter of 2019, due to a significant decline in our market capitalization, which we consider to be a triggering event, we conducted an initial test of impairment for our Goodwill based on qualitative factors. Among our considerations, we noted that actual results for our three reporting units aligned with the historical projections used in our most recent quantitative impairment analysis performed as of December 31, 2018. After assessing the totality of events or circumstances, we determined that it is not more likely than not that the fair value of any of our reporting units are less than their respective carrying amounts as of March 31, 2019.


15



Note 6.    Intangible Assets, net

As a result of historical business combinations, the Company acquired finite-lived intangible assets that are primarily amortized on a straight-line basis and the values of which approximate their expected cash flow patterns. The Company’s finite-lived intangible assets have assigned useful lives ranging from 2.0 to 10.0 years (weighted average of 7.5 years).

Intangible assets, net consisted of the following (dollars in thousands):
 
 
 
March 31, 2019
 
Weighted Average Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Definite life:
 
 
 
 
 
 
 
Existing technology -- software
5.2 years
 
$
36,799

 
$
24,960

 
$
11,839

Developed technology
8.0 years
 
7,317

 
5,030

 
2,287

Customer relationships
8.7 years
 
138,358

 
78,699

 
59,659

Backlog
3.0 years
 
18,300

 
16,268

 
2,032

Other
5.1 years
 
1,249

 
731

 
518

Total
 
 
$
202,023

 
$
125,688

 
$
76,335


 
 
 
December 31, 2018
 
Weighted Average Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Definite life:
 
 
 
 
 
 
 
Existing technology -- software
5.2 years
 
$
36,799

 
$
23,114

 
$
13,685

Developed technology
8.0 years
 
7,317

 
4,802

 
2,515

Customer relationships
8.7 years
 
138,358

 
74,558

 
63,800

Backlog
3.0 years
 
18,300

 
14,742

 
3,558

Other
5.1 years
 
1,249

 
671

 
578

Total
 
 
$
202,023

 
$
117,887

 
$
84,136


We expect to record amortization of intangible assets as follows (in thousands):
Year ending December 31,       
Amount
2019 (remaining nine months)
$
20,844

2020
22,263

2021
13,824

2022
7,907

2023
6,890

Thereafter
4,607

Total
$
76,335

    


16


We recorded amortization expense of $7.8 million and $10.7 million for the three months ended March 31, 2019 and 2018, respectively.

Note 7.    Equity Method Investments

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

Following is the summarized balance sheet information for these equity method investments on an aggregated basis as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Current assets
$
37,439

 
$
40,224

Non-current assets
27,162

 
26,115

Current liabilities
14,824

 
15,880

Non-current liabilities
2,449

 
2,581


Following is the summarized results of operations information for these equity method investments on an aggregated basis for the three months ended March 31, 2019 and 2018 (in thousands):    
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
$
32,100

 
$
36,211

Net income
6,887

 
5,899


The carrying values of the Company’s equity interests in WMS and Santander as of March 31, 2019 and December 31, 2018 were as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Carrying value in our equity method investments
$
85,230

 
$
83,135


As of March 31, 2019, there was an aggregate difference of $58.6 million between the carrying amounts of these investments and the amounts of underlying equity in net assets in these investments. The difference was determined by applying the acquisition method of accounting in connection with the EMC Acquisition and is being amortized ratably over the life of the related acquired intangible assets. The weighted-average life of the intangible assets at the time of the EMC Acquisition in total was 14.9 years.



17


Note 8.    Financing Arrangements

A summary of our borrowings as of March 31, 2019 and December 31, 2018 is set forth below (in thousands):
 
March 31, 2019
 
December 31, 2018
Senior secured term loan facility, due January 2023(+)
$
475,000

 
$
478,125

Senior secured revolving credit facility, due January 2022(+)(1)
50,915

 
54,015

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

 
82,500

Second Lien Notes, due June 2023(3)
167,957

 
158,450

Other debts(4)
17,380

 
1,707

Unamortized bond discounts, fair value adjustments and issue costs, net
(63,234
)
 
(65,186
)
Total carrying value of debt
730,518

 
709,611

Less: current portion, net
(38,190
)
 
(22,673
)
Total non-current
$
692,328

 
$
686,938

(+) This facility is a component of the 2017 Credit Agreement (as defined below).
(1) As of March 31, 2019, the available balance under our $85.0 million revolving credit facility is $29.9 million (net of outstanding letters of credit). The 2017 Credit Agreement provides for the issuance of letters of credit in the amount equal to the lesser of $15.0 million and the aggregate amount of the then-remaining revolving loan commitment. As of March 31, 2019, we had outstanding letters of credit of $4.2 million under the 2017 Credit Agreement. We expect to draw on the 2017 Revolving Loans from time to time to fund our working capital needs and for other general corporate purposes.
(2) The principal amount outstanding of the 2.75% convertible senior notes due 2035 (the “Convertible Notes”) as set forth in the foregoing table was $82.5 million as of March 31, 2019, and is not the carrying amount (i.e. outstanding principal amount is net of debt issuance costs and discount associated with the equity component). The carrying amount was $70.6 million and $70.4 million as of March 31, 2019 and December 31, 2018, respectively.
(3) The principal amount outstanding of the Second Lien Notes as set forth in the foregoing table was $168.0 million as of March 31, 2019, and is not the carrying amount (i.e. outstanding principal amount is net of debt issuance costs and discount associated with the equity component, and includes approximately $9.5 million of PIK interest converted to principal during the three months ended March 31, 2019). The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital”.
(4) As of March 31, 2019, Other debts primarily consisted of (i) $8.5 million financing for transponder purchases (payable in staggered dates until April 2020); and (ii) $7.4 million advance against future dividends from a related party (refer to Note 9. Related Party Transactions for further details).

The aggregate contractual maturities of all borrowings subsequent to March 31, 2019 are as follows (in thousands):
Years Ending December 31,
Amount
2019 (remaining nine months)
$
31,939

2020
28,644

2021
25,043

2022
75,958

2023
549,251

Thereafter
82,917

Total
$
793,752


Note 9.    Related Party Transactions

Loan Advances in lieu of Future Payouts from WMS
In February 2019, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately $7.4 million, bearing interest at 6.5% per annum, and concurrently signed an agreement to waive future dividends or other such distributions by WMS to the Company until such time as the outstanding principal on the demand promissory note has been repaid in full. The outstanding demand promissory note would be reduced dollar-for-dollar by any such distribution amounts waived. The Company may prepay the promissory note at any time without prepayment penalty. The entire principal balance of this promissory note together with all accrued but unpaid interest is due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2020 and (iii) the date of acceleration of the promissory note as a result of the occurrence of an event of default.


18


Due to Santander
In connection with the EMC Acquisition, the Company acquired a 49% equity interest in Santander. The Company accounts for its interest in Santander using the equity method and includes our share of Santander’s profits or losses in Income from equity method investments in the condensed consolidated statements of operations. During the three months ended March 31, 2019 and 2018, the Company purchased approximately $1.1 million and $1.4 million, respectively, from Santander for their Teleport services and related network operations support services. As of March 31, 2019 and December 31, 2018 the Company owed Santander approximately $1.8 million and $1.3 million, respectively, as remaining payments for these services, which is included in Accounts payable and accrued liabilities in the condensed consolidated balance sheets for their teleport services and related network operations support services.

Subscription Receivable with Former Employee
A former employee is party to a Secured Promissory Note dated July 15, 2011, pursuant to which the former employee agreed to pay the Company (as successor to Row 44, Inc., which is a Company subsidiary) a principal sum of approximately $0.4 million, plus interest thereon at a rate of 6% per annum. The former employee granted the Company a security interest in shares of Row 44 held by him (which Row 44 shares were subsequently converted into 223,893 shares of the Company’s common stock) to secure his obligations to repay the loan. As of March 31, 2019 and December 31, 2018, the balance of the note (with interest) was approximately $0.6 million, which is presented as a subscription receivable. We recognize interest income on the note when earned (using the simple interest method) but have not collected any interest payments since the origination of the note. Interest income recognized by the Company during the three months ended March 31, 2019 and March 31, 2018 was not material. The Company makes ongoing assessments regarding the collectability of this note and the subscription receivable balance, and is currently in litigation with the former employee to recover the loan and to address the former employee’s allegations that we breached related settlement agreements with him in 2014 and 2015.

Amended and Restated Registration Rights Agreement
When we consummated our business combination in January 2013 with Row 44 and AIA, we entered into an amended and restated registration rights agreement with Par Investment Partners, L.P. (“PAR”), entities affiliated with Putnam Investments, Global Eagle Acquisition LLC (the “Sponsor”) and our then and current Board members, Harry E. Sloan and Jeff Sagansky, who were affiliated with the Sponsor. Under that agreement, we agreed to register the resale of securities held by them (the “registrable securities”) and to sell those registrable securities pursuant to an effective registration statement in a variety of manners, including in underwritten offerings. We also agreed to pay the security holders’ expenses in connection with their exercise of their registration rights.

During 2017, Putnam Investments was a beneficial owner of more than 5% of our outstanding common stock. According to a Schedule 13G/A filed on February 7, 2018, Putnam Investments no longer holds more than 5% of our outstanding common stock, and as such has ceased to be a related party. PAR and Messrs. Sloan and Sagansky continue to be related parties.

In addition, the amended and restated registration rights agreement restricts our ability to grant registration rights to a third party on parity with or senior to those held by the “holders” (as defined under that agreement) without the consent of holders of at least a majority of the “registrable securities” under that agreement. In April 2018, we entered into a consent to the amended and restated registration rights agreement with PAR whereby PAR (as a holder of a majority of registrable securities thereunder) consented to the registration rights that we provided to Searchlight Capital Partners, L.P. (“Searchlight”) as part of its investment in us.

Note 10.    Commitments and Contingencies

Movie License and Internet Protocol Television (“IPTV”) Commitments
In the ordinary course of business, we have long-term commitments, such as license fees and guaranteed minimum payments owed to content providers. In addition, we have long-term arrangements with service and television providers to license and provide content and IPTV services that are subject to future guaranteed minimum payments from us to the licensor.



19


The following is a schedule of future minimum commitments under movie and IPTV arrangements as of March 31, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining nine months)
$
36,745

2020
13,210

2021
4,807

2022
800

Total
$
55,562


Satellite Bandwidth Capacity
The Company maintains agreements with satellite service providers to provide for satellite capacity. The Company expenses these satellite fees in the month the service is provided as a charge to licensing and services cost of sales.

The following is a schedule of future minimum satellite costs, across all connectivity end-markets, as of March 31, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining nine months)
$
78,653

2020
73,754

2021
45,188

2022
32,849

2023
31,389

Thereafter
87,942

Total Future Payments
$
349,775


Other Commitments
In the normal course of business, we enter into future purchase commitments with some of our connectivity vendors to secure future inventory for our customers and engineering and antenna project developments. As of March 31, 2019, we also had outstanding letters of credit in the amount of $4.7 million, of which $4.2 million were issued under the letter of credit facility under the senior secured credit agreement that the Company entered into on January 6, 2017 (the “2017 Credit Agreement”).

Contingencies
We are subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully and finally adjudicated. We record accruals for loss contingencies when our management concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. On a regular basis, our management evaluates developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously. While it is not possible to accurately predict or determine the eventual outcomes of these matters, an adverse determination in one or more of these matters could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Some of our legal proceedings as well as other matters that our management believes could become significant are discussed below:

Music Infringement and Related Claims. On May 6, 2014, UMG Recordings, Inc., Capitol Records, Universal Music Corp. and entities affiliated with the foregoing (collectively, “UMG”) filed suit in the United States District Court for the Central District of California against us and Inflight Productions Ltd. (“IFP”), our indirect subsidiary, for copyright infringement and related claims and unspecified money damages. In August 2016, we entered into settlement agreements with major record labels and publishers, including UMG, to settle music copyright infringement and related claims (the “Sound Recording Settlements”). As a result of the Sound Recording Settlements, we paid approximately $18.0 million in cash and issued approximately 1.8 million shares of our common stock to settle lawsuits and other claims. Under the settlement agreement with UMG, we paid UMG an additional $5.0 million in cash in March 2017 and agreed to issue 500,000 additional shares of our common stock when and if our closing price of our common stock exceeds $10.00 per share and 400,000 additional shares of our common stock when and if the closing price of our common stock exceeds $12.00 per share.


20



In 2016, we received notices from several other music rights holders and associations acting on their behalf regarding potential claims that we infringed their music rights and the rights of artists that they represent. To date, none of these rights holders or associations has initiated litigation against us, except for BMG Rights Management (US) LLC (“BMG”) as described in the following paragraph. Other than in respect of the BMG litigation (the loss probability and liability estimate of which we discuss in the following paragraph), we believe that a loss relating to these matters is probable, but we believe that it is unlikely to be material and therefore have accrued an immaterial amount for these loss contingencies. If initiated however, we intend to vigorously defend ourselves against these claims.

On May 3, 2018, BMG filed suit in the United States District Court for the Central District of California against us and IFP for copyright infringement and related claims and unspecified money damages. The Court set the trial date for September 2019. We believe that a loss relating to this matter is probable, and therefore, we have reserved for this loss contingency in the amount of $1.0 million as of March 31, 2019. We intend to vigorously defend ourselves against this claim.

SwiftAir Litigation. On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44 and against Southwest Airlines for breach of contract, quantum meruit, unjust enrichment and similar claims and money damages in the Superior Court of California for the County of Los Angeles. SwiftAir and Row 44 had a contractual relationship whereby Row 44 agreed to give SwiftAir access to Row 44’s Southwest Airlines portal so that SwiftAir could market its destination deal product to Southwest Airlines’ passengers. In 2013, after Southwest Airlines decided not to proceed with the destination deal product, Row 44 terminated its contract with SwiftAir. In its lawsuit, SwiftAir seeks approximately $9 million in monetary damages against Row 44 and Southwest Airlines.  In January 2018, the court granted Row 44’s motions in limine and thereby limited SwiftAir’s damages claims against Row 44 to nominal damages. Southwest Airlines however remains exposed to SwiftAir’s damages claims.  If Southwest Airlines is not successful in its defense against those claims, then Southwest Airlines may seek indemnification from Row 44 for its loss. The trial in this lawsuit is currently scheduled to commence in June 2019.  We intend to vigorously defend ourselves against SwiftAir’s claims as well as against any indemnification claim that Southwest Airlines may later assert against us. We do not believe that a material loss relating to this matter is probable, and due to the speculative nature of SwiftAir’s damages claims (and, therefore, Southwest Airlines’ potential indemnification claim), we are currently unable to estimate the amount of any potential loss; as such, we have not accrued any amount for this loss contingency.

In addition, from time to time, we are or may be party to various additional legal matters incidental to the conduct of our business. Some of the outstanding legal matters include speculative claims for indeterminate amounts of damages, for which we have not recorded any contingency accrual. Additionally, we have determined that other legal matters are likely not material to our financial statements, and as such have not discussed those matters above. Although we cannot predict with certainty the ultimate resolution of these speculative and immaterial matters, based on our current knowledge, we do not believe that the outcome of any of these matters will have a material adverse effect on our financial statements.


Note 11.    Equity Transactions    

2013 Equity Plan
Under the Company’s 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of the Company’s Board of Directors, was able to grant up to 11,000,000 shares (through stock options, restricted stock, restricted stock units (“RSUs”)) (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants. The Company ceased using the 2013 Equity Plan for new equity issuances in December 2017, upon receiving stockholder approval of the Company’s new 2017 Omnibus Long-Term Incentive Plan, although the Company continues to have outstanding previously granted equity awards issued under the 2013 Equity Plan. These previously granted awards represent the right to receive 7,070,298 shares of the Company’s common stock (as of January 18, 2018) if and when they later vest and/or are exercised. See “2017 Equity Plan” immediately below.

2017 Equity Plan
On December 21, 2017, the Company’s stockholders approved a new 2017 Omnibus Long-Term Incentive Plan (the “2017 Omnibus Plan”). The Company had 2,097,846 shares remaining shares available for issuance under the 2013 Equity Plan (as of that date) and those shares rolled into the 2017 Omnibus Plan became available for grant thereunder. The 2017 Omnibus Plan separately made available 6,500,000 shares of the Company’s common stock for new issuance thereunder, in addition to those rolled over


21


from the 2013 Equity Plan. The Administrator of the 2017 Omnibus Plan, which is the Compensation Committee of the Company’s Board of Directors, may grant share awards (through stock options, restricted stock, RSUs (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants.

On June 25, 2018, the Company’s stockholders approved an amendment and restatement of the 2017 Equity Plan that increased by 2,000,000 the number of shares of the Company’s common stock authorized for issuance thereunder.
 
Stock Repurchase Program
In March 2016, our Board of Directors authorized a stock repurchase program under which we may repurchase up to $50.0 million of our common stock. Under the stock repurchase program, we may repurchase shares from time to time using a variety of methods, which may include open-market purchases and privately negotiated transactions. The extent to which we repurchase our shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. We measure all potential buybacks against other potential uses of capital that may arise from time to time. The repurchase program does not obligate us to repurchase any specific number of shares, and may be suspended or discontinued at any time. We expect to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. We did not repurchase any shares of our common stock during the three months ended March 31, 2019 and 2018. As of March 31, 2019, the remaining authorization under the stock repurchase plan was $44.8 million.

Stock-Based Compensation Expense
Stock-based compensation expense related to our directors and other personnel for the three months ended March 31, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Cost of services
$
27

 
$
179

Sales and marketing
53

 
194

Product development
68

 
311

General and administrative
1,141

 
2,960

Total
$
1,289

 
$
3,644

The compensation expense for the three months ended March 31, 2019 is reduced by $1.1 million revaluation adjustment related to the Company’s cash-settled phantom stock options. These awards are accounted for as liability awards and are re-measured at fair value each reporting period. Compensation expense is recognized over the requisite service period.

Note 12.    Income Taxes

The Company recorded an income tax provision expense of $0.1 million and an income tax benefit of $4.7 million for the three months ended March 31, 2019 and 2018, respectively. In general, the effective tax rate for the three months ended March 31, 2019 differs from the federal income tax rate due to foreign withholding taxes, changes in valuation allowance, basis difference in convertible debt and effects of permanent differences. In general, the effective tax rate for the three months ended March 31, 2018 differs from the federal income tax rate due to the effects of foreign tax rate differences, foreign withholding taxes, changes in valuation allowance, and deferred tax expense on amortization of indefinite-lived intangible assets.

During the quarter ended March 31, 2019, the Company recorded a $2.7 million adjustment to reduce additional paid-in capital with a corresponding reduction to income tax expense. The adjustment pertains to a difference between the book basis and tax basis of the Second Lien Notes and equity warrants with Searchlight. The initial value assigned to the equity warrants was recorded as an increase to additional paid-in capital, and a corresponding tax implication for the basis difference should have be recorded as an offsetting decrease to additional paid-in capital. This basis difference originated in 2018 and the adjustment was recorded in 2019 to correct an immaterial prior period error.

Due to uncertainty as to the realization of benefits from the Company's U.S. and certain international net deferred tax assets, including net operating loss carryforwards, the Company has a full valuation allowance reserved against such net deferred tax


22


assets. The Company intends to continue to maintain a full valuation allowance on certain jurisdictions’ net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

As of March 31, 2019, and December 31, 2018, the liability for income taxes associated with uncertain tax positions was $7.8 million and $7.9 million, respectively. As of March 31, 2019, and December 31, 2018, the Company had accrued $6.2 million and $6.3 million, respectively, of interest and penalties related to uncertain tax positions. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly decrease within the next 12 months. This change may be the result of settlement of ongoing foreign audits.

Note 13.    Segment Information

Our business comprises two operating segments:

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

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

Our Chief Executive Officer, the Company’s chief operating decision-maker (“CODM”), evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our two segments. Total segment gross margin provides the CODM a measure to analyze operating performance of each of the Company’s operating segments and its enterprise value against historical data and competitors’ data. However, historical results may not be indicative of future results because operating performance is highly contingent on many factors, including customer tastes and preferences. All other financial information is reviewed by the CODM on a consolidated basis.

The following table summarizes revenue and gross margin by our reportable segments for the three months ended March 31, 2019 and 2018 (in thousands):


23


 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Media & Content -- Licensing and Services
$
80,010

 
$
74,915

Connectivity -- Services
70,468

 
71,611

Connectivity -- Equipment
16,141

 
9,971

Total revenue
$
166,619

 
$
156,497

Cost of sales:
 
 
 
Media & Content -- Licensing and Services
$
57,669

 
$
54,471

Connectivity -- Services
65,600

 
57,943

Connectivity -- Equipment
10,925

 
6,082

Total
76,525

 
64,025

Total cost of sales
$
134,194

 
$
118,496

Gross Margin:
 
 
 
Media & Content
$
22,341

 
$
20,444

Connectivity
10,084

 
17,557

Total Gross Margin
32,425

 
38,001

Other operating expenses
51,515

 
67,560

Loss from operations
$
(19,090
)
 
$
(29,559
)

The Company’s total assets by segment were as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Media & Content
 
$
335,828

 
$
346,280

Connectivity
 
370,665

 
355,144

Total segment assets
 
706,493

 
701,424

Corporate assets
 
28,363

 
15,663

Total assets
 
$
734,856

 
$
717,087


Note 14.    Fair Value Measurements

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

Level 1: Observable quoted prices in active markets for identical assets and liabilities.
Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The assets and liabilities that are fair valued on a recurring basis are described below and contained in the following tables. In addition, on a non-recurring basis, the Company may be required to record other assets and liabilities at fair value. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write-downs resulting from impairment of assets.


24



The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019, and December 31, 2018, respectively (dollar values in thousands, other than per-share values):
 
March 31, 2019
 
Quotes Prices in Active Markets
(Level 1)
 
 Significant Other Observable Inputs
(Level 2)
 
 Significant Other Unobservable Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Earn-out liability (1)
$
114

 
$

 
$

 
$
114

Contingently issuable shares (2)
432

 

 

 
432

Phantom stock options (3)
348

 

 

 
348

Total
$
894

 
$

 
$

 
$
894

 
December 31, 2018
 
Quotes Prices in Active Markets
(Level 1)
 
 Significant Other Observable Inputs
(Level 2)
 
 Significant Other Unobservable Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Earn-out liability (1)
$
114

 
$

 
$

 
$
114

Contingently issuable shares (2)
1,371

 

 

 
1,371

Phantom stock options (3)
1,564

 

 

 
1,564

Total
$
3,049

 
$

 
$

 
$
3,049


(1)
Represents aggregate earn-out liabilities assumed in business combinations for the year ended December 31, 2015.
(2)
In connection with the Sound-Recording Settlements (as described in Note 10. Commitments and Contingencies to our 2018 Form 10-K), the Company is obligated to issue to UMG (as defined in that Note) 500,000 shares of its common stock when and if the closing price of the Company's common stock exceeds $10.00 per share and an additional 400,000 shares of common stock when and if the closing price of the Company’s common stock exceeds $12.00 per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.
(3)
Our cash-settled phantom stock options are accounted for as liability awards and are re-measured at fair value each reporting period with changes flowing through statement of operations. As of March 31, 2019, the aggregate estimated fair value of our cash-settled phantom stock options was $1.1 million for which the amortized portion recognized as a liability in our condensed consolidated balance sheet was $348,000.

The following table shows the carrying amounts and the fair values of our long-term debt in the condensed consolidated financial statements at March 31, 2019 and December 31, 2018, respectively (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Carrying Amount(7)
 
Fair Value
 
Carrying Amount (7)
 
Fair Value
Senior secured term loan facility, due January 2023 (+)(1)
$
475,000

 
$
467,875

 
$
478,125

 
$
473,344

Senior secured revolving credit facility, due January 2022 (+)(2)
50,915

 
50,915

 
54,015

 
54,015

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

 
33,413

 
82,500

 
49,064

Second Lien Notes, due June 2023(4)(5)
167,957

 
90,307

 
158,450

 
112,230

Other debt (6)
17,380

 
17,380

 
1,707

 
1,707

 
$
793,752

 
$
659,890

 
$
774,797

 
$
690,360

(+)
This facility is a component of the 2017 Credit Agreement.
(1)
The estimated fair value is classified as Level 2 financial instrument and was determined based on quoted prices of the instrument in a similar over-the-counter market.
(2)
The estimated fair value is considered to approximate carrying value and is classified as Level 3 financial instruments. We expect to draw on the 2017 Revolving Loans from time to time to fund our working capital needs and for other general corporate purposes.
(3)
The fair value of the 2.75% Convertible Notes is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at $13.0 million, and is included in the condensed consolidated balance sheets within “Additional paid-in capital”. The principal amount outstanding of the Convertible Notes was $82.5 million as of March 31, 2019, and the carrying amounts in the foregoing table reflect this outstanding principal amount net of debt issuance costs and discount associated with the equity component.
(4)
The principal amount outstanding of the Second Lien Notes, due June 2023 as set forth in the foregoing table was $168.0 million as of March 31, 2019, and is not the carrying amount of the indebtedness (i.e. outstanding principal amount net of debt issuance costs and discount associated with the equity component and includes approximately $9.5 million of payment-in-kind (“PIK”) interest converted to principal during the three months ended March 31, 2019). The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These


25


qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital” (see Note 8. Financing Arrangements).
(5)
The fair value of the Second Lien Notes was determined based on a Black-Derman-Toy interest rate Lattice model. The key inputs of the valuation model contain certain Level 3 inputs.
(6)
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments. For March 31, 2019, Other debts primarily consisted of (i) $8.5 million financing for transponder purchases; and (ii) $7.4 million advance against future dividends from relate party (refer to Note 9. Related Party Transactions for further details).
(7)
The carrying amounts presented above at March 31, 2019 and December 31, 2018 exclude $63.2 million and $65.2 million of unamortized bond discounts and issuance costs, respectively.


Note 15.    Concentrations

Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents and accounts receivable.

As of March 31, 2019, and 2018, we maintain our cash and cash equivalents primarily with major U.S. financial institutions and foreign banks. Deposits with these institutions at times exceed the federally insured limits, which potentially subjects us to concentration of credit risk. We have not historically experienced any losses related to these balances and believe that there is minimal risk of any such losses.

As of March 31, 2019, approximately $11.8 million of our total cash and cash equivalents of $20.8 million was held by our foreign subsidiaries. If we repatriate these funds for use in our U.S. operations, we may be required to pay income taxes in the U.S. on the repatriated amount at the tax rates then in effect, reducing the net cash proceeds to us after repatriation. In the event we elect to repatriate any of these funds, we believe we have sufficient net operating losses for the foreseeable future to offset any repatriated income. As a result, we do not expect that any such repatriation would create a tax liability in the U.S. or have a material impact on our effective tax rate.

Customer Concentration
A substantial portion of our revenue is generated through arrangements with Southwest Airlines, Inc. (“Southwest Airlines”). As of March 31, 2019 and 2018, the percentage of revenue generated through this customer was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Southwest Airlines as a percentage of total revenue
21
%
 
18
%
Southwest Airlines as a percentage of Connectivity revenue
39
%
 
33
%

No other customer accounted for greater than 10% of total revenue for the periods presented. Accounts receivable from Southwest Airlines represented 16% of the total accounts receivable as of each of March 31, 2019 and December 31, 2018, respectively.

Note 16.    Net Results Per Share

Basic loss per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted loss per share is computed using the weighted-average number of common shares and the dilutive effect of contingent shares outstanding during the applicable period. Potentially dilutive contingent shares, which consist of stock options, restricted stock units (including performance stock units), liability warrants, warrants issued to third parties and accounted for as equity instruments, convertible senior notes and contingently issuable shares, have been excluded from the diluted loss per share calculation when the effect of including such shares is anti-dilutive.



26


The following table sets forth the computation of basic and diluted net loss per share of common stock (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2019
 
2018
Net loss (numerator):
 
 
 
Net loss – basic and diluted
$
(37,609
)
 
$
(38,284
)
Shares (denominator):
 
 
 
Weighted-average shares – basic and diluted
91,831

 
90,792

Loss per share -- basic and diluted
$
(0.41
)
 
$
(0.42
)

The following weighted average common equivalent shares are excluded from the calculation of the Company’s net loss per share as their inclusion would have been anti-dilutive (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Employee stock options
5,123

 
6,240

Restricted stock units (including performance stock units)
2,182

 
2,194

Public SPAC Warrants (1)

 
2,143

2.75% convertible senior notes due 2035
4,447

 
4,447

Contingently issuable shares (2)
900

 
900

Searchlight Penny Warrants (3)
18,066

 
803

Searchlight Market Warrants (3)
13,000

 
578


(1)
6,173,228 of our publicly traded warrants (the “Public SPAC Warrants”) expired on January 31, 2018 and are no longer exercisable.
(2)
In connection with the Sound Recording Settlement, we are obligated to issue 500,000 shares of our common stock to UMG when and if the closing price of our common stock exceeds $10.00 per share, and 400,000 shares of our common stock to UMG when and if the closing price of our common stock exceeds $12.00 per share.
(3)
On March 27, 2018 we sold to Searchlight (and associated entities) $150.0 million in aggregate principal amount of our Second Lien Notes as well as warrants to acquire an aggregate of 18,065,775 shares of the Company’s common stock at an exercise price of $0.01 per share (the “Penny Warrants”) and warrants to acquire an aggregate of 13,000,000 shares of Common Stock at an exercise price of $1.57 per share (the “Market Warrants”). See Note 9. Financing Arrangements to our 2018 Form 10-K.

Note 17.    Subsequent Event

Potential Sales of Certain Businesses or Assets
In connection with our strategic initiatives, we are considering the divestiture of various businesses and assets, including the potential sale of elements of our Maritime, Enterprise and Government business unit. Based on inbound interest, we retained a financial advisor in April 2019 to evaluate offers for non-aviation components of our Connectivity business. We expect to conclude our evaluation during the second quarter. We are also considering the sale of certain joint venture interests, consistent with our strategy to reduce leverage and focus our resources.




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Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used herein, “Global Eagle Entertainment,” “Global Eagle,” the “Company,” “our,” “we,” or “us” and similar terms include Global Eagle Entertainment Inc. and its subsidiaries, unless the context indicates otherwise.

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding our business outlook, industry, business strategy, plans (including potential sale of certain businesses and assets), goals and expectations concerning our market position (including the impact of Boeing 737 MAX aircraft grounding on our financial performance), international expansion, future technologies, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this Form 10-Q.

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:

our ability to timely remediate material weaknesses in our internal control over financial reporting; the effect of those weaknesses on our ability to report and forecast our operations and financial performance; and the impact of our remediation efforts (and associated management time and costs) on our liquidity and financial performance;
our ability to maintain effective disclosure controls and internal control over financial reporting;
our ability to execute on our operating-expense and cost-structure realignment plan and realize the benefits of those initiatives;
our ability to sell certain businesses and/or assets on favorable terms or at all, and our ability to realize the anticipated benefits from any such sales;
the continuation of the Boeing 737 MAX aircraft grounding for a period of time beyond our expectations;
our ability to properly implement the new leasing standard (ASC 842);
our dependence on the travel industry;
future acts or threats of terrorism;
our ability to obtain new customers and renew agreements with existing customers;
our customers’ solvency, inability to pay and/or delays in paying us for our services;
our ability to retain and effectively integrate and train key members of senior management;
our ability to recruit, train and retain highly skilled technical employees;
negative external perceptions that damage our reputation among potential customers, investors, employees, advisors and vendors;
our ability to receive the anticipated cash distributions or other benefits from our investment in the Wireless Maritime Services joint venture;
customer attrition due to direct arrangements between satellite providers and customers;
the effect of a variety of complex U.S. and foreign tax laws and regimes due to the global nature of our business;
our ability to continue to be able to make claims for e-business and multimedia tax credits in Canada;
our exposure to foreign currency risks;
the effect of the United Kingdom’s referendum to withdraw from the European Union on our business;
our dependence on our existing relationship and agreement with Southwest Airlines;
our need to invest in and develop new broadband technologies and advanced communications and secure networking systems, products and services and antenna technologies as well as their market acceptance;
increased demand by customers for greater bandwidth, speed and performance and increased competition from new technologies and market entrants;
our reliance on “sole source” service providers and other third parties for key components and services that are integral to our product and service offerings;
the potential need to materially increase our investments in product development and equipment beyond our current investment expectations;
our ability to expand our international operations and the risks inherent in our international operations, especially in light of current trade and national-security disputes between the United States and China (which may adversely impact our ability to conduct business in that market);
service interruptions or delays, technology failures, damage to equipment or software defects or errors and the resulting impact on our reputation and ability to attract, retain and serve our customers;


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Table of Contents

equipment failures or software defects or errors that may damage our reputation or result in claims in excess of our insurance or warranty coverage;
satellite failures or degradations in satellite performance;
our ability to integrate businesses or technologies we have acquired or may acquire in the future;
increased on-board use of personal electronic devices and content accessed and downloaded prior to travel and our ability to compete as a content provider against “over the top” download services and other companies that offer in-flight entertainment products;
pricing pressure from suppliers and customers in our Media & Content segment and a reduction in the aviation industry’s use of intermediary content service providers (such as us);
a reduction in the volume or quality of content produced by studios, distributors or other content providers or their refusal to license content or other rights upon terms acceptable to us;
a reduction or elimination of the time between our receipt of content and it being made available to the rental or home viewing market (i.e., the “early release window”);
increased competition in the in-flight entertainment (“IFE”) and in-flight connectivity (“IFC”) system supply chain;
our ability to plan expenses and forecast revenue due to the long sales cycle of many of our Media & Content segment’s products;
the refusal of content providers to license content to us and operational complexity and increased costs related to maintaining and tracking our music content licenses and rights related thereto;
our use of fixed-price contracts for satellite bandwidth and potential cost differentials that may lead to losses if the market price for our services declines relative to our committed cost;
our use of fixed-price contracts in our Media & Content segment that may lead to losses in the future if the market price for our services declines relative to our committed cost;
our ability to develop new products or enhance those we currently provide in our Media & Content segment;
our ability to successfully implement a new enterprise resource planning system;
the effect on our business and customers due to disruption of the technology systems utilized in our business operations;
our ability to protect our intellectual property;
the effect of cybersecurity attacks, data or privacy breaches, data or privacy theft, unauthorized access to our internal systems or connectivity or media and content systems, or phishing or hacking, especially in light of recently publicized security incidents affecting our industry and our systems;
the costs to defend and/or settle current and potential future civil intellectual property lawsuits (including relating to music and other content infringement) and related claims for indemnification;
changes in regulations and our ability to obtain regulatory approvals to provide our services or to operate our business in particular countries or territorial waters;
compliance with U.S. and foreign regulatory agencies, including the Federal Aviation Administration (“FAA”), the U.S. Department of Treasury’s Office of Foreign Asset Control (“OFAC”), the Federal Communications Commission (“FCC”), and the Federal Trade Commission (“FTC”) and their foreign equivalents in the jurisdictions in which we and our customers operate;
regulation by foreign government agencies that increases our costs of providing services or requires us to change services
changes in government regulation of the Internet, including e-commerce or online video distribution;
our ability to comply with trade, export, anti-money laundering and anti-bribery practices and data protection laws, especially the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and GDPR;
changes in foreign and domestic civil aviation authorities’ orders, airworthiness directives, or other regulations that restrict our customers’ ability to operate aircraft on which we provide services;
our (along with our directors’ and officers’) exposure to civil stockholder litigation relating to our investor disclosures and the related costs of defending and insuring against such litigation;
uninsured or underinsured costs associated with stockholder litigation and any uninsured or underinsured indemnification obligations with respect to current and former executive officers and directors;
limitations on our cash flow available to make investments due to our substantial indebtedness and our ability to generate sufficient cash flow to make payments thereon, comply with our reporting and financial covenants, or fund our operations;
our ability to repay the principal amount of our bank debt, second lien notes due June 30, 2023 (the “Second Lien Notes”) and/or 2.75% convertible senior notes due 2035 (the “Convertible Notes”) at maturity, to raise the funds necessary to settle conversions of our Convertible Notes or to repurchase our Convertible Notes upon a fundamental change or on specified repurchase dates or due to future indebtedness;
the conditional conversion of our Convertible Notes;
the effect on our reported financial results of the accounting method for our Convertible Notes;
the impact of the fundamental change repurchase feature and change of control repurchase feature of the securities purchase agreement governing our Second Lien Notes on our price or potential as a takeover target;
the dilution or price depression of our common stock that may occur as a result of the conversion of our Convertible Notes and/or Searchlight warrants;
our ability to meet the continued listing requirements of The Nasdaq Stock Market (“Nasdaq”), in particular given our recent history of delinquent periodic filings with the U.S. Securities and Exchange Commission (“SEC”) and the need to maintain a minimum $1.00 per share stock price pursuant to Nasdaq rules;
conflicts between our interests and the interests of our largest stockholders;
volatility of the market price of our securities;


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Table of Contents

anti-takeover provisions contained in our charter and bylaws;
the dilution of our common stock if we issue additional equity or convertible debt securities; and,
other risks and factors listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 18, 2019 (the “2018 Form 10-K”).



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Overview of the Company

We are a leading provider of media and satellite-based connectivity to fast-growing, global mobility markets across air, sea and land. Our principal operations and decision-making functions are located in North America, South America and Europe. We have two operating segments: Media & Content and Connectivity.

We generate revenue primarily through licensing and related services from our Media & Content segment and from the delivery of satellite-based Internet service and content to the aviation, maritime and land markets and the sale of equipment from our Connectivity segment. Our chief operating decision maker regularly analyzes revenue and profit on a segment basis, and our results of operations and pre-tax income or loss on a consolidated basis in order to understand the key business metrics driving our business.

For the three months ended March 31, 2019 and 2018, we reported revenue of $166.6 million and $156.5 million, respectively. For the three months ended March 31, 2019 and 2018, one airline customer, Southwest Airlines, Inc. (“Southwest Airlines”) accounted for 21% and 18%, respectively, of our total revenue.

Opportunities, Challenges and Risks

We believe our operating results and performance are driven by various factors that affect the commercial travel industry and the mobility markets serving hard-to-reach places on land, sea and in the air. These include general macroeconomic trends affecting the mobility markets, such as travel and maritime trends affecting our target user base, regulatory changes, competition and the rate of customer adoption of our services as well as factors that affect Wi-Fi Internet service providers in general. Growth in our overall business is principally dependent upon the number of customers that purchase our services, our ability to negotiate favorable economic terms with our customers and partners and the number of travelers who use our services. Growth in our margins is dependent on our ability to manage the costs associated with implementing and operating our services, including the costs of licensing, procuring and distributing content, equipment and satellite bandwidth service. Our ability to attract and retain customers is highly dependent on our ability to timely implement our services and continually improve our network and operations as technology changes and we experience increased network capacity constraints.

Media & Content Segment

The growth of our Media & Content segment is dependent upon a number of factors, including the growth of IFE systems (including both seatback installed and Wi-Fi IFE systems), our customers’ demand for content and games across global mobility markets, the general availability of content to license from our studio partners, pricing from our competitors and our ability to manage the underlying economics of content licensing by studio. Also, as mobility connectivity services become less costly and capable of faster speeds, the availability of “over the top” services like Netflix represents a potential source of future competition for our Media & Content segment. We believe that customer demand for content and games will continue to grow in the foreseeable future and we intend to capitalize on this opportunity, but our ability to do so in part depends on our ability to harness passenger data and analytics in order to improve and customize our offerings.

Connectivity Segment

In our Connectivity segment, the use of our connectivity equipment on our customers’ aircraft is subject to regulatory approvals, such as a Supplemental Type Certificate, or “STC,” that are imposed by agencies such as the Federal Aviation Administration (“FAA”), the European Aviation Safety Agency (“EASA”) and the Civil Aviation Administration of China (“CAAC”). The costs to obtain and/or validate an STC can be significant and vary by plane type and customer location. We have STCs to operate our equipment on several plane types, including The Boeing Company’s (“Boeing”) 737, 757, 767 and 777 aircraft families, and for the Airbus SE (“Airbus”) A320 aircraft family. While we believe we will be successful in obtaining STC approvals in the future as needed, there is a risk that the applicable regulatory agencies do not approve or validate an STC on a timely basis, if at all, which could negatively impact our growth, relationships and ability to sell our connectivity services. To partially address the risk and costs of obtaining STCs in the future, we signed an agreement with Boeing to offer our connectivity equipment on a “line-fit basis” for Boeing’s 737 and 787 models, and our connectivity equipment became available on a line-fit basis in August 2017 as an option on Boeing 737 airplanes. We are also pursuing line-fit initiatives with other aircraft manufacturers, such as Airbus, in the near term. As a result, we expect to continue to incur significant product development expenses in the foreseeable future as we invest in these long-term line-fit opportunities, which we believe will improve our long-term ability to onboard our connectivity equipment on new plane types in a more scalable and cost-effective manner.


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Our Connectivity segment is dependent on satellite-capacity providers for satellite bandwidth and certain equipment and servers required to deliver the satellite stream, rack space at the supplier's data centers to house the equipment and servers and network operations service support. Through our acquisition of Emerging Markets Communications (“EMC”) on July 27, 2016 (the “EMC Acquisition”), we expanded the number of our major suppliers of satellite capacity and became a party to an agreement with Intelsat S.A. We also purchase radomes, satellite antenna systems and rings from key suppliers. Any interruption in supply from these important vendors could have a material impact on our ability to sell equipment and/or provide connectivity services to our customers. In addition, some of our satellite-capacity providers (many of whom are well capitalized) are now entering our markets and have begun competing with our service offerings, which has challenged our business relationships with them and created additional competition in our industry.

The growth of our Connectivity segment is dependent upon a number of factors, including the rates at which we increase the number of installed connectivity systems for new and existing customers, customer demand for connectivity services and the prices at (and pricing models under) which we can offer them, government regulations and approvals, customer adoption, take rates (or overall usage of our connectivity services by end-users), the general availability and pricing of satellite bandwidth globally, pricing pressures from our competitors, general travel industry trends, new and competing connectivity technologies, our ability to manage the underlying economics of connectivity services on a global basis and the security of those systems. The regulatory grounding during 2019 of Boeing’s 737 MAX aircraft type, necessitated by flight incidents beyond our control and unrelated to passenger connectivity systems, imposes certain risks to us. Prior to the grounding, MAX aircraft represented approximately 1% of our total Connectivity service revenue. We estimate we will install at least 40 additional MAX aircraft this year, with the majority during the second half of the year. We expect the regulatory grounding of the aircraft type to impact the date such aircraft are activated on our connectivity network.

The success of our business depends, in part, on the secure and uninterrupted performance of our information technology systems.  An increasing number of companies have disclosed cybersecurity breaches, some of which have involved sophisticated and highly targeted attacks on their computer networks. Despite our efforts to prevent, detect and mitigate these threats, including continuously working to install new, and upgrade our existing, information technology systems and increasing employee awareness around phishing, malware, and other cyber risks, there is no guarantee that such measures will be successful in protecting us from a cyber-attack. We will respond to any reported cybersecurity threats as they are identified to us and work with our suppliers, customers and experts to quickly mitigate any threats, but we believe that cybersecurity risks are inherent in our industries and sectors and will continue to represent a significant reputational and business risk to our Connectivity segment’s growth and prospects, and those of our overall industries and sectors.

Our cost of sales, the largest component of our operating expenses, varies from period to period, particularly as a percentage of revenue, based upon the mix of the underlying equipment and service revenue that we generate. Cost of sales also varies period-to-period as we acquire new customers to grow of our Connectivity segment. During 2019, we have continued to increase our investment in satellite capacity over North America and the Middle East to facilitate the growth of our existing and new connectivity customer base, which has included purchases of satellite transponders. Depending on the timing of our satellite expenditures, our cost of sales as a percentage of our revenue may fluctuate from period to period.

A substantial amount of our Connectivity segment’s revenue is derived from Southwest Airlines, a U.S. based airline. Our contract with Southwest Airlines provides for a term of services through 2025, and includes a commitment from Southwest for live television services. We have continued to install our connectivity systems on additional Southwest Airlines aircraft. Under the contract, we committed to deploy increased service capacity (and our patented technology) to deliver a significantly enhanced passenger experience. We utilized a “monthly recurring charge” revenue model with Southwest Airlines that provides us with long-term revenue visibility. The contract also provides for additional rate cards for ancillary services and the adoption of a fleet management plan.

We plan to further expand our connectivity operations internationally to address opportunities in non-U.S. markets. As we expand our business further internationally in places such as the Middle East, Europe, Asia Pacific and Latin America, we will continue to incur significant incremental upfront expenses associated with these growth opportunities.

Material Weaknesses



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We expect to continue to expend significant time and resources remediating material weaknesses in our internal control over financial reporting. These weaknesses relate to our entity level control environment, financial statement closing and reporting process, intercompany process, business combinations, inventory, content library, internally developed software, long lived assets, goodwill impairment, accounts payable and accrued liabilities, revenue processes, license fee accruals, income taxes, payroll, treasury, and information technology processes.

We are strongly committed to addressing these material weaknesses, which we believe will strengthen our business and continue to work on, enhance and implement our remediation plan. However, we are uncertain as to our timing to complete the remediation, the extent to which such efforts will deplete our cash reserves and our ability to succeed in the remediation. If we are unable to establish and maintain effective internal control over financial reporting, we may not be able to detect and prevent a material misstatement in our financial statements, and we may be unable to timely file our periodic SEC reports or identify and forecast certain business trends and certain aspects of our financial performance, which could negatively impact our ability to focus on and achieve our business objectives. See Item 9A: Controls and Procedures of our 2018 Form 10-K for a discussion of our material weaknesses and remediation efforts.

Key Components of Consolidated Statements of Operations
There have been no material changes to the key components of our Condensed Consolidated Statements of Operations as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Form 10-K.

Critical Accounting Estimates

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our 2018 Form 10-K.

Recent Accounting Pronouncements

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) and all related amendments. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a discussion. There were no other material changes to our critical accounting policies during the three months ended March 31, 2019.



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Results of Operations

The following tables set forth our results of operations for the periods presented. The information in the tables below should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Form 10-Q. The period-to-period comparisons of financial results in the tables below are not necessarily indicative of future results.
 
Unaudited Condensed Consolidated Statement of Operations Data (in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
$
166,619

 
$
156,497

Operating expenses:
 
 
 
Cost of sales
134,194

 
118,496

Sales and marketing
8,249

 
9,654

Product development
6,979

 
8,358

General and administrative
27,980

 
38,285

Provision for legal settlements
508

 
516

Amortization of intangible assets
7,799

 
10,747

Total operating expenses (including cost of sales)
185,709

 
186,056

Loss from operations
(19,090
)
 
(29,559
)
Other expense
(18,389
)
 
(13,434
)
Loss before income taxes
(37,479
)
 
(42,993
)
Income tax expense (benefit)
130

 
(4,709
)
Net loss
$
(37,609
)
 
$
(38,284
)

The following table provides, for the periods presented, the depreciation expense included in the above line items (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Cost of sales
$
8,934

 
$
8,067

Sales and marketing
1,002

 
788

Product development
835

 
686

General and administrative
3,382

 
3,127

Total
$
14,153

 
$
12,668


The following table provides, for the periods presented, the stock-based compensation expense included in the above line items (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Cost of sales
$
27

 
$
179

Sales and marketing
53

 
194

Product development
68

 
311

General and administrative
1,141

 
2,960

Total
$
1,289

 
$
3,644




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The following table provides, for the periods presented, our results of operations, as a percentage of revenue, for the periods presented:
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
100
 %
 
100
 %
Operating expenses:
 
 
 
Cost of sales
81
 %
 
76
 %
Sales and marketing
5
 %
 
6
 %
Product development
4
 %
 
5
 %
General and administrative
17
 %
 
24
 %
Amortization of intangible assets
5
 %
 
7
 %
Total operating expenses
111
 %
 
119
 %
Loss from operations
(11
)%
 
(19
)%
Other expense
(11
)%
 
(9
)%
Loss before income taxes
(22
)%
 
(27
)%
Income tax expense (benefit)
 %
 
(3
)%
Net loss
(23
)%
 
(24
)%



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Three Months Ended March 31, 2019 and 2018

Operating Segments

Segment revenue, expenses and gross margin for the three months ended March 31, 2019 and 2018 derived from our Media & Content and Connectivity operating segments were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Media & Content
 
 
 
Licensing and services
$
80,010

 
$
74,915

Connectivity
 
 
 
Services
70,468

 
71,611

Equipment
16,141

 
9,971

Total
86,609

 
81,582

Total revenue
$
166,619

 
$
156,497

Cost of Sales:
 
 
 
Media & Content
 
 
 
Licensing and services
$
57,669

 
$
54,471

Connectivity
 
 
 
Services
65,600

 
57,943

Equipment
10,925

 
6,082

Total
76,525

 
64,025

Total cost of sales
$
134,194

 
$
118,496

Gross margin:
 
 
 
Media & Content
$
22,341

 
$
20,444

Connectivity
10,084

 
17,557

Total gross margin
32,425

 
38,001

Other operating expenses
51,515

 
67,560

Loss from operations
$
(19,090
)
 
$
(29,559
)

Revenue

Media & Content
Media & Content operating segment revenue for the three months ended March 31, 2019 and 2018 was as follows (in thousands, except for percentages):
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Change
Licensing and services
$
80,010

 
$
74,915

 
7
%

Media & Content Licensing and Services Revenue
Media & Content licensing and services revenue increased $5.1 million, or 7%, to $80.0 million for the three months ended March 31, 2019, compared to $74.9 million for the three months ended March 31, 2018. The increase was driven by a ramp-up in content programming for previously announced new customer contracts as well as expanded content programming with several of our existing airline partners.

Connectivity


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Connectivity operating segment revenue for the three months ended March 31, 2019 and 2018 was as follows (in thousands, except for percentages):
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Change
Services
$
70,468

 
$
71,611

 
(2
)%
Equipment
16,141

 
9,971

 
62
 %
Total
$
86,609

 
$
81,582

 
6
 %

Connectivity Services Revenue
Services revenue from our Connectivity operating segment decreased slightly by $1.1 million, or 2%