Global Eagle Entertainment
Global Eagle Entertainment Inc. (Form: 10-Q, Received: 11/09/2015 17:07:28)

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 September 30, 2015
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)
 
 
 
4553 Glencoe Avenue
 
 
Los Angeles, California
 
90292
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (310) 437-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
 
(Outstanding as of November 5, 2015)
 
COMMON STOCK, $0.0001 PAR VALUE
 
 
78,520,543

SHARES*
 
* Excludes 3,053,634 shares held by Global Entertainment AG, a wholly 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.
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014
 
 
 
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2015 and 2014
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2015 and 2014
 
 
 
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) for the nine months ended September 30, 2015
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II — Other Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I — FINANCIAL INFORMATION

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2015
 
December 31,
2014
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
218,054

 
$
197,648

Accounts receivable, net
97,583

 
85,517

Content library, current
11,527

 
9,570

Inventories
18,263

 
13,626

Prepaid and other current assets
26,966

 
23,549

TOTAL CURRENT ASSETS:
372,393

 
329,910

Property, plant & equipment, net
35,197

 
23,651

Goodwill
91,605

 
53,014

Intangible assets, net
134,336

 
112,904

Other non-current assets
15,095

 
14,116

TOTAL ASSETS
$
648,626

 
$
533,595

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
114,356

 
$
99,328

Deferred revenue
14,403

 
13,401

Warrant liabilities
26,140

 
52,671

Notes payable
750

 
752

Deferred tax liabilities
378

 
80

Other current liabilities
11,473

 
8,080

TOTAL CURRENT LIABILITIES:
167,500

 
174,312

Deferred tax liabilities, non-current
26,779

 
23,330

Deferred revenue, non-current
6,633

 
6,748

Notes payable, non-current
71,518

 
2,263

Other non-current liabilities
24,035

 
14,313

TOTAL LIABILITIES
296,465

 
220,966

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
EQUITY:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 81,248,274 and 79,626,261 shares issued, 78,194,640 and 76,572,627 shares outstanding at September 30, 2015 and December 31, 2014, respectively
8

 
8

Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

 

Treasury stock, 3,053,634 shares at September 30, 2015 and December 31, 2014
(30,659
)
 
(30,659
)
Additional paid-in capital
682,244

 
645,110

Subscriptions receivable
(522
)
 
(503
)
Accumulated deficit
(298,647
)
 
(301,331
)
Accumulated other comprehensive (loss) income
(263
)
 
4

TOTAL GLOBAL EAGLE ENTERTAINMENT INC. EQUITY
352,161

 
312,629

TOTAL LIABILITIES AND EQUITY
$
648,626

 
$
533,595


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

1

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
110,114

 
$
102,623

 
$
312,795

 
$
286,736

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
71,456

 
73,618

 
206,965

 
213,341

Sales and marketing expenses
4,819

 
3,980

 
13,058

 
10,119

Product development
7,766

 
7,212

 
21,447

 
15,561

General and administrative
22,102

 
17,172

 
58,547

 
51,440

Amortization of intangible assets
7,286

 
6,049

 
19,274

 
18,613

Restructuring charges
66

 
2,606

 
368

 
2,606

Total operating expenses
113,495

 
110,637

 
319,659

 
311,680

Loss from operations
(3,381
)
 
(8,014
)
 
(6,864
)
 
(24,944
)
Other income (expense):
 
 
 
 
 
 
 
Interest (expense) income, net
(803
)
 
175

 
(1,631
)
 
44

Change in fair value of derivatives
(1,877
)
 
(5,253
)
 
13,866

 
555

Other expense, net
(576
)
 
(984
)
 
(1,815
)
 
(1,786
)
(Loss) income before income taxes
(6,637
)
 
(14,076
)
 
3,556

 
(26,131
)
Income tax expense
235

 
1,454

 
872

 
3,552

Net (loss) income
(6,872
)
 
(15,530
)
 
2,684

 
(29,683
)
Net income attributable to non-controlling interests

 

 

 
194

Net (loss) income attributable to Global Eagle Entertainment Inc. common stockholders
$
(6,872
)
 
$
(15,530
)
 
$
2,684

 
$
(29,877
)
 
 
 
 
 
 
 
 
Net (loss) income per common share – basic
$
(0.09
)
 
$
(0.21
)
 
$
0.03

 
$
(0.41
)
Net loss per common share – diluted
$
(0.09
)
 
$
(0.21
)
 
$
(0.14
)
 
$
(0.41
)
 
 
 
 
 
 
 
 
Weighted average common shares – basic
77,753

 
72,877

 
77,249

 
72,284

Weighted average common shares – diluted
77,753

 
72,877

 
78,449

 
72,284


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

2

Table of Contents

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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net (loss) income
$
(6,872
)
 
$
(15,530
)
 
$
2,684

 
$
(29,683
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation (losses) gains
(78
)
 
(9
)
 
(267
)
 
(104
)
Unrealized gain on available for sale securities
 
 
 
 
 
 
 
Unrealized gain on available for sale securities

 

 

 
112

Less: reclassification adjustments for recognized gains included in net income

 

 

 
(112
)
Unrealized gain on available for sale securities, net

 

 

 

Other comprehensive (loss) income
(78
)
 
(9
)
 
(267
)
 
(104
)
Comprehensive (loss) income
(6,950
)
 
(15,539
)
 
2,417

 
(29,787
)
Comprehensive income attributable to non-controlling interests

 

 

 
194

Comprehensive (loss) income attributable to Global Eagle Entertainment Inc. common stockholders
$
(6,950
)
 
$
(15,539
)
 
$
2,417

 
$
(29,981
)

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


3

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands)
 
Common Stock
 Treasury Stock
Additional
Subscriptions
Accumulated
Accumulated Other
Total
 
Shares
Amount
Shares
 Amount
Paid-in Capital
Receivable
Deficit
Comprehensive Income (Loss)
Stockholders' Equity
Balance at December 31, 2014
79,626

$
8

(3,054
)
$
(30,659
)
$
645,110

$
(503
)
$
(301,331
)
$
4

$
312,629

Exercise of stock options and warrants
607




5,529




5,529

Equity component of convertible senior notes




12,674




12,674

Issuance of common stock in exchange for warrants
1,015




12,608




12,608

Stock-based compensation





6,248




6,248

Interest income on subscription receivable





(19
)


(19
)
Excess tax benefit related to the exercise of stock option




75




75

Other comprehensive loss







(267
)
(267
)
Net income






2,684


2,684

Balance at September 30, 2015
81,248

$
8

(3,054
)
$
(30,659
)
$
682,244

$
(522
)
$
(298,647
)
$
(263
)
$
352,161


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

4

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
2,684

 
$
(29,683
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
25,857

 
26,023

Non-cash interest expense (income), net
440

 
(19
)
Change in fair value of derivative financial instrument
(13,866
)
 
(555
)
Stock-based compensation
6,248

 
6,485

Issuance of shares for working capital settlement

 
345

Gain on sale of available for sale securities

 
(112
)
Loss on equity method investments

 
1,300

Deferred income taxes
(4,921
)
 
(8,124
)
Other
555

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,077
)
 
(18,704
)
Inventory and content library
(4,671
)
 
(6,264
)
Prepaid expenses and other assets
(335
)
 
(3,356
)
Deposits and other assets
1,820

 
(2,446
)
Accounts payable and accrued expenses
671

 
20,327

Deferred revenue
212

 
1,784

Other liabilities
3,393

 
945

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
12,010

 
(12,054
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investments
(2,324
)
 

Net proceeds from sale of available for sale securities
580

 
583

Purchases of property and equipment
(14,710
)
 
(6,231
)
Acquisitions of companies, net of cash acquired
(55,242
)
 
(500
)
Payment of deferred acquisition contingency
(5,000
)
 

NET CASH USED IN INVESTING ACTIVITIES
(76,696
)
 
(6,148
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Acquisition of non-controlling interest

 
(21,740
)
Proceeds from issuance of convertible senior notes
81,250

 
16

Repayments of notes payable
(636
)
 
(7,360
)
Purchase of common stock warrants

 
(1,406
)
Proceeds from the exercise of common stock options and warrants
5,472

 

Convertible senior note issuance fees
(831
)
 

Other financing activities, net
(476
)
 
(363
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
84,779

 
(30,853
)
Effects of exchange rate movements on cash and cash equivalents
313

 
(104
)
Net increase (decrease) in cash and cash equivalents
20,406

 
(49,159
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
197,648

 
258,796

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
218,054

 
$
209,637

Significant non-cash items:
 
 
 
Issuance of common stock in exchange for warrants
$
12,608

 
$

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

5

Table of Contents

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


Note 1.     Business

Global Eagle Entertainment Inc. ("GEE") is a Delaware corporation headquartered in Los Angeles, California. GEE together with its consolidated subsidiaries is referred to as the “Company”. The Company's business is focused on providing Wi-Fi Internet Connectivity and Content to the travel industry.
Connectivity
The Company's Connectivity service offering provides its airline partners and their passengers Wi-Fi connectivity over Ku-band satellite transmissions. The Company's Connectivity segment offers specialized network equipment, media applications and premium content services that allow airline passengers to access in-flight Internet, live television, on-demand content, shopping and travel-related information.
Content

The Company's Content services offering selects, manages, provides lab services, and distributes wholly owned and licensed media content, video and music programming, applications, and video games to airlines, as well as to the maritime and other away from home non-theatrical markets.
The Company's Content operations commenced on January 31, 2013, when the Company acquired 86%  of the issued and outstanding shares of Advanced Inflight Alliance AG ("AIA"). In 2013, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA's shares to  94% , and in April 2014, the Company acquired the remaining outstanding shares in AIA.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies

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

Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of September 30, 2015 , the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income (loss) for the three and nine month periods ended September 30, 2015 and 2014 , the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2015 and 2014 , and the condensed consolidated statement of stockholders' equity for the nine month period ended September 30, 2015 are unaudited.

In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's statement of financial position as of September 30, 2015 , and its results of operations and cash flows for the nine month period ended September 30, 2015 and 2014 . The results for the nine month period ended September 30, 2015 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2014 has been derived from the Company's audited financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 17, 2015 (the "2014 Form 10-K").

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's 2014 Form 10-K.

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


Principles of Consolidation

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

Investments that the Company has the ability to control, and where it is the primary beneficiary, are consolidated. Any non-controlling interests in the earnings or losses of a subsidiary of the Company, such as in AIA before April 23, 2014, are included in net income attributable to non-controlling interests in the Company's condensed consolidated statements of operations. Any investments in affiliates over which the Company has the ability to exert significant influence, but does not control and it is not the primary beneficiary, such as its historical investment in Allegiant Systems, Inc., were accounted for using the equity method of accounting. Investments in affiliates for which the Company has no ability to exert significant influence are accounted for using the cost method of accounting.

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

Segments of the Company

The Company reports its operations under two segments, Connectivity and Content. The Company's Connectivity segment provides airline customers and their passengers Wi-Fi connectivity over Ku-band satellite transmissions and to a lesser extent operations data solutions. The Company's Content segment selects, manages, and distributes owned and licensed media content, certain digital media offerings, video and music programming, applications, and video games to the airline, maritime and non-theatrical markets.

The decision to report two segments is principally based upon how the Company's chief operating decision maker (“CODM”) manages the Company's operations as two segments for purposes of evaluating financial performance and allocating resources. The CODM reviews revenue, cost of sales expense, and contribution profit information separately for the Company's Connectivity and Content businesses. Total segment contribution profit provides the CODM, investors and equity analysts a measure to analyze operating performance of each of the Company's business segments and its enterprise value against historical data and competitors' data, although historical results may not be indicative of future results, as operating performance is highly contingent on many factors, including customer tastes and preferences. All other financial information is reviewed by the CODM on a consolidated basis.


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

Segment revenue, expenses and contribution profit for the three and nine month periods ended September 30, 2015 and 2014 derived from the Company's Content and Connectivity segments were as follows (in thousands):

 
Three Months Ended September 30,
 
2015
 
2014
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
$
81,574

 
$
24,838

 
$
106,412

 
$
71,510

 
$
19,933

 
$
91,443

Equipment

 
3,702

 
3,702

 

 
11,180

 
11,180

Total revenue
81,574

 
28,540

 
110,114

 
71,510

 
31,113

 
102,623

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
53,995

 
14,654

 
68,649

 
50,596

 
13,428

 
64,024

Equipment

 
2,807

 
2,807

 

 
9,594

 
9,594

Total cost of sales
53,995

 
17,461

 
71,456

 
50,596

 
23,022

 
73,618

Contribution profit
27,579

 
11,079

 
38,658

 
20,914

 
8,091

 
29,005

Other operating expenses
 
 
 
 
42,039

 
 
 
 
 
37,019

Loss from operations
 
 
 
 
$
(3,381
)
 
 
 
 
 
$
(8,014
)

 
Nine Months Ended September 30,
 
2015
 
2014
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
$
227,037

 
$
71,602

 
$
298,639

 
$
206,641

 
$
53,735

 
$
260,376

Equipment

 
14,156

 
14,156

 

 
26,360

 
26,360

Total revenue
227,037

 
85,758

 
312,795

 
206,641

 
80,095

 
286,736

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
152,044

 
42,730

 
194,774

 
149,475

 
40,933

 
190,408

Equipment

 
12,191

 
12,191

 

 
22,933

 
22,933

Total cost of sales
152,044

 
54,921

 
206,965

 
149,475

 
63,866

 
213,341

Contribution profit
74,993

 
30,837

 
105,830

 
57,166

 
16,229

 
73,395

Other operating expenses
 
 
 
 
112,694

 
 
 
 
 
98,339

Loss from operations
 
 
 
 
$
(6,864
)
 
 
 
 
 
$
(24,944
)

Revenue Recognition

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

For arrangements with multiple deliverables, the Company allocates revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The fair value of the selling price for a deliverable is determined using a hierarchy of (1) Company specific objective and reliable

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

evidence, then (2) third-party evidence, then (3) best estimate of selling price. The Company allocates any arrangement fee to each of the elements based on their relative selling prices.

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

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

Connectivity

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

In certain cases where the Company sells its equipment on a stand-alone basis, it may charge a fee for obtaining Supplemental Type Certificates (“STC”) obtained from the Federal Aviation Administration, which allow its equipment to operate on certain model/type of aircraft. To the extent that the Company contracts to charge STC fees in equipment-only sales, the Company will record these fees as revenue. No STC fee revenue was recognized during the three and nine months ended September 30, 2015 . Total STC fees recognized as revenue for the three and nine months ended September 30, 2014 were $ 0.3 million and $0.8 million .

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

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

In certain cases, the Company records service revenue based on available and preliminary information from its network operations. Amounts collected on the related receivables may vary from reported information based upon third party refinement of estimated and reported amounts owed that generally occurs typically within thirty days of the period end. For all years and periods presented, the difference between the amounts recognized based on preliminary information and cash collected was not material.

Content

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

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

Company estimates licensing revenues from airline customers. The Company believes it has the ability to reasonably estimate the amounts that will ultimately be collected such that it recognizes these amounts when earned.

Services Revenue . Content services revenue, such as technical services, delivery of digital media advertising, the encoding of video products, development of graphical interfaces or the provision of materials, are billed and recognized as services are performed and or when the committed advertisement impressions have been delivered.

Costs of Sales

Connectivity

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

Content

Content cost of sales consist primarily of the costs to license or purchase media content, and direct costs to service content for the airlines. Included in Content cost of sales is amortization expense associated with the purchase of film content libraries acquired in business combinations and in the ordinary course of business of $0.0 million and $0.1 million for the three and nine months ended September 30, 2015 , respectively, and $0.4 million and $2.2 million for the three and nine months ended September 30, 2014 , respectively.

Product Development

Product research and software development costs, other than certain internal-use software costs qualifying for capitalization, are expensed as incurred. Costs of computer software or websites developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs of developing internal-use software incurred during the application and development stage, which include employee and outside consulting compensation and related expenses, costs of computer hardware and software, website development costs and costs incurred in developing additional features and functionality of the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized costs are generally amortized using the straight-line method over a  three  year estimated useful life, beginning in the period in which the software is ready for its intended use. Unamortized amounts are included in property and equipment, net in the accompanying condensed consolidated balance sheets. Capitalized software development costs totaled  $0.9 million and $2.6 million for the three and nine months ended September 30, 2015 , respectively, and $0.9 million and $2.4 million for the three and nine months ended September 30, 2014, respectively.

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

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, on a straight-line basis. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of stock options. This model requires the Company to estimate the expected volatility and the expected term of the stock options which are highly complex and subjective variables. The variables take into consideration, among other things, actual and projected employee stock option exercise behavior. The Company uses a predicted volatility of its stock price during the expected life of the options that is based on the historical performance of the Company's stock price as well as including an estimate using similar companies. Expected term is computed using the simplified method as the Company's best estimate given its lack of actual exercise history. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected term of the stock. Stock-based awards are comprised principally of stock options and restricted stock units ("RSUs").


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

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

Stock Repurchases

Shares repurchased by the Company are accounted for when the transaction is settled. Repurchased shares held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from common stock at par value and from additional paid in capital for the excess of cash paid over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the repurchased shares.

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.

Restricted Cash

The Company maintains certain letters of credit agreements with its airlines partners, which are secured by the Company’s cash for periods of less than  one year  and up to  three years . As of September 30, 2015 and December 31, 2014 , the Company had restricted cash of  $9.1 million and $3.7 million , respectively. As of September 30, 2015 , there were $6.3 million  and  $2.8 million  of restricted cash included in other current and other non-current assets, respectively, in the condensed consolidated balance sheets, of which $ 5.0 million represented funds held in escrow pursuant to future contingencies associated with the Marks Systems, Inc. doing business as masFlight acquisition in August 2105. As of December 31, 2014 , there were $1.5 million and $2.2 million  of restricted cash included in other current and other non-current assets, respectively, in the condensed consolidated balance sheets.

Investment securities
    
Marketable investment securities, all of which are considered available-for-sale and, accordingly, are stated at fair value based on market quotes. Unrealized gains and losses, net of deferred taxes, have not been significant and are recorded as a component of other comprehensive income.

Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets with finite useful lives, including its indefinite lived intangible assets acquired in business combinations, for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows the Company expects to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. Through September 30, 2015 , the Company has identified no such impairment loss. Assets to be disposed of would be separately presented on the balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized.


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

Inventory

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

At September 30, 2015 and December 31, 2014 , there was approximately $8.2 million and $7.8 million , respectively, of deferred equipment costs included in inventory and other non-current assets. The deferred equipment costs pertain to certain costs expended in advance of services for certain airlines, and are being amortized ratably over the underlying term of the agreement through 2020.
    
The Company is not directly responsible for warranty costs related to equipment it sells to its customers. The vendors that supply each of the individual parts, which comprise the assemblies sold by the Company to customers, are responsible for equipment warranties directly to the customer.

Content Library

The content library acquired in the AIA stock purchase is recorded at fair value. The useful life of licensed film rights within the content library corresponds to the respective period over which the film rights will be licensed and generate revenues, generally a period of one year or less. Licensed film rights are amortized ratably over their expected revenue streams and included in cost of sales. Certain film rights in the Company's portfolio may be used in perpetuity under certain conditions.

Subsequent to the AIA stock purchase, additions to the content library represent minimum guaranteed amounts or flat fees to acquire the distribution 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.

The content library is tested for impairment periodically, but no less than annually. Considering the marketability of the given film right, an impairment loss is recognized as necessary. If the estimated future cash flows for a given film right are lower than its carrying amount as of the reporting date, an impairment loss is recognized in such period.

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 1 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Buildings are amortized on the straight-line method over 30 years.

Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company's financial statements with the resulting gain or loss reflected in the Company's results of operations. Repairs and maintenance costs are expensed as incurred.

In 2013, the Company capitalized the costs of certain Connectivity equipment, which is installed on aircraft of a single customer to facilitate expanded services, on its balance sheet as the Company retains legal title to the equipment over a five -year use period, and is amortizing these costs over their five -year useful life period.

Intangible Assets and Goodwill

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination, and allocates the purchase price of each acquired business to its respective net tangible and intangible assets. Acquired intangible assets principally include customer relationships, technology, and content library. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in

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

which the majority of the economic benefits are expected to be consumed. Amortization of film rights intangible assets with finite useful lives is recognized in the condensed consolidated statements of operations under cost of sales.

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

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

As of September 30, 2015 , of the $ 91.6 million total goodwill, $ 72.1 million and $ 19.5 million was attributable to the Company's Content and Connectivity segments, respectively. As of December 31, 2014 , $53.0 million  of goodwill was attributed to the Company's Content reporting unit. The Company's most recent annual impairment analysis was performed in the fourth quarter of the year ended December 31, 2014  and indicated that there was no impairment of goodwill at that time. Through September 30, 2015 , the Company has identified no impairment loss associated with its goodwill.

Business Acquisitions

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

On January 31, 2013, the Company completed the acquisition of 86% of the issued and outstanding shares of AIA, a media content distributor to the airline industry with corporate headquarters based in Munich, Germany as part of a business combination transaction between Global Eagle Acquisition Corp, AIA and Row 44, Inc. (the "Business Combination"). In 2013, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA's shares to  94% , and in April 2014, the Company acquired the remaining outstanding shares in AIA.

On July 9, 2013, the Company acquired substantially all of the assets of Post Modern Edit, LLC and related entities ("PMG"). On October 18, 2013, the Company completed the acquisition of 100% of the issued and outstanding shares of Travel Entertainment Group Equity Limited and subsidiaries ("IFES"). On August 2, 2014, the Company acquired substantially all of the assets of Purple Inflight Entertainment Private, Ltd ("Purple"). On July 1, 2015, the Company completed the acquisition of 100% of the issued and outstanding shares of Western Outdoor Interactive Pvt. Ltd. ("WOI") and acquired certain assets and liabilities of RMG Networks Holding Corporation. On August 4, 2015, the Company completed the acquisition of 100% of the issued and outstanding shares of Marks Systems, Inc., doing business as masFlight, and completed the acquisition of 100% of the issued and outstanding shares of navAero AB. All of these acquisitions were accounted for as business combinations.

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


The Company completed four acquisitions in the quarter ended September 30, 2015 for an aggregate purchase price of approximately $55.2 million in net cash, and an additional $5.0 million of cash funded in escrow for contingent consideration, the aggregate of which may total up to $ 29.0 million based upon the performance of the acquired companies through the end of 2019 , see Note 3, Business Combinations.

Deferred Revenue and Costs

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

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

Net Income (Loss) Per Share

Basic earnings (loss) per share (EPS) 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 consultants, restricted stock units, warrants issued to third parties and accounted for as equity instruments and convertible senior notes have been excluded from the diluted income (loss) per share calculation because their effect is anti-dilutive. As illustrated in the table below, the change in the fair value of the Company’s warrants, which are assumed to be converted into the Company’s common stock upon exercise, are adjusted to net income for purposes of computing dilutive earnings (loss) per share for the three and nine months ended September 30, 2015 . Common shares to be issued upon the exercise of warrant instruments classified as liabilities are included in the calculation of diluted income (loss) per share when dilutive.

The computation for basic and diluted EPS was as follows (in thousands, except per share data):
    

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income (loss) (numerator):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(6,872
)
 
$
(15,530
)
 
$
2,684

 
$
(29,683
)
Income allocable to non-controlling interests
 

 

 

 
194

Net (loss) income for basic EPS
 
(6,872
)
 
(15,530
)
 
2,684

 
(29,877
)
 
 
 
 
 
 
 
 
 
Less: adjustment for change in fair value on warrants liability for diluted EPS after assumed exercise of warrants liability
 

 

 
13,866

 

Net loss for dilutive EPS
 
$
(6,872
)
 
$
(15,530
)
 
$
(11,182
)
 
$
(29,877
)
 
 
 
 
 
 
 
 
 
Shares (denominator):
 
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
 
77,753

 
72,877

 
77,249

 
72,284

Effect of assumed exercise of warrants liability
 

 

 
1,200

 

Adjusted weighted-average shares for diluted EPS
 
77,753

 
72,877

 
78,449

 
72,284

 
 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
$
(0.09
)
 
$
(0.21
)
 
$
0.03

 
$
(0.41
)
Diluted loss per share
 
$
(0.09
)
 
$
(0.21
)
 
$
(0.14
)
 
$
(0.41
)

Weighted average securities not included in the calculation of diluted loss per share were as follow (in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Stock options
 
3,545

 
4,434

 
3,004

 
1,816

Restricted stock units
 
190

 
13

 
44

 

Non-employees stock options
 

 
5

 
2

 
6

Equity warrants
 
392

 
445

 
475

 
1,378

Liability warrants
 
411

 
154

 

 
1,958

Convertible notes
 
4,447

 

 
3,663

 


Foreign Currency

The vast majority of the Company's foreign subsidiaries’ customers are airlines and major U.S.-based studios. As the standard currency of transacting for service revenue and related costs of the worldwide airline industry is the U.S. Dollar, the Company concluded that the financial position and results of operations of the majority of its foreign subsidiaries are determined using the U.S. dollar currency as the functional currency. Current or liquid assets and liabilities of these subsidiaries are remeasured at the exchange rate in effect at each period end. Long term assets such as goodwill, purchased intangibles and property and equipment are remeasured at historical exchange rates. The vast majority of the income statement accounts are remeasured at the spot rate, with the exception of amortization and depreciation expense, which are remeasured using historical exchange rates. Adjustments arising from the fluctuations in exchange rates for the remeasurement of financial statements from period to period are included in the condensed consolidated statements of operations.


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

Income Taxes

Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. Due to the uncertainty over its ability to realize future taxable income in certain jurisdictions, the Company has recorded a valuation allowance of $47.5 million and $70.9 million against its domestic deferred tax assets as of September 30, 2015 and December 31, 2014 , respectively, and $13.3 million and $2.8 million against its foreign deferred tax assets as of September 30, 2015 and December 31, 2014 , respectively.

The Company is subject to the accounting guidance for uncertain income tax positions. The Company's policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense.

Fair Value Measurements

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

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

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

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

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The assets and liabilities which are fair valued on a recurring basis are described below and contained in the following tables. In addition, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write downs resulting from impairment of assets.

The following tables summarize the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 , and December 31, 2014 , respectively (in thousands):

 
September 30, 2015
 
Quotes Prices in Active Markets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability (1)
$
14,132

 
$

 
$

 
$
14,132

Global Eagle warrants (2)
26,140

 
26,140

 

 

Total financial liabilities
$
40,272

 
$
26,140

 
$

 
$
14,132


(1) Includes $14.1 million earn-out liability for WOI, assets of RMG, NavAero and masFlight assumed in business combinations.
(2) Includes 7,083,978 public warrants at September 30, 2015 .


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

 
December 31, 2014
 
Quotes Prices in Active Markets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability  (1)
$
1,710

 
$

 
$

 
$
1,710

Global Eagle warrants (2)
52,671

 
52,671

 

 

Total financial liabilities
$
54,381

 
$
52,671

 
$

 
$
1,710


(1) Includes $1.7 million earn-out liability for EIM, a subsidiary of AIA, assumed in the Business Combination.
(2) Includes 10,148,508 public warrants as of December 31, 2014.

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

Earn-Out Liability . The September 30, 2015 fair value of the earn-out liability was comprised of earn-out liabilities associated with the WOI, assets of RMG, navAero and masFlight business combinations. The December 31, 2014 fair value of the earn-out liability was largely comprised of an assumed obligation in the AIA stock purchase. The earn-out liabilities are estimated by using the income approach. Based on the respective purchase agreements, management estimated best case, base case, and worst case scenarios and discounted it to a present value. The sum of the discounted weighted average probabilities was used to arrive at the fair value of the earn-out liability.

Derivative Warrants . The fair value of the outstanding warrants issued in our initial public offering ("public warrants"), recorded as derivative warrant liabilities, is determined by the Company using the quoted market prices for the public warrants, which are traded over the counter. On reporting dates where there are no active trades, the Company uses the last reported closing trade price of the public warrants to determine the fair value. The Company recorded income from the change in the fair value of these warrants during the three and nine months periods ended September 30, 2015 of $(1.9) million and $13.9 million , respectively. The Company also recorded income (loss) for the change in fair value of these warrants during the three and nine month periods ended September 30, 2014 of $(5.3) million and $0.6 million , respectively.

The following table presents the fair value roll-forward reconciliation of level 3 assets and liabilities measured at fair value basis for the period ended September 30, 2015 (in thousands):

 
Earn-Out Liability
Balance, December 31, 2014
$
1,710

Fair value of earn-out liability assumed in 2015 acquisitions
14,132

Payment of 2014 EIM earn-out liability
(1,519
)
Non-cash adjustment to 2014 EIM earn-out liability
(191
)
Balance, September 30, 2015
$
14,132


Financial Liabilities. The following table shows the carrying amounts, which approximate the fair values, of the Company's financial liabilities in the condensed consolidated financial statements at September 30, 2015 and December 31, 2014 , respectively (in thousands):

 
September 30, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Convertible senior notes (1)
$
69,836

 
$
74,267

 
$

 
$

Notes payable
$
2,433

 
$
2,433

 
$
3,015

 
$
3,015

(1) The fair value of the convertible senior notes is inclusive of the conversion feature, which was originally allocated for reporting purposes at $13.0 million , and is included in the condensed consolidated balance sheets within "Additional paid-in capital" (see Note 12).
 

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

Convertible Senior Notes

The estimated fair value of the convertible senior notes, which are classified as level 2 financial instruments, was determined based on the quoted bid price of the convertible senior notes in an over-the-counter secondary market on September 30, 2015 .
    
Notes Payable

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

Recent Accounting Pronouncements

In May 2014, the FASB issued updated guidance that affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date for this standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 eliminates the requirement to retrospectively account for adjustments to provisional amounts within the measurement period recognized at the acquisition date in a business combination. ASU 2015-16 requires that these adjustments be recognized in the reporting period in which the adjustment amounts are determined and be calculated as if the accounting had been completed as of the acquisition date. ASU 2015-16 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory measured using any method other than last-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market value. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
Note 3. Business Combinations

During the three months ended September 30, 2015, the Company completed four acquisitions. The fair values of these acquisitions, as set forth below, are considered preliminary and subject to adjustment as additional information is obtained through the purchase price measurement period (a period of up to one year from the closing date). Any prospective adjustments would change the fair value allocation as of the acquisition date.


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

The following table summarizes the preliminary fair value of the assets and liabilities assumed in the acquisitions (in thousands):

 
Weighted Average Useful Life (Years)
Amount
Goodwill
 
$
38,832

Customer relationship
8.0
19,200

Developed technology
7.2
21,800

Trade name
5.0
200

Accounts receivable
 
6,814

Property and equipment
 
1,783

Deferred tax liability
 
(12,952
)
Accrued expenses

(4,045
)
Other liabilities assumed, net of assets acquired
 
(2,033
)
Total consideration transferred
 
$
69,599



WOI Stock Purchase

On July 1, 2015, the Company acquired Western Outdoor Interactive Private Limited (“WOI”) for approximately $38.3 million in cash and $4.3 million of contingent consideration. WOI produces and licenses games and applications for global in-flight entertainment, provides technical services to third parties for global in-flight entertainment user interfaces. The acquisition is intended to augment and diversify the Company’s Content operating segment. The goodwill recorded for the WOI acquisition was $17.3 million . Key factors that contributed to the recognition of WOI goodwill were trained workforce, expansion of international operations, the opportunity to consolidate and complement existing content operations, and the opportunity to generate future synergies within the existing Content business. As a result of the stock purchase of WOI, the goodwill is not deductible for tax purposes.
 
Significant other assets and net liabilities assumed and included in the table above were approximately $4.7 million in accounts receivable, $11.0 million of deferred tax liabilities and $1.8 million of fixed assets that included two long-term office buildings lease arrangements. The net tax liability is made up of short-term deferred tax assets of $0.2 million and long-term deferred tax liabilities of $11.2 million , largely driven by the tax impact of the fair value of the intangible assets. The Company incurred approximately $0.5 million in transaction costs associated with the WOI purchase. The sellers of WOI have the opportunity to receive an additional $5.0 million in cash if, among other things, WOI achieves certain revenue and earnings targets within the first and second yearly anniversaries of the closing date (the “WOI earn-out”). The WOI earn-out fair valued as of the acquisition date was approximately $4.3 million and presented as other long-term liabilities.

RMG Asset Acquisition

On July 1, 2015, the Company acquired certain assets and assumed certain liabilities of RMG Networks Holding Corporation ("RMG") for approximately $2.2 million in cash. These assets were integrated into the Company's advertising and sponsorship team, which provides digital media advertising and related services through executive clubs, in-flight entertainment systems, in-flight Wi-Fi portals and in private terminals. The acquisition is intended to enhance the Company’s digital media offerings within its Content operating segment. The goodwill recorded for the acquisition of assets from RMG was $ 2.1 million . Key factors that contributed to the recognition of goodwill were the opportunity to expand the Company's digital media offerings to the travel industry, the opportunity to consolidate and complement existing Content operations, and the opportunity to generate future synergies with our existing business. As a result of the asset purchase, the goodwill is deductible for tax purposes.

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

 
Significant other assets and net liabilities assumed and included in the table above were approximately $ 2.2 million in accounts receivable, $ 3.1 million of revenue share liabilities and a $ 1.0 million provision for estimated losses on a specific loss contract expiring in December 2015. The Company incurred approximately $0.2 million in transaction costs associated with the acquisition of assets from RMG. RMG has the opportunity to receive an additional $3.0 million in cash if, among other things, certain revenue and earnings targets are achieved with respect to the acquired assets within the first anniversary of the closing date.

NavAero, Inc. Stock Purchase

On August 4, 2015, the Company acquired NavAero Holding AB (“NavAero”) for approximately $4.8 million in cash and $0.3 million contingent consideration. NavAero is engaged in developing and commercializing technologies to enable and deploy electronic flight bag solutions for the commercial aviation market, which allows airlines to improve their in-flight operations.  The acquisition is intended to enhance the Company’s Connectivity operating segment. The goodwill recorded for the NavAero acquisition was $ 3.3 million . Key factors that contributed to the recognition of NavAero goodwill were trained workforce, expansion of international operations, the opportunity to expand into new product and technology offerings within the airline industry, and to a lesser extent the opportunity to generate future synergies with our existing business. As a result of the stock purchase of navAero, the goodwill is not deductible for tax purposes.

Significant other assets and net liabilities assumed included a net tax liability of $0.6 million , which is made up of short-term deferred tax assets of $0.1 million and long-term deferred tax liabilities of $0.6 million . The Company incurred approximately $0.3 million in transaction costs associated with the NavAero purchase. The sellers of NavAero have the opportunity to receive an additional $1.0 million in cash if NavAero achieves certain revenue targets through December 31, 2016 (the “NavAero earn-out”).

masFlight, Inc. Stock Purchase

On August 4, 2015, the Company acquired Marks Systems, Inc. doing business as masFlight for approximately $10.3 million in cash and $9.4 million contingent consideration. The acquisition was completed as a merger resulting in the acquisition subsidiary, masFlight Inc. (“masFlight”) as the surviving corporation. masFlight pioneered the adoption of cloud-based technologies to collect, compile, link, validate and host a variety of information and offer a single solution enabling airlines to analyze predictive data to run their operations more effectively and efficiently. The acquisition is intended to enhance the Company’s Connectivity operating segment. The goodwill recorded for the masFlight acquisition was $16.2 million . Key factors that contributed to the recognition of masFlight goodwill were trained workforce, expansion into new operations data solutions offerings, the opportunity to consolidate and complement current Connectivity operations within the airline industry as well as expand into new industries, and the opportunity to generate future savings through synergies with our existing business. As a result of the acquisition, the goodwill is not deductible for tax purposes.

Significant other assets and net liabilities assumed included a net tax liability of $ 1.4 million , which is made up of net short-term deferred tax asset of $0.3 million and long-term deferred tax liabilities of $1.7 million . The Company incurred approximately $0.3 million in transaction costs associated with the masFlight purchase. The sellers of masFlight have the opportunity to receive up to an additional $20.0 million in cash if, among other things, masFlight achieves certain operational, revenue and earnings targets at various dates through December 31, 2019. As a portion of the contingent consideration is subject to future employment of certain key employee of masFlight, certain contingent consideration will be recorded as compensation expenses prospective to the acquisition date. The fair value of masFlight contingent consideration as of the acquisition date was $9.4 million .

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

Note 4. Goodwill


The following table presents the changes in the Company’s goodwill balance for the periods presented (in thousands).
Balance at December 31, 2014
$
53,014

Goodwill arising from 2015 acquisitions
38,832

Currency translation adjustment
(241
)
Balance at September 30, 2015
$
91,605


Goodwill arose from the acquisitions of AIA, PMG, IFES and Purple in 2013 and 2014 and WOI, assets from RMG, NavAero and masFlight in 2015. No goodwill existed prior to 2013.

Note 5. Property, Plant, and Equipment, net

At September 30, 2015 and December 31, 2014 , property, plant, and equipment, net consisted of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Leasehold improvements
$
3,787

 
$
1,592

Furniture and fixtures
2,080

 
2,293

Equipment
21,142

 
17,593

Computer equipment
6,134

 
4,115

Computer software
8,476

 
5,950

Automobiles
256

 
307

Building
2,649

 
2,649

Albatross (aircraft)
425

 
425

Satellite transponder
6,000

 

Other
1,489

 
1,501

Total property, plant, and equipment
52,438

 
36,425

Accumulated depreciation
(17,241
)
 
(12,774
)
Property, plant, and equipment, net
$
35,197

 
$
23,651


Depreciation expense for property, plant, and equipment amounted to $2.2 million and $1.8 million for the three months ended September 30, 2015 and 2014 , respectively, and $6.4 million and $5.2 million for the nine months ended September 30, 2015 and 2014, respectively.
 

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

Depreciation expense, including software amortization expense, by classification for the three and nine months ended September 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Cost of sales
$
648

 
$
567

 
$
1,985

 
$
2,197

Sales and marketing
219

 
163

 
622

 
377

Product development
353

 
295

 
1,021

 
580

General and administrative
1,007

 
809

 
2,805

 
2,016

Total depreciation expense
$
2,227

 
$
1,834

 
$
6,433

 
$
5,170

 
 
 
 
 
 
 
 
Note 6. Intangible Assets, net

As a result of various business combinations, 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 years (weighted average of 5.7 years).

Intangible assets, net at September 30, 2015 , consisted of the following (in thousands, except for useful lives):
 
 
 
September 30, 2015
 
Weighted Average Useful Lives
 
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Intangible assets:
 
 
 
 
 
Definite life:
 
 
 
 
 
Existing technology - software
7 years
 
$
24,375

$
(1,721
)
$
22,654

Existing technology - games
5 years
 
12,331

(6,576
)
5,755

Developed technology
8 years
 
7,317

(1,829
)
5,488

Customer relationships
7.2 years
 
138,800

(44,923
)
93,877

Other
2.5 years
 
7,437

(4,628
)
2,809

Content library (acquired in the Business Combination)
1.5 years
 
14,298

(14,298
)

Content library (acquired post Business Combination)
1.5 years
(1)  
40,254

(24,974
)
15,280

 
 
 
$
244,812

$
(98,949
)
$
145,863

Currency translation adjustment
 
 
 
 

Total intangible assets
 
 
 
 
$
145,863


Intangible assets, net at December 31, 2014, consisted of the following (in thousands, except for useful lives):


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

 
 
 
December 31, 2014
 
Weighted Average Useful Lives
 
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Intangible assets:
 
 
 
 
 
Definite life:
 
 
 
 
 
Existing technology - software
7 years
 
$
2,575

$
(705
)
$
1,870

Existing technology - games
5 years
 
12,331

(4,727
)
7,604

Developed technology
8 years
 
7,317

(1,143
)
6,174

Customer relationships
7.2 years
 
119,879

(30,437
)
89,442

Other
2.5 years
 
7,319

(3,448
)
3,871

Content library (acquired in Business Combination)
1.5 years
 
14,298

(14,148
)
150

Content library (acquired post Business Combination)
1.5 years
(1)
31,949

(18,586
)
13,363

Total intangible assets
 
 
$
195,668

$
(73,194
)
$
122,474

    
(1) Useful life estimate based upon the content library acquired in the Business Combination, which approximates historical experience.

The content library that is expected to be licensed and to generate revenues within the next twelve months is classified as Content library, current, on the Company's condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 . The remainder of content library is classified and included within the intangible asset amount. The Company expects to record amortization of the intangible assets as follows (in thousands):

Year ending December 31,        
Amount
2015 (remaining three months)
$
10,055

2016
37,629

2017
27,680

2018
21,531

2019
16,557

Thereafter
32,411

Total
$
145,863

The Company recorded amortization expense, excluding amortization of content library (acquired post business combination) of $7.3 million and $19.4 million for the three and nine months ended September 30, 2015 , respectively, and $6.5 million and $20.9 million during the three and nine months ended September 30, 2014 , respectively. Amortization expense excludes the amortization of the content library, which is included in cost of sales.
Note 7. Available For Sale (“AFS”) Securities

At September 30, 2015, the Company held  $1.7 million  of Available for Sale equity securities at fair value, which approximates cost.
Note 8.    Commitments and Contingencies


Movie License and Internet Protocol Television (IPTV) Commitments
In the ordinary course of business and as a result of the Business Combination, the Company has certain long-term commitments including movie license fees and guaranteed minimum payments owed to movie content providers. In addition, the Company has certain long-term arrangements with service and television providers to license and provide content and IPTV services that are subject to future guaranteed minimum payments.

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

Operating Lease Commitments

The Company leases its operating facilities under noncancelable operating leases that expire through 2025 . The Company also leases certain facilities and vehicles under month-to-month arrangements. Total rent expense for the three months ended September 30, 2015 and 2014 was $1.7 million and $1.1 million , respectively. Rent expense for the nine months ended September 30, 2015 and 2014 was $3.8 million and $3.0 million , respectively. The Company is responsible for certain operating and property tax expenses in connection with these leases.
     
Satellite Cost Commitments

During the nine months ended September 30, 2015 the Company had in place a Master Services Agreement ("MSA") with its satellite service provider to provide for satellite capacity over Russia, the North Atlantic and for expansion of its existing capacity in the U.S. and Europe. As of December 31, 2014 , the remaining MSA satellite cost commitments totaled up to $289.8 million through December 31, 2027. The Company expenses these satellite fees in the month the service is provided as a charge to cost of services.

During the year ended December 31, 2014, the Company entered into a satellite service agreement with New Skies Satellites B.V. (“SES”) that will provide global, Ku-band satellite bandwidth to GEE for use in GEE’s in-flight connectivity system. The SES agreement required the Company to make an up-front prepayment of $4.0 million . During the three months ended March 31, 2015 , the Company entered into an agreement with Hughes Network Systems, LLC (“HNS”) to administer and assume the underlying obligations under the SES agreement, and transferred its $4.0 million SES prepayment to HNS. These prepayments are being applied to certain service fees as they become due. In the event that the HNS agreement is terminated, HNS will refund the prepayments, less any amounts applied to services rendered or scheduled to be rendered. In July 2015, the Company entered into a separate agreement with SES that extended additional prepayments each upon the achievement of certain milestones relating to the development by SES of future Capacity Services, with such additional prepayments being due no earlier than January 2016.
Legal Matters

On May 6, 2014, UMG Recordings, Inc., Capitol Records, Universal Music Corp and entities affiliated with the foregoing (collectively, “UMG”) filed suit in the United States District Court for the Central District of California against the Company and Inflight Productions Ltd. (“IFP”) for copyright infringement and related claims and unspecified money damages. IFP is a direct subsidiary of Global Entertainment AG (formally AIA) and an indirect subsidiary of the Company.  On July 1, 2014, American Airlines, Inc. (“American”) filed suit in Texas State Court, Tarrant County, against IFP, and filed an amended complaint on October 29, 2014, seeking a declaration that IFP is obligated to defend and indemnify American against claims that UMG may assert against American for copyright infringement insofar as such claims arise out of American’s use of content provided by IFP during a limited period of time, and for breach of contract.  The American lawsuit seeks unspecified money damages and liquidated damages, as well as attorney’s fees. On February 24, 2015, American was added as a defendant in UMG’s case against the Company and IFP, but American has now settled with UMG.  We participated in a non-binding mediation of the case with UMG on April 1, 2015, and September 2, 2015, which did not result in a settlement.  In addition, we have been engaged in settlement discussions with American. Based on currently available information, the Company believes that IFP has strong defenses and intends to defend vigorously against the UMG and American lawsuits, but the outcome of these matters is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations.  As of September 30, 2015, the potential range of loss related to these matters cannot be determined.
            On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44, Inc. and one of its customers for breach of contract, quantum meruit, unjust enrichment and similar claims and unspecified money damages in the Superior Court of California for the Country of Los Angeles.  SwiftAir and Row 44 had a contractual relationship, which Row 44 terminated in 2013, with respect to the provision of destination deal content to one of Row 44’s connectivity customers. Based on currently available information, the Company believes that Row 44 has strong defenses and intends to defend vigorously against this lawsuit, but the outcome of this matter is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations. As of September 30, 2015, the potential range of loss related to this matter cannot be determined.
               In addition, from time to time we are party to various legal matters incidental to the conduct of our business. Certain of our outstanding legal matters include speculative claims for indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. While the resolution of the above matters cannot be predicted with certainty, the Company does not believe, based on current knowledge, that the

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

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.
Other
The movie license agreements are contracted for periods up to 3 years. Minimum payments required under executed agreements are mainly to be paid within 12 months. Earn-out obligations associated with prior business combinations. AIA and PMG earn-out obligations, were accrued for as of December 31, 2014 and were fully paid in 2015.
Note 9. Related Party Transactions

Administrative Services

One of the Company's subsidiaries rents office space belonging to a company in which a former member of such subsidiary's management had an ownership interest. The former management sold his interest in the office during the third quarter of 2015. There were no unpaid lease liabilities as of September 30, 2015 and December 31, 2014 . The Company recognized rent expense of $60,000 and $180,000 for the three and nine month periods ended September 30, 2015 and 2014 , respectively. The Company no longer has a related party relationship with this former employee and former building owner.

Office Lease Agreement with Employee

In connection with the acquisition of PMG, the Company acquired an office lease that is currently being occupied and used as part of operations in Irvine, California. This building is majority owned by one of the founding members of PMG, who was an employee of the Company at September 30, 2015 . The lease terminates on March 31, 2024. The total rental expense incurred during the three and nine months periods ended September 30, 2015 and 2014 was approximately $0.1 million .

PMG Post-Closing Payment
    
In connection with the Company's purchase of substantially all of the assets of PMG in June 2013, the Company agreed to a post-closing payment based on the fulfillment of certain post-closing employment obligations by certain PMG executives (the "PMG Earn Out"), which the Company is required to account for as compensation to the sellers and is recognized as an expense, over the requisite service period. In June 2014, the Company modified the PMG Earn Out to waive the PMG Earn Out and certain other purchase obligations and PMG seller rights in exchange for cash consideration of $2.5 million (the “Additional PMG Consideration”). Fifty percent of the additional PMG Consideration was payable after 10 days from closing, and the remaining $1.25 million was payable in four quarterly installments through the first half of 2015. At December 31, 2014 , the remaining outstanding balance was approximately $0.9 million . During the nine months ended September 30, 2015 , the Company further modified the PMG Earn Out to accelerate the payment of the remaining payment. As the PMG Earn Out was settled during the nine months ended September 30, 2015 , there was no outstanding balance on the PMG Earn Out as of September 30, 2015 .

AIA Noncontrolling Interests Acquisition
    
In April 2014, the Company acquired the remaining outstanding shares in AIA for a total cash consideration of approximately $21.7 million (the "AIA Consideration"). Included in the AIA Consideration was approximately $2.5 million owed to BF Ventures, an entity in which one of our directors owns an indirect stake of approximately 25% , which was paid in full during the year ended December 31, 2014 .

AIA Earn-Out

The Company recognized an expense of $1.4 million during the year ended December 31, 2014 as a result of the remeasurement of the fair value of the earn-out liability acquired in the AIA stock acquisition. The earn-out was payable to certain employees of EIM, a wholly owned subsidiary. At December 31, 2014 , the outstanding balance relating to the earn-out liability was $1.7 million . The earn-out liability was paid and fully settled during the nine months ended September 30, 2015. As of September 30, 2015 , there was no outstanding balance.

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

Note 10. Stock Options and Warrants     

Stock Options

In conjunction with the Business Combination, the Company adopted its 2013 Equity Incentive Plan, which was subsequently amended and restated (as so amended and restated, the "Plan"). Under the Plan, the Administrator of the Plan, which is the compensation committee of the Company's board of directors, may grant up to  9,000,000  stock options, restricted stock, restricted stock units and other incentive awards to employees, officers, non-employee directors, and consultants, and such options or awards may be designated as incentive or non-qualified stock options at the discretion of the Administrator. Employee stock option grants made prior to 2015 have  5 -year terms and vest 1/4th on the anniversary of the vesting commencement date and 1/36th monthly thereafter, over a  3 -year period. During the nine months ended September 30, 2015, employee stock options were granted to the Company’s named executive officers that have 5 -year terms and vest 1/4 th on each anniversary date over a 4 -year period. Stock options granted to the Board of Directors prior to 2015 have  5 -year terms and vest monthly over  two years from the vesting commencement date. During the nine months ended September 30, 2015 , stock options with 5 -year terms were granted to the Board of Directors for services performed in 2014 and to be performed in 2015 . The grants made for 2014 services vested immediately and the grants made for 2015 services vest 1/4 th quarterly through December 31, 2015 . Certain stock option awards have accelerated vesting provisions in the event of a change in control and/or termination without cause.

Fair values of the stock options at September 30, 2015 and 2014 were determined using the Black-Scholes model and the following weighted average assumptions:
 
Nine Months Ended September 30,
 
2015
 
2014
Common stock price on grant date
$12.90
 
$11.42
Expected life (in years)
3.8

 
4.0

Risk-free interest rate
1.30
%
 
1.54
%
Expected stock volatility
43
%
 
59
%
Expected dividend yield
%
 
%
Fair value of stock options granted
$4.41
 
$5.15

Stock option activity for the nine months ended September 30, 2015 is as follows:

 
Shares (in thousands)
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2015
5,771

 
$
10.64

 

 


Granted
1,443

 
12.94

 

 
 
Exercised
(557
)
 
9.82

 

 
 
Forfeited
(867
)
 
11.13

 

 
 
Outstanding at September 30, 2015
5,790

 
$
11.22

 
4.01
 
$
4,998

Vested and expected to vest at September 30, 2015
5,126

 
$
11.13

 
3.87
 
$
4,685

Exercisable at September 30, 2015
2,259

 
$
10.60

 
3.08
 
$
2,740


Restricted stock units

During the three months ended September 30, 2014, the Company granted certain employees performance units in the form of RSUs. A performance unit gives the recipient the right to receive common stock that is contingent upon achievement of a specified predetermined performance target for fiscal 2014 and the continuation of employment for a period of one year from the grant date. The grant date fair value of an RSU equals the closing price of the Company's common stock on the grant date. The number of shares issued totaled 77,687 shares of the Company’s common stock. During the nine months ended September 30, 2015 , the Company granted 29,000 RSUs to the Board of Directors that fully vest on the 13 -month anniversary of the grant date. The Company also granted 379,000 RSUs to certain employees that vest 1/4 th on the grant anniversary date over a 4 -year term.


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

The following summarizes select information regarding our RSUs during the nine months ended September 30, 2015 :

 
Units (in thousands)
 
Weighted Average Grant Date Fair Value
 
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2015
59

 
$
12.90

 
 
Granted
408

 
12.88

 
 
Vested
(48
)
 
12.90

 
 
Forfeited
(13
)
 
12.98

 
 
Balance nonvested at September 30, 2015
406

 
12.88

 
$
4,658

Vested and expected to vest at September 30, 2015
295

 
$
12.89

 
$
3,391


Stock-Based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards for the three and nine months ended September 30, 2015 and 2014 was as follow, (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Cost of services
$
81

 
$
6

 
$
246

 
$
6

Sales and marketing expenses
177

 
14

 
540

 
14

Product development
262

 
53

 
771

 
53

General and administrative
1,627

 
1,823

 
4,691

 
6,412

Total stock-based compensation expense
$
2,147

 
$
1,896

 
$
6,248

 
$
6,485

 
Warrants

The following is a summary of non-public warrants outstanding as of September 30, 2015 that the Company assumed in the Business Combination:


Weighted Average Exercise Price per Warrant
 
Number of Warrants (as converted) (in thousands)
 
Weighted Average Remaining Life
(in years)
Common stock warrants
$
8.79

 
690

 
1.47
Series C Preferred stock warrants
8.74

 
734

 
1.68

Public warrants activity for the nine months ended September 30, 2015 is as follows:
Global Eagle Warrants
 
Number of Warrants (in thousands)
 
Weighted Average Exercise price
 
Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2015
 
10,149

 
$
11.50

 
 
Exercises and exchanges
 
(3,065
)
 
11.50

 
 
Outstanding and exercisable at September 30, 2015
 
7,084

 
$
11.50

 
2.34

The Company accounts for 7,083,978 of Global Eagle's warrants as derivative liabilities at  September 30, 2015 . During the three and nine months ended September 30, 2015 , the Company recorded approximately  $1.9 million of expense and $13.9 million of income, respectively, in the condensed consolidated statements of operations as a result of the remeasurement of these warrants at balance sheet date until exercised. During the three and nine months ended September 30, 2014, the Company recorded approximately $5.3 million of expenses and $0.6 million of income, respectively, of income in the consolidated statements of operations as a result of the remeasurement of these warrants at balance sheet date until exercised. The fair value of warrants

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

issued by the Company has been estimated using the warrants' quoted public market price. In the event the Company’s closing stock price is at or above  $17.50  for twenty of thirty consecutive trading days, the Company can call the  7,083,978  public warrants and force the holders to exercise their warrants at  $11.50  per share, with estimated proceeds of approximately  $81.5 million .

During the year ended December 31, 2014, the Company's Board of Directors (the “Board”) authorized the Company to repurchase GEE's public warrants for an aggregate purchase price, payable in cash and/or shares of common stock, of up to  $25.0 million (inclusive of certain prior warrant purchases).  In August 2015, the Board increased this amount by an additional $20.0 million .   As of September 30, 2015 , $ 20.5 million was available for warrants repurchases under this authorization.  The amount the Company spends and the number of warrants repurchased varies based on a variety of factors including the warrant price. On July 31, 2015, the Company issued 1,015,176 shares of common stock in exchange for the surrender of public warrants exercisable for 3,045,530 shares of the Company's common stock.
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 September 30, 2015 and 2014 was $0.2 million and $1.5 million respectively. The tax expense for the three months ended September 30, 2015 was driven primarily by income in foreign jurisdictions and tax benefit from deferred tax liabilities resulted from acquired assets.
As of September 30, 2015 and December 31, 2014 the Company has recorded a valuation allowance of $60.8 million and $73.7 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 September 30, 2015 , the valuation allowance on domestic and foreign deferred tax assets were $47.5 million and $13.3 million , respectively.
As of September 30, 2015 and December 31, 2014 , the Company had federal net operating loss carry-forwards ("NOLs") of $83.9 million and $128.4 million , respectively, and state net operating loss carry-forwards of $54.2 million and $64.8 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 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 plans to perform a study to determine the extent of the limitation. 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. Currently, the Company expects the utilization of our net operating loss and tax credit carry-forwards in the near term to be affected by certain limitations placed on these carry-forwards as a result of our previous ownership changes.

As of September 30, 2015 , 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.


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

The Company does not expect its uncertain tax position to materially change during the next twelve months .  As of September 30, 2015 , the Company has recorded a $5.7 million cumulative liability for uncertain income tax positions largely pertaining to historical tax positions associated with one of its Canadian subsidiaries acquired as part of the AIA acquisition in January 2013, which includes accumulated interest and penalties of approximately $0.8 million .
Note 12.    Notes Payable and Bank Debts

Convertible Senior Notes

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

On February 20, 2022, February 20, 2025 and February 20, 2030 and if the Company undergoes a “fundamental change” (as defined in the indenture governing the Convertible Notes (the “Indenture”)), subject to certain conditions, a holder will have the option to require the Company to repurchase all or a portion of its Convertible Notes for cash at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) or if the Company delivers a redemption notice prior to February 20, 2022, the Company will, in certain circumstances, increase the conversion rate for a holder that converts its Convertible Notes in connection with such make-whole fundamental change or redemption notice, as the case may be.

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

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

In accounting for the direct transaction costs (the "issuance costs") related to the Convertible Notes, the Company allocated the total amount of issuance costs incurred to the liability and equity components based on their relative values. The Company recorded issuance costs of $1.8 million and $0.3 million to the liability and equity components, respectively. Issuance costs, including fees paid to the initial purchasers who acted as intermediaries in the placement of the Convertible

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

Notes, attributable to the liability component are included within "Other current assets" and "Other non-current assets" in the condensed consolidated balance sheets and are being amortized to interest expense over the term of the Convertible Notes, and the issuance costs attributable to the equity component were netted with the equity component and included within "Additional paid-in capital" in the condensed consolidated balance sheets. Interest cost related to the amortization expense of the issuance costs associated with the liability component was not material during the nine months ended September 30, 2015 .

As of September 30, 2015 , the outstanding Convertible Notes balance, net of the discount associated with the equity component, was $69.8 million .

Bank Debt

With the acquisition of PMG in July 2013, the Company assumed approximately $3.3 million of debt in the form a $1.5 million term loan (the “Term Loan”) and a $1.8 million line of credit (the “LOC”) with a bank. The Term Loan and the LOC matured in October 2017, and bear interest at a rate equal to the bank’s reference rate, which was approximately 3.25% during the year ended December 31, 2014, or the bank’s current prime rate. During the year ended December 31, 2014, the Company repaid the outstanding balance of the Term Loan and the LOC in full using a portion of the Citibank Term Loan proceeds described below.

With the acquisition of IFES on October 18, 2013, the Company assumed approximately $1.3 million of debt in the form of two facility letters for a commercial mortgage loan with a bank for $0.2 million and $1.1 million . The mortgage letters mature in October 2014 and 2032, respectively, and bear interest at a rate equal to 1.75% during the three months ended September 30, 2015 . Interest is paid on a monthly basis. There was no accrued interest on the credit facilities as of September 30, 2015 or December 31, 2014. As of September 30, 2015 , there was $0.9 million in borrowings outstanding under the remaining facility letter.

Bank Loan

On December 22, 2014 , the Company entered into a Loan and Security Agreement with Citibank, N.A. (the "Credit Agreement") providing for $2.4 million of term loans (the "Citibank Term Loans"), which the Company used to repay in full the Term Loan and LOC, and a revolving line of credit (the "Citibank Revolving Loans") in an amount not to exceed $20.0 million . The Citibank Term Loans bear interest at a floating rate based on LIBOR plus an applicable interest margin per annum and mature on December 22, 2017 . A total of  $0.2 million  of the principal amount of the Citibank Term Loans plus any accrued and unpaid interest is to be repaid at the end of each quarter. The outstanding balance of the Citibank Term Loans may be prepaid in whole or in part at any time without penalty.

Debt issuance costs incurred in connection with the Citibank Term Loans totaled  $0.3 million and are being amortized over the respective term of the loans. At September 30, 2015 , there was $1.5 million outstanding under the Citibank Term Loans and $20.0 million available for future borrowings under the Citibank Revolving Loans.

    The following is a schedule, by year, of future minimum principal payments required under notes payable and bank debt as of September 30, 2015 (in thousands):