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, 2018
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
FOR THE TRANSITION PERIOD FROM __________ TO ________

COMMISSION FILE NUMBER 001-35176

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12257090&doc=20
GLOBAL EAGLE ENTERTAINMENT INC.

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
(Outstanding as of May 10, 2018)
COMMON STOCK, $0.0001 PAR VALUE
 
91,057,616

SHARES*

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


Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2018

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
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
168,931

 
$
48,260

Restricted cash
3,388

 
3,608

Accounts receivable, net
102,264

 
113,545

Inventories
32,593

 
28,352

Prepaid expenses
13,888

 
13,486

Other current assets
14,431

 
20,923

TOTAL CURRENT ASSETS:
335,495

 
228,174

Content library
9,523

 
8,686

Property, plant and equipment, net
189,970

 
195,029

Goodwill
159,654

 
159,696

Intangible assets, net
112,019

 
122,582

Equity method investments
138,495

 
137,299

Other non-current assets
9,815

 
9,118

TOTAL ASSETS
$
954,971

 
$
860,584

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
196,967

 
$
205,036

Deferred revenue
8,602

 
6,508

Current portion of long-term debt
16,656

 
20,106

Other current liabilities
7,996

 
7,785

TOTAL CURRENT LIABILITIES:
230,221

 
239,435

Deferred revenue, non-current
1,081

 
1,079

Long-term debt
719,427

 
598,958

Deferred tax liabilities
9,028

 
16,247

Other non-current liabilities
30,256

 
30,340

TOTAL LIABILITIES
990,013

 
886,059

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

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

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 93,896,772 and 93,834,805 shares issued, 90,843,138 and 90,781,171 shares outstanding, at March 31, 2018 and December 31, 2017, respectively
10

 
10

Treasury stock, 3,053,634 shares at March 31, 2018 and December 31, 2017
(30,659
)
 
(30,659
)
 Additional paid-in capital
807,355

 
779,565

 Subscriptions receivable
(584
)
 
(578
)
 Accumulated deficit
(811,142
)
 
(773,791
)
 Accumulated other comprehensive loss
(22
)
 
(22
)
TOTAL STOCKHOLDERS’ DEFICIT
(35,042
)
 
(25,475
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
954,971

 
$
860,584

* See Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

Table of Contents

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

 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 
 
 
Licensing and services
$
146,526

 
$
143,643

Equipment
9,971

 
8,949

Total revenue
156,497

 
152,592

Cost of sales:
 
 
 
Licensing and services
112,414

 
102,872

Equipment
6,082

 
7,668

Total cost of sales
118,496

 
110,540

Gross margin
38,001

 
42,052

Operating expenses:
 
 
 
Sales and marketing
9,654

 
11,012

Product development
8,358

 
7,649

General and administrative
38,285

 
35,321

Provision for legal settlements
516

 
475

Amortization of intangible assets
10,747

 
11,008

Goodwill impairment

 
78,000

Total operating expenses
67,560

 
143,465

Loss from operations
(29,559
)
 
(101,413
)
Other (expense) income:
 
 
 
Interest expense, net
(15,597
)
 
(10,964
)
Loss on extinguishment of debt

 
(14,389
)
Income from equity method investments
1,161

 
1,539

Change in fair value of derivatives
564

 
2,920

Other (expense) income, net
438

 
(488
)
Loss before income taxes
(42,993
)
 
(122,795
)
Income tax (benefit) expense
(4,709
)
 
2,816

Net loss
$
(38,284
)
 
$
(125,611
)
 
 
 
 
Net loss per share – basic and diluted
$
(0.42
)
 
$
(1.47
)
Weighted average shares outstanding – basic and diluted
90,792

 
85,440

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

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

2

Table of Contents

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

 
Three Months Ended March 31,
 
2018
 
2017
Net loss
$
(38,284
)
 
$
(125,611
)
Other comprehensive income (loss):
 
 
 
Unrealized foreign currency translation adjustments

 
56

Other comprehensive income

 
56

Comprehensive loss
$
(38,284
)
 
$
(125,555
)

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


3

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
)
Other comprehensive income

 

 

 

 

 

 


 

 

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
)


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 CASH FLOWS (UNAUDITED)
(In thousands)


 
Three Months Ended March 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(38,284
)
 
$
(125,611
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization of property, plant, equipment and intangibles
23,250

 
20,720

Amortization of content library
2,400

 
4,622

Non-cash interest expense, net
1,877

 
1,212

Change in fair value of derivatives
(564
)
 
(2,920
)
Stock-based compensation
3,644

 
1,852

Impairment of goodwill

 
78,000

Loss (gain)on disposal of fixed assets
(525
)
 
452

Loss on extinguishment of debt

 
14,389

Earnings from equity method investments
(1,161
)
 
(1,539
)
Distributions from equity method investments

 
2,445

Provision for bad debts
(326
)
 
595

Deferred income taxes
(7,230
)
 
(351
)
Other
(325
)
 
(734
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
10,068

 
(6,581
)
Inventories
(5,246
)
 
(6,099
)
Prepaid expenses and other current assets
6,084

 
5,668

Content library
(2,627
)
 
(6,405
)
Other non-current assets
1,255

 
(4,484
)
Accounts payable and accrued liabilities
1,267

 
(10,515
)
Deferred revenue
2,279

 
381

Other current liabilities
211

 
(471
)
NET CASH USED IN OPERATING ACTIVITIES
(3,953
)
 
(35,374
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(15,244
)
 
(20,182
)
NET CASH USED IN INVESTING ACTIVITIES
(15,244
)
 
(20,182
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of Second lien notes and equity warrants
150,000

 
485,000

Issuance costs
(6,968
)
 
(12,313
)
Repayments of EMC indebtedness

 
(412,400
)
Proceeds from borrowings

 
50,000

Repayments of long-term debt
(3,414
)
 
(171
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
139,618

 
110,116

Effects of exchange rate changes on cash and cash equivalents
30

 
250

Net increase in cash and cash equivalents
120,451

 
54,810

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD1
51,868

 
68,678

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD1
$
172,319

 
$
123,488

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

 
$
28,500

1 March 31, 2017 figures have been recast to include the impact of the adoption of ASU 2016-18. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies.

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

5

Table of Contents



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

Global Eagle Entertainment Inc. is a Delaware corporation headquartered in Los Angeles, California. Global Eagle (together with its subsidiaries, “Global Eagle” or the “Company”, “we”, “us” or “our”) is a leading provider of media and satellite-based connectivity to fast-growing, global mobility markets across air, land and sea. Global Eagle offers a fully integrated suite of rich media content and seamless connectivity solutions that cover the globe. As of March 31, 2018, its business was comprised of two operating segments: Media & Content and Connectivity. See Note 13. Segment Information for further discussion on the Company’s reportable segments.

Prior to the Company’s acquisition (the “EMC Acquisition”) of Emerging Markets Communications (“EMC”) on July 27, 2016 (the “EMC Acquisition Date”), the Company’s business consisted of two operating segments: Content and Connectivity. (EMC was a communications services provider that offered land-based sites and marine vessels globally a multimedia platform delivering communications, Internet, live television, on-demand video, voice, cellular and 3G/LTE services. Following the EMC Acquisition, the acquired EMC business became our then third operating segment called Maritime & Land Connectivity, and we renamed our other two segments to be Media & Content and Aviation Connectivity. However, in the second quarter of 2017, we reorganized our business from three operating segments back into two operating segments—Media & Content and Connectivity. Our chief operating decision maker determined this was appropriate based on the similarities and synergies between the Aviation Connectivity and Maritime & Land Connectivity segments relating to satellite bandwidth and equipment used in those businesses as well as on our restructured reporting lines across all of our business departments. However, we will continue to have three separate reporting units for purposes of our goodwill impairment testing. See below and Note 13. Segment Information for a further discussion of our reportable segments.

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

Connectivity

The Connectivity operating segment provides its customers, including their passengers and crew, with (i) Wi-Fi connectivity via L, C, Ka and Ku-band satellite transmissions that enable access to the Internet, live television, on-demand content, shopping and travel-related information and (ii) operational solutions that allow customers to improve the management of their internal operations. The segment consists of our former Maritime & Land Connectivity segment and Aviation Connectivity segment, which were combined into a single Connectivity operating segment in the second quarter of 2017.


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

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

Basis of Presentation

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


6


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 financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's 2017 Form 10-K.

These 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 consolidated financial statements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 205-40 (“ASC Topic 205-40”), Presentation of Financial Statements—Going Concern. The Company’s principal sources of liquidity have historically been its debt and equity issuances and its cash and cash equivalents (which cash and cash equivalents amounted to $168.9 million as of March 31, 2018, and $48.3 million as of December 31, 2017, respectively). 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.

The assessment by the Company’s management that the Company will have sufficient liquidity to continue as a going concern is based on its completion on March 27, 2018 of a second lien notes issuance (as discussed in Note 8. Financing Arrangements) which provided net cash proceeds of approximately $143.0 million and on underlying estimates and assumptions, including that the Company: (i) timely files its periodic reports with the SEC; (ii) services its indebtedness and complies with the covenants (including the financial-reporting covenants) in the agreements governing its indebtedness; and (iii) remains listed on The Nasdaq Stock Market (“Nasdaq”), including maintaining a minimum stock price pursuant to Nasdaq’s listing rules.

If the Company is unable to satisfy the covenants and obligations contained in its senior secured credit agreement dated January 6, 2017 (as amended, the “2017 Credit Agreement”) the securities purchase agreement governing its second lien notes due June 30, 2023 (the “Second Lien Notes”) or the indenture governing its 2.75% convertible senior notes due 2035 (the “convertible notes”), in each case, or obtain waivers thereunder (if needed), then the debtholders and noteholders could have the option to immediately accelerate the outstanding indebtedness, which the Company may not have the ability to repay. In addition, if the Company is unable to remain in compliance with Nasdaq’s listing requirements, then Nasdaq could determine to delist the Company’s common stock from Nasdaq, which would in turn constitute a “fundamental change” under the terms of the indenture governing the convertible notes. This would give the convertible noteholders the option to require the Company to repurchase all or a portion of their convertible notes at a repurchase price equal to 100% of the principal amount thereof. In this event, the Company may not have the ability to repurchase the tendered notes.

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

Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements of the prior year and the accompanying notes to conform to the current year presentation. Effective January 1, 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) and as a result we reclassified the presentation of our statement of cash flows for the three months ended March 31, 2017 to conform with the new restricted cash guidance. Refer to section Adoption of New Accounting Pronouncements below.

Revenue Recognition

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


7


We recorded a net reduction to an opening accumulated deficit of $0.9 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the capitalization of contract costs previously expensed and the recognition of deferred revenue as of December 31, 2017 through accumulated deficit relating to time-based software licenses offset by the deferral of revenues for usage based licenses that were previously recognized upfront. The impact to revenues for the quarter ended March 31, 2018 was a net decrease of $0.7 million and a net decrease in cost of goods sold of $0.4 million primarily relating to revenues in our Media & Content segment as a result of applying Topic 606.

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

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

Media & Content

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

Licensing Revenues

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

Services Revenues

Advertising Services - The Company sells airline advertisement spots to customers through the use of insertion orders which normally range between one and six months. The Company typically prices advertisements based on a total guaranteed number of impressions within a predetermined play cycle for the advertisement. Pricing is also dependent on the type of advertisement (e.g., pop-up, banner, etc.) and on which media platform it will be displayed (e.g., airport lounge or in-flight entertainment system). The

8


total number of impressions are estimated upfront, based on reported flight levels and passenger data supplied by airlines. The Company acquires these advertising distribution rights from airlines via supplier agreements. These supplier agreements with airlines are normally revenue-share arrangements which provide the Company with exclusive distribution rights of the airline advertising spots and can also include a minimum guarantee payment from the Company to the airline. These agreements with airlines are generally for one to three year terms. Revenue is recognized over time as the advertisements are played and/or when the committed advertisement impressions have been delivered, which is generally evenly throughout the term and often the Company continues to display the advertisement after the minimum number of impressions is met. When the Company enters into revenue-sharing arrangements with the airlines, the Company evaluates whether it is the principal or agent in the arrangement with the airline. When the Company is considered the principal, the Company reports the underlying revenue on a gross basis in its Consolidated Statements of Operations, and records these revenue-sharing payments to the airline in service costs. In circumstances where the Company acts as an agent in the arrangement, the associated revenues are recorded net.

Lab Services - The Company addresses a variety of technical customer needs relating to content regardless of the particular IFE system being used. Content acquired from studios and producers is normally provided to the Company in certain languages, aspect ratios, and file sizes. The Company’s customers (e.g., airlines) have IFE systems requiring certain aspect ratios and file sizes. In addition, the customers request additional languages for their global passenger base. These technical services include encoding, editing and metadata services, as well as language subtitle and dubbing services, and are generally performed in-house in the Company’s technical facilities (collectively considered “Lab Services”). Lab Services are typically priced on a flat fee per month, ad hoc basis, or included in the content pricing. Revenue is recognized when the Lab Services performance obligation is complete and the underlying content has been accepted by and is available to the customer, typically on the license available date of the respective content.

Ad Hoc Services - The Company may perform additional non-recurring implementation, configuration, interactive development or other ad hoc services connected with the games and applications delivery. These services include embedding of customer logo(s) and population of content within applications (e.g., food and beverage content within the Company’s eMealMenu application).

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

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

Maritime and Land Service Revenue - The Maritime business provides satellite telecommunications services (“connectivity services”) through the Company’s private network that utilizes very small aperture terminal (“VSAT”) satellite technology for cruise ships and ferries, commercial shipping companies, yachts, and offshore drilling platforms.

9


The technology enables voice and data capabilities to customers with ocean-going vessels or ocean-based environments. For certain cruise ship customers, the Company also offers maritime live television services (“TV services”). The service offerings cover a wide range of end-to-end network service combinations for customers’ point-to-point and point-to-multipoint telecommunications needs. These offerings range from simple connections to customized private network solutions through a network that uses “multiple channel per carrier” or “single channel per carrier” technology with bandwidth satellite capacity and fiber optic infrastructure. The business also offers teleport services through its proprietary teleports located in Germany and the US. In conjunction with the Connectivity services, the Company also provides equipment as part of the service for which the Company retains ownership of the equipment throughout the term of the service. Revenue is recognized over time in accordance with the transfer of control, which is continuously as the customer receives the bandwidth/ connectivity services. Certain of the Company’s contracts involve a revenue sharing or reseller arrangement to distribute the connectivity services. The Company assesses these services under the principal versus agent criteria and determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.

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

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

Significant Judgments

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

Topic 606 requires the Company to estimate variable consideration. Service Level Agreement (“SLA”) or service issue/outage credits that are considered variable consideration (i.e., customer credits) and require estimation including the use of historical credit levels. These credits have historically not been material in the context of the customer contracts for the Maritime & Land or Media & Content businesses.

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 October 1 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 the then newly adopted 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

10


to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

The Company periodically analyzes whether any indicators of impairment have occurred. As part of these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price, to its net book value.

For the quarter ended March 31, 2017, the Company identified an event triggering a goodwill impairment assessment (a “triggering event”) due to a significant decline in the market capitalization of the Company. Accordingly, the Company assessed the fair value of its three reporting units as of March 31, 2017 and recorded a goodwill impairment charge of $78.0 million related to its Maritime & Land Connectivity reporting unit. This impairment was primarily due to lower than expected financial results of the reporting unit during the three months ended March 31, 2017 due to delays in new maritime installations, slower than originally estimated execution of EMC Acquisition-related synergies and other events that occurred in the first quarter of 2017. Given these indicators, the Company then determined that there was a higher degree of uncertainty in achieving its financial projections for this unit and as such, increased its discount rate, which reduced the fair value of the unit.
    
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 condensed consolidated statements of operations.

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

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

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

In accordance with SAB118, we have estimated the impacts of the Tax Act using information known at this time, including an income tax benefit of $4.6 million in the year ended December 31, 2017 reflecting the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent and no estimated tax impact related to the estimated repatriation toll charge of $18.5 million, fully offset by the current year net operating loss and corresponding release of valuation allowance. Our management is still evaluating the effects of the Tax Act provisions, and the assessment does not purport to disclose all change of the Tax Act that could have material positive or negative impacts on our current or future tax positions.


11



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.

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

 
March 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 (3)
904

 

 

 
904

Total
$
1,018

 
$

 
$

 
$
1,018


 
December 31, 2017
 
Quotes Prices in Active Markets
(Level 1)
 
 Significant Other Observable Inputs
(Level 2)
 
 Significant Other Unobservable Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Earn-out liability (1)
$
114

 
$

 
$

 
$
114

Liability Warrants (2)
20

 

 

 
20

Contingently issuable shares (3)
1,448

 

 

 
1,448

Total
$
1,582

 
$

 
$

 
$
1,582


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

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

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


12


Public SPAC Warrants. Through the quarter ended March 31, 2018, the fair value of the Company’s publicly-traded warrants (the “Public SPAC Warrants”) issued in the Company’s initial public offering in 2011 (which were recorded as derivative warrant liabilities) was determined by the Company using the quoted market prices for the Public SPAC Warrants traded over the counter. For the three months ended March 31, 2018 and 2017, due to the change in the fair value of these warrants, the Company recorded income of less than $0.1 million and $0.4 million, respectively. The Public SPAC Warrants expired on January 31, 2018 and are no longer exercisable. The change in value of these Public SPAC warrants is included in Change in fair value of derivatives in the condensed consolidated statements of operations.

The following table presents the fair value roll-forward reconciliation of Level 3 assets and liabilities measured at fair value basis for the three months ended March 31, 2018 (in thousands):

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

 
$
1,448

 
$
114

Change in value
(20
)
 
(544
)
 

Balance as of March 31, 2018
$

 
$
904

 
$
114


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, 2018 and December 31, 2017, respectively (in thousands):

 
March 31, 2018
 
December 31, 2017
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Senior secured term loan facility, due January 2023 (+)(1)
487,500

 
504,563

 
490,625

 
486,945

Senior secured revolving credit facility, due January 2022 (+)(2)
78,000

 
78,000

 
78,000

 
78,000

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

 
52,594

 
82,500

 
43,313

Second Lien Notes, due June 2023
124,626

 
120,527

 

 

Other debt (4)
8,823

 
8,823

 
9,075

 
9,075

Unamortized bond discounts and issue costs
(45,366
)
 

 
(41,136
)
 

 
736,083

 
764,507

 
619,064

 
617,333


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

(2)
This facility is a component of the 2017 Credit Agreement. The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments.

(3)
The fair value of the 2.75% convertible senior notes due 2035 is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at $13.0 million, and is included in the condensed consolidated balance sheets within “Additional paid-in capital” (see Note 11. Common Stock, Stock-Based Awards and Warrants). The principal amount outstanding of the 2.75% convertible senior notes due 2035 was $82.5 million as of March 31, 2018, and the carrying amounts in the foregoing table reflect this outstanding principal amount net of debt issuance costs and discount associated with the equity component.

(4)
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments.


Adoption of New Accounting Pronouncements

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

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which requires that a statement of cash flows explains the change during the period

13


in cash, cash equivalents, and amounts generally described as restricted cash. Amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We adopted the standard effective January 1, 2018 and as a result we reclassified the presentation of our statement of cash flows for the three months ended March 31, 2017 for restricted cash balances. For the three months ended March 31, 2017, adopting the standard resulted in an increase to our beginning-of-period and end-of-period cash, cash equivalents and restricted cash of $18.0 million and $18.1 million in the condensed consolidated statements of cash flows, respectively. In addition, removing the change in restricted cash from operating activities in the condensed consolidated statements of cash flows resulted in a decrease of $0.1 million in our cash used in operating activities for the three months ended March 31, 2017.

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

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends Accounting Standards Codification (“ASC”) 230, Statement of Cash Flows, the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. We adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update will require lease assets and lease liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements. ASU 2016-02 must be adopted using a modified retrospective transition, and provides for certain practical expedients. We have decided to adopt ASU 2016-02 effective in the first quarter of 2019. We are currently evaluating the impact of this standard 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 Cuts and Jobs Act. The ASU is effective for the Company beginning January 1, 2019, with early adoption permitted. We intend to adopt the ASU effective January 1, 2019. Management is currently evaluating the impact of this standard on our condensed consolidated financial statements.
    
Note 3.    Revenue

On January 1, 2018, we adopted ASU 2014-09 using the modified retrospective method and applied it to contracts which were not completed as of January 1, 2018. The following table presents the effect of the adoption of ASU 2014-09 on our consolidated balance sheet as of March 31, 2018 (in thousands):


14


 
March 31, 2018
 
Without ASC 606 Adoption
 
Effect of change Increase/ (Decrease)
 
As Reported
 
 
 
 
 
 
 Cash and cash equivalents
168,931

 
 
 
168,931

 Restricted cash
3,388

 
 
 
3,388

 Accounts receivable, net
104,440

 
(2,176
)
 
102,264

 Inventories
32,593

 
 
 
32,593

 Prepaid expenses
13,888

 
 
 
13,888

 Other current assets
14,431

 
 
 
14,431

 TOTAL CURRENT ASSETS
337,671

 
(2,176
)
 
335,495

 Content library
9,523

 


 
9,523

 Property, plant and equipment
189,970

 
 
 
189,970

 Goodwill
159,654

 
 
 
159,654

 Intangible assets, net
112,019

 
 
 
112,019

 Equity method investments
138,495

 
 
 
138,495

 Other non-current assets
8,712

 
1,103

 
9,815

 TOTAL ASSETS
956,044

 
(1,073
)
 
954,971

 
 
 
 
 
 
 Accounts payable and accrued liabilities
198,798

 
(1,831
)
 
196,967

 Deferred revenue
8,736

 
(134
)
 
8,602

 Current portion of long-term debt
16,656

 
 
 
16,656

 Other current liabilities
7,996

 
 
 
7,996

 TOTAL CURRENT LIABILITIES
232,186

 
(1,965
)
 
230,221

 Deferred revenue, non-current
1,081

 
 
 
1,081

 Long-term debt
719,427

 
 
 
719,427

 Deferred tax liabilities
9,028

 
 
 
9,028

 Other non-current liabilities
30,256

 
 
 
30,256

 TOTAL LIABILITIES
991,978

 
(1,965
)
 
990,013

 
 
 
 
 
 
 Preferred stock

 
 
 

 Common stock
10

 
 
 
10

 Treasury stock
(30,659
)
 
 
 
(30,659
)
 Additional paid-in capital
807,355

 
 
 
807,355

 Subscriptions receivable
(584
)
 
 
 
(584
)
Prior year accumulated deficit
(773,791
)
 
933

 
(772,858
)
Current year retained deficit
(38,243
)
 
(41
)
 
(38,284
)
 Accumulated other comprehensive loss
(22
)
 
 
 
(22
)
 TOTAL STOCKHOLDERS' DEFICIT
(35,934
)
 
892

 
(35,042
)
 TOTAL LIABILTIES & STOCKHOLDERS' DEFICIT
956,044

 
(1,073
)
 
954,971



The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statements of operations for the three months ended March 31, 2018 (in thousands, except per share amounts):


15


 
March 31, 2018
 
Without ASC 606 Adoption
 
Effect of change Increase/ (Decrease)
 
As Reported
Revenue:
 
 
 
 
 
Licensing and services
147,182

 
(656
)
 
146,526

Equipment
9,971

 

 
9,971

Total revenue
157,153

 
(656
)
 
156,497

Cost of Sales
 
 
 
 
 
Cost of sales:
 
 
 
 
 
Licensing and services
112,856

 
(442
)
 
112,414

Equipment
6,060

 
22

 
6,082

Total cost of sales
118,916

 
(420
)
 
118,496

Gross Margin
38,237

 
(236
)
 
38,001

Operating expenses:
 
 
 
 
 
Sales and marketing
9,676

 
(22
)
 
9,654

Product development
8,531

 
(173
)
 
8,358

General and administrative
38,285

 

 
38,285

Provision for legal settlements
516

 

 
516

Amortization of intangible assets
10,747

 

 
10,747

Total operating expenses
67,755

 
(195
)
 
67,560

Loss from operations
(29,518
)
 
(41
)
 
(29,559
)
Other income (expense):
 
 

 
 
Interest expense, net
(15,597
)
 

 
(15,597
)
Income from equity method investments
1,161

 

 
1,161

Change in fair value of derivatives
564

 

 
564

Other expense, net
438

 

 
438

Loss before income taxes
(42,952
)
 
(41
)
 
(42,993
)
Income tax benefit
(4,709
)
 

 
(4,709
)
Net loss
(38,243
)
 
(41
)
 
(38,284
)
 
 
 
 
 
 
Net loss per share – basic and diluted
(0.42
)
 
 
 
(0.42
)
Weighted average shares outstanding – basic and diluted
90,792

 
 
 
90,792



The following table represents a disaggregation of our revenue from contracts with customers for the three months ended March 31, 2018 and 2017 (in thousands):


16


 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 
 
 
Media & Content
 
 
 
Licensing & Services
$
74,915

 
$
76,380

Total Media & Content
74,915

 
76,380

 
 
 
 
Connectivity
 
 
 
Aviation Services
29,325

 
28,195

Aviation Equipment
7,598

 
6,563

Maritime & Land Services
$
42,286

 
39,068

Maritime & Land Equipment
2,373

 
2,386

Total Connectivity
81,582

 
76,212

 
 
 
 
Total revenue
$
156,497

 
$
152,592

    
Contract Assets and Liabilities

Aviation connectivity contracts involve performance obligations primarily consisting 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 principal. Where the SSP exceeds the revenue allocation, the revenue to which the Company is entitled is contingent on performing the ongoing connectivity services and we record a contract asset accordingly. The balance as of March 31, 2018 and December 31, 2017 of contract contingent revenue was not material.

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

The following table summarizes the significant changes in the contract liabilities balances during the period to March 31, 2018 (in thousands);

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

Adjustments as a result of cumulative catch-up adjustment
 
(190
)
Revenue recognized that was included in the contract liability balance at the beginning of the period
 
(2,544
)
Increase due to cash received, excluding amounts recognized as revenue during the period
 
4,830

Balance as of March 31, 2018
 
9,683

 
 
 
Deferred revenue, current
 
8,602

Deferred revenue, non-current
 
1,081

 
 
$
9,683


As of March 31, 2018, we had $1.1 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 19% of our remaining performance obligations as revenue in 2018, an additional 32% by 2020 and the balance thereafter.



17


Accounts Receivable, net

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

Accounts receivable consist of the following (in thousands):

 
March 31,
 
December 31,
 
2018
 
2017
Accounts receivable, gross
$
108,188

 
$
122,225

Less: Allowance for doubtful accounts
(5,924
)
 
(8,680
)
Accounts receivable, net
$
102,264

 
$
113,545


Movements in the balance for bad debt reserve and sales allowance for the three months ended March 31, 2018 and 2017 are as follows (in thousands):
 
March 31,
 
2018
 
2017
Beginning balance
$
8,680

 
10,091

(Recovery) additions charged to statements of operations
(326
)
 
595

Less: Bad debt write offs
(2,430
)
 
(426
)
Ending balance
$
5,924

 
$
10,260


Capitalized Contract Costs

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

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

The following table summarizes the significant changes in the contract assets balances during the period to March 31, 2018 (in thousands);

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

 

 

Increases as a result of cumulative catch-up adjustment
120

 
810

 
930

Capitalization during period
30

 
173

 
203

Amortization
(7
)
 
(22
)
 
(29
)
Balance as of March 31, 2018
142

 
961

 
1,103


Contract assets are included within Other current assets on our condensed consolidated balance sheet.

18


    
Practical Expedients, Policy Elections and Exemptions

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

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

The Company does not believe the impact of electing to use such practical expedients have a material impact on the financial statements.




Note 4.    Property, Plant and Equipment, net

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

 
March 31, 2018
 
December 31, 2017
Leasehold improvements
$
6,639

 
$
6,869

Furniture and fixtures
2,144

 
2,187

Equipment
130,395

 
128,046

Computer equipment
11,484

 
10,661

Computer software
33,302

 
31,518

Automobiles
309

 
311

Buildings
6,744

 
6,744

Albatross (Company-owned aircraft)
447

 
447

Satellite transponder
80,432

 
79,097

Construction in-progress
3,760

 
3,370

Total property, plant and equipment
275,656

 
269,250

Accumulated depreciation
(85,686
)
 
(74,221
)
Property, plant and equipment, net
$
189,970

 
$
195,029



Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):

 
Three Months Ended March 31,
 
2018
 
2017
Cost of sales
$
8,067

 
$
6,214

Sales and marketing
788

 
831

Product development
686

 
577

General and administrative
3,127

 
2,701

Total depreciation expense
$
12,668

 
$
10,323



19


Note 5.    Goodwill
    
The changes in the carrying amount of goodwill by segment were as follows (in thousands):
 
Aviation Connectivity Reporting Unit
 
Maritime & Land Connectivity Reporting Unit
 
Media & Content
 
Total
Balance as of December 31, 2017
 
 
 
 
 
 
 
Gross carrying amount
$
98,037

 
$
209,130

 
$
83,529

 
$
390,696

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

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

 
22,130

 
83,529

 
159,696

Impairment loss

 

 

 

Foreign currency translation adjustments
(16
)
 

 
(26
)
 
(42
)
Balance as of March 31, 2018
$
54,021

 
$
22,130

 
$
83,503

 
$
159,654

 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
 
 
 
 
 
 
Gross carrying amount
98,021

 
209,130

 
83,503

 
390,654

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

 
(231,000
)
Balance at March 31, 2018, net
$
54,021

 
$
22,130

 
$
83,503

 
$
159,654


Goodwill Impairments

For the quarter ended March 31, 2017, the Company identified a triggering event due to a significant decline in the market capitalization of the Company. Accordingly, the Company assessed the fair value of its three reporting units as of March 31, 2017 and recorded a goodwill impairment charge of $78.0 million related to its Maritime & Land Connectivity reporting unit. This impairment was primarily due to lower than expected financial results of the reporting unit during the three months ended March 31, 2017 due to delays in new maritime installations, slower than originally estimated execution of EMC Acquisition-related synergies and other events that occurred in the first quarter of 2017. Given these indicators, the Company then determined that there was a higher degree of uncertainty in achieving its financial projections for this unit and as such, increased its discount rate, which reduced the fair value of the unit.
 
For the quarter ended December 31, 2017, we again identified a triggering event due to a further decline in our market capitalization, which we believe was driven by investor uncertainty around our liquidity position and our then delinquent SEC filing status. Consequently, we performed another assessment of the fair value of our three reporting units as of December 31, 2017. In performing that reassessment, we adjusted the assumptions used in the impairment analysis and increased the discount rate used in the impairment model, which negatively impacted the fair value of the Maritime & Land Connectivity and Aviation Connectivity reporting units. Following this analysis, we determined that the fair value of the Media & Content reporting unit exceeded its carrying value, while the fair value of the Maritime & Land Connectivity and Aviation Connectivity reporting units were below their carrying values. As such, we recorded impairment charges of $45.0 million and $44.0 million in our Maritime & Land Connectivity and Aviation Connectivity reporting units, respectively, during the fourth quarter of 2017. The key assumptions underlying our valuation model used for accounting purposes, as described above, were updated to reflect the delays in realizing anticipated EMC Acquisition-related synergies previously discussed that impacted both the Maritime & Land Connectivity and Aviation Connectivity reporting units. Additionally, network expansion to meet current and anticipated new customer demand caused a step-up in bandwidth costs in our Maritime & Land and Aviation Connectivity reporting units. Our total goodwill impairment recorded for the full year ended December 31, 2017 was $167.0 million.

As of March 31, 2018 we completed a qualitative impairment assessment and concluded that no impairment trigger existed and no impairment to our goodwill balance was required at that time. Our Maritime & Land reporting unit, which is included in our Connectivity segment, had negative carrying amounts of assets. As of March 31, 2018, remaining goodwill allocated to this reporting unit was $22.1 million.


20


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 6.9 years).

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

 
 
 
March 31, 2018
 
Weighted Average Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Existing technology -- software
4.8
 
$
42,999

 
$
22,800

 
$
20,199

Existing technology -- games
5.0
 
12,331

 
12,331

 

Developed technology
8.0
 
7,317

 
4,116

 
3,201

Customer relationships
7.9
 
170,716

 
91,056

 
79,660

Backlog
3.0
 
18,300

 
10,167

 
8,133

Other
4.5
 
2,746

 
1,920

 
826

Total
 
 
$
254,409

 
$
142,390

 
$
112,019


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

 
$
20,209

 
$
22,790

Existing technology -- games
5.0
 
12,331

 
12,125

 
206

Developed technology
8.0
 
7,317

 
3,887

 
3,430

Customer relationships
7.9
 
170,716

 
85,160

 
85,556

Backlog
3.0
 
18,300

 
8,642

 
9,658

Other
4.5
 
2,746

 
1,804

 
942

Total
 
 
$
254,409

 
$
131,827

 
$
122,582


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

Year ending December 31,       
Amount
2018 (remaining nine months)
$
27,879

2019
28,647

2020
22,263

2021
13,824

2022
7,907

Thereafter
11,499

Total
$
112,019

    

We recorded amortization expense of $10.7 million and $11.0 million for the three months ended March 31, 2018 and 2017, respectively.

21



Note 7.    Equity Method Investments

In connection with the EMC Acquisition, the Company acquired 49% equity interests in each of WMS and Santander (which 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 (1) the summarized balance sheet information for these equity method investments on an aggregated basis as of March 31, 2018 and December 31, 2017, and (2) results of operations information for these equity method investments on an aggregated basis for the three months ended March 31, 2018 (in thousands):    

 
March 31, 2018
 
December 31, 2017
Current assets
$
37,520

 
$
35,859

Non-current assets
21,025

 
21,009

Current liabilities
17,068

 
15,151

Non-current liabilities
1,012

 
1,056


 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
Revenue
$
36,211

 
$
34,429

Net income
5,899

 
6,449


The carrying values of the Company’s equity interests in WMS and Santander as of March 31, 2018 and December 31, 2017 were as follows (in thousands):

 
March 31, 2018
 
December 31, 2017
Carrying value in our equity method investments
138,495

 
137,299


During the fourth quarter of 2017, in accordance with ASC 323, Investments—Equity Method and Joint Ventures, we completed an assessment of the recoverability of our equity method investments. We determined that the fair value of our investment in Santander exceeded the carrying value; however, the carrying value of our interest in our WMS joint venture exceeded the estimated fair value of our interest and accordingly we recorded an impairment charge of $16.7 million relating to our WMS equity investment. This WMS impairment was primarily as a result of lower than expected financial results for WMS for the year ended December 31, 2017 due to the loss of a WMS roaming partner. This resulted in a decline in revenue and margin which is not expected to recover in the foreseeable future, causing us to reduce our financial projections for the WMS business for 2018 and beyond.

As of March 31, 2018 there was an aggregate difference of $116.4 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.

Note 8.    Financing Arrangements

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


22


 
March 31, 2018
 
December 31, 2017
Senior secured term loan facility, due January 2023(+)
487,500

 
490,625

Senior secured revolving credit facility, due January 2022(+)(2)
78,000

 
78,000

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

 
82,500

Second Lien Notes, due 2023
124,626

 

Other debt
8,823

 
9,075

Unamortized bond discounts, fair value adjustments and issue costs, net
(45,366
)
 
(41,136
)
Total carrying value of debt
736,083

 
619,064

Less: current portion, net
(16,656
)
 
(20,106
)
Total non-current
$
719,427

 
$
598,958


(+) This facility is a component of the 2017 Credit Agreement.
(1) The principal amount outstanding of the 2.75% convertible senior notes due 2035 as set forth in the foregoing table was $82.5 million as of March 31, 2018, and is not the carrying amounts of this indebtedness (i.e., outstanding principal amount net of debt issuance costs and discount associated with the equity component).
(2)In the second quarter of 2018, we used a portion of the proceeds of the issuance of our Second Lien Notes to repay the full $78 million principal balance on our revolving credit facility, following which the full $85 million facility (reduced for approximately $6.2 million in letters of credit outstanding thereunder) became (and remains) available.

Senior Secured Credit Agreement (2017 Credit Agreement)

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

The 2017 Term Loans initially bore interest on the outstanding principal amount thereof at a rate per annum equal to (i) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) plus 6.00% or (ii) the Base Rate (as defined in the 2017 Credit Agreement) plus 5.00% or (iii) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) for each Interest Period (as defined in the 2017 Credit Agreement) plus 6.00%. The 2017 Credit Agreement initially required quarterly principal payments equal to 0.25% of the original aggregate principal amount of the 2017 Term Loans, with such payments reduced for prepayments in accordance with the terms of the 2017 Credit Agreement. The 2017 Revolving Loans initially bore interest at a rate per annum equal to (i) the Base Rate plus 5.00% or (ii) the Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus 6.00% until the delivery of financial statements for the first full fiscal quarter ending after January 6, 2017, the closing date of the 2017 Credit Agreement. Now that we have delivered those financial statements, the 2017 Revolving Loans bear interest at a rate based on the Base Rate, Eurocurrency Rate or EURIBOR (each as defined in the 2017 Credit Agreement) plus an interest-rate spread thereon that varies based on the Consolidated First Lien Net Leverage Ratio (as defined in the 2017 Credit Agreement). The spread thereon initially ranged from 4.50% to 5.00% for the Base Rate and 5.50% to 6.00% for the Eurocurrency Rate and EURIBOR. In May 2017 and October 2017, the interest rates and required quarterly principal payments for the 2017 Term Loans and the interest rates and interest-rate spreads for the 2017 Revolving Loans were amended.

The 2017 Credit Agreement also provides for the issuance of letters of credit in the amount equal to the lesser of $15.0 million and the aggregate amount of the then-remaining revolving loan commitment. As of March 31, 2018, we had outstanding letters of credit of $6.2 million under the 2017 Credit Agreement.

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

The 2017 Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things: create or incur liens on assets; make any investments, loans or advances; incur additional indebtedness, engage in mergers, dissolutions, liquidations or consolidations; engage in transactions with affiliates; make dispositions; and declare or make dividend

23


payments. The 2017 Credit Agreement requires us to maintain compliance with a maximum consolidated first lien net leverage ratio, as set forth in the 2017 Credit Agreement. One of the conditions to drawing on the revolving credit facility is confirmation that the representations and warranties in the 2017 Credit Agreement are true on the date of borrowing, and if we are unable to make that confirmation, including that no material adverse effect has occurred, we will be unable to draw down further on the revolver. As of March 31, 2017, we were not in compliance with reporting covenants relating to the delivery of financial statements and other information. However, we have obtained waivers from our lenders that extended the deadlines for delivery thereof, and we have not at any time been in default under the 2017 Credit Agreement.

2.75% Convertible Senior Notes due 2035

In February 2015, we issued an aggregate principal amount of $82.5 million of convertible senior notes due 2035 (the “Convertible Notes”) in a private placement. The Convertible Notes were issued at par, pay interest semi-annually in arrears at an annual rate of 2.75% and mature on February 15, 2035, unless earlier repurchased, redeemed or converted pursuant to the terms of the Convertible Notes. In certain circumstances and subject to certain conditions, the Convertible Notes are convertible at an initial conversion rate of 53.9084 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $18.55 per share), subject to adjustment. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2034, only if one or more of the following conditions has been satisfied: (1) during any calendar quarter beginning after March 31, 2015 if the closing price of our common stock equals or exceeds 130% of the respective conversion price per share during a defined period at the end of the previous quarter, (2) during the five consecutive business day period immediately following any 5 consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if specified corporate transactions occur, or (4) if we call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date. On or after November 15, 2034, until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes at any time, regardless of the foregoing circumstances.

On February 20, 2022, February 20, 2025 and February 20, 2030 and if we undergo a “fundamental change” (as defined in the indenture governing the Convertible Notes (the “Indenture”)), subject to certain conditions, a holder will have the option to require us to repurchase all or a portion of its Convertible Notes for cash at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date. If our common stock ceases to be listed or quoted on Nasdaq, this would constitute a “fundamental change,” as defined in the Indenture, and the holders of the Convertible Notes would have the right to require us to repurchase all or a portion of their convertible notes at a repurchase price equal to 100% of the principal amount of our convertible notes to be repurchased. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) or if we deliver a redemption notice prior to February 20, 2022, we will, in certain circumstances, increase the conversion rate for a holder that converts its Convertible Notes in connection with such make-whole fundamental change or redemption notice, as the case may be.

The Company may not redeem the Convertible Notes prior to February 20, 2019. The Company may, at its option, redeem all or part of the Convertible Notes at any time (i) on or after February 20, 2019 if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide written notice of redemption and (ii) on or after February 20, 2022 regardless of the sale price condition described in clause (i), in each case, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Upon conversion of any Convertible Note, we shall pay or deliver to the converting noteholder cash, shares of common stock or a combination of cash and shares of our common stock, at our election.

The Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component of $69.5 million was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component was calculated to be $13.0 million, and represents the conversion option which was determined by deducting the fair value of the liability component from the principal amount of the notes. This difference represents a debt discount that is amortized to interest expense over the term of the Convertible Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
   

24


In accounting for the direct transaction costs (the “issuance costs”) related to the Convertible Notes, we allocated the total amount of issuance costs incurred to the liability and equity components based on their relative values. We recorded issuance costs of $1.8 million and $0.3 million to the liability and equity components, respectively. Issuance costs, including fees paid to the initial purchasers who acted as intermediaries in the placement of the Convertible Notes, attributable to the liability component are presented in the condensed consolidated balance sheets as a direct deduction from the carrying amount of the debt instrument and are amortized to interest expense over the term of the Convertible Notes in the condensed consolidated statements of operations. The issuance costs attributable to the equity component are netted with the equity component and included within Additional paid-in capital in the condensed consolidated balance sheets. Interest expense related to the amortization expense of the issuance costs associated with the liability component was not material during the three months ended March 31, 2018.

As of March 31, 2018 and December 31, 2017, the outstanding principal on the Convertible Notes was $82.5 million, and the outstanding Convertible Notes balance, net of debt issuance costs and discount associated with the equity component, was $69.9 million and $69.7 million, respectively. As of March 31, 2018, the equity component of the Convertible Notes was $13.0 million. Subsequent to March 31, 2017, we became non-compliant with our obligations under the Indenture relating to the delivery to the Indenture trustee of our 2016 annual financial statements and interim financial statements for the quarters ended March 31, June 30 and September 30, 2017, and such non-compliance constituted an Event of Default (as defined in the Indenture) under the Indenture. As a result, immediately after the occurrence of the Event of Default and through such time as the noncompliance was continuing, we incurred additional interest on the Convertible Notes at a rate equal to (i) 0.25% per annum of the principal amount of the Convertible Notes outstanding for each day during the first 90 days after the occurrence of each Event of Default and (ii) 0.50% per annum of the principal amount of the Convertible Notes outstanding from the 91st day until the 180th day following the occurrence of each such Event of Default. (The Company cured its non-compliance relating to the delivery of the 2016 annual financial statements by filing its 2016 Annual Report on Form 10-K on November 17, 2017 and its interim financial statements by filing its Quarterly Reports on Form 10-Q for the first three quarters of 2017 on January 31, 2018.) However, the maximum additional interest was capped at 0.50% per annum irrespective of how many Events of Default were in existence at any time for our failure to deliver any required financial statements. The aggregate penalty interest incurred during this period of non-compliance was approximately $0.2 million.

Second Lien Notes due 2023 and Warrants

On March 27, 2018 (the “Closing Date”) we issued to Searchlight II TBO, L.P. (“Searchlight”) $150.0 million in aggregate principal amount of its Second Lien Notes, and to Searchlight II TBO-W L.P. warrants to acquire an aggregate of 18,065,775 shares of the Company’s common stock, par value $0.0001 per share (the “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” and, together with the Penny Warrants, the “Warrants”), for aggregate price of $150.0 million.

The Second Lien Notes mature on June 30, 2023. Interest on the Second Lien Notes will initially be payable in kind (compounded semi-annually) at a rate of 12.0% per annum. Interest will automatically convert to accruing cash pay interest at a rate of 10.0% per annum upon the earlier of (i) March 15, 2021 and (ii) the last day of the most recently ended fiscal quarter of the Company for which financial statements have been delivered for which the Company’s “total net leverage ratio” has decreased to 3.39 to 1.0. Our “total net leverage ratio” is as defined in the purchase agreement relating to the Second Lien Notes (the “Purchase Agreement”), and uses a “Consolidated EBITDA” definition from the Purchase Agreement that is different than the “Adjusted EBITDA” figure that we publicly report to our investors.

Each of the Company’s subsidiaries that guarantees the Company’s obligations under its 2017 Credit Agreement guarantee the Second Lien Notes (the “Guarantors”) pursuant to a guaranty agreement (the “Guaranty”). The Second Lien Notes and the guarantees thereof are subordinated in right of payment to the obligations of the Company and the Guarantors under the 2017 Credit Agreement and are secured by the same assets securing the obligations of the Company and the Guarantors under the 2017 Credit Agreement on a second lien basis, subject to the terms of an intercreditor and subordination agreement (the “Intercreditor Agreement”) among the Company, the Guarantors, the Administrative Agent and the collateral agent.

Prior to the third anniversary of the Closing Date, the Company may redeem the Second Lien Notes at a price equal to 100.0% of the principal amount of the Second Lien Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to (but excluding) the date of redemption. Thereafter, each Note will be redeemable at 105.0% of the principal amount thereof from the third anniversary of the Closing Date until (and excluding) the fourth anniversary of the Closing Date, at 102.5%

25


of the principal amount thereof from the fourth anniversary of the Closing Date until (and excluding) the fifth anniversary of the Closing Date, and thereafter at 100.0% of the principal amount thereof, plus, in each case, accrued and unpaid interest thereon, if any, to (but excluding) the redemption date. Upon a “change of control” (as defined in the Purchase Agreement), the Company must offer to purchase the Second Lien Notes at a price in cash equal to 101% of the principal amount of such Second Lien Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of purchase.

The Purchase Agreement contains affirmative and negative covenants of the Company and its subsidiaries consistent with those in the 2017 Credit Agreement (including limitations on the amount of first lien indebtedness that may be incurred) and contains customary events of default, upon the occurrence and during the continuance of which the majority holders of the Second Lien Notes may declare all obligations under the Second Lien Notes to become immediately due and payable. There are no financial “maintenance covenants” in the purchase agreement for the Second Lien Notes.

On the Closing Date, the Company and the Guarantors entered into a security agreement with the Collateral Agent (the “Security Agreement”). Under the Security Agreement, each of the Company and the Guarantors granted and pledged to the Collateral Agent, to secure the payment and performance in full of all of the obligations under the Notes, a security interest in substantially all of its respective assets, and all proceeds and products and supporting obligations in respect thereof, subject to customary limitations, exceptions, exclusions and qualifications, and the Security Agreement is subject to the terms of the Intercreditor Agreement.

Searchlight will not be permitted to transfer its Second Lien Notes before January 1, 2021, except to its controlled affiliates.

The Warrants

The Warrants vest and are exercisable at any time and from time to time after the Vesting Date (as defined below) until on or prior to the close of business on the tenth anniversary of the Closing Date. The Warrants vest and become exercisable on January 1, 2021 (the “Vesting Date”), if the 45-day volume-weighted average price of our common stock (as reported by Nasdaq) is at or above (i) $4.00, in the case of the Penny Warrants, and (ii) $2.40, in the case of the Market Warrants, in each case at any time following the Closing Date.

The holders of the Warrants cannot exercise the Warrants if and to the extent, as a result of such exercise, either (i) such holder’s (together with its affiliates) aggregate voting power on any matter that could be voted on by holders of the Common Stock would exceed 19.9% of the maximum voting power outstanding or (ii) such holder (together with its affiliates) would beneficially own more than 19.9% of our then outstanding common stock, subject to customary exceptions in connection with public sales or the consummation of a specified liquidity event described in the Warrants.

The Warrants also include customary anti-dilution adjustments.

Pursuant to the terms of a Warrantholders Agreement between us and Searchlight II TBO-W L.P., entered into on the Closing Date, the Company increased the size of its board of directors (the “Board”) to eleven members, and appointed each of Eric Zinterhofer and Eric Sondag as Class III directors (as such term is used in the Company’s certificate of incorporation) of the Board, with a term expiring in 2020. For so long as Searchlight and its controlled affiliates beneficially own at least 25% of the number of Penny Warrants issued on the Closing Date (and/or the respective shares of our common stock issued in connection with the exercise of the Penny Warrants), Searchlight shall have the right to nominate a number (rounded up to the nearest whole number) of individuals for election to the Board equal to the product of the following (such individuals, the “Searchlight Nominees”):

the number of directors then serving on the Board, multiplied by
a fraction, the numerator of which is the total number of outstanding shares of our common stock underlying the Penny Warrants beneficially owned by Searchlight (after giving effect to the exercise of the Penny Warrants) and the denominator of which is the sum of (A) the total number of outstanding shares of our common stock plus (B) the number of shares of our common stock underlying the Penny Warrants that have not yet been exercised;

Searchlight will not be entitled to nominate more than one individual to the Board if it beneficially owns less than 50% of the Penny Warrants (or the underlying shares of common stock) issued or issuable on the Closing Date. In no event will Searchlight be entitled to nominate more than two individuals to the Board.


26


Searchlight’s rights to Board representation terminate if Searchlight and its affiliates have an employee, member or partner (other than a limited partner who is an investor in Searchlight) who is a director or executive officer of a competitor of the Company, or if Searchlight has a portfolio company that is a competitor of the Company.

Stock Buy-back Restriction

Until the earlier of (i) the date on which Searchlight no longer beneficially owns at least 25% of the number of Market Warrants issued on the Closing Date (and/or the respective shares of Common Stock issued in connection with the exercise of the Market Warrants) and (ii) January 1, 2021, without the prior consent of Searchlight, the Company will not directly or indirectly redeem, purchase or otherwise acquire any equity securities of the Company for a consideration per share (plus, in the case of any options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) greater than the market price (as defined in the Warrants) per share of common stock immediately prior to the earlier of (x) the announcement of such acquisition or (y) such acquisition.

Warrant Transfer Restrictions

Searchlight is not permitted to transfer its Warrants prior to January 1, 2021, except to its controlled affiliates or in connection with certain tender offers, exchange offers, mergers or similar transactions. The Warrants and the underlying shares of common stock are freely transferable by Searchlight on and after January 1, 2021.

Registration Rights

Searchlight has customary shelf, demand and piggyback registration rights with respect to the common stock (including shares of common stock underlying the Warrants) that it holds, including demand registrations and underwritten “shelf takedowns,” subject to specified restrictions, thresholds and the Company’s eligibility to use a registration statement on Form S-3.

Participation Rights

Until the earlier of (i) the fifth anniversary of the Closing Date and (ii) the date Searchlight no longer holds at least 50% of the Penny Warrants (or the respective shares of common stock underlying such Penny Warrants), Searchlight has participation rights with respect to issuances of common equity securities by the Company, subject to exceptions. These rights entitle Searchlight to opt to participate in future issuances by the Company of common equity or common equity-linked securities, subject to customary exceptions.

Standstill

Until the earlier of (i) the 18-month anniversary of the Closing Date and (ii) the date on which Searchlight owns less than
10% of the outstanding common stock (directly or on an as-exercised basis), neither Searchlight nor its affiliates may (unless invited by the Company’s Board) (a) acquire any voting equity securities or material assets of the Company if Searchlight (together with its affiliates) would beneficially hold in the aggregate more than 9.9% of the Company’s 2.75% convertible senior notes due 2035 or 9.9% of the Company’s common stock, (b) acquire all or a material part of the Company or its subsidiaries, (c) make, or in any way participate in any “proxy contest” or other solicitation of proxies, (d) form, join or in any way participate in a “group” (within the meaning of Section 13 (d)(3) of the Securities Exchange Act of 1934, as amended) with respect to any voting securities of the Company or any of its subsidiaries, (e) seek to influence or control the Company’s management or policies, (f) directly or indirectly enter into any discussions, negotiations, arrangements or understandings with any other person with respect to any of the foregoing activities, (g) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection any of the foregoing activities or (h) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing.

Amendment to Senior Secured Credit Agreement

In connection with the issuance of the Second Lien Notes, on March 8, 2018, the Company entered into the Sixth Amendment to the 2017 Credit Agreement (the “Sixth Amendment”), among the Company, the Guarantors, the lenders party thereto and the Administrative Agent. The Sixth Amendment amends the terms of the 2017 Credit Agreement, in part, by:


27


resetting the non-call period by modifying the definition of the “Relevant Call Date” to mean June 30, 2020;
modifying the mandatory prepayments provision therein to require the Company, following the filing of its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and the delivery of a budget and certain projections for the 2018 fiscal year to Searchlight, to repay all then outstanding revolving credit loans outstanding under the 2017 Credit Agreement, including outstanding interest thereon;
modifying the debt covenant therein to permit the incurrence of indebtedness in connection with the issuance of $150,000,000 in aggregate principal amount of the Second Lien Notes and any refinancing thereof and adding a corresponding exception to the lien covenant; and
modifying the junior-debt-prepayments covenant therein to prohibit the Company from making interest payments in respect of the Second Lien Notes in cash prior to the earlier of (i) March 15, 2021 and (ii) such time as the Company’s “total net leverage ratio” has decreased to 3.39 to 1.0.

The Company did not pay the lenders any fees in connection with the Sixth Amendment.

The aggregate contractual maturities of all borrowings due subsequent to March 31, 2018 are as follows (in thousands):

Years Ending December 31,
Amount
2018 (remaining nine months)
$
16,656

2019
22,413

2020
25,416

2021
25,046

2022
103,047

Thereafter
588,871

Total
$
781,449


Note 9.    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.


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The following is a schedule of future minimum commitments under movie and IPTV arrangements as of March 31, 2018 (in thousands):
Years Ending December 31,
Amount
2018 (remaining nine months)
$
51,376

2019
17,947

2020
6,283

2021
750

2022
750

Thereafter

Total
$
77,106


Operating Lease Commitments

The Company leases its operating facilities under non-cancelable operating leases that expire on various dates through 2025. Some of our operating leases provide us with the option to renew for additional periods. Where operating leases contain escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. Some of our operating leases require the payment of real estate taxes or other occupancy costs, which may be subject to escalation. The Company also leases some facilities and vehicles under month-to-month arrangements.

The following is a schedule of future minimum lease payments under operating leases as of March 31, 2018 (in thousands):

Years Ending December 31,
Amount
2018 (remaining nine months)
$
4,666

2019
4,994

2020
3,513

2021
3,413

2022
2,981

Thereafter
5,107

Total
$
24,674


Total rent expense for the three months ended March 31, 2018 and 2017 was $2.0 million and $1.8 million, respectively.

Capital Leases

The Company leases certain computer software and equipment under capital leases that expire on various dates through 2020. The current portion and non-current portion of capital lease obligations are included in Current portion of long-term debt and Long-term debt, respectively, on the condensed consolidated balance sheets. As of March 31, 2018, future minimum lease payments under these capital leases were as follows (in thousands):


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Year Ending December 31,
Amount
2018 (remaining nine months)
$
774

2019
731

2020
371

Total minimum lease payments
1,875

Less: amount representing interest
(225
)
Present value of net minimum lease payments
1,650

Less: current portion
(679
)
Capital lease obligation, non-current
$
971


Satellite Capacity Commitments

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

The following is a schedule of future minimum satellite costs as of March 31, 2018 (in thousands):

Years Ending December 31,
Amount
2018 (remaining nine months)
$
83,497

2019
96,341

2020
70,395

2021
38,785

2022
34,276

Thereafter
116,672

Total
$
439,966


Other Commitments

In the normal course of business, the Company enters into future purchase commitments with some of its connectivity vendors to secure future inventory for its customers and the development pertaining to engineering and antenna projects. At March 31, 2018, the Company also had outstanding letters of credit in the amount of $6.8 million, of which $6.2 million were issued under the letter of credit facility under the 2017 Credit Agreement. See Note 8. Financing Arrangements.

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”) for copyright infringement and related claims and unspecified money damages. IFP is a direct subsidiary of Global Entertainment AG (formally AIA) and as such is our indirect subsidiary. In August 2016, we entered into settlement agreements with major record labels and publishers, including UMG, to settle music copyright infringement and related claims

30


(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. 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 has not yet set a trial date. We believe that a material loss relating to this matter is reasonably possible, but we are currently unable to estimate the amount of the potential loss at this time due to the lack of specificity in the complaint; the fact that we have not yet completed our internal investigation; the speculative nature of the claimed damages; and the varying theories and wide range of statutory damages under which damages could be measured. As such, we have not accrued any amount for this loss contingency. 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 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 its Southwest Airlines portal so that SwiftAir could market its destination deal product to Southwest’s passengers. In 2013, after Southwest Airlines decided not to proceed with SwiftAir’s destination deal product, Row 44 terminated the contract. In its lawsuit, SwiftAir seeks approximately $9 million in monetary damages against Row 44 and Southwest Airlines. The Court has scheduled the trial for this matter in September 2018. We believe that a material loss relating to this matter is reasonably possible, but we are currently unable to estimate the amount of the potential loss at this time due to the speculative nature of the claimed damages and the varying theories under which damages could be measured, and as such have not accrued any amount for this loss contingency. We intend to vigorously defend ourselves against this claim. In addition, even if we are successful in our defense of this claim, we potentially may owe an obligation to indemnify Southwest Airlines if they are not successful in this litigation.

STM Litigation. On April 12, 2016, STM Atlantic N.V. and STM Group, Inc. (jointly, the “STM Sellers”) filed a breach-of-contract action in Delaware Superior Court against EMC relating to EMC’s 2013 acquisition of STM Norway AS, STMEA (FZE), Vodanet Telecomuniçacões Ltda. and STM Networks from the STM Sellers. The STM Sellers alleged, among other things, that EMC breached earn-out provisions in the purchase agreement by failing to develop and sell sat-link technology following the acquisition closing. We believed that a material loss relating to this matter was reasonably possible, but we were previously unable to estimate the amount of such loss, and as such did not accrue a reserve for this loss contingency. In February 2018, EMC settled the lawsuit with STM Sellers, and pursuant to the purchase agreement whereby we purchased the EMC business, the seller of the EMC business indemnified us in full for this claim and all related legal expenses.

Securities Class Action Litigation. On February 23, 2017 and on March 17, 2017, following our announcement that we anticipated a delay in filing our Annual Report for the year ended December 31, 2016 (or “2016 Form 10-K”) and that our former CEO and former CFO would separate from us, three putative securities class action lawsuits were filed in United States District Court for the Central District of California. These lawsuits alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against us, our former CEO and two of our former CFOs. The plaintiffs voluntarily dismissed two of these lawsuits. The third lawsuit, brought by putative stockholder M&M Hart Living Trust and Randi Williams (the “Hart complaint”), alleged that we and the other defendants made misrepresentations and/or omitted material information about the EMC Acquisition, our projected financial performance and synergies following that acquisition, and the impact of that acquisition on our internal controls over financial reporting. The plaintiffs sought unspecified damages, attorneys’ fees and costs. On November 2, 2017, the Court granted our and the other defendants’

31


motion to dismiss the Hart complaint, and dismissed the action with prejudice. On November 30, 2017, the plaintiffs filed a motion to alter or amend the Court’s previous judgment of dismissal to permit them to file a further amended complaint. On January 8, 2018 the Court denied the plaintiffs’ motion to alter or amend the previous judgment. On January 29, 2018, the plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit from the Court’s denial of the plaintiffs’ motion to alter or amend the judgment. We expect the Ninth Circuit to hear the appeal in late 2018 or early 2019. We believe that a loss relating to this matter is probable, but we believe that it is unlikely to be material and therefore have accrued an immaterial amount related to this loss contingency. We intend to vigorously defend ourselves against this claim.

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 10.    Related Party Transactions

Loan Agreement with Lumexis

On February 24, 2016, we entered into a loan agreement (the “Loan Agreement”) with Lumexis Corporation (“Lumexis”), a company that provided in-flight entertainment systems to airlines. Lumexis was at the time majority-owned by PAR Investment Partners, L.P. (“PAR”), which is our largest stockholder. When we entered into the Loan Agreement, Mr. Shapiro, our then Board Chair and now our Board’s Lead Independent Director, was also a Managing Partner of PAR and a member of Lumexis’s board of directors.

The Loan Agreement provided for extensions of credit by us to Lumexis of up to $5.0 million. After due consideration, our Board determined that it was appropriate and in our best interests and our stockholders to enter into the Loan Agreement given (x) Lumexis’ position as a key supplier to flydubai (one of our connectivity customers), (y) Lumexis’s position as a key supplier to another then-potential connectivity customer of our company and (z) Lumexis’s future M&A prospects. Our Board further determined that the parties’ relationships did not give rise to any material conflict of interest (including Mr. Shapiro) in entering into the Loan Agreement. Mr. Shapiro recused himself from our Board’s decision to approve the transaction.


The Loan Agreement qualifies Lumexis as our variable interest entity. In accordance with ASC 810, Consolidation, we were not deemed to be the primary beneficiary of Lumexis because we did not hold any power over Lumexis’s activities that most significantly impacted its economic performance. Therefore, Lumexis was not subject to consolidation into our financial reporting. The maximum exposure to loss as a result of the Loan Agreement was the outstanding principal balance of the loan and any accrued interest thereon.

The borrowings under the Loan Agreement were evidenced by a senior secured promissory note (the “Note”) and bore interest at a per annum rate of 15%. The outstanding principal and accrued interest thereon were payable in full on December 31, 2016. As a result of information provided by Lumexis in June 2016 as to the note’s collectability and Lumexis’s insolvency, we wrote off the Note during the three months ended June 30, 2016 and discontinued accruing interest receivable.

On December 5, 2016, we, Lumexis and PAR entered into a Partial Cancellation of Debt and Acceptance of Collateral, which provided a transfer of certain assets in the amount of $0.2 million to us in partial satisfaction of the Lumexis’ principal amount of the outstanding debt. On January 6, 2017, we—as the senior-most secured creditor of Lumexis—then foreclosed on substantially all of Lumexis’s remaining assets pursuant to a public foreclosure auction. During the third quarter of 2017, the Company entered into an arrangement with flydubai to sell to flydubai certain of the assets acquired. The arrangement resulted in a recovery of approximately $0.2 million during the three months ended September 30, 2017 and a further $0.1 million during the three months ended March 31, 2018.

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Due from WMS

In connection with the EMC Acquisition, the Company acquired a 49% equity interest in WMS. The Company accounts for its interest in WMS using the equity method and includes the Company’s share of WMS’s profits or losses in Income from equity method investments in the condensed consolidated statements of operations. During the three months ended March 31, 2018 and March 31, 2017, sales to WMS (for the Company’s services provided to WMS for WMS’s onboard cellular equipment) were approximately $0.2 million and $0.3 million under the terms of the WMS operating agreement and an associated master services agreement with WMS. These sales are included in Revenue in the condensed consolidated statements of operations. As of March 31, 2018 and December 31, 2017, we had a balance due from WMS of $0.1 million and $0.1 million, respectively, included in Accounts receivable, net in the condensed consolidated balance sheets.

Note Payable to WMS

In December 2017, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately $6.4 million 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 will 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 unpaid principal of the promissory note bears interest at 2.64%, and all interest calculated under the promissory note commences upon the occurrence of an “Event of Default,” which includes, for example, the Company’s breach of the promissory note or the WMS operating agreement, Company insolvency events and material judgments against the Company. The entire principal balance of the promissory note together with all accrued but unpaid interest shall be due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2019 and (iii) the date of acceleration of the promissory note as a result of the occurrence of an event of default. The principal amount of the outstanding note was $6.4 million as of March 31, 2018 and has been included within current portion of long-term debt in the condensed consolidated balance sheet as of March 31, 2018.


Due to Santander

Also 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, 2018 and March 31, 2017 the Company purchased approximately $1.4 million and $0.3 million from Santander for their Teleport services and related network operations support services. As of March 31, 2018 and December 31, 2017 the Company owed Santander approximately $1.3 million and $0.9 million, respectively, 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.

Transactions with TRIO Connect, LLC and its Affiliates

In July 2015 (prior to our acquisition of EMC in July 2016), EMC divested its interest in TRIO Connect (“TRIO”), one of EMC’s joint ventures formed to commercialize EMC’s ARABSAT Ka Band contract, such that following the divestiture EMC no longer had any ownership in TRIO and TRIO was instead owned by funds affiliated with ABRY Partners and EMC’s other former stockholders. (ABRY is currently one of our significant stockholders.) We did not acquire the TRIO business in connection with our acquisition of EMC.

Prior to our acquisition of the EMC business, EMC and its subsidiaries had collectively made various loans to TRIO and its affiliated entities in an aggregate amount equal to approximately $6.5 million. Also prior to the EMC acquisition, STMEA (FZE), a wholly-owned subsidiary of TRIO, had made sales of equipment and provided employee payroll services to EMC and its subsidiaries in an aggregate amount equal to approximately $5.7 million. After netting the then-outstanding trade payables for the equipment sales and payroll services against the then-outstanding loan amounts, TRIO and its affiliates collectively owed EMC and its subsidiaries approximately $0.8 million at the time we acquired EMC, and we inherited this receivable in the acquisition.
    
Between October 2016 and August 2017, we made payments to a TRIO affiliate totaling $0.4 million for equipment purchases and service fees in connection with servicing various customer contracts. In September 2017, we made additional equipment

33


purchases from TRIO’s affiliate totaling $0.4 million for customer orders and for inventory purposes. We believe that all of these purchase transactions were on arms’-length pricing and terms, and our Audit Committee approved them.

ABRY Partners divested its interest in our TRIO counterparty’s operations in November 2017, such that the TRIO counterparty is no longer a related party of the Company.

ABRY Board Nomination Right

ABRY, through its affiliate EMC HoldCo 2 B.V., had a right under a nomination letter agreement (the “ABRY Nomination Agreement”) that we entered into in connection with the EMC acquisition to nominate one individual for election to our Board. This right was due to terminate when (i) ABRY held less than 5% of our outstanding common stock, (ii) ABRY or its affiliates consummated a transaction involving a company or business that competed with any business then engaged in (or contemplated to be engaged in) by us, (iii) any partner, member or employee of ABRY or any of its affiliates became a director, board observer or executive officer of any competitor of ours, (iv) we sold all or substantially all of our assets, (v) we participated in a merger, consolidation or similar transaction in which our stockholders immediately prior to the consummation of the transaction held less than 50% of all of the outstanding common stock or other securities entitled to vote for the election of directors of the surviving entity in such transaction or (vi) ABRY gave written notice to us that it desired to terminate its nomination right. The ABRY Nomination Agreement also required that, subject to exceptions, ABRY and its affiliates would be subject to a “standstill” provision. This provision prohibited ABRY and its affiliates from taking actions to influence or control us (including by acquiring additional securities) until six months after the termination of ABRY’s nomination right.

ABRY Partners irrevocably forfeited its nomination right in February 2018. The “standstill” provision described above remains in effect through August 2018.


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, 2018 and December 31, 2017, 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, 2018 and March 31, 2017 was not material. The Company makes ongoing assessments regarding the collectability of this note and the subscription receivable balance.

masFlight Earn-Out
In connection with our acquisition of masFlight on August 4, 2015 (the “masFlight Closing Date”), we agreed that if, prior
to the second anniversary of the masFlight Closing Date, we terminated Josh Marks (formerly CEO of masFlight and now our CEO) without “cause” or he resigned with “good reason,” we would pay a $10 million accelerated earnout payment to Mr. Marks and the other masFlight sellers. We did not terminate Mr. Marks prior to this date, and so Mr. Marks’ acceleration right has expired.

Registration Rights Agreement

When we consummated our business combination in January 2013 with Row 44 and Advanced Inflight Alliance AG, we entered into an amended and restated registration rights agreement with PAR, 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 securityholders’ expenses in connection with their exercise of their registration rights.


34


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.


Note 11.    Common Stock, Share-Based Awards and Warrants    

Common Stock

Issuance of Common Stock

The Company issued approximately 5.5 million shares of its common stock to the EMC seller on July 27, 2016 in connection with the EMC Acquisition. On the first anniversary of the EMC Acquisition, on July 27, 2017, the Company issued to the EMC seller an additional approximately 5.0 million shares of the Company’s common stock. Pursuant to the EMC purchase agreement, 50% of the newly issued shares was valued at $8.40 per share, and 50% was valued at the volume-weighted average price of a share of Company common stock measured two days prior the first anniversary date.

Furthermore, in August 2016, the Company issued approximately 1.8 million shares of its common stock as partial consideration for the Sound-Recording Settlements. The Company is obligated to issue an additional 500,000 shares of its common stock to UMG in connection with the litigation when and if the share price of the Company’s common stock exceeds $10.00 per share and an additional 400,000 shares of its common stock when and if the closing price exceeds $12.00 per share (together, the “Supplemental Shares”) at any time in the future if the share price reaches these price thresholds. In lieu of issuing the Supplemental Shares of the Company’s common stock upon exceeding the respective share price thresholds, the Company may pay the equivalent in cash at its sole discretion. If the Company were to experience a liquidation event, as defined in the settlement documentation, and if the equivalent liquidation price per share at that time exceeds one or both of the share price thresholds, the Company is obligated to pay the equivalent liquidation price per share in cash in lieu of issuing the Supplemental Shares. See Note 9. Commitments and Contingencies for a further description of the Sound-Recording Settlements.

2013 Equity Plan

Under our 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of our Board, 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. We ceased using the 2013 Equity Plan for new equity issuances in December 2017 upon receiving stockholder approval of our new 2017 Omnibus Long-Term Incentive Plan, although we continue to have outstanding previously granted equity awards issued under the 2013 Equity Plan. See “2017 Equity Plan” immediately below.

2017 Equity Plan

On December 21, 2017, our stockholders approved a new 2017 Omnibus Long-Term Incentive Plan (the “2017 Omnibus Plan”). We 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 are now available for grant thereunder. The 2017 Omnibus Plan separately made available 6,500,000 shares of our 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 our Board, may grant share awards thereunder (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. In connection with its upcoming 2018 annual meeting of stockholders, the Company is requesting stockholder approval of its Amended and Restated 2017 Omnibus Long-Term Incentive Plan, which amends and restates the 2017 Omnibus Plan to add an additional two million shares to the number of shares that may be granted as awards under such plan.
 
Stock Repurchase Program

In March 2016, the Company’s Board authorized a stock repurchase program under which the Company may repurchase up to $50.0 million of its common stock. Under the stock repurchase program, the Company may repurchase shares from time to time

35


using a variety of methods, which may include open-market purchases and privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. The Company measures all potential buybacks against other potential uses of capital that may arise from time to time. The repurchase program does not obligate the Company to repurchase any specific number of shares, and may be suspended or discontinued at any time. The Company expects to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2018 and 2017. As of March 31, 2018 the remaining authorization under the stock repurchase plan was $44.8 million.

Stock-Based Compensation Expense

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Stock-based compensation expense related to all employee and, where applicable, non-employee stock-based awards for the three months ended March 31, 2018 and 2017 was as follows (in thousands):

 
Three Months Ended March 31,
 
2018
 
2017
Cost of services
$
179

 
$
87

Sales and marketing
194

 
175

Product development
311

 
171

General and administrative
2,960

 
1,419

Total
$
3,644

 
$
1,852


Warrants Issued in Connection with Second Lien Notes

The Company’s penny warrants and market warrants issued in connection with the Searchlight investment qualify for classification in stockholders’ equity, as they are indexed to the Company’s own stock and meet all additional criteria to be classified in stockholders’ equity. They are considered freestanding, equity-classified instruments that are initially measured at fair value and recorded at their allocated value, with no remeasurement required as long as the contract continues to be classified in equity.
    
The following is a summary of the penny and market warrants outstanding as of March 31, 2018:

 
Number of Warrants (in thousands)
 
Weighted Average Exercise price
 
Weighted Average Remaining Contractual Term (in years)
Penny Warrants
18,065,775

 
$
0.01

 
10.0
Market Warrants
13,000,000

 
$
1.57

 
10.0


Public SPAC Warrants

The following is a summary of Public SPAC Warrants (which were exercisable for shares of our common stock) for the three months ended March 31, 2018, with the “Number of Warrants” in the table below indicating the shares of our common stock underlying the Public SPAC Warrants:

 
Number of Warrants (in thousands)
 
Weighted Average Exercise price
 
Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2018
6,173

 
$
11.50

 
 
Expired
(6,173
)
 

 
 
Outstanding and exercisable at March 31, 2018


$

 
0.0

The Company accounted for its 6,173,228 Public SPAC Warrants as derivative liabilities. During the three months ended March 31, 2018 and 2017, the Company recorded income of less than $0.1 million and $0.4 million, respectively, in the condensed consolidated statement of operations as a result of the marked to fair value adjustment of these warrants at the respective balance sheet dates. The fair value of Public SPAC Warrants issued by the Company were estimated using the Black-Scholes option pricing model. The Public SPAC Warrants had a five-year term that expired on January 31, 2018, and are no longer exercisable.


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Warrant Repurchase Program

During the year ended December 31, 2014, the Board authorized the Company to repurchase Public SPAC Warrants for an aggregate purchase price, payable in cash and/or shares of common stock, of up to $25.0 million (inclusive of prior warrant purchases). In August 2015, the Board increased this amount by an additional $20.0 million. As of March 31, 2018, $16.7 million remained available for warrant repurchases under this Warrant Repurchase Program. The amount the Company spends (and the number of Public SPAC Warrants repurchased) varies based on a variety of factors, including the warrant price. The Company did not repurchase any warrants during the three months ended March 31, 2018 and 2017.

Note 12.    Income Taxes

The Company recorded an income tax benefit of $4.7 million and a provision of $2.8 million for the three months ended March 31, 2018 and 2017, respectively. In general, the effective 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, and changes in valuation allowance. In general, the effective rate for the three months ended March 31, 2017 differs from the federal income tax rate due to the effects of foreign tax rate differences, changes in unrecognized tax benefits, changes in valuation allowance, and deferred tax expense on amortization of indefinite-lived intangible assets.

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 March 31, 2018 and December 31, 2017, the liability for income taxes associated with uncertain tax positions was $8.5 million and $8.7 million, respectively. As of March 31, 2018 and December 31, 2017, the Company had accrued $6.7 million and $6.5 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.

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

In accordance with SAB 118, we have estimated the impacts of the Tax Act using information known at this time, including an income tax benefit of $4.6 million in the year ended December 31, 2017 reflecting the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent and are expecting no tax impact related to the estimated repatriation of net taxable income of $18.5 million, which will be fully offset by the net operating loss generated in 2017. As of March 31, 2018, our management is still evaluating the effects of the Tax Act provisions, and our assessment does not purport to disclose all changes relating to the Tax Act that could have material positive or negative impacts on our current or future tax positions.


Note 13.    Segment Information

During the first quarter of 2017, the Company reported its operations through three reportable segments: Media & Content, Aviation Connectivity and Maritime & Land Connectivity. Prior to the EMC Acquisition in the third quarter of 2016, the Company operated through two operating segments: Media & Content and Connectivity. Following the EMC Acquisition, because the Company had acquired a significant number of new customers in different markets and geographic areas of operations and given a then-new management structure and corresponding organizational changes, the Company re-evaluated its reportable segments and concluded that a change to its reportable segments was appropriate and consistent with how its chief operating decision maker (“CODM”) would manage the Company’s operations for purposes of evaluating financial performance and allocating resources. As such, during the fourth quarter of 2016, as a result of the EMC Acquisition, the Company formed a Maritime & Land Connectivity segment.


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In the second quarter of 2017 however, following changes in our senior management (including our CODM) and organizational changes across our business, we reorganized our business from three operating segments back into two operating segments—Media & Content and Connectivity—primarily through integrating the business and operations of our former Aviation Connectivity segment with that of our former Maritime & Land Connectivity segment. Our CODM determined this was appropriate based on the similarities and synergies between these two segments relating to satellite bandwidth and equipment used in those businesses as well as on our restructured organizational reporting lines across our business departments.

The CODM evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our various segments. Total segment gross margin provides the CODM a measure to analyze operating performance of each of the Company’s operating segments and its enterprise value against historical data and competitors’ data, although historical results may not be indicative of future results, as operating performance is highly contingent on many factors, including customer tastes and preferences. All other financial information is reviewed by the CODM on a consolidated basis.

The following table summarizes revenue and gross margin by our reportable segments for the three months ended March 31, 2018 and 2017 (in thousands):

39



 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 
 
 
Media & Content
 
 
 
Licensing and services
$
74,915

 
$
76,380

Connectivity
 
 
 
Services
71,611

 
67,263

Equipment
9,971

 
8,949

Total
81,582

 
76,212

Total revenue
$
156,497

 
$
152,592

Cost of sales:
 
 
 
Media & Content
 
 
 
Licensing and services
$
54,471

 
$
54,255

Connectivity
 
 
 
Services
57,943

 
48,617

Equipment
6,082

 
7,668

Total
64,025

 
56,285

Total cost of sales
$
118,496