Global Eagle Entertainment
Global Eagle Entertainment Inc. (Form: 10-Q, Received: 11/12/2013 17:21:41)

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

FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
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
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)
 
 
 
4353 Park Terrace Drive


 
 
Westlake Village, California
 
91361
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (818) 706-3111
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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
 
(Outstanding as of November 12, 2013)
 
COMMON STOCK, $0.0001 PAR VALUE
 
 
38,514,808
SHARES*
 
NON-VOTING COMMON STOCK, $0.0001 PAR VALUE
 
 
19,118,233
SHARES
 
* Excludes 3,053,634 shares held by Advanced Inflight Alliance AG, a majority-owned subsidiary of the registrant.



Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
INDEX TO FORM 10-Q

Item No.
 
Description
 
Page
 
 
 
 
 
 
 
PART I — Financial Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II — Other Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I — FINANCIAL INFORMATION
GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
September 30, 2013
 
December 31, 2012
ASSETS
(unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
97,917

 
$
2,088

Accounts receivable, net
55,739

 
8,292

Content library, current
8,802

 

Inventories
13,641

 
7,386

Prepaid and other current assets
12,822

 
3,344

TOTAL CURRENT ASSETS:
188,921

 
21,110

Property, plant & equipment, net
16,807

 
4,639

Goodwill
46,801

 

Intangible assets
109,743

 

Other non-current assets
22,822

 
3,688

TOTAL ASSETS
$
385,094

 
$
29,437

LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
70,489

 
$
8,178

Deferred revenue
7,563

 
8,539

Warrant liabilities, current
28,050

 
8,178

Notes payable and accrued interest, current
10,254

 
14

Deferred tax liabilities, current
3,149

 

Other current liabilities
9,590

 

TOTAL CURRENT LIABILITIES:
129,095

 
24,909

Deferred tax liabilities, non-current
34,797

 

Deferred revenue, non-current
4,890

 
3,075

Other non-current liabilities
10,988

 
38

TOTAL LIABILITIES
179,770

 
28,022

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE PREFERRED STOCK:
 
 
 
Series A-1, $0.0001 par value; 0 and 9,794,142 shares authorized, issued and outstanding, at September 30, 2013 and December 31, 2012, respectively

 
9,245

Series A-2, $0.0001 par value; 0 and 19,887,000 shares authorized, issued and outstanding, at September 30, 2013 and December 31, 2012, respectively

 
21,454

Series B-1, $0.0001 par value; 0 and 73,783,872 shares authorized, issued and outstanding, at September 30, 2013 and December 31, 2012, respectively

 
27,488

Series B-2, $0.0001 par value; 0 and 62,326,439 shares authorized, issued and outstanding, at September 30, 2013 and December 31, 2012, respectively

 
19,981

Series C-1, $0.0001 par value; 0 and 105,868,792 shares authorized, 0 and 84,695,034 shares issued and outstanding, at September 30, 2013 and December 31, 2012, respectively

 
24,535

Series C-2, $0.0001 par value; 0 and 107,187,927 shares authorized, 0 and 85,750,341 shares issued and outstanding, at September 30, 2013 and December 31, 2012, respectively

 
19,837

TOTAL REDEEMABLE PREFERRED STOCK

 
122,540

EQUITY (DEFICIT):
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 39,114,980 and 23,405,785 shares issued, 36,061,346 and 20,352,151 shares outstanding, at September 30, 2013 and December 31, 2012, respectively
4

 
2

Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, 19,118,233 and 0 shares issued and outstanding, at September 30, 2013 and December 31, 2012, respectively
2

 

Treasury stock, 3,053,634 and 0 shares at September 30, 2013 and December 31, 2012, respectively

 

Additional paid-in capital
370,573

 
8,238

Subscriptions receivable
(472
)
 
(453
)
Accumulated deficit
(174,357
)
 
(128,912
)
Accumulated other comprehensive loss
(768
)
 

TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
194,982

 
(121,125
)
Non-controlling interest
10,342

 

TOTAL EQUITY (DEFICIT)
205,324

 
(121,125
)
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY (DEFICIT)
$
385,094

 
$
29,437


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

1


GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012 (Revised)
Revenue
$
74,518

 
$
19,305

 
$
179,862

 
$
54,648

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
54,002

 
22,264

 
139,571

 
58,868

Sales and marketing expenses
3,758

 
1,055

 
8,444

 
3,047

Product development
2,282

 
758

 
5,946

 
2,257

General and administrative
17,056

 
3,176

 
53,860

 
9,103

Amortization of intangible assets
4,221

 
12

 
8,470

 
24

Total operating expenses
81,319

 
27,265

 
216,291

 
73,299

Loss from operations
(6,801
)
 
(7,960
)
 
(36,429
)
 
(18,651
)
Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
(267
)
 
18

 
(726
)
 
(10,382
)
Change in fair value of derivatives
2,233

 
248

 
(7,107
)
 
248

Other income (expense), net
601

 
(157
)
 
571

 
(275
)
Loss before income taxes
(4,234
)
 
(7,851
)
 
(43,691
)
 
(29,060
)
Income tax provision
(1,161
)
 

 
(1,754
)
 

Net loss
(5,395
)
 
(7,851
)
 
(45,445
)
 
(29,060
)
Net income attributable to non-controlling interests
(158
)
 

 
(89
)
 

Cumulative preferred stock dividends and accretion

 
(2,783
)
 
(942
)
 
(5,931
)
Net loss attributable to Global Eagle Entertainment common stockholders
$
(5,553
)
 
$
(10,634
)
 
$
(46,476
)
 
$
(34,991
)
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.10
)
 
$
(0.52
)
 
$
(0.91
)
 
$
(1.72
)
Weighted average common shares basic and diluted
55,132

 
20,352

 
51,106

 
20,352


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


2


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
2012
 
2013
2012
Net loss
$
(5,395
)
$
(7,851
)
 
$
(45,445
)
$
(29,060
)
Other comprehensive income (loss):
 
 
 
 
 
Unrealized gain on available for sale securities


 
101


Less: reclassification adjustment for realized gains on available for sale securities included in net loss


 
(101
)

Total unrealized gain on available for sale securities


 


Foreign currency translation adjustments
(134
)

 
(747
)

Total other comprehensive loss
(134
)

 
(747
)

Comprehensive loss
(5,529
)
(7,851
)
 
(46,192
)
(29,060
)
Comprehensive income attributable to non-controlling interests
(161
)

 
(110
)

Comprehensive loss attributable to Global Eagle Entertainment common stockholders
$
(5,690
)
$
(7,851
)

$
(46,302
)
$
(29,060
)

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


3


GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) (UNAUDITED)
(In thousands)
 
Common Stock
 Common Stock Non-Voting
 Treasury Stock
Additional
Subscriptions
Accumulated
Accumulated Other
Total Global Eagle Entertainment Inc.
Non-Controlling
Total
 
Shares
Amount
 Shares
 Amount
Shares
 Amount
Paid-in Capital
Receivable
Deficit
Comprehensive Income (Loss)
Stockholders' Equity
Interest
Stockholders' Equity (Deficit)
Balance, December 31, 2012
20,352

$
2


$


$

$
8,238

$
(453
)
$
(128,912
)
$

$
(121,125
)
$

$
(121,125
)
Reclassification of MLBAM warrants






2,696




2,696


2,696

Reclassification of Series C warrants






2,879







2,879



2,879

Change in fair value of common stock warrants






93




93


93

Warrants for common stock issued for services and equipment






359




359


359

Exercise of warrants and common stock options






28




28


28

Preferred stock dividends






(818
)



(818
)

(818
)
Accretion of redeemable preferred stock






(124
)



(124
)

(124
)
Recapitalization as a result of Row 44 Merger
15,373

2

4,750

1



229,025




229,028


229,028

Stock purchase of AIA


14,368

1



144,256




144,257

25,424

169,681

Shares of the Company acquired in stock purchase of AIA




3,054


(30,659
)



(30,659
)

(30,659
)
Repurchase and retirement of common stock
(95
)





(1,069
)



(1,069
)

(1,069
)

4

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) (UNAUDITED) (continued)
(In thousands)

 
Common Stock
 Common Stock Non-Voting
 Treasury Stock
Additional
Subscriptions
Accumulated
Accumulated Other
Total Global Eagle Entertainment Inc.
Non-Controlling
Total
 
Shares
Amount
 Shares
 Amount
Shares
 Amount
Paid-in Capital
Receivable
Deficit
Comprehensive Income (Loss)
Stockholders' Equity
Interest
Stockholders' Equity (Deficit)
Shares issued for the PMG asset purchase
431






4,447




4,447


4,447

Conversion of Sponsor promissory note to warrants






(393
)



(393
)

(393
)
Waiver modification of sponsor warrants






9,900




9,900


9,900

Stock-based compensation






1,902




1,902


1,902

Interest income on subscription receivable







(19
)


(19
)

(19
)
Purchase of subsidiary share from non-
controlling interest shareholders






(187
)



(187
)
(15,192
)
(15,379
)
Comprehensive income (loss) attributable to non-controlling interest









(768
)
(768
)
21

(747
)
Change in unrealized gain on available for sale securities, net of tax













Net loss








(45,445
)

(45,445
)
89

(45,356
)
Balance, September 30, 2013
36,061

$
4

19,118

$
2

3,054

$

$
370,573

$
(472
)
$
(174,357
)
$
(768
)
$
194,982

$
10,342

$
205,324


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

5


GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(45,445
)
 
$
(29,060
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
20,375

 
870

Non-cash interest on convertible promissory notes

 
9,629

Change in fair value of derivative financial instruments
7,107

 
(248
)
Stock-based compensation
1,902

 
748

Warrants for common stock issued for services
359

 
280

Common stock issued for services

 
550

Deferred income taxes
1,576

 

Accrued interest and other
639

 
782

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,477
)
 
(3,783
)
Inventory
(9,260
)
 
143

Prepaid expenses and other current assets
(2,442
)
 
(2,018
)
Deposits and other assets
(1,344
)
 
(489
)
Accounts payable and accrued expenses
(20,728
)
 
(3,085
)
Deferred revenue
839

 
(2,946
)
NET CASH USED IN OPERATING ACTIVITIES
(47,899
)
 
(28,627
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(10,025
)
 
(2,189
)
PMG asset purchase, net of cash acquired
(10,563
)
 

Cash received from Row 44 Merger
159,253

 

Cash received from AIA Stock Purchase
22,136

 

Net proceeds from sale and purchase of investments
4,786

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
165,587

 
(2,189
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Acquisition of non-controlling interest
(15,379
)
 

Proceeds from issuance of notes payable

 
10,000

Long-term borrowings, net of costs

 

Payments on notes payable
(3,613
)
 
(10
)
Purchase of common stock warrants
(795
)
 
7

Purchase of common stock
(1,069
)
 
24,981

Other financing activities, net
(345
)
 
5

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(21,201
)
 
34,983

Effects of exchange rate movements on cash and cash equivalents
(658
)
 

Net increase in cash and cash equivalents
95,829

 
4,167

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,088

 
8,810

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
97,917

 
$
12,977


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

6


Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Business

Global Eagle Entertainment Inc., together with its consolidated subsidiaries (the “Company”), is a Delaware corporation headquartered in Westlake Village, California. The Company's business is focused on providing Wi-Fi Internet Connectivity and Content to the airline industry.

Connectivity

The Company's Connectivity service offering provides airline partners and their passengers Wi-Fi connectivity over Ku-band satellite transmissions. The Company's Connectivity services are delivered through its wholly owned subsidiary, Row 44, Inc. ("Row 44"), which combines specialized network equipment, media applications and premium content services that allow airline passengers to access in-flight Internet, live television, on-demand content, shopping and travel-related information.

Content

The Company's Content services offering selects, manages, and distributes wholly-owned and licensed media content, video and music programming, applications, and video games to the airline industry through its majority-owned subsidiary, Advanced Inflight Alliance AG ("AIA") and the business it acquired from Post Modern Edit, LLC and related entities ( such business, which the Company operates through wholly-owned subsidiaries, is referred to herein as "PMG").

Prior to January 31, 2013, the Company was known as Global Eagle Acquisition Corp. (“GEAC”), which was formed in February 2011 to effect a merger, capital stock exchange, asset acquisition or similar business combination with one or more businesses. Effective in the first quarter of 2013, and in conjunction with the business combination transaction (the "Business Combination") in which GEAC acquired Row 44 and 86% of the issued and outstanding shares of AIA, GEAC changed the Company's name from Global Eagle Acquisition Corp. to Global Eagle Entertainment Inc. (the “Company”, “Global Eagle”, “GEE” “we”, “us”, or “our”). In addition, in July 2013, the Company purchased substantially all the assets of Post Modern Edit, LLC and related companies. Refer to Note 3. "Business Combination" of this Form 10-Q for additional information.

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

The accompanying interim condensed consolidated balance sheet as of September 30, 2013, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the three and nine month periods ended September 30, 2013 and 2012, condensed consolidated statements of cash flows for the nine month periods ended September 30, 2013 and 2012 and the condensed consolidated statement of stockholders' equity (deficit) for the nine month period ended September 30, 2013 are unaudited.

Since Row 44 was deemed the accounting acquirer in the Business Combination consummated on January 31, 2013, the presented financial information for the three and nine months ended September 30, 2012 reflects the financial information and activities only of Row 44. The presented financial information for the three and nine months ended September 30, 2013 includes the financial information and activities of Row 44 for the period January 1, 2013 to September 30, 2013 (274 days) as well as the financial information and activities of GEE and AIA for the period January 31, 2013 to September 30, 2013 (243 days) and PMG for the period July 10, 2013 to September 30, 2013 (82 days).

In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's statement of financial position as of September 30, 2013 and its results of operations for the three and nine month periods ended September 30, 2013 and 2012 and its cash flows for the nine month periods ended September 30, 2013 and 2012. The results for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December

7

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


31, 2012 has been derived from the Company's audited financial statements included in the Company's Current Report on Form 8-K/A filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, on August 9, 2013.

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 Securities and Exchange Commission (“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 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 Current Report on Form 8-K/A filed with the Securities and Exchange Commission on August 9, 2013.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Acquisitions are included in the Company's condensed consolidated financial statements from the date of the acquisition. The Company's Business Combination purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All intercompany balances and transactions have been eliminated in consolidation, including AIA's historical investment in Row 44.

Investments that the Company has the ability to control, and where it is the primary beneficiary of, are consolidated. Any non-controlling interests in a Company's subsidiary earnings or losses, such as AIA, are included in other income (expense) in the Company's condensed consolidated statements of operations. Any investments in affiliates over which the Company has the ability to exert significant influence, but does not control and where it is not the primary beneficiary of, are accounted for using the equity method of accounting. Investments in affiliates for which the Company has no ability to exert significant influence are accounted for using the cost method of accounting.

Use of Estimates
 
The preparation of the Company's unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue (relative selling price of deliverables) and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, fair value of issued common stock warrants, the assigned value of acquired assets and assumed and contingent liabilities associated with business combinations, valuation of media content inventory, useful lives and impairment of property and equipment, intangible assets, goodwill and other assets, the fair value of the Company's equity-based compensation awards, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Segments of the Company

The Company reports its operations under two segments, its Connectivity and Content businesses. The Company's Connectivity segment provides airline partners and their passengers Wi-Fi connectivity over Ku-band satellite transmissions through Row 44. The Company's Content segment selects, manages, and distributes owned and licensed media content, video and music programming, applications, and video games to the airline industry through AIA and PMG.

The decision to report two segments is principally based upon the Company's chief operating decision makers (“CODMs”), and how they manage the Company's operations as two segments from a consolidated basis for purposes of evaluating financial performance and allocating resources. The CODMs review revenue, expense, and contribution profit income (loss) information separately for its Connectivity and Content businesses. Total segment contribution profit income (loss) provides the CODMs, investors and equity analysts a measure to analyze operating performance of each of the Company's business 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 CODMs on a consolidated basis.


8

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Segment revenue, expenses and contribution profit for the three and nine month periods ended September 30, 2013 and 2012 derived from the Company's Connectivity and Content segments were as follows (in thousands):


Three Months Ended

Nine Months Ended

September 30, 2013

September 30, 2013

Connectivity
Content
Consolidated

Connectivity
Content
Consolidated
Revenue:







     Licensing
$

$
44,645

$
44,645


$

$
106,353

$
106,353

     Service
16,218

8,796

25,014


34,893

18,346

53,239

     Equipment
4,859


4,859


20,270


20,270

Total Revenue
21,077

53,441

74,518


55,163

124,699

179,862















Operating Expenses:











Cost of Sales
15,193

38,809

54,002


47,413

92,158

139,571

Contribution Profit
5,884

14,632

20,516


7,750

32,541

40,291

Other Operating Expenses




27,317






76,720

Loss from Operations




$
(6,801
)





$
(36,429
)

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
 
Connectivity
 
Connectivity
Revenue:
 
 
 
     Licensing
$

 
$

     Service
3,204

 
7,887

     Equipment
16,101

 
46,761

Total Revenue
19,305

 
54,648

 
 
 
 
Operating Expenses:
 
 
 
     Cost of Sales
22,264

 
58,868

Contribution Loss
(2,959
)
 
(4,220
)
Other Operating Expenses
5,001

 
14,431

Loss from Operations
$
(7,960
)
 
$
(18,651
)

Revenue Recognition

The Company recognizes revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. The Company considers persuasive evidence of a sales arrangement to be the receipt of a signed contract. Collectability is assessed based on a number of factors, including transaction history and the credit worthiness of a customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. The Company records cash received in advance of revenue recognition as deferred revenue.

The Company extends credit to its customers. An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company's customers to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the collectability of the Company's trade 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.


9

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


For arrangements with multiple deliverables, the Company allocates revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The fair value of the selling price for a deliverable is determined using a hierarchy of (1) Company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price. The Company allocates any arrangement fee to each of the elements based on their relative selling prices.

The Company's revenue is principally derived from the following services:

Connectivity

Equipment Revenue. Equipment revenue is recognized when title and risk pass to the buyer, which is generally upon shipment or destination depending on the contractual arrangement with the customer. In determining whether an arrangement exists, the Company ensures that a binding arrangement is in place, such as a standard purchase order or a fully executed customer-specific agreement. In cases where a customer has the contractual ability to accept or return equipment within a specific time frame, the Company will provide for return reserves when and if necessary, based upon historical experience.

Included in equipment revenue are certain deferred obligations that exist pursuant to the Company's contractual arrangements and typically include, but are not limited to, technical support, regulatory support, network support and installation support. These support-based arrangements are customarily bundled with the Company's contracts and are accounted for as a single unit of account. To the extent that these support services have value on a standalone basis, the Company allocates revenue to each element in the arrangement based upon their relative fair values. Fair value is determined based upon the best estimate of the selling price, and the fair value of undelivered elements is deferred and recognized over the performance or contractual period. The most significant of the deferred obligations are typically network support, which includes 24/7 operational support for the airlines that, the Company incurs significant and periodic external and internal costs to deliver on a daily basis.

Service Revenue. Service revenue includes in-flight Wi-Fi Internet services, live television, on-demand content, shopping and travel-related information. Service revenue is recognized after it has been rendered and the customer can use the service, which customarily is in the form of (i) enplanement for boarded passengers, (ii) usage by passengers, depending upon the specific contract, and (iii) other revenues such as advertising sponsorship. The Company assesses whether performance criteria have been met and whether its service fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or customer performance data in circumstances where that data is available.

When the Company enters into revenue sharing arrangements where it acts as the primary obligor, the Company recognizes the underlying revenue on a gross basis. In determining whether to report revenue gross for the amount of fees received from its customers, the Company assesses whether it maintains the principal relationship, whether it bears credit risk and whether it has latitude in establishing prices with the airlines.

In certain cases, the Company records service revenue based on available and preliminary information from its network operations. Amounts collected on the related receivables may vary from reported information based upon third party refinement of estimated and reported amounts owing that generally occurs typically within thirty days of the period end. For the three and nine months ended September 30, 2012 and 2013, the difference between the amounts recognized based on preliminary information and cash collected was not material.

Content

Licensing Revenue. Content licensing revenue is principally generated through the sale or license of media content, video and music programming, applications, and video games to the airlines, and to a lessor extent through various services such as encoding and editing of media content. Revenue from the sale or license of content is recognized when the content has been delivered and the contractual performance obligations have been fulfilled, generally at the time a customer's license period begins. For arrangements in which the license period commences after the delivery of content, revenue is not recognized until the license period commences even if delivery and performance obligations have already occurred.

Services Revenue. Content services revenue, such as technical services, the encoding of video products, development of graphical interfaces or the provision of materials, are billed and recognized as services are performed.


10

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Costs of Sales

Connectivity

Connectivity costs of sales consist primarily of equipment fees paid to third party manufacturers, certain revenue recognized by the Company and shared with its customers or partners as a result of its revenue-sharing arrangements, Internet connection and satellite charges and other platform operating expenses associated with the Company's Connectivity business, including depreciation of the systems internally developed software and website development costs and hardware used to build and operate the Company's Connectivity platform, and personnel costs relating to information technology.

Content

Content costs of sales consist primarily of the costs to license or purchase media content, and direct costs to service content for the airlines.

Product Development

Product and software development costs, other than costs qualifying for capitalization, are expensed as incurred. Costs of computer software or websites developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs incurred during the application and development stage, which include compensation and related expenses, costs of computer hardware and software, website development costs and costs incurred in developing additional features and functionality of the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized costs are generally amortized using the straight-line method over a three year estimated useful life, beginning in the period in which the software is ready for its intended use. Unamortized amounts are included in property and equipment, net in the accompanying consolidated balance sheets. Capitalized software development costs totaled $0.3 million and $1.0 million for the three and nine months ended September 30, 2013. There were no software development costs capitalized in the same periods in 2012.

The Company's product development expenditures are focused on developing new products and services, and obtaining Supplemental Type Certificates (“STCs”) as required by the Federal Aviation Administration for each model/type of aircraft prior to providing Connectivity services. To the extent that the Company is contracted to obtain STCs, and customers reimburse these costs, the Company will record these reimbursements directly against its product development expenses.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, on a straight-line basis. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of stock options that do not include market conditions. The Company estimates fair value of share-based awards using the Black-Scholes model. This model requires the Company to estimate the expected volatility and the expected term of the stock options which are highly complex and subjective variables. The variables take into consideration, among other things, actual and projected employee stock option exercise behavior. The Company uses a predicted volatility of its stock price during the expected life of the options that is based on the historical performance of the Company's stock price as well as including an estimate using similar companies. Expected term is computed using the simplified method as the Company's best estimate given its lack of actual exercise history. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected term of the stock. Stock-based awards are comprised principally of stock options.

Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management believes that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based compensation award is re-measured each period until performance is completed, which is generally the vesting date.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents.


11

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Derivative Financial Instruments and Hedges

All derivatives are accounted for on a fair value basis. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis. The change in fair value of derivatives is recorded through earnings. Cash flows from embedded derivatives subject to bifurcation are reported consistently with the host contracts within the statements of cash flows.

The Company sometimes uses derivative financial instruments such as interest rate swaps to hedge interest rate risks. These derivatives are recognized at fair value on the transaction date and subsequently remeasured at fair value. Derivatives are measured as financial assets when their fair value is positive and as financial liabilities when their fair value is negative. Gains or losses on changes in the fair value of derivatives are recognized immediately in the statement of operations as a component of other income (expense) as they do not qualify for hedge accounting.

Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. Through September 30, 2013, the Company has identified no such impairment loss. Assets to be disposed of would be separately presented on the balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized.

Inventory, net

Equipment inventory. Equipment inventory, which is classified as finished goods, is comprised of individual equipment parts and assemblies and are stated at the lower of cost or market. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market, based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of goods sold. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

At September 30, 2013 and December 31, 2012, there was approximately $6.0 million and $5.4 million , respectively, of deferred equipment costs included in inventory and other long-term assets. The deferred equipment costs pertain to certain costs expended in advance of services for one airline, and are being amortized ratably over the underlying term of the agreement through 2020.

Content Library

The content library was acquired in the AIA stock purchase and was recorded at fair value. The useful life of licensed film rights within the content library corresponds to the respective period over which the film rights will be licensed and generate revenues, generally a period of one year or less. Licensed film rights are amortized ratably over their expected revenue streams and included in cost of sales. Certain film rights in the Company's portfolio may be used in perpetuity under certain conditions. The content library is tested for impairment periodically, but no less than annually. Considering the marketability of the given film right, an impairment loss is recognized as necessary. If the estimated future cash flows for a given film right are lower than its carrying amount as of the reporting date, an impairment loss is recognized in such period.

Subsequent to the AIA stock purchase, additions to the content library represent minimum guaranteed amounts or flat fees to acquire film rights from film studios. Amounts owed in excess of the capitalized minimum guarantees are expensed and accrued

12

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


as a liability when the Company's revenues from exploiting the film right have fully recouped the minimum guarantee based on the contractual royalty rates.

Property, Plant, & Equipment, net

Property, plant and equipment is measured at cost less accumulated depreciation and/or impairment losses. Straight-line depreciation is based on the underlying assets' useful lives. The estimated useful life of technical and operating equipment is 3 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Buildings are amortized on the straight-line method over 30 years.

Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company's financial statements with the resulting gain or loss reflected in the Company's results of operations. Repairs and maintenance costs are expensed as incurred. In the event that property and equipment is no longer in use, the Company will record a loss on disposal of the property and equipment, which is computed as the net remaining value (gross amount of property and equipment less accumulated depreciation expense) of the related equipment at the date of disposal.

During the first nine months of 2013, the Company purchased and capitalized $4.9 million of Connectivity equipment, which is installed on aircrafts of a single customer to facilitate expanded services over a five-year period. The Company capitalized the costs of this equipment on its balance sheet as it retained legal title to the equipment over the five-year use period, and will amortize these costs over their five -year useful life period.

Intangible Assets and Goodwill

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. Acquired intangible assets principally include customer relationships, technology, and content library. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience 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 economic benefits are consumed.

Amortization of certain intangible assets with finite useful lives is recognized in the statements of operations under cost of sales.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually on October 1st or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends or significant under-performance relative to expected historical or projected future results of operations.

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of September 30, 2013, the Company determined that it has two reporting units, Content and Connectivity. When testing goodwill for impairment, the Company first performs a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. The Company is required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of the Company's reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as the Company's software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. As of September 30, 2013, the entire balance of goodwill of $46.8 million is attributed to the Company's Content unit.
 

13

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Business Acquisitions and Supplemental Pro Forma Information

The Company accounts for acquisitions of businesses using the purchase method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition.

On January 31, 2013, the Company completed the acquisition of 86% of the issued and outstanding shares of AIA, a media content distributor to the airline industry with corporate headquarters based in Munich, Germany. On July 9, 2013, the Company acquired substantially all of the assets of Post Modern Edit, LLC and related entities. Both of these acquisitions were accounted for as business combinations.

Supplemental information on an unaudited pro forma basis, as if these acquisitions had been completed as of January 1, 2012, is as follows (in thousands, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
2012
 
2013
2012
Revenues
$
77,239

$
79,912

 
$
191,993

$
218,810

Net Loss
(5,065
)
(1,125
)
 
(66,009
)
(18,122
)
Basic and diluted net loss per share
(0.09
)
(0.06
)

(1.29
)
(0.89
)

The unaudited pro forma supplemental information is based on estimates and assumptions which the Company believes are reasonable and reflect amortization of intangible assets as a result of the acquisition. The pro forma results are not necessarily indicative of the results that would have been realized had the acquisitions been consolidated as of the beginning of the periods presented. The pro forma amounts include the historical operating results of the Company, with adjustments directly attributable to the acquisitions. Included in the supplemental information for the nine months ended September 30, 2013 were certain one-time non-recurring fees associated with the Business Combination of approximately $34.0 million .

Deferred Revenue and Costs

Deferred revenue consists substantially of amounts received from customers in advance of the Company's performance service period and fees deferred for future support services. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term of an agreement.

In the event the Company sells its equipment at or below its cost, and a portion of the related equipment revenue was allocated to other elements in the arrangement, the Company will defer an equal amount of such equipment costs on its balance sheets. Deferred costs are amortized to expense concurrent with the recognition of the related revenue and the expense is included in cost of sales.

Net Income (Loss) Per Share

Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted-average number of common shares and the dilutive effect of contingent shares outstanding during the period. Potentially dilutive contingent shares, which primarily consist of stock options issued to employees and warrants issued to third parties have been excluded from the diluted loss per share calculation because their effect is anti-dilutive.

Foreign Currency

The financial position and results of operations of the Company's foreign subsidiaries are generally determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each

14

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Adjustments arising from the fluctuations in exchange rates for the translation of financial statements from period to period are included in the statements of comprehensive loss.

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. Due to the uncertainty over its ability to realize future taxable income in certain jurisdictions, the Company has recorded a valuation allowance of $49.5 million and $0.9 million against its domestic and foreign deferred tax assets as of September 30, 2013 , respectively.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Interest expense of $0.2 million , no penalties and unrecognized tax benefits of $4.1 million have been recognized as of and for the three and nine months period ended on September 30, 2013. No interest expense, penalties or unrecognized tax benefits were recognized as of and for the three and nine month period ended on September 30, 2012.
Fair Value Measurements

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

Level 1: Observable quoted prices in active markets for identical assets and liabilities.

Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The assets and liabilities which are fair valued on a recurring basis are described below and contained in the following tables. In addition, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis. 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 the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013, and December 31, 2012, respectively (in thousands):

 
September 30, 2013
Quotes Prices in Active Markets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability  (1)
$
1,133

$

$

$
1,133

Global Eagle warrants (2)
28,157

28,157



Total financial liabilities
$
29,290

$
28,157

$

$
1,133


(1) Includes $1.1 million earn-out liability for EIM.
(2) Includes 18,492,500 public warrants and 333,333 sponsor warrants.


15

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
December 31, 2012
Quotes Prices in Active Markets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Other Unobservable Inputs (Level 3)
Series C warrants
$
5,482

$

$

$
5,482

Common stock warrants
2,696



2,696

Total financial liabilities
$
8,178

$

$

$
8,178


During the nine months ended September 30, 2013, the Series C warrants and common stock warrants were reclassified into equity and transferred out of level 3.

The valuation methodology used to estimate the fair value of the financial instruments in the table above is summarized as follows:

Earn-Out Liability . The fair value of the earn-out liability assumed in the AIA stock purchase were estimated by using the income approach. Based on the respective purchase agreements, management estimated best case, base case, and worst case scenarios and discounted it to a present value. The sum of the discounted weighted average probabilities was used to arrive at the fair value of the earn-out liability.

Derivative Warrants . The fair value of Global Eagle's warrants, recorded as derivative warrant liabilities, is determined by the Company using the quoted market prices for the Company's over the counter publicly traded warrants. During the nine months ended September 30, 2013, the Company repurchased and retired 500,000 of the public warrants. On reporting dates where there are no active trades, the Company uses the last reported closing trade price of the warrants to determine the fair value. Income (expense) from these warrants for the three and nine months ended September 30, 2013 was $2.1 million and $(7.2) million , respectively. There was no income (expense) from these warrants in the three and nine months ended September 30, 2012.

The fair values of warrants for Row 44's Series C Preferred Stock that were assumed by the Company upon the acquisition of Row 44 are determined using the Black-Scholes model, which utilizes level 3 unobservable inputs. Significant inputs used in valuing the derivatives included (i) the Company's current stock price, (ii) the Company's expected stock-price volatility, and (iii) the contractual term of the instrument. Significant increases (decreases) in any of these inputs could result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the contracted term is accompanied by a change in the assumption used for the risk-free rate and the expected stock volatility. During the nine months ended September 30, 2013, the Series C warrants were reclassified from derivative liabilities to stockholders' equity (deficit) due to certain exercise price adjustments expired on June 7, 2013.

Prior to June 7, 2013, the change in the value of the Series C warrants derivative liabilities was presented as a part of other income (expenses) in the accompanying statements of operations. Income (expense) from the series C warrants for the three and nine months ended September 30, 2013 was $0.0 million and $(0.1) million , respectively, and $0.0 million for the three and nine months ended September 30, 2012. Refer to Note 11. "Convertible, Redeemable Preferred Stock, Stock Options, Common Stock, and Warrants" section of these footnotes found in this Form 10-Q for the level 3 assumptions used in the level 3 Black-Scholes model calculations on the warrants.

The following table shows both the carrying amounts, which are equal to and the fair values, of financial assets and liabilities in the consolidated financial statements at September 30, 2013 and December 31, 2012, respectively (in thousands):

 
September 30, 2013
 
December 31, 2012
 
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Financial Liabilities:
 
 
 
 
 
Notes Payable
$
11,482

$
11,482

 
$

$


Notes Payable

The Company classifies the notes payable within the level 2 of the fair value hierarchy because it uses discount rates for similar credit-rated companies that are publicly available and widely observable as an input to estimate fair value. The fair value presented above is calculated based on the present value of expected principal and interest cash flows given the short term nature of its maturity.

16

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)



The following tables present the fair value roll-forward reconciliation of level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis for the nine months ended September 30, 2013, and 2012, respectively (in thousands):

 
Series C Warrants
Common Stock Warrants
Earn-Out Liabilities
Total
Balance, January 1, 2013
$
5,482

$
2,696

$

$
8,178

  Reclassification to equity
(2,879
)
(2,696
)

(5,575
)
  Change in value
132



132

Elimination of Row 44 Series C-1 Preferred Warrants held by AIA
(2,735
)


(2,735
)
Level 3 Liability acquired in AIA Stock Purchase


1,299

1,299

Balance, September 30, 2013
$

$

$
1,299

$
1,299


 
Series C Warrants
Common Stock Warrants
Earn-Out Liability
Total
Balance, January 1, 2012
$

$

$

$

Issuance of warrants
4,323

279


4,602

  Change in value




Balance, September 30, 2012
$
4,323

$
279

$

$
4,602


Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

Revisions to Previously Reported Financial Statements

As previously disclosed in the Company’s June 30, 2013 Form 10-Q, errors were identified related to the accounting for certain revenues, cost of sales, cost reimbursements and internally developed software for the years ended December 31, 2012, 2011, 2010, and the three months ended March 31, 2013, as well as the cumulative impact of these errors as of March 31, 2013. These errors consisted of corrections of revenue recognition pertaining to certain agreements containing multiple elements during the years ended December 31, 2012, 2011, 2010, and the three months ended March 31 2013, certain revenue and cost reimbursements pertaining to fiscal 2012 but recorded in the three months ended March 31, 2013, certain reclassifications to conform to the condensed financial statement presentation during the three months ended March 31, 2013, and certain internal use software and website development costs that were corrected for during the three months ended March 31, 2013. Accordingly, in the June 30, 2013 Form 10-Q the Company revised its statements of operations for the years ended December 31, 2012, 2011, 2010, and the three-month period ended March 31, 2013, as well as the balance sheets at December 31, 2012, 2011, and March 31, 2013, to correct for these errors in accordance with the SEC's Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statement."

The impact on the Company's statements of operations for the years ended December 31, 2012, 2011 and 2010, as well as the balance sheets at December 31, 2012, and 2011 is summarized on form 8-K/A filed with SEC on August 9, 2013. The corresponding corrections to the Company's statements of operations for the three and nine months ended September 30, 2012 have also been reflected in the revised amounts presented herein in the same line items (revenues and cost of sales) as previously disclosed. The net impact of the corrections on pre-tax and net loss for the three and nine months ended September 30, 2012 was to reduce net loss by approximately $0.1 million and to increase pre-tax and net loss by approximately $0.1 million , respectively.

Recent Accounting Pronouncements

Effective January 1, 2013, the Company adopted recently issued accounting guidance which updates the presentation of reclassifications from comprehensive income to net income in consolidated financial statements. Under this new guidance, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income ("AOCI") either by the respective line items of net income or by cross-reference to other required disclosures. The new guidance does not

17

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


change the requirements for reporting net income or other comprehensive income in financial statements. As the new guidance relates to presentation only, the adoption did not have any effect on the Company's results of operations, financial position, or cash flows.

In February 2013 , the FASB issued guidance ASU 2013-04, “ Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ”, on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Under this guidance the Company is required to measure its obligations under such arrangements as the sum of the amount it agreed to pay in the arrangement among its co-obligors and any additional amount the Company expects to pay on behalf of its co-obligors. The Company is also required to disclose the nature and amount of the obligation. The Company is currently evaluating the impact of this guidance on its consolidated financial statements, which is effective for reporting periods beginning after December 15, 2013 .

In July 2013, the FASB issued guidance ASU 2013-10, “Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes”. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The adoption of the new guidance did not have an effect on the Company’s results of operations, financial position, or cash flows.

Proposed Amendments to Current Accounting Standards.  Updates to other existing accounting standards and exposure drafts, such as exposure drafts related to revenue recognition, lease accounting, loss contingencies and fair value measurements, that have been issued or proposed by FASB or other standards setting bodies that do not require adoption until a future date are being evaluated by the Company to determine whether adoption will have a material impact on the Company’s consolidated financial statements.

Note 3. Business Combination

Accounting Treatment of the Business Combination

After the closing of the Business Combination on January 31, 2013 , the Business Combination was consummated, in which a merger subsidiary of GEAC merged with and into Row 44, with Row 44 surviving, and concurrently GEE acquired 86% of the issued and outstanding shares of AIA held by PAR Investment Partners L.P. (“PAR”). Row 44 is considered the acquirer for accounting purposes, and has accounted for the Row 44 Merger as a recapitalization. The AIA stock purchase is accounted for as an acquisition of a business because the Company obtained effective control of AIA. Row 44 was determined to be the acquirer based on the following facts and circumstances:

Row 44 had the greatest enterprise value between Row 44 and AIA based on the consideration paid by GEAC;
The officers of the newly combined company consist primarily of former Row 44 executives, including the Chief Executive Officer, Chief Financial Officer, and General Counsel;
GEAC paid a premium over the market value of AIA’s shares prior to the public announcement of the AIA Stock Purchase;
As of the date of the Business Combination, the Row 44 and combined Company's headquarters are in the same Los Angeles metropolitan area; and
The composition of the Board of Directors does not result in the ability of either Row 44 or AIA being able to appoint, elect, or remove a majority of the Board of Directors.

Since the Row 44 Merger was accounted for as a recapitalization, the assets and liabilities of Row 44 and GEAC are carried at historical cost and GEE has not recorded any step-up in basis or any intangible assets or goodwill as a result of the Row 44 Merger. Under the acquisition method, the acquisition-date fair value of the gross consideration transferred to effect the AIA Stock Purchase was allocated to the assets acquired, the liabilities assumed, and non-controlling interest based on their estimated fair values. Transaction costs of $16.4 million were attributable to the Business Combination and were recorded as reductions to the additional paid-in capital. In connection with the closing of the Row 44 Merger, Row 44 paid PAR $11.9 million under a backstop fee agreement. This was recorded as transaction costs reflected in operating results as a general and administrative expense in the period ended March 31, 2013.

The fair values in respect of the AIA Stock Purchase were preliminary and provisional and subject to adjustment if additional information is obtained during the measurement period (a period of up to one year from the Closing Date) of this transaction that would change the fair value allocation as of the acquisition date.

18

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)



The number of shares of voting and non-voting common stock of the Company issued and outstanding immediately following the consummation of the Business Combination is reflected in the unaudited consolidated statement of stockholders' equity found in this Form 10-Q. Excluding the July 2013 PMG asset acquisition, there were no additional shares of common stock of the Company issued in the period following the consummation of the Business Combination through September 30, 2013.

In the consolidated financial statements, the recapitalization of the number of shares of common stock attributable to Row 44 is reflected retroactive to December 31, 2012 . Accordingly, the number of shares of common stock that was used to calculate the Company's earnings per share for all periods prior to the Business Combination was 20,352,151 , which comprises the number of shares of common stock, net of treasury stock, issued to Row 44 equity holders.

Accordingly, the number of shares of common stock, net of treasury stock, issued to Row 44 stockholders in the Row 44 Merger was used to calculate the Company's earnings per share for all periods prior to the Business Combination.

Row 44 Merger

Pursuant to the Row 44 Merger Agreement, all shares of capital stock of Row 44 then outstanding were converted into the right to receive shares of common stock of the Company, and all options to purchase common stock of Row 44 then outstanding were net stock settled for shares of common stock of the Company. In exchange for the shares of Row 44, the Company issued at closing 23,405,785 shares of GEAC common stock to the Row 44 equity holders. AIA's ownership of 3,053,634 shares of GEE stock was deemed to be treasury stock.

The cash flows related to the Row 44 Merger in the Business Combination, as reported in the unaudited consolidated statements of cash flows within the investing section, is summarized as follows (in thousands):

 
Amount
Operating cash
$
8

Add: cash held in trust
189,255

Less: cash paid for GEAC shares that were redeemed
(101,286
)
Add: cash received from backstop participants
71,250

Net cash received from Row 44 Merger
$
159,227


19

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)



AIA Stock Purchase

The acquisition date fair value of the consideration transferred totaled $144.3 million . The fair value was determined based on the closing market price of the Company's common stock on January 31, 2013. The fair values set forth below are subject to adjustments if additional information is obtained during the measurement period (a period of up to one year from the closing date) of this transaction that would change the fair value allocation as of the acquisition date.

The following table summarizes the provisional allocation of the AIA purchase price to the estimated fair values of the assets acquired and liabilities assumed in the AIA Stock Purchase (in thousands):
 
Amount
Goodwill
$
39,217

Existing technology – software
2,537

Existing technology – games
12,150

IPR&D
7,210

Customer relationships
79,871

Other intangibles
2,659

Content library
15,418

Other assets acquired, net of liabilities assumed
10,482

Net assets acquired
169,544

Less: Non-controlling interests
25,287

Total consideration transferred

$
144,257


As a result of the AIA Stock Purchase, a non-controlling interest was recorded on the Company's consolidated balance sheets. As of March 31, 2013 and September 30, 2013, the remaining 14% and 6% , respectively, of AIA shares was owned by others unrelated and independent of Global Eagle. The fair value of the non-controlling interest was determined based upon the fair value of AIA common stock on the closing date. Since the acquisition date, the results of AIA have been included in the Company’s consolidated financial results for the eight months ended September 30, 2013 in the Content segment.

PMG Asset Purchase

On July 9, 2013, the Company purchased substantially all the assets of Post Modern Edit, LLC and related entities to further expand its leadership in delivering media and content solutions to the global travel industry. Pursuant to the terms of the purchase, the Company acquired such assets of PMG in exchange for approximately $10.8 million in cash, 431,734 shares of common stock for a fair value of $4.4 million and the assumption of approximately $3.3 million in debt and $0.4 million in certain accrued obligations. The sellers of the PMG assets have the opportunity to receive an additional $5.0 million in cash if, among other things, the PMG business, combined with certain AIA businesses, achieve certain financial target milestones from the second half of 2013 through December 31, 2014 (the “PMG Earn Out”). Due to the fact that the PMG Earn Out is tied to the fulfillment of certain post-closing employment obligations by certain PMG executives, the Company is required to account for the PMG Earn Out as compensation to the sellers and is recognized as an expense over the requisite service period. During the quarter ended September 30, 2013, the Company accrued for approximately $0.2 million of the PMG Earn Out obligation.
As of September 30, 2013, the Company held 151,420 of the total 431,734 shares issuable to the sellers in escrow, which are subject to certain standard warranties and representations and scheduled to be released to the sellers by the end of 2013. In addition, approximately $0.3 million of the cash proceeds is subject to a hold back to satisfy post-closing obligations as well as a working capital adjustment and any remaining portion of such hold back amount that is not subject to then pending claims will be paid to the selling shareholders prior to the end of 2013.


20

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the provisional fair value of the assets and liabilities assumed in the PMG asset purchase (in thousands):

 
Amount
Goodwill
$
7,584

Trade Names
826

Customer relationships
6,865

Non-Compete
824

Fixed assets
3,284

Other assets acquired, net of liabilities assumed
(3,687
)
Total consideration transferred
$
15,696


Significant other assets and net liabilities assumed and included in the table above were $8.5 million of accounts receivable, $1.1 million of tape-stock inventory and prepaid assets, $1.1 million of restricted cash, $3.3 million of assumed indebtedness pertaining to debt assumed by the Company, and $11.1 million of accounts payable and accrued expenses outstanding and assumed at the purchase date. The fair values set forth above are subject to adjustments if additional information is obtained during the measurement period (a period of up to one year from the closing date) of this transaction that would change the fair value allocation as of the acquisition date. The Company incurred approximately $0.3 million in transaction costs associated with the PMG asset purchase. Since the acquisition date, the amount of revenue and net loss of PMG included in the consolidated statements of operations for the three and nine months ended September 30, 2013 was $12.8 million and $0.6 million , respectively.


Note 4. Property, Plant, and Equipment, net

At September 30, 2013 and December 31, 2012 , property, plant, and equipment, net consisted of the following (in thousands):
 
September 30, 2013
 
December 31, 2012
Leasehold improvements
$
1,145

 
$
370

Furniture and fixtures
1,279

 
526

Equipment
14,234

 
5,942

Computer equipment
3,141

 
981

Computer software
2,471

 
155

Automobiles
105

 
37

Buildings
218

 

Albatross (aircraft)
385

 
385

Other
11

 

Total property, plant, and equipment
22,989

 
8,396

Accumulated depreciation
(6,182
)
 
(3,757
)
Property, plant, and equipment, net
$
16,807

 
$
4,639


Depreciation expense for property, plant, and equipment amounted to $1.1 million and $2.4 million for the three and nine months ended September 30, 2013 , respectively and $0.4 million and $0.8 million during the three and nine months ended September 30, 2012, respectively.

21

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Depreciation expense, including software amortization expense, by classification for the three and nine months ended September 30, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
2012
 
2013
2012
Depreciation expense:
 
 
 
 
 
Cost of sales
$
546

$

 
$
1,256

$
257

Product Development
18


 
51


General and administrative
542

366

 
1,050

588

Total depreciation expense
$
1,106

$
366

 
$
2,357

$
845



Note 5. Intangible Assets, net

As a result of the Business Combination, the Company acquired definite-lived intangible assets that are primarily amortized on a straight-line basis. The Company's definite-lived intangible assets have assigned useful lives ranging from  1.5  to  8.5 years (weighted average of 7.2 years). The Company had no material indefinite-lived intangible assets at December 31, 2012 .

Intangible assets, net at September 30, 2013 , consisted of the following (in thousands):
 
 
 
September 30, 2013
 
Weighted Average Useful Lives
 
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Intangible assets:
 
 
 
 
 
Definite life:
 
 
 
 
 
Existing technology - software
8 years
 
$
2,574

$
(215
)
$
2,359

Existing technology - games
6 years
 
12,331

(1,370
)
10,961

IPR&D
8 years
 
7,317


7,317

Customer relationships
5.5 years
 
87,623

(6,883
)
80,740

Other
3.5 years
 
4,362

(991
)
3,371

Content library (acquired in business combination)
1.5 years
 
15,245

(6,776
)
8,469

Content library (acquired post business combination)
1.5 years
(1)
7,101

(1,773
)
5,328

Total intangible assets
 
 
$
136,553

$
(18,008
)
$
118,545

(1) Useful estimate based upon the content library acquired in business combination, which approximates historical experience.

Content library is classified on a standalone basis on the Company's September 30, 2013 condensed balance sheet. The Company expects to record amortization of the intangible assets as follows (in thousands):

Year ending December 31,        
Amount
2013 (3 months ended)
$
6,287

2014
28,364

2015
15,658

2016
14,301

2017
12,958

Thereafter
40,977

Total
$
118,545



22

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


The Company recorded amortization expense of $7.6 million and $0.0 million during the three months ended September 30, 2013 and 2012, respectively, and $18.0 million and $0.0 million during the nine months ended September 30, 2013 and 2012, respectively. Amortization expense excludes the amortization of the content library, which is included in cost of sales.

Note 6. Available For Sale (“AFS”) Securities

At March 31, 2013, the Company held $7.1 million of common stock at an unrealized gain of $1.4 million . During the three months ended June 30, 2013, the Company sold this investment for proceeds of approximately $5.9 million and recorded a realized gain of approximately $0.1 million . Unrealized gains or losses relating to AFS securities were historically accounted for by adjusting the carrying amount of the securities. An offsetting entry after the adjustment for taxes at the Company's corporate effective tax rate, when applicable, was recognized in accumulated other comprehensive income (loss).

Note 7. Commitments and Contingencies


Operating Lease Commitments

Operating lease commitments include payments on outstanding, noncancelable, operating lease obligations. The Company leases its operating facilities under noncancelable operating leases that expire through 2017 . The Company also leases certain facilities and vehicles under month-to-month arrangements. Total rent expense for the three and nine months ended September 30, 2013 and 2012 was $0.5 million , $1.6 million , $0.1 million , and $0.4 million , respectively. The Company is responsible for certain operating expenses in connection with these leases.
     
Satellite Cost Commitments

During the nine months ended September 30, 2013 the Company signed four amendments to its Master Services Agreement ("MSA") with its satellite service provider to provide for satellite capacity over Russia, the North Atlantic and for expansion of its existing capacity in the US and Europe. These collective amendments increased satellite cost commitments by a total of $40.0 million over the period from September 30, 2013 through December 31, 2018. The commitment increase by period is as follows: $1.7 million for the remainder of 2013, $9.3 million for 2014, $12.3 million for 2015, $8.4 million for 2016 and $4.2 million for each of the years 2017 and 2018. The Company expenses these satellite fees in the month the service is provided as a charge to cost of services.


Legal Matters

On December 28, 2012, Advanced Media Networks, L.L.C. filed suit in the United States District Court for the Central District of California against Row 44 and one of its customers which Row 44 has agreed to indemnify for allegedly infringing two of its patents and seeking injunctive relief and unspecified monetary damages. Both of the patents are being reexamined by the U.S. Patent & Trademark Office. Based on currently available information, the Company believes it has strong defenses and intends to defend vigorously against this lawsuit, but the outcome of this matter is inherently uncertain and could have a materially adverse effect on its Connectivity business, financial condition and results of operations. The potential range of loss related to this matter cannot be determined and as a result, no reserve has been established.

On October 22, 2013, Arista Music, Sony Music Entertainment and certain parties believed to be related to the foregoing filed suit in the United States Direct Court for the Southern District of New York against Inflight Productions Ltd. (“IFP”), one of its customers and a third party contractor of IFP for copyright infringement and related claims and unspecified money damages. IFP is a direct subsidiary of AIA and an indirect subsidiary of the Company. The Company is in the process of evaluating the merits of this matter, and we intend to defend vigorously against this matter, however the the outcome is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations. The potential range of loss related to this matter cannot be determined.

While the resolution of the above matters cannot be predicted with certainty, the Company does not believe, based on current knowledge, that the outcome of the currently pending claims or legal proceedings in which the Company is currently involved will have a material adverse effect on the Company's financial statements.

Business Combination


23

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


As a result of the AIA Stock Purchase, the Company assumed certain commitments. AIA’s long-term commitments include contracts for office space leases and operating equipment leases of $5.6 million , movie license fees of $23.1 million and certain guaranteed minimum payments owed to movie content providers of $7.5 million . In addition and as a result of the PMG asset purchase, the Company assumed obligations of $1.8 million associated with a 25 -year operating lease agreement.

The operating lease contracts usually have a contract period from 1 to 5 years. The movie license contracts have a contract period of 3 years. Minimum payments for already signed contracts are mainly to be paid within 12 months. The earn-out payment will be due in the years 2014 through 2016.

Note 8. Related Party Transactions

PAR Backstop Fee

In connection with the closing of the Row 44 Merger, the Company paid PAR $11.9 million under a backstop fee agreement. This was recorded as transaction costs reflected in operating results as a general and administrative expense in the nine month period ended September 30, 2013.
  
Agreement with Board Member and Former AIA Executive

During the three months ended September 30, 2013, the former CEO of AIA, who is also a current Board member, entered into a consulting agreement and mutual general release, which was subsequently amended (as so amended, the “Consulting Agreement”). The Consulting Agreement provides that, amongst other things, the former executive is entitled to certain remuneration, at the former executive’s option, in exchange for certain releases and subject to the Company closing an equity offering by January 1, 2014, in the form of (i) $3.0 million in cash or (ii) $1.0 million in cash and $2,000,000 in fully vested common shares (subject to certain limitations). If the equity offering does not occur by January 1, 2014, the Company would be required to issue the former executive 300,000 in fully vested common shares at no cost to the former executive (collectively, the “Remuneration Payment”). In addition the former executive (i) entered into a consulting arrangement at a rate of $41,666 per month, commencing September 2013 and ending on the date the Remuneration Payment is made and (ii) received a new stock option grant of 25,000 in September 2013 for his service as a Board member, which vests monthly over two years beginning on the date of grant. During the three months ended September 30, 2013, the Company recorded an expense of approximately $2.8 million associated with its Remuneration Payment obligation.

Share Repurchases

During the three months ended September 30, 2013, the Company repurchased approximately 95,000 shares of its common stock, at a price of $11.25 per share, from certain officers of the Company for the purpose of satisfying certain federal and state employment tax withholding obligations related to the January 2013 Business Combination. Upon the repurchase, the shares were cancelled.

Administrative Services

AIA's subsidiary, Entertainment in Motion (“EIM”), rents office space belonging to a company in which AIA's management has an ownership interest. There were no unpaid lease liabilities as of September 30, 2013 and December 31, 2012 . The Company recognized rent expense of $60,000 , $180,000 , $0 , and $0 for the three and nine months ended September 30, 2013 and 2012 , respectively. EIM also made a loan to one of its managing directors. As of September 30, 2013 , the outstanding balance was less than $0.1 million .


24

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 9. Convertible, Redeemable Preferred Stock, Stock Options, Common Stock and Warrants

Convertible, Redeemable Preferred Stock

The following is a summary of activity of Row 44's convertible, redeemable preferred stock for the nine months ended September 30, 2013 (in thousands):

Row 44 Preferred Stock
Series A-1
Series A-2
Series B-1
Series B-2
Series C-1
Series C-2
Total
Balance - January 1, 2013
$
9,245

$
21,454

$
27,488

$
19,981

$
24,535

$
19,837

$
122,540

Cumulative dividends
60

139

179

129

170

141

818

Accretion of preferred stock




57

67

124

Conversion to common stock
(9,305
)
(21,593
)
(27,667
)
(20,110
)
(24,762
)
(20,045
)
(123,482
)
Balance - September 30, 2013
$

$

$

$

$

$

$


Common Stock

The following is a summary of activity of the Company's common stock for the nine months ended September 30, 2013 (in thousands):

GEE Common Stock
Common Stock
Amount
Common Non-Voting Stock
Amount
Balance - January 1, 2013
20,352

$
2


$

Recapitalized as a result of Row 44 Merger

15,373

2

4,750

1

Stock Purchase of AIA



14,368

1

Repurchased and retired common stock held by certain executives
(95)




Asset Purchase of PMG
431




Balance - September 30, 2013
36,061

$
4

19,118

$
2


During the three months ended September 30, 2013, the Company acquired PMG assets in exchange for approximately $10.8 million , 431,734 shares of common stock and the assumption of approximately $3.3 million in debt. 151,420 of the shares are amounts held in escrow amounting to $1.6 million . In addition and during the same period, the Company also repurchased and retired approximately 95,000 shares of common stock to settle certain employee tax withholding obligations associated with the Business Combination in January 31, 2013.

Stock Options

In connection with the signing of the Row 44 Merger Agreement, Row 44's Board of Directors elected to accelerate the vesting of all outstanding stock options of Row 44 effective November 2012. Accordingly, the Company recorded all remaining unamortized grant date fair value as compensation expense in 2012 and terminated the Row 44 stock option plan as of January 31, 2013 . Of the 43,686,492 Row 44 stock options outstanding under the plan, 40,644,825 were exchanged for shares of Global Eagle stock, 2,816,667 options were forfeited and 225,000 options were exchanged for cash of $22,000 .

After the signing of the Row 44 Merger Agreement, the Company granted 2,175,000 Global Eagle stock options to key executives, 1,025,000 stock options to key employees and 150,000 stock options to the board members which had a weighted-average grant date fair value of $4.34 per stock option. Fair values of the stock options were determined using the Black-Scholes model and the following level 3 assumptions:


25

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Expected life (in years)
4.87

Risk-free interest rate
0.77
%
Expected stock volatility
50.00
%
Expected dividend yield
0.00
%

Stock option activity for nine months ended September 30, 2013 is as follows:

Row 44 2011 Equity Incentive Plan
Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value
Outstanding at January 1, 2013
43,686,492

$
0.11

7.95
$
9,187

Granted



Exercised-cashless (Global Eagle)
(40,644,825
)
0.11


Exercised-cash
(225,000
)
0.10


Forfeited
(2,816,667
)
0.10


Outstanding - January 31, 2013

$

$


Global Eagle Stock Option Plan
Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value
Outstanding at January 31, 2013

$

$

Granted
5,270,000

9.82

4.44
149,500

Exercised



Forfeited
(500,000
)
9.79

4.43

Outstanding at September 30, 2013
4,770,000

9.82

4.44
149,500

Exercisable at September 30, 2013
93,750

9.40

2.56

Expected to vest at September 30, 2013
4,676,250

$
9.83

4.48
$
149,500


The following is a summary of the Company's stock options outstanding at September 30, 2013 :

Exercise Price
Number Outstanding
Weighted Average Remaining Contractual Term (in years)
Number Exercisable
Weighted Average Exercise Price
$
10.00

2,970,000

4.34
43,750

$
10.00

$
9.83

700,000

4.74


$
9.79

525,000

4.43


$
8.88

575,000

4.62
50,000

8.88

 
4,770,000

4.44
93,750

$
9.40


Stock-based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows for the three and nine months ended September 30, 2013 and 2012 (in thousands):


26

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
2012
 
2013
2012
Stock-based compensation expense:
 
 
 
 
 
Cost of services
$

$

 
$

$

Sales and marketing expenses


 


Product development


 

32

General and administrative
526

73

 
1,902

716

Total stock-based compensation expense
$
526

$
73

 
$
1,902

$
748

 
Warrants

At December 31, 2012, Row 44 had issued and outstanding warrants with various investors and partners to purchase up to 84,612,107 shares of its common stock with a weighted average price of $0.08 per common share and a weighted average remaining term of 4.92 years. Excluded from these warrants were 21,173,758 shares owned by AIA and eliminated in consolidation in conjunction with the Business Combination on January 31, 2013.

The following is a summary of activity for Row 44 warrants for common stock convertible into GEE common stock for the nine months ended September 30, 2013 :

Row 44 Warrants for Common Stock - Upon Exercise Convertible to Global Eagle Common Stock
Number of Warrants
Weighted Average Exercise price
Weighted Average Remaining Contractual Term (in years)
Outstanding - January 1, 2013
84,612,107

$
0.0801

4.92
Granted
2,414,524



Exercised
(65,964,131)

0.0001


Forfeited



Outstanding - January 31, 2013
21,062,500

0.3214

4.03
Granted



Exercised



Forfeited



Outstanding - September 30, 2013
21,062,500

0.3214

3.37
Exercisable at September 30, 2013
21,062,500

0.3214

3.37

In conjunction with the Business Combination and on January 31, 2013, the Company converted 21,062,500 Row 44 warrants to warrants to purchase up to 721,600 shares of Global Eagle common stock. The following is a summary of all Row 44 warrants converted to warrants to purchase GEE common stock (exercise price per warrant and number of warrants presented using the conversion ratio to Global Eagle common stock used in the Row 44 Merger) outstanding at September 30, 2013:

Weighted Average Exercise Price per Warrant (as converted)
Number of Warrants (as converted)
Weighted Average Remaining Life (in years)
Common stock warrants
$
9.45

721,600

3.37
Series C Preferred stock warrants
$
8.74

734,451

3.69


27

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following is a summary of Global Eagle warrants for the three and nine months ended September 30, 2013 :

Global Eagle Warrants
Number of Warrants
Weighted Average Exercise price
Weighted Average Remaining Contractual Term (in years)
Outstanding at January 31, 2013
25,992,500

$
11.50

5.00
Granted
666,667

11.50


Exercised



Purchased
(500,000
)
11.50

 
Forfeited



Outstanding and exercisable at September 30, 2013
26,159,167

$
11.50

4.34

The following is a summary of all Global Eagle warrants outstanding at September 30, 2013 :

Exercise Price per Warrant
Number of Warrants
Class of Shares
Weighted Average Remaining Life (in years)
 
$
11.50

18,492,500

Public Warrants
4.34
Total outstanding
 
18,492,500

 
 
 
11.50

666,667

Sponsor Warrants
4.32
 
$