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 June 30, 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=13052576&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 July 30, 2019)
COMMON STOCK, $0.0001 PAR VALUE
 
92,821,420

SHARES


Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019

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



Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS


3

Table of Contents


GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
June 30, 2019
 
December 31, 2018
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
10,853

 
$
39,154

Restricted cash
1,172

 
801

Accounts receivable, net
91,801

 
97,623

Inventories, net
35,378

 
34,649

Prepaid expenses
5,042

 
9,104

Other current assets
10,473

 
10,498

TOTAL CURRENT ASSETS:
154,719

 
191,829

Content library
5,065

 
6,966

Property and equipment, net
170,046

 
176,577

Right-of-use assets, net
34,551

 

Goodwill
159,613

 
159,562

Intangible assets, net
68,534

 
84,136

Equity method investments
83,369

 
83,135

Other non-current assets
27,032

 
14,882

TOTAL ASSETS
$
702,929

 
$
717,087

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
184,837

 
$
177,056

Deferred revenue
10,672

 
7,430

Current portion of long-term debt and finance leases
17,005

 
22,673

Current portion of operating lease liabilities
4,806

 

Other current liabilities
7,560

 
5,032

TOTAL CURRENT LIABILITIES:
224,880

 
212,191

Deferred revenue, non-current
252

 
1,116

Long-term debt and finance leases
713,281

 
686,938

Long-term operating lease liabilities
22,277

 

Deferred tax liabilities
7,702

 
8,406

Other non-current liabilities
35,067

 
34,771

TOTAL LIABILITIES
1,003,459

 
943,422

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ DEFICIT:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 95,679,549 and 94,835,320 shares issued, 92,625,915 and 91,781,686 shares outstanding, at June 30, 2019 and December 31, 2018, respectively
10

 
10

Treasury stock, 3,053,634 shares at June 30, 2019 and December 31, 2018
(30,659
)
 
(30,659
)
Additional paid-in capital
816,119

 
814,488

Subscriptions receivable
(597
)
 
(597
)
 Accumulated deficit
(1,085,527
)
 
(1,009,458
)
 Accumulated other comprehensive income (loss)
124

 
(119
)
TOTAL STOCKHOLDERS’ DEFICIT
(300,530
)
 
(226,335
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
702,929

 
$
717,087

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 OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Licensing and services
$
145,129

 
$
156,428

 
$
295,607

 
$
302,954

Equipment
12,338

 
9,534

 
28,479

 
19,505

Total revenue
157,467

 
165,962

 
324,086

 
322,459

Cost of sales:
 
 
 
 
 
 
 
Licensing and services
116,308

 
122,304

 
239,577

 
234,795

Equipment
7,909

 
4,427

 
18,834

 
10,415

Total cost of sales
124,217

 
126,731

 
258,411

 
245,210

Gross margin
33,250

 
39,231

 
65,675

 
77,249

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
7,365

 
10,877

 
15,614

 
20,492

Product development
6,125

 
9,872

 
13,104

 
18,206

General and administrative
27,161

 
29,799

 
55,141

 
68,235

Provision for (gain from) legal settlements
25

 
(141
)
 
533

 
375

Amortization of intangible assets
7,800

 
10,357

 
15,599

 
20,920

Total operating expenses
48,476

 
60,764

 
99,991

 
128,228

Loss from operations
(15,226
)
 
(21,533
)
 
(34,316
)
 
(50,979
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense, net
(22,329
)
 
(19,755
)
 
(43,606
)
 
(35,352
)
Income from equity method investments
2,517

 
428

 
4,646

 
1,589

Change in fair value of derivatives

 
(655
)
 
938

 
(91
)
Other expense, net
(105
)
 
(673
)
 
(284
)
 
(347
)
Loss before income taxes
(35,143
)
 
(42,188
)
 
(72,622
)
 
(85,180
)
Income tax expense (benefit)
3,317

 
3,722

 
3,447

 
(987
)
Net loss
$
(38,460
)
 
$
(45,910
)
 
$
(76,069
)
 
$
(84,193
)
 
 
 
 
 
 
 
 
Net loss per share – basic and diluted
$
(0.42
)
 
$
(0.50
)
 
$
(0.83
)
 
$
(0.93
)
Weighted average shares outstanding – basic and diluted
92,259

 
91,057

 
92,046

 
90,925


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


5

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(38,460
)
 
$
(45,910
)
 
$
(76,069
)
 
$
(84,193
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized foreign currency translation adjustments
10

 
199

 
243

 
199

Other comprehensive income
10

 
199

 
243

 
199

Comprehensive loss
$
(38,450
)
 
$
(45,711
)
 
$
(75,826
)
 
$
(83,994
)

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 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
)
Restricted stock units vested and distributed, net of tax
440

 

 

 

 
(210
)
 

 

 

 
(210
)
Stock-based compensation

 

 

 

 
2,224

 

 

 

 
2,224

Interest income on subscription receivable

 

 

 

 

 
(7
)
 

 

 
(7
)
Net loss

 

 

 

 

 

 
(45,910
)
 

 
(45,910
)
Comprehensive loss, net of tax

 

 

 

 

 

 

 
199

 
199

Balance at June 30, 2018
94,337

 
10

 
(3,054
)
 
(30,659
)

809,369

 
(591
)
 
(857,052
)
 
177

 
(78,746
)

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


7

Table of Contents
GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (UNAUDITED) (continued)
(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, 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

Tax effect relating to the beneficial conversion feature of Second Lien Notes

 

 

 

 
(2,688
)
 

 

 

 
(2,688
)
Net loss

 

 

 

 

 

 
(37,609
)
 

 
(37,609
)
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
)
Restricted stock units vested and distributed, net of tax
515

 

 

 

 
(147
)
 

 

 

 
(147
)
Stock-based compensation

 

 

 

 
2,194

 

 

 

 
2,194

Net loss

 

 

 

 

 

 
(38,460
)
 

 
(38,460
)
Unrealized foreign currency translation adjustments

 

 

 

 

 

 

 
10

 
10

Balance at June 30, 2019
95,680

 
$
10

 
(3,054
)
 
$
(30,659
)
 
$
816,119

 
$
(597
)
 
$
(1,085,527
)
 
$
124

 
$
(300,530
)

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


8

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


 
Six Months Ended June 30,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(76,069
)
 
$
(84,193
)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
 
 
 
Depreciation and amortization of property and equipment and intangibles
43,477

 
50,035

Amortization of right-of-use asset
2,557

 

Amortization of content library
3,570

 
5,909

Non-cash interest expense, net
14,220

 
8,294

Change in fair value of derivatives
(938
)
 
91

Stock-based compensation
3,616

 
5,868

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

Loss (gain) on disposal of fixed assets
357

 
(16
)
Earnings from equity method investments
(4,646
)
 
(1,589
)
Provision for (recovery of) bad debts
830

 
(802
)
Deferred income taxes
(624
)
 
(7,906
)
Others
388

 
(650
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,992

 
5,211

Inventories
(1,420
)
 
(7,336
)
Prepaid expenses and other current assets
4,087

 
138

Content library
(1,647
)
 
(4,817
)
Other non-current assets
(12,463
)
 
(598
)
Accounts payable and accrued liabilities
11,474

 
(14,972
)
Deferred revenue
2,378

 
2,157

Other liabilities
10,521

 
2,349

Net cash provided by/(used in) operating activities
$
1,972

 
$
(42,827
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
$
(13,442
)
 
$
(24,472
)
Net cash used in investing activities
$
(13,442
)
 
$
(24,472
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of Second Lien Notes and equity warrants
$

 
$
150,000

Proceeds from borrowings on revolving credit facility
34,650

 

Repayment of revolving credit facility
(46,250
)
 
(78,000
)
Issuance costs

 
(6,968
)
Repayments of indebtedness
(9,399
)
 
(6,712
)
Borrowings from related party
7,350

 

Principal payments of finance leases
(710
)
 

Payment of satellite purchase financing
(2,300
)
 

Net cash (used in)/provided by financing activities
(16,659
)
 
58,320

Effects of exchange rate changes on cash, cash equivalents and restricted cash
199

 
(96
)
Net decrease in cash, cash equivalents and restricted cash
(27,930
)
 
(9,075
)
Cash, cash equivalents and restricted cash at January 1
39,955

 
51,868

Cash, cash equivalents and restricted cash at June 30
$
12,025

 
$
42,793

SIGNIFICANT NON-CASH ACTIVITIES:
 
 
 
Purchase consideration for equipment included in accounts payable
$
1,530

 
$
6,290

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

 

Financing of purchased satellite transponders included in property and equipment
8,500

 

Distributions from equity method investments offset against demand promissory note
4,410

 
3,430

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


9

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 and six months ended June 30, 2019. The results for the three and six months ended June 30, 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 June 30, 2019 included cash and cash equivalents of approximately $10.9 million, and available borrowing capacity under our 2017 Revolving Loans (as defined below) of approximately $38.9 million, for a total available liquidity of approximately $49.8 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. For the foreseeable future, the Company's ability to continue its operations will depend on its ability to obtain additional capital. The Company is currently evaluating a variety of capital raising options, including financings and the potential sale of elements of our Maritime, Enterprise and Government business unit, as well as the sale of certain joint venture interests. In July 2019, the Company was granted $40 million of additional capacity under the Senior Secured Term Loan due 2023 (“Term Loan”), in addition to term amendments to existing borrowings under the Term Loan (collectively “First Lien Amendment”). The Amendment reduced principal repayments over the next six quarters by an aggregate amount of approximately $26 million. Please refer to Note 17. Subsequent Event and Note 2. Basis of Preparation and Summary of Accounting Policies in our 2018 Form 10-K for additional details.

The Company believes that its current available current cash resources will be sufficient to fund planned operations into the third quarter of 2020. For the foreseeable future, the Company's ability to continue its operations will depend on its ability to obtain additional capital.



10


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:

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 and 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 and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Media & Content -- Licensing and Services
$
74,013

 
$
83,455

 
$
154,023

 
$
158,369

Connectivity -- Aviation Services
30,621

 
29,423

 
61,862

 
58,749

Connectivity -- Aviation Equipment
8,719

 
6,712

 
22,779

 
14,310

Connectivity -- Maritime & Land Services
40,495

 
43,550

 
79,722

 
85,836

Connectivity -- Maritime & Land Equipment
3,619

 
2,822

 
5,700

 
5,195

Total Revenues
$
157,467

 
$
165,962

 
$
324,086

 
$
322,459


Contract Assets and Liabilities

Aviation connectivity contracts involve performance obligations primarily relating to the delivery of equipment and services. Equipment is delivered upfront and in certain instances provided at a discount. Services are rendered and paid over time. Aviation connectivity revenue is allocated based upon the standalone selling price (SSP) methodology. The primary method used to estimate the SSP is the expected cost-plus margin approach. When the SSP exceeds the revenue allocation, the revenue to which the Company is entitled is contingent on performing the ongoing connectivity services and the Company records a contract asset accordingly. The balance as of June 30, 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. Contract payment terms are generally 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.



11


The following table summarizes the significant changes in the contract liabilities during the six months ended June 30, 2019 (in thousands):
 
June 30, 2019
Opening balance as of January 1
$
8,546

Revenue recognized during the period relating to opening balance
(5,006
)
Increase due to collections, excluding amounts recognized as revenue during the period
7,384

Closing Balance
$
10,924

 
 
Deferred revenue, current
10,672

Deferred revenue, non-current
252

 
$
10,924


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. The Company may perform an optional qualitative assessment, referred to as “Step 0” to judge indicators as to whether it is more likely than not that impairment exists. In the event that the Company elects to bypass Step 0 or if Step 0 indicates that it is more likely than not that there are qualitative indicators of impairment, the Company will perform a quantitative assessment of the respective fair values of the reporting units to determine the existence and amount of goodwill impairment. An impairment loss is 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.

Income Taxes
Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the Company’s position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits (UTBs) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company recognizes both accrued interest and penalties associated with uncertain tax positions as a component of Income tax (benefit) expense in the Consolidated Statements of Operations.
Adoption of New Accounting Pronouncements
On January 1, 2019, the Company adopted ASC 842, Leases (“ASC 842”), using the modified retrospective method. The Company has presented financial results and applied its accounting policies for the period beginning January 1, 2019 under ASC 842, while


12


prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to ASC 840. In connection with the adoption of ASC 842, the Company performed an analysis of contracts to ensure proper assessment of leases (or embedded leases) in existence as of January 1, 2019. The Company elected the package of practical expedients permitted under ASC 842, which allows the Company not to reassess 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 $23.0 million and associated operating lease liabilities of $25.9 million relating to real estate leases. See Note 3. Leases for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

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

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

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

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. The new model applies to all financial instruments, including those 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 anticipates no significant change in the methodology of estimating credit losses will be applied.

Note 3.    Leases

Our leasing operations consist of various arrangements, where we act either (i) as the lessee (primarily related to our corporate and regional offices, teleport co-location arrangements and a satellite bandwidth capacity), or (ii) as the lessor (for our owned equipment rented to connectivity customers). The foregoing table summarizes the impact of ASC 842 adoption on the Company’s condensed consolidated balance sheet as of June 30, 2019 (in thousands):


13


 
Impact of Change in Accounting Policy --
as of June 30, 2019
 
As reported
 
ASC 842 Impact
 
Legacy GAAP
ASSETS
Right-of-use assets, net
 
 
 
 
 
Operating leases(1)(4)
$
23,820

 
$
(23,820
)
 
$

Finance lease(2)(4)
10,731

 
(10,731
)
 

Total Right-of-Use Assets
$
34,551

 
$
(34,551
)
 
$

Net lease investment -- other non-current assets(3)(4)
1,267

 
(1,267
)
 

Total Lease Assets
$
35,818

 
$
(35,818
)
 
$

 
 
 
 
 
 
Property and equipment, net(4)

 
1,065

 
1,065

 
 
 
 
 
 
LIABILITIES
Operating lease liabilities(1) -- current portion
$
4,806

 
$
(4,806
)
 
$

                                           -- long-term
22,277

 
(22,277
)
 

Finance lease liabilities(2) -- current portion
1,996

 
(1,996
)
 

                                      -- long-term
17,117

 
(17,117
)
 

Total Lease Liabilities
$
46,196

 
$
(46,196
)
 
$

(1) This includes arrangements for: (i) corporate and regional office leases, and (ii) teleport co-location leases.
(2) This refers to the satellite bandwidth capacity arrangement assessed as a finance lease during the quarter ended June 30, 2019. The right-of-use asset balance as of June 30, 2019 included the unamortized lease incentive of $0.9 million and unamortized unfavorable contract liability of $7.2 million.
(3) This includes customer equipment arrangements classified as sales-type leases as of June 30, 2019.
(4) All existing arrangements as of January 1, 2019 were not re-assessed as allowed under our ASC 842 implementation. 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.

The following describes the nature of our various leasing arrangements and the impact to our statement of operations for the three and six months ended June 30, 2019:

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

The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total lease expense for the three and six months ended June 30, 2019 was $1.5 million and $3.1 million, respectively.

The Company’s leases have remaining lease terms of one year to 11 years. Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of 12 months or less, the Company does not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet.

Teleport Co-Location Operating Leases (as a Lessee)
The Company engages certain bandwidth providers for teleport co-location services to deliver bandwidth to our network. These co-location service agreements typically include provisions for physical rack space at a third-party teleport facility. We have determined that the space provided for our equipment constitutes an operating lease.

These leases have remaining lease terms of one year to 10 years as of June 30, 2019. The Company records lease expense on a straight-line basis over the lease term as part of cost of sales -- licensing and services. Total lease cost recorded for the three and six months ended June 30, 2019 was $0.4 million and $0.4 million, respectively.



14


Satellite Bandwidth Finance Lease (as a Lessee)
The Company maintains agreements with satellite service providers to provide for satellite bandwidth capacity. During the current quarter ended June 30, 2019, the Company modified an existing arrangement for bandwidth capacity. Based on our evaluation, we have concluded that the modified bandwidth capacity agreement met the definition of a finance lease under ASC 842. The Company has elected to combine lease and non-lease components, if applicable.

This finance lease has a remaining lease term of 7 years as of June 30, 2019. The Company records finance lease cost as part of cost of sales -- licensing and services and interest expense, net. The following table provides the components of the finance lease cost for the three and six months ended June 30, 2019:
 
Three and Six Months Ended June 30, 2019
Amortization of right-of-use asset
$
675

Interest accretion on finance lease liabilities
470

Total lease cost
$
1,145


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 continue to account for the equipment leases transactions as operating leases. We recognize lease payments for operating leases as licensing and services revenue in our consolidated statement of operations on a straight-line basis over the lease term.

We assess 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 the 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. We allocate the total consideration in a contract assessed with a sales-type lease using the expected cost-plus margin and residual methods for the lease and non-lease components, respectively.

The service revenues and recognized revenues on sales-type leases for the three and six months ended June 30, 2019 is presented in the following table (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Bandwidth service and equipment revenues(1)
$
36,154

 
$
70,261

Earned revenues on sales-type leases at commencement(2)
977

 
1,310

Total Licensing and Service Revenues -- Maritime and Land Connectivity
$
37,131

 
$
71,571

(1) This is presented as part of Revenues -- Licensing and services in our consolidated statement of operations, and includes the equipment lease component that is embedded in the overall bandwidth service arrangement. Since we adopted the practical expedient to not separate the lease and non-lease components as allowed with the ASC 842 implementation as of January 1, 2019, we will continue to classify existing embedded equipment arrangements as operating leases, to the extent unmodified.
(2) This includes the equipment lease revenues recognized at commencement date of the customer equipment arrangements classified as sales-type leases. As equipment leasing is a standard component in our connectivity business model, we present equipment revenues relating to these sales-type leases on a gross basis, and recognize a corresponding cost of sales equal to the net book value of the leased equipment. Interest income component is considered immaterial.

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 was assessed as insignificant as of June 30, 2019.

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

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



15


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):
 
Six Months Ended June 30, 2019
Supplemental cash flow information
 
Cash paid for amounts included in measurement of operating lease liabilities
$
3,103

Cash paid for amounts included in measurement of finance lease liabilities
$
940

Right-of-use-assets obtained in exchange for operating lease obligations
$
2,795

Right-of-use-assets obtained in exchange for finance lease obligations
$
19,582

Weighted average remaining lease term -- real estate operating leases
7.5 years

Weighted average remaining lease term -- teleport co-location operating leases
5.7 years

Weighted average remaining lease term -- finance lease
7.0 years

Weighted average IBR -- real estate operating leases
9.57
%
Weighted average IBR -- teleport co-location operating leases
9.07
%
Weighted average IBR -- finance lease
9.85
%

Maturity Analysis

Undiscounted Cashflows and Reconciliation to Consolidated Balance Sheet
The following table reflects a summary of the undiscounted cash flows on an annual basis and reconciliation to the Company’s lease assets and liabilities as of June 30, 2019 (in thousands):
 
As a Lessee
 
As a Lessor
Years Ending December 31,
Real Estate
 
Satellite Capacity
 
Teleport
Co-Location
 
Total
 
Equipment Held by Customers
Lease Classification
Operating
 
Finance
 
Operating
 
 
Sales-Type
2019 (remaining six months)
$
2,349

 
$
1,879

 
$
385

 
$
4,613

 
$
157

2020
4,766

 
3,758

 
722

 
9,246

 
314

2021
4,713

 
3,758

 
528

 
8,999

 
314

2022
4,412

 
3,758

 
438

 
8,608

 
314

2023
4,007

 
3,758

 
433

 
8,198

 
258

Thereafter
15,312

 
9,398

 
834

 
25,544

 
222

Total Future Lease Payments
$
35,559

 
$
26,309

 
$
3,340

 
$
65,208

 
$
1,579

Less: Imputed interest
(11,073
)
 
(7,196
)
 
(743
)
 
(19,012
)
 
(312
)
Present Value of Lease Liabilities
$
24,486

 
$
19,113

 
$
2,597

 
$
46,196

 
 
Net Investment in Sales-Type Leases
 
 
 
 
 
 
 
 
$
1,267


The following is a schedule of future minimum lease payments for our real estate 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




16


Maritime & Land MRC’s
The following is a schedule of future monthly recurring charges (“MRCs”) arising from our contractual arrangements with Maritime & Land Connectivity customers as of June 30, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining six months)
$
59,287

2020
53,423

2021
29,166

2022
6,953

Total Maritime and Land Monthly Recurring Charges
$
148,829


The following is a schedule of future MRCs arising from our contractual arrangements with Maritime and Land Connectivity customers as of December 31, 2018 (in thousands):
Years Ending December 31,
Amount
2019
$
89,111

2020
34,885

2021
20,594

2022
4,864

2023
2,396

Total Maritime and Land Monthly Recurring Charges
$
151,850


The book value of the equipment held by customers under operating leases, which are classified as “Equipment” in Note 4 - Property & Equipment, is as follows:
 
June 30, 2019
 
December 31, 2018
Equipment
 
 
 
Gross balance
$
57,611

 
$
62,012

Accumulated depreciation
(25,807
)
 
(25,232
)
Net Book Value
$
31,804

 
$
36,780


Note 4.    Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Leasehold improvements
$
11,112

 
$
6,579

Furniture and fixtures
2,729

 
2,147

Equipment
156,483

 
156,029

Computer equipment
16,993

 
18,561

Computer software
47,468

 
38,475

Automobiles
303

 
293

Buildings
7,065

 
8,005

Albatross (Company-owned aircraft)
456

 
447

Satellite transponders
70,806

 
62,306

Construction in-progress
3,600

 
7,771

Total property and equipment
$
317,015

 
$
300,613

Accumulated depreciation
(146,969
)
 
(124,036
)
Property and equipment, net
$
170,046

 
$
176,577




17


Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of sales
$
8,662

 
$
11,475

 
$
17,596

 
$
19,557

Sales and marketing
912

 
1,065

 
1,914

 
1,830

Product development
772

 
967

 
1,607

 
1,629

General and administrative
3,378

 
2,925

 
6,760

 
6,099

Total depreciation expense
$
13,724

 
$
16,432

 
$
27,877

 
$
29,115


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

 

 
51

 
51

Balance at June 30, 2019, net
$
54,022

 
$
22,130

 
$
83,461

 
$
159,613


As of June 30, 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.

During the three months ended March 31, 2019, due to a significant decline in our market capitalization, which was considered to be a triggering event by the Company, 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.

No triggering events were noted by the Company during the three months ended June 30, 2019. No impairments were recorded for the three and six months ended June 30, 2019 and 2018, respectively.



18



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, which approximate their expected cash flow patterns. The Company’s finite-lived intangible assets have been 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):
 
 
 
June 30, 2019
 
Weighted Average Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Existing technology -- software
5.2 years
 
$
36,799

 
$
26,806

 
$
9,993

Developed technology
8.0 years
 
7,317

 
5,259

 
2,058

Customer relationships
8.7 years
 
138,358

 
82,839

 
55,519

Backlog
3.0 years
 
18,300

 
17,793

 
507

Other
5.1 years
 
1,248

 
791

 
457

Total
 
 
$
202,022

 
$
133,488

 
$
68,534


 
 
 
December 31, 2018
 
Weighted Average Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
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 six months)
$
13,045

2020
22,263

2021
13,824

2022
7,907

2023
6,890

Thereafter
4,605

Total
$
68,534

    
We recorded amortization expense of $7.8 million and $10.4 million for the three months ended June 30, 2019 and 2018, respectively, and $15.6 million and $20.9 million for the six months ended June 30, 2019 and 2018, respectively.



19

Table of Contents



Note 7.    Equity Method Investments

In connection with the Company’s acquisition of Emerging Markets Communications (“EMC”) in July 2016 (the “EMC Acquisition”), the Company acquired 49% of the equity interests in each of EMC’s 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 June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
December 31, 2018
Current assets
$
44,359

 
$
40,224

Non-current assets
26,420

 
26,115

Current liabilities
18,056

 
15,880

Non-current liabilities
2,453

 
2,581


Following is the summarized results of operations information for these equity method investments on an aggregated basis for the three and six months ended June 30, 2019 and 2018 (in thousands):    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
37,548

 
$
29,068

 
$
69,589

 
$
64,905

Net income
8,077

 
4,200

 
14,842

 
10,098


The carrying values of the Company’s equity interests in WMS and Santander as of June 30, 2019 and December 31, 2018 were as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Carrying value in our equity method investments
$
83,369

 
$
83,135


As of June 30, 2019, there was an aggregate difference of $57.4 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.



20


Note 8.    Financing Arrangements

A summary of our borrowings as of June 30, 2019 and December 31, 2018 is set forth below (in thousands):
 
June 30, 2019
 
December 31, 2018
Senior secured term loan facility, due January 2023(+)
$
468,750

 
$
478,125

Senior secured revolving credit facility, due January 2022(+)(1)
42,415

 
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)
29,847

 
1,707

Unamortized bond discounts, fair value adjustments and issue costs, net
(61,183
)
 
(65,186
)
Total carrying value of debt
730,286

 
709,611

Less: current portion, net
(17,005
)
 
(22,673
)
Total non-current
$
713,281

 
$
686,938

(+) This facility is a component of the 2017 Credit Agreement (as defined below).
(1) As of June 30, 2019, the available balance under our $85.0 million revolving credit facility is $38.9 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 June 30, 2019, we had outstanding letters of credit of $3.7 million under the 2017 Credit Agreement. We expect to draw on the loans under our revolving credit facility (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 June 30, 2019,. The carrying amount, net of debt issuance costs and associated discount, was $70.8 million and $70.4 million as of June 30, 2019 and December 31, 2018, respectively.
(3) The principal amount outstanding of the second lien notes due June 30, 2023 (the “Second Lien Notes”) as set forth in the foregoing table was $168.0 million as of June 30, 2019. The carrying amount, net of debt issuance costs and associated discount, was $138.6 million and $128.2 million as of June 30, 2019 and December 31, 2018, respectively, and it includes approximately $9.5 million of PIK interest converted to principal during the six months ended June 30, 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 June 30, 2019, Other debts primarily consisted of (i) $6.2 million remaining financed amount for transponder purchases (payable in staggered dates until April 2020); (ii) $3.1 million advance against future dividends from a related party (refer to Note 9. Related Party Transactions for further details), and (iii) $19.1 million of finance lease liability relating to an assessed right-of-use over a satellite bandwidth capacity (refer to Note 3. Leases for further details).

On July 19, 2019, the Company entered into an amendment to the 2017 Credit Agreement and security agreement (the “2017 Credit Agreement Amendment”), which, among other things, upsized the existing senior secured term loan due in 2023 (the “Term Loan”) by $40 million, reduced scheduled principal repayments over the next six quarters by an aggregate amount of approximately $26 million and provided additional stock pledges (including the remaining 35% of the equity interests of first tier foreign subsidiaries that was previously not pledged) as collateral. Net of fees and expenses of approximately $5.5 million, the 2017 Credit Agreement Amendment will result in approximately $61 million of incremental liquidity over the next 18 months. Concurrently with entering into the 2017 Credit Agreement Amendment, the Company also entered into a second amendment to the securities purchase agreement and amendment to security agreement (the “Second Lien Amendment”) relating to the Second Lien Notes, which, among other things, removed the ability to make any cash interest payments under the Second Lien Notes so long as such payments are prohibited by the terms of the 2017 Credit Agreement, added collateral for the Second Lien Notes consistent with the additional collateral provided under the 2017 Credit Agreement and modified the prepayment premium schedule. See Note 17 Subsequent Event for more information.


21



The aggregate contractual maturities of all borrowings subsequent to June 30, 2019, factoring in the amendment to its term loan, are as follows (in thousands):
Years Ending December 31,
Amount
2019 (remaining six months)
$
11,133

2020
29,430

2021
25,041

2022
67,457

2023
575,500

Thereafter
82,908

Total
$
791,469


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. During the six months ended June 30, 2019, WMS approved and distributed dividends to the Company amounting to $4.4 million, which was offset against the outstanding loan balance.
Due to Santander
In connection with the EMC Acquisition, the Company acquired a 49% equity interest in Santander. The Company accounts for its interest in Santander using the equity method and includes our share of Santander’s profits or losses in Income from equity method investments in the condensed consolidated statements of operations. The Company purchased approximately $1.2 million and $2.4 million during the three and six months ended June 30, 2019, respectively, and approximately $2.4 million and $3.8 million for the three and six ended June 30, 2018, respectively, from Santander for their Teleport services and related network operations support services. As of June 30, 2019 and December 31, 2018, the Company owed Santander approximately $1.9 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 June 30, 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 six months ended June 30, 2019 and June 30, 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


22


When we consummated our business combination in January 2013 with Row 44 and Advanced Inflight Alliance AG, we entered into an amended and restated registration rights agreement with Par Investment Partners, L.P. (“PAR”), entities affiliated with Putnam Investments, Global Eagle Acquisition LLC (the “Sponsor”) and our then and current member of our board of directors (“Board of Directors” or “Board”), Harry E. Sloan and our then Board member, Jeff Sagansky, both of whom were affiliated with the Sponsor. Under that agreement, we agreed to register the resale of securities held by 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.

According to a Schedule 13G/A filed on February 7, 2018, and a Schedule 13D/A filed on June 6, 2019, respectively, neither Putnam Investments nor PAR hold more than 5% of our outstanding common stock, and as such each has ceased to be a related party. Mr. Sagansky ceased being a related party when he retired from our Board, effective June 24, 2019. Mr. Sloan continues to be a related party.

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

Note 10.    Commitments and Contingencies

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

The following is a schedule of future minimum commitments under movie and IPTV arrangements as of June 30, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining six months)
$
23,997

2020
14,453

2021
4,394

2022
800

Total
$
43,644


Satellite Bandwidth Capacity
The Company maintains agreements with satellite service providers to provide for satellite capacity. Except when an arrangement is assessed to meet the definition of a finance lease in accordance with ASC 842, in which case the expensing pattern is front-loaded, the Company expenses these satellite fees in the month the service is provided as a charge to licensing and services cost of sales.



23


The following is a schedule of future minimum satellite costs, across all connectivity end-markets and including the satellite bandwidth arrangement assessed as a finance lease, as of June 30, 2019 (in thousands):
Years Ending December 31,
Amount
2019 (remaining six months)
$
102,533

2020
73,321

2021
46,816

2022
34,473

2023
33,013

Thereafter
91,613

Total Future Payments
$
381,769


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 June 30, 2019, we also had outstanding letters of credit in the amount of $4.2 million, of which $3.7 million was issued under the letter of credit facility under the senior secured credit agreement that the Company entered into on January 6, 2017 (the “2017 Credit Agreement”).

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

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

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

On May 3, 2018, BMG filed suit in the United States District Court for the Central District of California against us and IFP for copyright infringement and related claims and unspecified money damages. The Court set the trial date for September 2019. We believe that a loss relating to this matter is probable, and therefore, we have reserved for this loss contingency in the amount of $1.0 million as of June 30, 2019. We intend to vigorously defend ourselves against this claim.



24


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 August 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 2013 Equity Plan, which is the Compensation Committee of the 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 2017 Omnibus Long-Term Incentive Plan (the “2017 Omnibus 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 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 and became available for grant thereunder. The 2017 Omnibus Plan separately made available 6,500,000 shares of the Company’s common stock for new issuance thereunder, in addition to those rolled over from the 2013 Equity Plan. The Administrator of the 2017 Omnibus Plan, which is the Compensation Committee of the 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


25


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 six months ended June 30, 2019 and 2018. As of June 30, 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 and six months ended June 30, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of services
$
89

 
$
80

 
$
116

 
$
260

Sales and marketing
34

 
98

 
87

 
291

Product development
112

 
139

 
180

 
450

General and administrative
2,092

 
1,913

 
3,233

 
4,867

Total
$
2,327

 
$
2,230

 
$
3,616

 
$
5,868

Total stock-based compensation expense includes the revaluation adjustment related to the Company’s cash-settled phantom stock options, which 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 income tax provisions of $3.3 million and $3.7 million for the three months ended June 30, 2019 and 2018, respectively, and an income tax provision of $3.4 million compared to an income tax benefit of $1.0 million for the six months ended June 30, 2019 and 2018, respectively. In general, our effective tax rate differs from the federal income tax rate due to the effects of foreign tax rate differences, foreign withholding taxes, changes in unrecognized tax benefits, changes in valuation allowance, and deferred tax expense on amortization of indefinite-lived intangible assets.

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

Due to uncertainty as to the realization of benefits from the Company's U.S. and certain international net deferred tax assets, including net operating loss carryforwards, the Company has a full valuation allowance reserved against such net deferred tax assets. The Company intends to continue to maintain a full valuation allowance on certain jurisdictions’ net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

As of June 30, 2019, and December 31, 2018, the liability for income taxes associated with uncertain tax positions was $7.3 million and $7.9 million, respectively. As of June 30, 2019, and December 31, 2018, the Company had accrued $6.4 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



26


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 and terrestrial wireless 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 and passenger service delivery.

Our Chief Executive Officer, the Company’s 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 and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Media & Content -- Licensing and Services
$
74,013

 
$
83,455

 
$
154,023

 
$
158,369

Connectivity -- Services
71,116

 
72,973

 
141,584

 
144,585

Connectivity -- Equipment
12,338

 
9,534

 
28,479

 
19,505

Total revenue
$
157,467

 
$
165,962

 
$
324,086

 
$
322,459

Cost of sales:
 
 
 
 
 
 
 
Media & Content -- Licensing and Services
$
57,604

 
$
58,456

 
$
115,273

 
$
112,910

Connectivity -- Services
58,704

 
63,848

 
124,304

 
121,885

Connectivity -- Equipment
7,909

 
4,427

 
18,834

 
10,415

Total
66,613

 
68,275

 
143,138

 
132,300

Total cost of sales
$
124,217

 
$
126,731

 
$
258,411

 
$
245,210

Gross Margin:
 
 
 
 
 
 
 
Media & Content
$
16,409

 
$
24,999

 
$
38,750

 
$
45,459

Connectivity
16,841

 
14,232

 
26,925

 
31,790

Total Gross Margin
33,250

 
39,231

 
65,675

 
77,249

Other operating expenses
48,476

 
60,764

 
99,991

 
128,228

Loss from operations
$
(15,226
)
 
$
(21,533
)
 
$
(34,316
)
 
$
(50,979
)

The Company’s total assets by segment were as follows (in thousands):
 
 
June 30, 2019
 
December 31, 2018
Media & Content
 
$
319,157

 
$
346,280

Connectivity
 
359,825

 
355,144

Total segment assets
 
678,982

 
701,424

Corporate assets
 
23,947

 
15,663

Total assets
 
$
702,929

 
$
717,087




27


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 measurements. 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.

Due to the short-term nature, carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019, and December 31, 2018, respectively (dollar values in thousands, other than per-share values):
 
June 30, 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)
396

 

 

 
396

Phantom stock options (3)
634

 

 

 
630

Total
$
1,144

 
$

 
$

 
$
1,144

 
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