Global Eagle Entertainment
Global Eagle Entertainment Inc. (Form: 10-Q, Received: 05/15/2013 12:14:28)

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

FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 10, 2013)
 
COMMON STOCK, $0.0001 PAR VALUE
 
 
35,724,655
SHARES*
 
NON-VOTING COMMON STOCK, $0.0001 PAR VALUE
 
 
19,118,233
SHARES
 
* Excludes 3,054,634 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.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts and par value)
March 31, 2013
December 31, 2012
ASSETS
(unaudited)
 
CURRENT ASSETS:
 
 
Cash and cash equivalents
$
135,251

$
2,088

Accounts receivable, net of allowance for doubtful accounts of $7 and $7
41,350

7,797

Income tax receivable
5,686


Receivable from related parties
23


Content library, net
11,491


Inventories
8,460

4,311

Prepaid expenses
6,121

3,107

Deferred tax assets
538


Available for sale securities
7,140


Other current assets
3,485

237

TOTAL CURRENT ASSETS:
219,545

17,540

OTHER ASSETS:
 
 
Property, plant & equipment, net
7,907

4,639

Goodwill
40,301


Customer relationships, net
78,416


Other intangible assets, net
23,926


Content library, net
1,845


Other non-current assets
1,193

614

TOTAL OTHER ASSETS:
153,588

5,253

TOTAL ASSETS
$
373,133

$
22,793

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
CURRENT LIABILITIES:
 
 
Accounts payable and accrued liabilities
$
59,875

$
7,790

Deferred revenue
6,035

4,593

Derivative warrant liabilities
29,181

8,178

Income tax payable
6,630


Deferred tax liabilities
524


Accrued payroll and employee benefits
5,724

389

Notes payable and accrued interest
7,755

14

Other current liabilities
2,944


TOTAL CURRENT LIABILITIES:
118,668

20,964

OTHER LIABILITIES:
 
 
Accrued liabilities
4,070


Other non-current liabilities
257


Notes payable and accrued interest, net of current portion
3,337

38

Deferred tax liabilities
21,856


TOTAL LIABILITIES
148,188

21,002

 
 
 
COMMITMENTS AND CONTINGENCIES


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

19,837

            TOTAL REDEEMABLE PREFERRED STOCK

122,540


1

GLOBAL EAGLE ENTERTAINMENT INC.
CONSOLIDATED BALANCE SHEETS (Continued)

STOCKHOLDERS' EQUITY:
 
 
Common stock, $0.0001 par value; 375,000,000 shares authorized, 38,778,289 and 23,405,785 shares issued, 35,724,655 and 20,352,151 shares outstanding, at March 31, 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 March 31, 2013 and December 31, 2012, respectively
2


Treasury stock, 3,053,634 shares at March 31, 2013 and December 31, 2012


Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively


Additional paid-in capital
363,189

8,238

Subscriptions receivable
(459
)
(453
)
Accumulated deficit
(155,335
)
(128,536
)
 Accumulated other comprehensive income (loss)
1,024


Total Global Eagle Entertainment Inc., Stockholders' Equity
208,425

(120,749
)
Non-controlling interest
16,520


TOTAL STOCKHOLDERS' EQUITY
224,945

(120,749
)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
373,133

$
22,793


See accompanying notes to the unaudited consolidated financial statements.

2

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended
 
       March 31,
(in thousands, except share amounts and per share data)
2013
2012
Revenue:
 
 
Licensing revenue
$
23,677

$

Equipment revenue
8,709

17,630

Service revenue
9,846

2,079

Total revenue
42,232

19,709

Cost of goods sold and services:
 
 
Cost of goods sold
22,407

14,625

Cost of services
9,763

4,008

Total cost of goods sold and services
32,170

18,633

   Gross profit
10,062

1,076

Operating expenses:
 
 
     Salaries and wages
8,597

1,937

     Selling, general and administrative
18,277

2,076

     Depreciation and amortization
1,661

239

     Research and development, net
1,193

649

     Other operating expenses
2,303


Total operating expenses
32,031

4,901

Loss from operations
(21,969
)
(3,825
)
Other income (expense):
 
 
Interest income
16

16

Interest expense
(192
)
(3,283
)
Change in fair value of derivative financial instruments
(4,615
)

Other income (expense)
(44
)

Total other income (expense)
(4,835
)
(3,267
)
Loss before income taxes
(26,804
)
(7,092
)
Income tax expense
(34
)

Net loss
(26,838
)
(7,092
)
Plus: Net loss attributable to non-controlling interest
39


Net loss attributable to Global Eagle Entertainment Inc. stockholders
(26,799
)
(7,092
)
Less: Preferred stock dividends
(818
)
(1,376
)
Less: Accretion of preferred stock
(124
)

Net loss attributable to Global Eagle Entertainment Inc. common stockholders
$
(27,741
)
$
(8,468
)
Net loss attributable to Global Eagle Entertainment Inc. common stockholders per share:
 
 
Basic
$
(0.64
)
$
(0.42
)
Diluted
$
(0.64
)
$
(0.42
)
Weighted average common shares outstanding:
 
 
Basic
43,345,976

20,352,151

Diluted
43,345,976

20,352,151


See accompanying notes to the unaudited consolidated financial statements.


3

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


Three Months Ended
 
March 31,
(in thousands)
2013
2012
Net loss attributable to Global Eagle Entertainment Inc. common stockholders
$
(26,799
)
$
(7,092
)
Other comprehensive income (loss), net of tax:
 
 
     Unrealized foreign currency translation adjustments

(223
)

     Unrealized gain on available for sales securities
1,353


Other comprehensive income (loss), net of tax
1,130


Less: Comprehensive (income) loss attributable to non-controlling interest
(106
)

Comprehensive loss attributable to Global Eagle Entertainment Inc. common stockholders
$
(25,775
)
$
(7,092
)


4

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (dollars 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
20,352,151

$
2


$


$

$
8,238

$
(453
)
(128,536
)
$

$
(120,749
)
$

$
(120,749
)
Reclassification of MLBAM warrants






2,696




2,696


2,696

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
15,372,504

2

4,750,000

1



229,025




229,028


229,028

Stock purchase of AIA


14,368,233

1



144,256




144,257

25,287

169,544

Shares of the Company acquired in stock purchase of AIA




3,053,634


(30,659
)



(30,659
)
 
(30,659
)
Conversion of Sponsor promissory note to warrants






(393
)



(393
)

(393
)
Waiver modification of sponsor warrants






9,900




9,900


9,900

Stock-based compensation






496




496


496

Interest income on subscription receivable







(6
)


(6
)

(6
)

5

Table of Contents
GLOBAL EAGLE ENTERTAINMENT INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (continued) (dollars in thousands)

Purchase of subsidiary share from non-
controlling interest shareholders






92




92

(8,834
)
(8,742
)
Foreign currency translation adjustment









(223
)
(223
)


(223
)
Unrealized gain on available for sale securities, net of tax









1,247

1,247


1,247

Comprehensive income attributable to non-controlling interest











106

106

Net loss








(26,799
)

(26,799
)
(39
)
(26,838
)
Balance, March 31, 2013
35,724,655

$
4

19,118,233

$
2

3,053,634

$

$
363,189

$
(459
)
$
(155,335
)
$
1,024

$
208,425

$
16,520

$
224,945


See accompanying notes to the unaudited consolidated financial statements.

6

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
(in thousands)
March 31,
 
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net loss
$
(26,838
)
$
(7,092
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
4,702

239

Non-cash interest on convertible promissory notes

2,972

Change in fair value of common stock warrants
93


Provision for doubtful accounts
(134
)

Interest income on subscriptions receivable
(6
)
(13
)
Loss (gain) disposal of assets
(5
)

FX effect on intercompany borrowings
1,378


Change in fair value of derivative financial instruments
4,456


Stock-based compensation
496

459

Warrants for common stock issued for services
309

279

Common stock issued for services

550

Deferred income taxes
(1,201
)

Changes in operating assets and liabilities:
 
 
Accounts receivable
(2,827
)
(4,687
)
Inventory
(1,105
)
278

Prepaid expenses and other current assets
(1,960
)
(443
)
Deposits and other assets
(397
)
(343
)
Accounts payable and accrued expenses
(13,526
)
419

Deferred revenue
(147
)
(2,093
)
Other long-term liabilities
(385
)

NET CASH USED IN OPERATING ACTIVITIES
(37,097
)
(9,475
)
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Purchases of property and equipment
(256
)
(76
)
Cash received from Row 44 Merger
159,227


Cash received from AIA Stock Purchase
22,136


NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
181,107

(76
)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Acquisition of non-controlling interest
(9,512
)

Proceeds from issuance of notes payable

10,000

Long-term borrowings, net of costs
(80
)

Payments on notes payable

(3
)
Proceeds from the exercise of common stock warrants
5


Proceeds from the exercise of common stock options
291


Repayment of short-term borrowings
(327
)

NET CASH USED IN FINANCING ACTIVITIES
(9,623
)
9,997

Effects of exchange rate movements on cash and cash equivalents
(1,224
)

Net increase in cash and cash equivalents
133,163

446

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,088

8,810

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
135,251

$
9,256




7

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


Supplemental disclosures of cash flow information:
 
 
Interest paid in cash
$
(586
)
$
1

Income taxes paid in cash
$
(1,019
)
$
2

 
 
 
Supplemental disclosure of non-cash financing and investing activities:
 
 
Purchase of AIA through issuance of common stock
$
(144,257
)
$

Conversion of sponsor promissory note to warrants
$
393

$

Reclassification of sponsor warrants due to waiver
$
9,900

$

Reclassification of MLBAM warrants
$
2,696

$

Property and equipment purchased with warrants for common stock
$
50

$


See accompanying notes to the unaudited consolidated financial statements.

8

Table of Contents

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements

Note 1. Business

On February 2, 2011 , Global Eagle Acquisition Corp, (“GEAC”) was formed to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On November 8, 2012 , GEAC entered into an Agreement and Plan of Merger and Reorganization (the "Row 44 Merger Agreement") with Row 44 and PAR Investment Partners, L.P. (“PAR”) to acquire all of the outstanding capital stock of Row 44 (the “Row 44 Merger”), and a Stock Purchase Agreement (the "AIA Purchase Agreement") with PAR (the “AIA Stock Purchase”) for the purchase of all of the shares of AIA capital stock held by PAR (collectively with the Row 44 Merger, the "Business Combination"). On January 31, 2013 , the stockholders of GEAC approved the Business Combination, and 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”). Refer to Note 2. "Business Combination" of this Form 10-Q for additional information.

GEE provides commercial airlines and the millions of passengers they serve with a full service offering of in-flight entertainment content, Internet access e-commerce, and information products. Through its Row 44, Inc. ("Row 44") subsidiary, Global Eagle utilizes Ku-band satellite technology to deliver airline passengers Internet access, live television, on-demand content, shopping and travel-related information. Currently installed on more than 475 aircraft, Row 44 has outfitted and supports the largest fleet of in-flight entertainment and connectivity ("IFEC") connected aircraft capable of operating over land and sea. Through its Advanced Inflight Alliance AG ("AIA") subsidiary, Global Eagle selects, manages, and distributes video and music programming, applications, and video games to more than 130 airlines worldwide. Global Eagle is headquartered in Westlake Village, California and maintains offices and support personnel around the world.

Note 2. Business Combination

Basis of Presentation and Accounting Treatment of the Business Combination

After the closing of the Business Combination on January 31, 2013 , Row 44 became the accounting acquirer of GEE, and concurrently, GEE acquired 86% of the issued and outstanding shares of AIA held by PAR.

Row 44 is considered the acquirer for accounting purposes, and has accounted for the Row 44 Merger as a recapitalization. The AIA Purchase Agreement 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 is 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 selling, general, and administrative expense in the period ended March 31, 2013.

The fair values set forth in the AIA Purchase Agreement are 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.

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

9

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


this Form 10-Q. There were no additional shares of common stock of the Company issued in the period following the consummation of the Business Combination and March 31, 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 .

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


10

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements



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
Cash and cash equivalents
$
22,136

Trade receivables (1)
31,611

Content library
14,298

Inventories
2,035

Prepaid expenses
1,531

Investments
36,766

Intangible assets
105,547

Property and equipment
3,277

Deferred taxes
251

Other assets
10,974

Total identified assets acquired
228,426

Accounts payable
11,729

Accrued liabilities
43,398

Deferred revenue
1,590

Debt
11,633

Tax liabilities
4,654

Deferred tax liabilities, net
24,970

Other liabilities
1,209

Total liabilities assumed
99,183

Net identified assets acquired
129,243

Goodwill
40,301

Net assets acquired
169,544

Less: Non-controlling interests
25,287

Total consideration transferred

$
144,257


(1) Gross contractual amounts past due total $8.0 million and $1.6 million estimated to be uncollectible.

As a result of the AIA Stock Purchase, a non-controlling interest was recorded on the Company's consolidated balance sheets. The remaining 14% 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 January 31, 2013 , net loss attributable to the non-controlling interest has been $39,000 and comprehensive loss attributable to the AIA non-controlling interest has been $0.1 million .

The fair value of assets acquired included accounts receivable of $31.6 million consisting of the gross amount due under contracts of $33.2 million , net of $1.6 million estimated to be uncollectible.

The fair value of assets acquired also included intangible assets of $105.5 million , with a weighted average amortization life of 7.2 years. See Note 5. "Intangible Assets" in the Notes to unaudited consolidated financial statements for additional purchase price allocation information related to intangible assets.

11

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements



The amount of revenue and net loss of AIA since the acquisition date included in the consolidated statements of operations for the period ended March 31, 2013 is $27.5 million and $(0.6) million , respectively.

The fair value of liabilities acquired included prior business combination and earn-out liabilities of $1.2 million , which will be amortized over a weighted average life of 2.3 years.

The following table presents pro forma results of GEE as if the Business Combination had occurred as of January 1, 2012 , (the beginning of the earliest period presented). These pro forma results do not necessarily represent what would have occurred if the Row 44 Merger and AIA Stock Purchase had taken place on January 1, 2012 , nor do they represent the results that may occur in the future. The pro forma amounts include the historical operating results of the Company prior to the Business Combination, with adjustments directly attributable to the Business Combination. The pro forma results include (decreases) increases to tax expense assuming Row 44 and AIA were part of the Company in the amount of $(1.8) million and $2.2 million for the three months ended March 31, 2013 and 2012 , respectively. The pro forma results also include increases to amortization expense, related to the fair value of the intangible assets acquired, amounting to $5.3 million and $1.5 million for the three months ended March 31, 2013 and 2012 , respectively.


Three Months Ended
 
March 31,
(in thousands, except per share data)
2013
2012
Revenues
$
55,557

$
61,136

Net loss
$
(49,924
)
$
(10,217
)
Basic net loss per share
$
(1.15
)
$
(0.50
)
Diluted net loss per share
$
(1.15
)
$
(0.50
)

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("US GAAP") to reflect the financial position, results of operations and cash flows of the Company. These financial statements have been prepared on a going concern basis, which assumes the realization of assets and satisfaction of liabilities in the normal course of business.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted.   These consolidated financial statements should be read in conjunction with the Company's most recent audited consolidated financial statements and related notes for the fiscal year ended December 31, 2012 , which are included in the Company's 8K/A filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, on March 18, 2013 . In the opinion of management, all adjustments considered necessary have been made for a fair presentation of the results of these interim periods. All adjustments are of a normal, recurring nature, except as otherwise disclosed in this Note under the Correction of an Immaterial Error in the Financial Statements section.

Principles of Consolidation

The unaudited consolidated financial statements included herein are the financial statements of Global Eagle and its owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation, including AIA's investment in Row 44. The Company's fiscal year ends on December 31 . The operating results for the interim period presented are not necessarily indicative of the results that may be expected for the Company's fiscal year ending December 31, 2013 .
 
Use of Estimates
 
The preparation of the Company's unaudited consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Management bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the

12

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


circumstances. The amount of assets and liabilities reported on the Company's balance sheets and the amounts of income and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, revenue recognition, accounts receivable and related reserves, useful lives of property, plant and equipment and intangible assets, fair value of financial instruments, intangible assets and goodwill, valuation of inventory and related reserves, warrants and derivatives, earn-out liabilities, income taxes, contingent liabilities, and determining the fair value of stock-based compensation awards. Accordingly, actual results may differ from these estimates.

Segments of the Company

The Company currently reviews its business from a segmented perspective. The Company believes that total segment operating income is an appropriate measure for evaluating the operating performance of Global Eagle’s business segments because it is the primary measure used by Global Eagle’s chief operating decision makers to evaluate the performance and allocate resources within Global Eagle’s businesses. Total segment operating income provides the chief operating decision makers, investors and equity analysts a measure to analyze operating performance of each of Global Eagle’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). Global Eagle’s consolidated business is divided into three reporting segments as follows:

Connectivity
Connectivity represents the current Row 44 business, and is the Company's global satellite-based broadband services provider to the worldwide commercial airline industry. Row 44's network enables airlines to connect to orbiting Ku-band satellites and to communicate with existing satellite ground earth stations. Row 44's in-cabin communications link currently provides airline passengers with Internet access, live television, on-demand media, shopping and flight and destination information.

Content Service Providing ("CSP")
CSP represents a portion of the current business of AIA, and is providing technical and substantive services related to in-flight entertainment; however, AIA's range of services does not include development, provision or maintenance of the hardware that airlines use on-board for in-flight entertainment purposes.

Content
The Company's in-flight entertainment content business, a current segment of AIA's business, creates, purchases, develops and/or utilizes content such as movies and audio.

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.

Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times, may exceed the Federal Depository Insurance Coverage ("FDIC") of $250,000 . The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

The Connectivity segment of the business has a major customer that has historically accounted for a significant portion of revenue and receivables. During the three months ended March 31, 2013 and 2012 , the customer represented 65% and 65% of net revenues, respectively. Total connectivity segment accounts receivable from this customer represented 63% and 78% of total accounts receivable at March 31, 2013 and December 31, 2012 , respectively.

The CSP segment of the business has two major customers that have historically accounted for a significant portion of revenue and receivables. During the two months ended March 31, 2013, these customers represented 15% and 11% of net revenues, respectively. Total CSP segment accounts receivable from these customers represented 11% and 8% of total accounts receivable at March 31, 2013, respectively.

The Content segment of the business has two major customers that have historically accounted for a significant portion of revenue and receivables. During the two months ended March 31, 2013, these customers represented 15% and 11% of net

13

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


revenues, respectively. Total Content segment accounts receivable from these customers represented 21% and 5% of total accounts receivable at March 31, 2013, respectively.

The Connectivity segment of the business is also significantly dependent on certain key suppliers. The Connectivity segment purchases its satellite bandwidth from a single supplier, which also provides the segment with certain equipment and servers required to deliver the satellite stream, rack space at the supplier's data centers to house the equipment and servers and network operations service support. The Connectivity segment also purchases radomes and rings from a single supplier. Additionally, the segment purchases its satellite antenna system from another single supplier. Any interruption in supply from these significant vendors could have a material impact on the Company’s ability to provide connectivity to its commercial airline customers.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with ASC 718, "Compensation - Stock Compensation” , which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the estimated grant date fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's statement of operations.

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 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. 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 option or warrant.

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. Cash flows from other derivatives are reported in cash flows from investing activities 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).

Accounts Receivable, net

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.

Inventory, net

Inventories, which are classified as finished goods, are comprised of individual parts and assemblies and are stated at the lower of cost or market. Cost of inventory is determined using actual cost on a first-in, first-out basis. 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,

14

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


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.

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.

Property, plant and equipment is reviewed for disposal when no economic benefit is expected from the continuing use or sale of the asset. Gains or losses arising from the retirement or disposal of the asset shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognized as a gain or loss in the period in which the asset is disposed of or retired. The residual values, useful lives and depreciation methods applied to assets are reviewed annually and adjusted prospectively as necessary.

Intangible Assets and Goodwill

Intangible assets with finite useful lives are amortized over their useful life and tested for impairment if there are any indicators of impairment. An impairment loss is recognized only if the carrying amount of a long-lived asset with finite useful lives is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Amortization of intangible assets with finite useful lives is recognized in the statements of operations under cost of goods sold.

Goodwill is not amortized, but instead will be tested for impairment annually or more frequently if certain indicators are present. In the event management of the Company determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during the quarter in which the determination is made is recognized.

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 finite useful lives 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. Certain film rights in the Company's portfolio may be used in perpetuity under certain conditions. The content library is tested for impairment at least annually. Considering the marketability of the given film right, an impairment loss is recognized as necessary. If the cash flows from the future revenue forecast of a given film right are lower than its carrying amount as of the reporting date, an impairment loss is recognized.

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 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.

Revenue Recognition

The Company recognizes revenue when all of the following have occurred:

persuasive evidence of an agreement with the customer exists;
products are shipped and the customer takes delivery;
the selling price is fixed or determinable; and
collectability of the selling price is reasonably assured.

Equipment Revenue

Revenue recognition from sales of equipment to airlines, which are hardware equipment sets that the Company purchases from third party vendors and then sells to the commercial airlines, generally occurs at the time of shipment or delivery, depending on shipping terms.

15

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Service Revenue

Service revenue is recognized after it has been rendered and the customer can use the service, which can be in the form of (i) enplanement for boarded passengers or (ii) usage by passengers, depending upon the specific contract.

Licensing Revenue

In the CSP segment, revenue is recognized for service arrangements associated with licenses after the service has been rendered and the customer can use the service in the form of an "in-flight entertainment package." This is the case at the beginning of what is known as the "on-board cycle," i.e., at the inception of the license or from the time when the customer can use the services provided in the aircraft.

In the content segment, revenue from the use and/or sublicensing of the film rights for in-flight entertainment is realized at the time the customer's license period begins. Any additional services rendered, such as technical services or the provision of materials, are billed as ancillary costs, and recognized as services are provided.

Revenue Share

A portion of service revenues earned from airline passengers is shared with some airline customers. The terms of the revenue share agreements vary with each airline, however, are typically based upon the net revenue of services and are expensed to cost of services in the period the service is provided.

Deferred Revenue

Deferred revenue primarily consists of prepayments received from customers for which the Company's revenue recognition criteria have not been met. The deferred revenue will be recognized as revenue once the criteria for revenue recognition have been met.

Multiple-Element Arrangements

Revenue derived from a single sales contract that contains multiple products and services is allocated based on the relative selling price of each delivered item and recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting.
 
Research and Development

The Company’s research and 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. Research and development costs are expensed as incurred.

Earnings (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 period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Adjustments arising from the use of differing exchange rates from period to period are included in the statements of comprehensive loss.


16

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Income Taxes

Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. Due to the uncertainty over our ability to realize future taxable income in certain jurisdictions, the Company has recorded a valuation allowance of $42.2 million and $0.6 million against our domestic and foreign deferred tax assets as of March 31, 2013, respectively
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense. No interest expense or penalties have been recognized as of and for the three months ended March 31, 2013 and 2012. The Company is subject to income taxes in the U.S. and numerous state and foreign jurisdictions in which it operates.
Correction of an Immaterial Error in the Financial Statements

From the time of issuance, March 2012, through the period ended December 31, 2012, the Company accounted for 20 million common stock warrants issued by Row 44 to a certain supplier (“supplier warrants”) as a derivative liability. At the time of issuance, the Company recorded the fair value of these supplier warrants as a derivative liability in the amount of $279,000 . Since that time the Company has marked-to-market these supplier warrants with changes being recorded to change in fair value of financial derivative liabilities in its statements of operations. The total liability associated with these supplier warrants at December 31, 2012 was $2.7 million

During the first fiscal quarter of 2013, the Company concluded that these supplier warrants should not have been classified as derivative liabilities as certain features that called for liability classification had expired. As such the Company elected to reclassify the amount related to this warrant liability in the amount of $2.7 million to additional paid-in capital during the fiscal quarter ended March 31, 2013.
The Company evaluated the effect of making such a reclassification as of the date the supplier warrants became exercisable on its financial condition as of March 31, 2013 and December 31, 2012, and the effect of recognizing the change in the value of the Warrant in its operating results as of each quarterly and annual reporting period for the year ended December 31, 2012.  As a result, the Company concluded that the effects of the reclassification upon each quarterly and annual reporting period, was not material.  Consequently, the Company recognized the cumulative effects of these adjustments in the Company's first quarter of 2013 as an immaterial correction of an error, which is reflected in the accompanying consolidated financial statements for the quarter ended March 31, 2013.
The following table presents the effect this correction would have had on the Company's prior period reported financial statements. Additionally, financial information included in the notes to the financial statements or elsewhere in this Form 10-Q that is impacted by the adjustment have been revised, as applicable. The Company considers these adjustments to be immaterial to prior periods individually and in the aggregate.


December 31, 2012
 (in thousands)
As reported
Adjustment
As adjusted
Derivative warrant liabilities
$
8,178

$
(2,696
)
$
5,482

Additional paid-in capital
$
8,238

$
2,696

$
10,934


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 change the requirements for reporting net income or other comprehensive income in financial statements.

17

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


As the new guidance relates to presentation only, the adoption did not have a material 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 .


18

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements



Note 4. Property, Plant, and Equipment, net

At March 31, 2013 and December 31, 2012 , property, plant, and equipment, net consisted of the following:
(in thousands)
March 31, 2013
December 31, 2012
Leasehold improvements
$
493

$
370

Furniture and fixtures
933

526

Equipment
6,876

5,942

Computer equipment
2,226

981

Computer software
901

155

Automobiles
153

37

Buildings
210


Albatross (aircraft)
385

385

Other
7


Total property, plant, and equipment
12,184

8,396

Accumulated depreciation
(4,277
)
(3,757
)
Property, plant, and equipment, net
$
7,907

$
4,639


Depreciation expense for property, plant, and equipment amounted to $0.5 million and $0.2 million during the three months ended March 31, 2013 and 2012 , respectively.

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. The Company had no material indefinite-lived intangible assets at December 31, 2012 .

Intangible assets, net at March 31, 2013 , consisted of the following:
 
 
March 31, 2013
(in thousands)
Weighted Average Useful Lives
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Intangible assets:
 
 
 
 
Definite life:
 
 
 
 
Existing technology - software
8 years
$
2,537

$
(53
)
$
2,484

Existing technology - games
6 years
12,150

(338
)
11,812

IPR&D
8 years
7,210


7,210

Customer relationships
8.5 years
79,871

(1,455
)
78,416

Other
2 years
2,659

(239
)
2,420

Content library
1.5 years
15,418

(2,082
)
13,336

Total intangible assets
 
$
119,845

$
(4,167
)
$
115,678





19

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Concurrent with the Business Combination, The Company acquired approximately 86% of the issued and outstanding shares of AIA, all of which were owned by PAR. The purchase price was allocated to the intangible assets as follows:

(in thousands)
Purchase Price Allocation
Existing technology - software
$
2,537

Existing technology - games
12,150

IPR&D
7,210

Customer relationships
79,871

Other
2,659

Content library
15,418

Total
$
119,845

As of March 31, 2013 , there were no legal, regulatory or contractual limitations associated with these intangible assets.

The Company expects to record amortization of the intangible assets over the next five fiscal years and thereafter as follows:

Year ending December 31,        (in thousands)
Amount
2013 (9 months ended)
$
10,528

2014
13,835

2015
13,323

2016
12,973

2017
12,972

Thereafter
52,047

Total
$
115,678

The Company recorded amortization expense of $4.2 million and $0 in the three months ended March 31, 2013 and 2012, respectively.

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

A summary of investments held by the Company at March 31, 2013 is as follows:
 
March 31, 2013
(in thousands)
Fair Value at Business Combination
Gross
Unrealized
Gains  
Gross
Unrealized
Losses  
Fair Value
Available for sale:
 
 
 
 
Common stock (1)
$
5,771

$
1,369

$

$
7,140

Total AFS securities
$
5,771

$
1,369

$

$
7,140


(1)
Common stock represents a minority investment in GuestLogix, Inc.

There were no investments held by the Company as of December 31, 2012 .

At March 31, 2013 , the Company held $7.1 million of common stock at an unrealized gain of $1.4 million . Unrealized gains or losses relating to AFS securities are 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, is recognized in accumulated other comprehensive income (loss).


20

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Note 7. 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 nonrecurring 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 and non-recurring basis as of March 31, 2013 , and December 31, 2012 , respectively:

(in thousands)
March 31, 2013
Quotes Prices in Active Markets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Other Unobservable Inputs (Level 3)
AFS securities
$
7,140

$
7,140

$

$

Total financial assets
$
7,140

$
7,140

$

$

 
 
 
 
 
Earn-out liability
$
1,265

$

$

$
1,265

Interest rate swaps
149


149


Global Eagle warrants (1)
26,090

26,090



Series C preferred warrants
3,091



3,091

Total financial liabilities
$
30,595

$
26,090

$
149

$
4,356


(1) Includes 18,992,500 public warrants and 333,333 sponsor warrants.
(in thousands)
December 31, 2012
Quotes Prices in Active Markets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Other Unobservable Inputs (Level 3)
Total financial assets
$

$

$

$

 
 
 
 
 
Series C warrants
$
5,482

$

$

$
5,482

Common stock warrants
2,696



2,696

Total financial liabilities
$
8,178

$

$

$
8,178


There were no assets or liabilities transferred in or out of level 3 during the periods presented.

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

Common Stock

The common stock is recorded at fair value on a recurring basis. The fair value of the common stock is reported as level 1 because the share price is obtained directly from a public exchange. Therefore, it is an observable quoted price in an active market.

21

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements



Earn-Out Liabilities

The fair value of the earn-out liabilities 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 them 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.

Interest Rate Swaps

AIA uses futures to hedge a portion of its risk of increases in variable interest rates related to its bank loan from UniCredit Bank AG. These interest rate swaps are marked to market at the end of each reporting period. Interest rate swaps of $0.1 million were recognized in derivative liabilities as of the reporting date. The Company classifies the fair value of interest rate swaps within the level 2 hierarchy. Gains (losses) from these interest rate swaps for the three months ended March 31, 2013 , and 2012 , were $4,000 and $0 , respectively.

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. 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 months ended March 31, 2013 , and 2012 , were $(4.2) million and $0 , respectively.

The fair values of warrants for Row 44's Series C Preferred Stock that were assumed by GEE under the Row 44 Merger Agreement 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 expected 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 expected term is accompanied by a change in the assumption used for the risk-free rate and the expected stock volatility. The change in value of derivative liabilities is presented as a part of other income (expenses) in the accompanying statements of operations. Income (expense) from the Series C warrants for the three months ended March 31, 2013 , and 2012 , were $(0.3) million and $0 , respectively. Income (expense) from the Common Stock warrants for the three months ended March 31, 2013 , and 2012 , were $(0.1) million and $(0.3) million , respectively. Please refer to the Note 10. "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 and the fair values of financial assets and liabilities not carried at fair value in the consolidated financial statements at March 31, 2013 and December 31, 2012 , respectively:

 
March 31, 2013
December 31, 2012
(in thousands)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Financial Assets:
 
 
 
 
Other Assets
$

$

$

$

Financial Liabilities:
 
 
 
 
Notes Payable
$
11,092

$
10,200

$

$


Notes Payable

The Company classifies the notes payable within the level 2 hierarchy because it uses discount rates on the public market for similar credit-rated companies for its valuation. The fair value presented above is calculated based on the present value of expected principle and interest cash flows.

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 three months ended March 31, 2013 , and 2012 , respectively:


22

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


(in thousands)
Series C Warrants
Common Stock Warrants
Earn-Out Liability
Total
Balance, January 1, 2013
$
5,482

$
2,696

$

$
8,178

  Reclassification to equity

(2,696
)

(2,696
)
  Change in value
344



344

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


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


1,265

1,265

Balance, March 31, 2013
$
3,091

$

$
1,265

$
4,356


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

$

$

$

Issuance of warrants

279


279

  Change in value




Balance, March 31, 2012
$

$
279

$

$
279



23

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Note 8. 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 months ended March 31, 2013 and 2012 was $0.5 million and $0.1 million , respectively. The Company is responsible for certain operating expenses in connection with these leases.
     
Satellite Costs Commitments

In the first quarter of 2013 the Company signed an amendment to the Master Sales Agreement ("MSA") with its satellite service provider to provide for satellite capacity in Russia in support of its newly signed Russian airline customers. The amendment increases satellite cost commitments by $0.8 million for the remainder of 2013 and by $2.1 million for each of the years 2014 through 2016. The Company expenses these satellite fees in the month the service is provided as a charge to cost of services.

Legal Matters

From time to time, the Company is involved in certain claims and proceedings arising in the normal course of business. While the resolution of these 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

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 . Additionally there are two earn-out commitments, which are part of the purchase price of prior AIA acquisitions of $1.2 million .
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 9. Related Party Transactions

PAR Backstop Fee

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 selling, general, and administrative expense in the period ended March 31, 2013.
 
Administrative Services

AIA's subsidiary, Entertainment in Motion (“EIM”), rented office space belonging to a company in which the AIA's managing directors have a stake. There were no unpaid lease liabilities as of March 31, 2013 and December 31, 2012 . The Company recognized rent expense of $60,000 and $0 for the period ended March 31, 2013 and 2012 , respectively. EIM also made a loan to the managing director. As of March 31, 2013 , the outstanding balance was $22,500 .

In the reporting period, AIA's subsidiary, Fairdeal Multimedia, rented office space belonging to the AIA's managing director, for which it paid rent equivalent to $11,100 per month. As of March 31, 2013 , there were no unpaid rent liabilities.


24

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Note 10. 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 three months ended March 31, 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 - March 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:

Stock Value (low value of range) (per share)
$
9.94

Stock Value (high value of range) (per share)
$
10.04

Weighted-Average Expected Term
4.87 years

Risk-Free Rate
0.77
%
Expected Stock Volatility
50.00
%
Dividend Yield
%


25

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


Stock option activity for three months ended March 31, 2013 is as follows:

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

$
0.11

7.95 years

$
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
Aggregate Intrinsic Value (in thousands)
Outstanding - January 31, 2013

$


$

     Granted
3,350,000

9.94

4.88 years

10,250

     Exercised




     Forfeited




Outstanding - March 31, 2013
3,350,000

9.94

4.88 years

10,250

Exercisable at March 31, 2013
6,252

10.00

4.89 years


Expected to vest at March 31, 2013
3,343,748

$
9.94

4.88 years

$
10,250


The following is a summary of the Company's stock options outstanding at March 31, 2013 :

Exercise Price
Number Outstanding
Weighted Average Remaining Contractual Life
Number Exercisable
Weighted Average Remaining Contractual Life
$
10.00

2,325,000

4.84 years
6,252

4.89 years
$
9.79

1,025,000

4.93 years

n/a

The fair value of stock options vested and related stock-based compensation recognized, during the three months ended March 31, 2013 , and 2012 , amounted to $0.5 million and $0.5 million , respectively, and was included in salaries and wages and research and development expenses as follows:

 
Three Months Ended March 31,
(in thousands)
2013
2012
Salaries and wages
$
496

$
443

Research and development

16

                            Total
$
496

$
459


Warrants

Row 44 warrants for common stock convertible into GEE common stock were accounted for as equity instruments at March 31, 2013 .

The following is a summary of Row 44 warrants for common stock convertible into GEE common stock for the three months ended March 31, 2013 :


26

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


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
Outstanding - January 1, 2013
84,612,107

$
0.0801

4.92 years
     Granted
2,414,524



     Exercised
(65,964,131
)
0.0001


     Forfeited



Outstanding - January 31, 2013
21,062,500

0.3214

4.03 years
     Granted



     Exercised



     Forfeited



Outstanding - March 31, 2013
21,062,500

0.3214

3.87 years
Exercisable at March 31, 2013
21,062,500

0.3214

3.87 years

The amount of Row 44 warrants for Series C preferred stock convertible into GEE common stock changed from 42,611,344 to 21,437,586 because the warrants owned by AIA were eliminated in consolidation associated with the Business Combination.

The following is a summary of all Row 44 warrants (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 March 31, 2013 :

Exercise Price per Warrant (as converted)
Number of Warrants (as converted)
Class of Shares
Weighted Average Remaining Life
 
$
4.41

4,282

Common
3.94 years
 
8.82

685,199

Common
3.97 years
 
23.53

32,119

Common
1.74 years
 Total outstanding
 
721,600



 
$
8.74

734,451

Series C-2
4.18 years
Total outstanding
 
734,451




The following is a summary of Global Eagle warrants for the three months ended March 31, 2013 :

Global Eagle Warrants
Number of Warrants
Weighted Average Exercise price
Weighted Average Remaining Contractual Term
Outstanding - January 31, 2013
25,992,500

$
11.50

5.00 years
     Granted
666,667

11.50


     Exercised



     Forfeited



Outstanding - March 31, 2013
26,659,167

11.50

4.92 years
Exercisable at March 31, 2013
26,659,167

11.50

4.92 years


27

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


The following is a summary of all Global Eagle warrants outstanding at March 31, 2013 :

Exercise Price per Warrant
Number of Warrants
Class of Shares
Weighted Average Remaining Life
 
$
11.50

18,992,500

Public Warrants
4.92 years
Total outstanding
 
18,992,500

 
 
 
11.50

666,667

Sponsor Warrants
4.83 years
 
$
11.50

7,000,000

Sponsor Warrants
4.92 years
 Total outstanding
 
7,666,667

 
 

The Company accounted for its 18,992,500 public warrants and 333,333 of the sponsor warrants as derivative liabilities at March 31, 2013. These liabilities are subject to remeasurement at each balance sheet date until exercised, with any changes in fair value is recognized in the consolidated statements of operations. The fair value of warrants issued by the Company has been estimated using the warrants' quoted market price.

On March 29, 2013 , Global Eagle Acquisition, LLC ("Sponsor") executed a waiver relating to 7,333,334 of the sponsor warrants. The waiver relates to a specific provision of the warrant agreement that provides for a reduction of exercise price of the warrants. This provision originally triggered liability accounting as discussed above and the warrants were recorded as derivative liabilities. The Company valued the warrants as of the waiver date and recorded the change in fair value of the warrants in earnings and reclassified the portion of the warrant liability of $9.9 million represented by these sponsor warrants to equity. As a result of the waiver, these sponsor warrants became equity warrants as of March 29, 2013, leaving the 18,992,500 public warrants and 333,333 of the sponsor warrants accounted for as derivative liabilities.

Note 11. Income Taxes

The Company is subject to income taxes in the U.S. and numerous state and foreign jurisdictions in which it operates. The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company's tax expense and in evaluating its tax positions including evaluating uncertainties.
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.

Income tax expense for the three months ended March 31, 2013 and 2012 was $34,000 and $0 , respectively.
As of March 31, 2013, the Company has recorded a valuation allowance of $42.2 million and $0.6 million against its domestic and foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of December 31, 2012, the valuation allowance on domestic and foreign deferred tax assets were $39.6 million and $0 , respectively.
In connection with the acquisition of AIA, the Company recorded net deferred tax liabilities of $25.0 million .
As of March 31, 2013 and December 31, 2012, the Company had federal net operating loss carry-forwards ("NOLs") of $87.0 million and $81.0 million , respectively, and state net operating loss carry-forwards of $84.2 million and $78.1 million , respectively, which losses will begin to expire during the fiscal years ending in December 31, 2028 and 2018, respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three year period. In the event that an ownership change has occurred, or were to occur, utilization of the Company's NOLs would be subject to an annual limitation under Section 382 as determined by multiplying the value of the Company's stock at the

28

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. The Company could experience an ownership change under Section 382 as a result of events in the past in combination with events in the future. If so, the use of the Company's NOLs, or a portion thereof, against future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization. Therefore, the Company could be liable for income taxes sooner than otherwise would be true if the Company were not subject to Section 382 limitations. The Company is performing a study to determine the extent of the limitation, if any. Any carry-forwards that expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance.
As of March 31, 2013, the Company intends to reinvest the foreign earnings of its subsidiaries on an indefinite basis. As a result, deferred taxes have not been established for unremitted earnings of foreign subsidiaries.
Note 12. Notes Payable

Bank loan

The Company's controlled subsidiary AIA has an unsecured four -year loan of $15.9 million from UniCredit Bank AG, Munich, Germany. The loan is subject to initial repayment of $0.7 million and thereafter regular half-yearly repayments of $2.2 million , no prepayment penalties and variable interest based on the six-month Euribor plus 2.35% . In order to avoid any exposure to the risk from rising interest rates associated with variable interest obligations, a portion of the variable interest payments was converted into fixed interest obligations by means of interest rate swaps over the term of the loan.

Under the terms of the loan agreement, mandatory special loan payments are agreed under certain conditions. The provision regarding mandatory special loan payments will probably result in a mandatory special loan payment of $1.4 million , payable as of June 30, 2013 . As a result, the repayment period and thus the loan will now end six months earlier than originally envisioned. These special loan payments result in a reclassification of the amount of the special loan payments to the current portion of the loan.

As of March 31, 2013 , the non-current portion of the loan amounts to $3.3 million (inclusive of the special loan payment of $1.4 million noted above) and the current portion amounts to $7.8 million .

Subordinated bank loan

The Company's controlled subsidiary, AIA holds a note payable of $2.6 million from taking up mezzanine capital through a financing program of Capital Efficiency Group AG, Zug, Switzerland. This financing program matures in March 2014 . The interest rate is 8.8% per year. A payment of 1% must be made each year and interest of 7.8% on the principal must be paid every quarter. The liability's carrying amount as of March 31, 2013 was $2.6 million .

Annuity loan

The Company's controlled subsidiary, AIA is a party to a loan agreement for $1.1 million with HVB Investitionsbank GmbH, Munich, to finance investments in hardware for the technical services of The Lab.Aero, a subsidiary of Inflight Productions Inc. Of the total remaining balance, $0.2 million is current as of March 31, 2013 , and $0 million is non-current.

Long-term debt consists of the following at March 31, 2013 and December 31, 2012 :

(in thousands)
March 31, 2013
December 31, 2012
Bank loans
$
3,303

$
38

Other loans
34


Long-term debt
$
3,337

$
38



29

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements


The following is a schedule, by year, of future minimum principal payments required under notes payable as of March 31, 2013 :

Years Ending March 31,
(in thousands)
2013 (9 months ended)
$
5,200

2014
5,892

2015

2016

2017

Thereafter

Total
$
11,092


Note 13. Segment Information

The following table sets forth the Company's reportable segment financial information for the three months ended March 31, 2013 , and 2012 , respectively:

 
For the Three Months Ended
 
March 31,
(in thousands)
2013
2012
Revenues:
 
 
Connectivity
$
14,682

$
19,709

Content Service Providing
21,881


Content
5,669


Total revenues
$
42,232

$
19,709

 
 
 
Segment operating income (loss):
 
 
Connectivity
$
(18,221
)
$
(3,825
)
Content Service Providing
239


Content
(374
)

Total segment operating income (loss)
$
(18,356
)
$
(3,825
)

The following table reconciles total segment income to consolidated income (loss) from continuing operations for the three months ended March 31, 2013 , and 2012 , respectively:
 
For the Three Months Ended
 
March 31,
(in thousands)
2013
2012
Segment results:
 
 
Connectivity
$
(18,654
)
$
(7,092
)
Content Service Providing
(56
)

Content
(150
)

Other Non-Operating Entities
(7,978
)

Consolidated income (loss) from continuing operations
$
(26,838
)
$
(7,092
)

30

Global Eagle Entertainment Inc.
Notes to Unaudited Consolidated Financial Statements



The following table reconciles total assets identifiable by segment at March 31, 2013 and December 31, 2012 , respectively:

(in thousands)
March 31, 2013
December 31, 2012
Assets identifiable by segment
 
 
Connectivity
$
22,356

$
22,793

Content Service Providing
231,566


Content
52,104


Unallocated Assets
67,107


Total Assets
$
373,133

$
22,793


Note 14. Subsequent Events

The Company has evaluated subsequent events through the date these unaudited consolidated financial statements were issued.

On April 19, 2013 , the Company completed its tender offer for the remaining shares of AIA and now owns 22,598,078 no par value shares in AIA, or 94.07% of the issued and outstanding shares of AIA.

In April 2013 , AIA sold Guestlogix shares for $6.0 million .

On April 18, 2013 , the Company purchased 155,726 shares in Allegiant Systems, Inc. (“AS”) at a purchase price of $9.63 per share. As of the closing of this transaction, the Company's investment in AS represents approximately 18% of the issued and outstanding shares of AS.

On April 25, 2013 , the Company filed a Form S-3 Registration Statement for the offer and sale of up to 15,000,000 shares of the Company's common stock. Pursuant to the Plan of Distribution for the shares, the Company may sell the registered shares in one or more transactions over a period of time. As of the date hereof, the foregoing registration statement has not been declared effective by the SEC.

On May 8, 2013, the Company entered into an Asset Purchase Agreement for the purchase (the “PMG Purchase”) of substantially all the assets of Post Modern Group, LLC and certain affiliated entities (collectively, “PMG”). Pursuant to the terms of the PMG Purchase, the Company will acquire the assets of PMG and assume certain related liabilities in exchange for $10.5 million in cash and $5.0 million in shares of the Company. In addition, the owners of PMG will have the opportunity to receive an additional $5.0 million in cash if the PMG business combined with the Company's CSP business achieves certain target milestones in fiscal years 2013 and 2014 . The transaction is subject to a number of closing conditions, but is expected to close in late May 2013 .




31


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

Cautionary Note Regarding Forward-Looking Statements

We make forward-looking statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein within the meaning of the Securities Litigation Reform Act of 1995 . These forward-looking statements relate to expectations or forecasts for future events, including without limitation our earnings, revenues, expenses or other future financial or business performance or strategies, or the impact of legal or regulatory matters on our business, results of operations or financial condition. These statements may be preceded by, followed by or include the words “may,” “might,” “will,” “will likely result,” “should,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “continue,” “target” or similar expressions.
  
These forward-looking statements are based on information available to us as of the date of this report and on its current expectations, forecasts and assumptions, involve a number of risks and uncertainties and may turn out to be wrong. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
 
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

the ability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition, the ability to integrate the Row 44 and AIA businesses, the ability of the combined business to grow and the ability of our executive officers to manage growth profitably;
costs related to the Business Combination;
the outcome of any legal proceedings pending or that may be instituted against us, Row 44 or AIA;
changes in applicable laws or regulations;
our ability to recognize and timely implement future technologies in the satellite connectivity space, including Ku-band system development and deployment;
our ability to deliver end-to-end network performance sufficient to meet increasing airline customer and passenger demand;
our ability to obtain and maintain international authorizations to operate our service over the airspace of the foreign jurisdictions our customers utilize;
our ability to expand our service offerings and deliver on our service roadmap;
our ability to timely and cost-effectively identify and license television and media content that passengers will purchase;
general economic and technological circumstances in the satellite transponder market, including access to transponder space in capacity limited regions and successful launch of replacement transponder capacity where applicable;
our ability to obtain and maintain licenses for content used on legacy installed in-flight entertainment systems;
the loss of, or failure to realize benefits from, agreements with our airline partners;
the loss of relationships with original equipment manufacturers or dealers;
unfavorable economic conditions in the airline industry and economy as a whole;
our ability to expand our domestic or international operations, including our ability to grow our business with current and potential future airline partners or successfully partner with satellite service providers, including Hughes Network Systems;
our reliance on third-party satellite service providers and equipment and other suppliers, including single source providers and suppliers;
the effects of service interruptions or delays, technology failures, material defects or errors in our software, damage to our equipment or other geopolitical restrictions;
the limited operating history of our connectivity and in-flight television and media products;
costs associated with defending pending or future intellectual property infringement actions and other litigation or claims;
increases in our projected capital expenditures due to, among other things, unexpected costs incurred in connection with the roll out of our technology roadmap or our international plan of expansion;
fluctuation in our operating results;
the demand for in-flight broadband Internet access services and market acceptance for our products and services;
changes or developments in the regulations that apply to us, our businesses and our industries;
our ability to manage our growth in a cost-effective manner and consummate, integrate and manage acquisitions; and

32

Table of Contents

other risks and uncertainties set forth in this Item 2 and in our Annual Report on Form 10-K for the year ended December 31, 2012 in Item 1A entitled "Risk Factors," which is incorporated herein by reference.

The following discussion and analysis of our business and results of operations for the three months ended March 31, 2013 , and our financial conditions at that date, should be read in conjunction with the financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Introduction
Management’s discussion and analysis of the financial condition and results of operations is intended to help provide an understanding of Global Eagle's and its subsidiaries’ (together, “Global Eagle”, the “Company” or “GEE”) financial condition, changes in financial condition and results of operations. This discussion is organized as follows:

Overview of the Business Combination Transactions — GEE is the result of a Business Combination that was consummated on January 31, 2013 . This section provides a general description of the Business Combination.
Overview of the Company’s Business — This section provides a general description of GEE’s business, as well as developments that have occurred in the reporting period that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.
Results of Operations — This section provides an analysis of GEE’s results of operations for the three months ended March 31, 2013 and 2012 . This analysis is presented on both a consolidated and segment basis. In addition, a brief description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed. Due to the specific situation of the Company, the presented financial information for the three months ended March 31, 2013 is only partially comparable to the financial information for the three months ended March 31, 2012 . Since Row 44 is the accounting acquirer in the Business Combination consummated on January 31, 2013 , the presented financial information for the three months ended March 31, 2012 reflects the financial information and activities only of Row 44. The presented financial information for the three months ended March 31, 2013 includes the financial information and activities of Row 44 for the period January 1, 2013 to March 31, 2013 ( 90 days ) as well as the financial information and activities for GEE and AIA for the period January 31, 2013 to March 31, 2013 ( 59 days ). This lack of comparability needs to be taken into account when reading the discussion and analysis of our results of operations and cash flows.
Liquidity and Capital Resources — This section provides an analysis of the GEE’s cash flows for the three months ended March 31, 2013 and 2012 . Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s future commitments and obligations, as well as a discussion of other financing arrangements.

Overview of the Business Combination Transaction

On February 2, 2011 , Global Eagle Acquisition Corp. (“GEAC”) was formed to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On November 8, 2012 , GEAC entered into an Agreement and Plan of Merger and Reorganization with Row 44 and PAR Investment Partners, L.P. ("PAR") for the acquisition of Row 44 by reverse merger and a Stock Purchase Agreement (the “AIA Stock Purchase”) with PAR for the purchase of the shares of AIA owned by PAR (collectively, the “Business Combination”). On January 31, 2013 , the stockholders of GEAC approved the Business Combination, and GEAC changed its name from Global Eagle Acquisition Corp. to Global Eagle Entertainment Inc. As of the date of the Business Combination, GEE owns all of the issued and outstanding shares of the capital stock of Row 44 and approximately 86% of the issued and outstanding shares of the capital stock of AIA.

Parties to the Business Combination

GEAC was a blank check company formed in Delaware in 2011 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination involving one or more businesses. Prior to the consummation of the Business Combination, GEAC did not engage in any business except for activities related to its formation and related public financing. Upon the closing of the Business Combination, GEAC became GEE, a holding company whose assets primarily consist of shares of its wholly-owned subsidiary, Row 44, and its majority-owned subsidiary, AIA.

Row 44 is a leading satellite-based broadband services provider to the global commercial airline industry and its passengers. Row 44’s connectivity system enables aircraft to connect to orbiting Ku-band satellites and to communicate with existing satellite ground earth stations. The Row 44 connectivity system currently provides airline passengers with WiFi-based Internet access, live television, on-demand content, shopping, and flight and destination information.

33

Table of Contents


AIA is a global leader in the business of selecting, procuring, managing, encoding, and distributing video and music programming, e-readers and similar applications and video games to the in-flight entertainment market, including delivering content compatible with a multitude of third-party in-flight entertainment systems. Following the Business Combination, GEE undertook a mandatory tender offer for the purchase of the shares of AIA not acquired in the AIA Stock Purchase. The shares of AIA's capital stock not owned by GEE (approximately 9% at March 31, 2013) remain listed in the Regulated Market ("General Standard") of the Frankfurt Stock Exchange.

Row 44 is the accounting acquirer in the Business Combination. Thus, the Business Combination is accounted for in a manner similar to a capital infusion in Row 44. The assets and liabilities of the Company are carried at historical cost and Row 44 will not record any step-up in basis or any intangible assets or goodwill as a result of the Business Combination. GEE holds approximately 91%, as of March 31, 2013, of the issued and outstanding shares of AIA. AIA constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of the AIA shares constitutes the acquisition of a business for purposes of Financial Accounting Standards Board’s Accounting Standard Codification 805, ‘‘Business Combinations,’’ (" ASC 805"), and due to the change in control, is accounted for using the acquisition method.

Additional information regarding the Business Combination is set forth in (i) the definitive proxy statement filed by GEAC with the SEC on January 17, 2013 and subsequently supplemented on January 28, 2013 , (ii) the Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013 and (iii) the Current Reports on Form 8-K and Form 8-K/A filed with the SEC on February 6, 2013 and March 18, 2013.

Overview of the Company's Business
GEE is the only full service provider of content, content services, and connectivity to the worldwide airline industry. The Company manages and intends to report its businesses in the following three segments:

Connectivity

GEE’s Connectivity operations consist entirely of the business and operations of Row 44.

Row 44 is a global satellite-based broadband services provider to the worldwide commercial airline industry. Its network enables airlines to connect to orbiting Ku-band satellites and to communicate with existing satellite ground earth stations. Row 44’s in-cabin communications link currently provides airline passengers with Internet access, live television, on-demand media, shopping and flight and destination information. In the near future, Row 44 expects to deliver to airline passengers additional content and other desired communication services and to provide airlines with valuable aircraft operations data and applications. Row 44 was formed in 2004 , its WiFi connectivity system was first deployed by a domestic commercial airline in 2009 and its broadband services were fully operational in 2010 . Currently installed on more than 475 aircraft, Row 44 has outfitted and supports the largest fleet of in-flight entertainment and connectivity connected aircraft capable of operating over land and sea. Since its formation, Row 44 completed the research, development and engineering and to secure the complex regulatory certifications necessary to produce a fully functional satellite-based connectivity system for commercial airlines. The development of the Row 44 connectivity system included the following:

the design and creation of a turnkey system for in-flight broadband connectivity through a satellite link, including a fully operational antenna, an in-cabin modem and several other key operational components;
the registration, testing and licensing of the Row 44 connectivity system with the FAA and the FCC (and foreign government equivalents where applicable);
the establishment of a company-managed network operating center to allow for the full-time monitoring of the operation of all Row 44 connectivity systems in-flight;
the acquisition of satellite transponder capacity to support the connectivity demands of Row 44’s airline customers; and
the development of a just-in-time manufacturing system for the efficient delivery and activation of the Row 44 connectivity system on customer aircraft. 

Following the completion of the development of a licensed and operational in-flight broadband system, in 2010 Row 44 commenced the installation of its equipment on the aircraft of Southwest Airlines and began to generate revenues from operations. Row 44 generates revenues from the following sources:

sale of Row 44’s connectivity equipment to its commercial airline customers;
fees paid by airlines and/or airline passengers for the delivery of in-flight services, such as Internet access and live television; and

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revenue sharing arrangements with commercial airlines for Internet based services used by their passengers, such as shopping.
 
Beginning in 2009 , management at Row 44 began to focus on the global roll-out of its satellite-based system and on domestic and international customer acquisitions, signing its first commercial passenger airline in 2010 . Row 44 has achieved the following customer acquisition milestones during the past three years:

2010 — Southwest Airlines Co.;
2011 — Norwegian Air Shuttle;
2011 — WirelessG (Mango Airlines);
2012 — Transaero Airlines;
2012 — UTair Airlines; and
2012 — Icelandair. 
 
The combined satellite coverage with these customers spans from Alaska to Japan, covering North America, the North Atlantic, Europe, a substantial portion of the Middle East, Russia and Asia.

Content Service Providing

GEE’s Content Service Providing operations ("CSP") consist of the CSP Segment of AIA.

GEE's CSP operations primarily focus on making content available for in-flight entertainment systems and all associated services. CSP’s services range from the selection, purchase, production and technical adjustment of content to customer support in connection with the integration and servicing of in-flight entertainment programs. Programmers in GEE'S CSP operations choose movies, TV and audio programs relevant and appropriate for each individual airline. The technical services in the CSP operations include encoding, editing and meta-data services accomplished in-house in technical facilities located in Singapore, Auckland (New Zealand) and El Segundo (California). In these technical facilities GEE's CSP operations also provide a full r