Global Eagle Entertainment
Global Eagle Entertainment Inc. (Form: 10-Q, Received: 08/09/2016 15:40:20)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED June 30, 2016
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, Suite 300
 
 
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 August 5, 2016)
COMMON STOCK, $0.0001 PAR VALUE
 
83,639,083

SHARES*
 
 
 
 
* Excludes 3,053,634 shares held by 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)

 
June 30,
2016
 
December 31,
2015
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
196,709

 
$
223,552

Accounts receivable, net
88,649

 
93,449

Inventories
18,014

 
14,998

Prepaid and other current assets
29,675

 
27,209

TOTAL CURRENT ASSETS:
333,047

 
359,208

Content library
20,529

 
16,083

Property, plant and equipment, net
49,422

 
39,066

Goodwill
93,037

 
93,796

Intangible assets, net
102,595

 
117,684

Other non-current assets
16,831

 
12,024

TOTAL ASSETS
$
615,461

 
$
637,861

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
112,514

 
$
112,330

Accrued legal settlements
47,157

 
6,200

Deferred revenue
6,808

 
10,449

Warrant liabilities
7,284

 
24,076

Notes payable and accrued interest, current
731

 
749

Other current liabilities
13,708

 
12,111

TOTAL CURRENT LIABILITIES:
188,202

 
165,915

Deferred tax liabilities, non-current
20,385

 
22,324

Deferred revenue, non-current
6,050

 
6,345

Notes payable and accrued interest, non-current
69,730

 
69,815

Other non-current liabilities
19,774

 
19,701

TOTAL LIABILITIES
304,141

 
284,100

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
EQUITY:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 81,116,369 and 81,676,390 shares issued, 78,062,735 and 78,622,756 shares outstanding, at June 30, 2016 and December 31, 2015, respectively
8

 
8

Treasury stock, 3,053,634 shares at June 30, 2016 and December 31, 2015
(30,659
)
 
(30,659
)
Additional paid-in capital
686,998

 
688,696

Subscriptions receivable
(541
)
 
(528
)
Accumulated deficit
(344,029
)
 
(303,457
)
Accumulated other comprehensive loss
(457
)
 
(299
)
TOTAL GLOBAL EAGLE ENTERTAINMENT INC. STOCKHOLDERS' EQUITY
311,320

 
353,761

TOTAL LIABILITIES AND EQUITY
$
615,461

 
$
637,861


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

1


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

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
112,265

 
$
102,376

 
$
226,082

 
$
202,681

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
75,086

 
66,083

 
151,854

 
135,509

Sales and marketing expenses
6,491

 
4,964

 
11,163

 
8,239

Product development
8,416

 
6,451

 
17,162

 
13,681

General and administrative
18,447

 
17,576

 
37,667

 
35,695

Provision for legal settlements
38,142

 
750

 
40,143

 
750

Amortization of intangible assets
7,486

 
6,005

 
14,889

 
11,988

Restructuring charges

 

 

 
302

Total operating expenses
154,068

 
101,829

 
272,878

 
206,164

(Loss) income from operations
(41,803
)
 
547

 
(46,796
)
 
(3,483
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(613
)
 
(583
)
 
(1,417
)
 
(828
)
Change in fair value of derivatives
10,926

 
14,789

 
16,791

 
15,743

Other expense, net, including related party loan impairment
(5,934
)
 
(443
)
 
(5,254
)
 
(1,239
)
(Loss) income before income taxes
(37,424
)
 
14,310

 
(36,676
)
 
10,193

Income tax expense
736

 
1,323

 
3,896

 
637

Net (loss) income
$
(38,160
)
 
$
12,987

 
$
(40,572
)
 
$
9,556

 
 
 
 
 
 
 
 
Net (loss) income per common share – basic
$
(0.49
)
 
$
0.17

 
$
(0.52
)
 
$
0.12

Net (loss) per common share – diluted
$
(0.49
)
 
$
(0.02
)
 
$
(0.52
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
Weighted average common shares – basic
78,127

 
77,111

 
78,385

 
76,993

Weighted average common shares – diluted
78,127

 
78,518

 
78,385

 
78,623


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

2


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

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(38,160
)
 
$
12,987

 
$
(40,572
)
 
$
9,556

Other comprehensive (loss) gain:
 
 
 
 
 
 
 
Unrealized foreign currency translation (losses) gains
(74
)
 
39

 
(158
)
 
(189
)
Other comprehensive (loss) gain
(74
)
 
39

 
(158
)
 
(189
)
Comprehensive (loss) income
$
(38,234
)
 
$
13,026

 
$
(40,730
)
 
$
9,367


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


3


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 Loss
Stockholders' Equity
Balance at December 31, 2015
81,676

$
8

(3,054
)
$
(30,659
)
$
688,696

$
(528
)
$
(303,457
)
$
(299
)
$
353,761

Repurchase and retirement of common stock
(614
)



(5,219
)



(5,219
)
Exercise of stock options
26




254




254

Restricted stock units vested and distributed, net of tax
28




(119
)



(119
)
Purchase of subsidiary shares from non-controlling interests




(876
)



(876
)
Stock-based compensation




4,262




4,262

Interest income on subscription receivable





(13
)


(13
)
Other comprehensive income







(158
)
(158
)
Net loss






(40,572
)

(40,572
)
Balance at June 30, 2016
81,116

$
8

(3,054
)
$
(30,659
)
$
686,998

$
(541
)
$
(344,029
)
$
(457
)
$
311,320


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

4


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

 
Six Months Ended June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$
(40,572
)
 
$
9,556

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,595

 
16,345

Non-cash interest expense, net
424

 
281

Change in fair value of derivative financial instrument
(16,792
)
 
(15,743
)
Stock-based compensation
4,262

 
4,102

Impairment of related party loan
4,516

 

Deferred income taxes
(1,839
)
 
(7,326
)
Other
454

 
265

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,338

 
(2,533
)
Inventory and content library
(5,105
)
 
(4,128
)
Prepaid expenses and other assets
(2,981
)
 
(1,042
)
Deposits and other assets
(4,214
)
 
474

Accounts payable and accrued expenses
37,919

 
1,372

Deferred revenue
(3,936
)
 
(262
)
Other liabilities
1,597

 
3,183

NET CASH PROVIDED BY OPERATING ACTIVITIES
666

 
4,544

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(17,579
)
 
(4,979
)
Issuance of loan to related party
(4,400
)
 

Purchase of investments
(7,669
)
 

Net proceeds from sale of available for sale securities
7,738

 

NET CASH USED IN INVESTING ACTIVITIES
(21,910
)
 
(4,979
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of convertible senior notes

 
81,250

Repayments of notes payable
(425
)
 
(433
)
Proceeds from the exercise of common stock options and warrants
134

 
5,504

Purchase of common stock
(5,219
)
 

Convertible senior note issuance fees

 
(831
)
Other financing activities, net

 
(476
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(5,510
)
 
85,014

Effects of exchange rate movements on cash and cash equivalents
(89
)
 
225

Net (decrease) increase in cash and cash equivalents
(26,843
)
 
84,804

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
223,552

 
197,648

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
196,709

 
$
282,452


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

5


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 and its consolidated subsidiaries are referred collectively herein as the “Company”. The Company's business primarily focuses on providing Wi-Fi Internet Connectivity and Content to the travel industry.
Connectivity
The Company's Connectivity service offering provides its customers and their passengers with operational solutions and Wi-Fi connectivity over Ku-band satellite transmissions. The Company's Connectivity segment offers (i) specialized network equipment, media applications and premium content services that allow passengers to access in-flight Internet, live television, on-demand content, shopping and travel-related information and (ii) operational solutions that allow customers to improve their internal operation management.
Content

The Company's Content service offering selects, manages, provides lab services and distributes wholly-owned and licensed media content, video and music programming, advertising, applications and video games to airlines, as well as to the maritime and other "away from home" non-theatrical markets.
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 June 30, 2016 , the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive (loss) income for the three and six month periods ended June 30, 2016 and 2015 , the condensed consolidated statements of cash flows for the six month periods ended June 30, 2016 and 2015 , and the condensed consolidated statement of stockholders' equity for the six month period ended June 30, 2016 , 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 Company's audited consolidated financial statements for the year ended December 31, 2015 , and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's condensed consolidated balance sheet as of June 30, 2016 , its condensed consolidated statements of operations for the three and six month periods ended June 30, 2016 and 2015 and its condensed consolidated statements of cash flows for the six month periods ended June 30, 2016 and 2015 . The results for the six month period ended June 30, 2016 are not necessarily indicative of the results expected for the full 2016 year. The consolidated balance sheet as of December 31, 2015 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, 2016 (the " 2015 Form 10-K"). The presentation of the provision for legal settlements included in the condensed consolidated statements of operations for the three and six month periods ended June 30, 2015 and the presentation of accrued legal settlements included in the condensed consolidated balance sheet as of December 31, 2015 have been reclassified to conform to the current year presentation. In addition, the Company made an immaterial correction pertaining to the classification of its content library as of December 31, 2015. As a result, the Company reclassified the presentation of its current content library of $12.3 million to non-current assets.

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 2015 Form 10-K.


6

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 applicable 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 relevant acquisition date. 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. Investments in affiliates over which the Company has the ability to exert significant influence, but do not control and where the Company is not the primary beneficiary, are accounted for using the equity method of accounting. Investments in affiliates for which the Company has no ability to exert significant influence are accounted for using the cost method of accounting. The Company had no such affiliates for the six months ended June 30, 2016.

Use of Estimates
 
The preparation of the Company's 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 (allocated on the basis of the 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, legal settlements, 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 customers and their passengers with Wi-Fi connectivity over Ku-band satellite transmissions. This segment, to a lesser extent, also provides airlines with 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 under 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 segments. 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.

Segment revenue, expenses and contribution profit for the three and six month periods ended June 30, 2016 and 2015 derived from the Company's Content and Connectivity segments were as follows (in thousands):


7

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

 
Three Months Ended June 30,
 
2016
 
2015
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
$
78,710

 
$
27,170

 
$
105,880

 
$
73,814

 
$
24,563

 
$
98,377

Equipment

 
6,385

 
6,385

 

 
3,999

 
3,999

Total Revenue
78,710

 
33,555

 
112,265

 
73,814

 
28,562

 
102,376

Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
52,940

 
17,195

 
70,135

 
48,047

 
14,378

 
62,425

Equipment

 
4,951

 
4,951

 

 
3,658

 
3,658

Total cost of sales
52,940

 
22,146

 
75,086

 
48,047

 
18,036

 
66,083

Contribution Profit
25,770

 
11,409

 
37,179

 
25,767

 
10,526

 
36,293

Other Operating Expenses
 
 
 
 
78,982

 
 
 
 
 
35,746

(Loss) Income from Operations
 
 
 
 
$
(41,803
)
 
 
 
 
 
$
547

 
Six Months Ended June 30,
 
2016
 
2015
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
$
162,316

 
$
51,395

 
$
213,711

 
$
145,463

 
$
46,764

 
$
192,227

Equipment

 
12,371

 
12,371

 

 
10,454

 
10,454

Total revenue
162,316

 
63,766

 
226,082

 
145,463

 
57,218

 
202,681

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
Licensing and services
108,577

 
32,952

 
141,529

 
98,049

 
28,076

 
126,125

Equipment

 
10,325

 
10,325

 

 
9,384

 
9,384

Total Cost of sales
108,577

 
43,277

 
151,854

 
98,049

 
37,460

 
135,509

Contribution profit
53,739

 
20,489

 
74,228

 
47,414

 
19,758

 
67,172

Other operating expenses
 
 
 
 
121,024

 
 
 
 
 
70,655

Loss from operations
 
 
 
 
$
(46,796
)
 
 
 
 
 
$
(3,483
)

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 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.


8

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

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. The Company recognized STC fee revenue of $0.7 million during the three and six months ended June 30, 2016 . No STC fee revenue was recognized during the three and six months ended June 30, 2015 .

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 typically is network support, which includes 24/7 operational support for customers 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 customer 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 customer 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 typically occurs within thirty days of the end of the period end. For all 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 customers, 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

9

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

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

Services Revenue . Content services, 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 revenue is recognized as services are performed and/or when the committed advertisement impressions have been delivered. Obligations pursuant to the Company’s advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements is recognized as the related performance criteria are met. We assess whether performance criteria have been met and whether the 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. Where we enter into revenue-sharing arrangements with our customers, such as those relating to our advertising on airplanes and in airline lounges, and when we are considered the primary obligor, we report the underlying revenue on a gross basis in our consolidated statements of operations, and record these revenue-sharing payments to our customers in service costs.

Costs of Sales

Connectivity

Connectivity costs of sales consist primarily of equipment fees paid to third-party manufacturers, certain revenue recognized by the Company and shared with its customers or partners as a result of 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, hardware and services 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 $0.1 million for the six months ended June 30, 2015 . There was no amortization expense included in Content cost of sales associated with the purchase of film content libraries acquired in business combinations for the three and six months ended June 30, 2016 .

Sales and marketing

Sales and marketing expense is primarily comprised of personnel costs related to the Company's sales and marketing staff, advertising costs, including promotional events and other brand building and product marketing expenses, corporate communications, certain professional fees, occupancy costs and travel expenses.

Advertising costs are expensed as incurred. Advertising expenses for the three and six months ended June 30, 2016 and 2015  were not material.     

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

10

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

totaled  $3.1 million and $4.2 million  for the three and six months ended June 30, 2016 , respectively, and  $1.0 million  and  $1.7 million  for the three and six months ended June 30, 2015 , 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 an 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 an expected 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").

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

Stock Repurchases

Shares of the Company's stock 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 customers which are secured by the Company’s cash for periods of less than  one year  and up to  three years . As of June 30, 2016 and December 31, 2015 , the Company had restricted cash of  $4.0 million and $4.4 million , respectively. As of June 30, 2016 and December 31, 2015 , there was $1.0 million and $2.3 million , respectively, of restricted cash included in other current assets in the condensed consolidated balance sheets. As of June 30, 2016 and December 31, 2015 , there was $3.0 million  and  $2.1 million  of restricted cash included in 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

11

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


The Company evaluates the recoverability of its long-lived assets with finite useful lives, including its infinite 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 we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. During the three and six months ended June 30, 2016 , the Company recorded an impairment loss of approximately $0.9 million . Assets to be disposed of would be separately presented on the balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized.

Inventory

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 June 30, 2016 and December 31, 2015 , there was approximately $7.2 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 terms of the agreements through 2020.
    
The Company generally 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 warranty directly to the customer.

Content Library

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. Licensed film rights are amortized ratably over their expected revenue streams and included in cost of sales in the condensed consolidated statements of operations. Certain film rights in the Company's portfolio may be used in perpetuity under certain conditions.

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.


12

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

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 three 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 are 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 on its balance sheet the costs of certain Connectivity equipment installed on aircraft of a single customer to facilitate expanded services over a five -year use period, as the Company retains legal title to the equipment. The Company is amortizing this equipment over its five -year useful life period.

In 2016, the Company began installing certain connectivity equipment under an agreement entered into with a customer in 2015. Under this agreement, legal title of the equipment is transferred upon delivery but sales are not recognized for accounting purposes because the risks and rewards of ownership are not fully transferred due to our continuing involvement with the equipment, the term of our agreement with the airline and restrictions in the agreement regarding the airline's use of the equipment. The Company also takes possession of the equipment upon the end of the term. The Company accounts for these equipment transactions as operating leases. The assets are recorded as property, plant and equipment, net on our condensed consolidated balance sheet. The Company will begin depreciating the assets when they are ready for their intended use and depreciate them over the 10 -year term of the agreement which approximates the expected useful lives of the equipment.

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 and technology. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed.

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.

13

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


As of June 30, 2016 , of the $93.0 million total goodwill, $72.4 million and $20.6 million  was attributed to the Company's Content and Connectivity segments, respectively. The Company's most recent annual impairment analysis was performed in the fourth quarter of the year ended December 31, 2015  and indicated that there was no impairment of goodwill at that time. The Company did not recognize any impairment losses associated with its goodwill during the six months ended June 30, 2016 .

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.

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 (Loss) Income Per Share

Basic (loss) income per share (EPS) is computed using the weighted-average number of common shares outstanding during the period. Diluted (loss) income per share is 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, restricted stock units, liability warrants, warrants issued to third parties and accounted for as equity instruments and convertible senior notes, have been excluded from the diluted (loss) income 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 loss per share for the  three and six months ended June 30, 2015 . Common shares to be issued upon the exercise of warrant instruments classified as liabilities are included in the calculation of diluted loss per share when dilutive.


14

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

The computation for basic and diluted EPS was as follows (in thousands, except per share data):
    
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net (loss) income (numerator):
 
 
 
 
 
 
 
Net (loss) income for basic EPS
$
(38,160
)
 
$
12,987

 
$
(40,572
)
 
$
9,556

 
 
 
 
 
 
 
 
Less: adjustment for change in fair value on warrants liability for diluted EPS after assumed exercise of warrants liability

 
14,789

 

 
15,743

Net loss for dilutive EPS
$
(38,160
)
 
$
(1,802
)
 
$
(40,572
)
 
$
(6,187
)
 
 
 
 
 
 
 
 
Shares (denominator):
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
78,127

 
77,111

 
78,385

 
76,993

Effect of assumed exercise of warrants liability

 
1,407

 

 
1,630

Adjusted weighted-average share for diluted EPS
78,127

 
78,518

 
78,385

 
78,623

 
 
 
 
 
 
 
 
Basic (loss) income per share
$
(0.49
)
 
$
0.17

 
$
(0.52
)
 
$
0.12

Diluted loss per share
$
(0.49
)
 
$
(0.02
)
 
$
(0.52
)
 
$
(0.08
)

Securities not included in the calculation of diluted (loss) income per share were as follows (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Employee stock options
6,139

 
3,234

 
5,919

 
2,926

Restricted stock units
602

 
51

 
397

 
36

Non-employee stock options

 
1

 

 
3

Equity warrants (1)
1,164

 
489

 
1,165

 
513

Liability warrants (2)
6,173

 

 
6,173

 

Convertible notes
4,447

 
4,447

 
4,447

 
3,261

(1) Legacy Row 44 warrants originally issuable for Row 44 common stock and Row 44 Series C preferred stock.
(2) Warrants issued in our initial public offering to non-sponsor shareholders ("Public SPAC Warrants").

Foreign Currency

As of June 30, 2016 , 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 through June 30, 2016 . 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.


15

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.

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 June 30, 2016 , and December 31, 2015 , respectively (in thousands):

 
June 30, 2016
 
Quotes Prices in Active Markets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability   (1)
$
6,565

 
$

 
$

 
$
6,565

Public SPAC Warrants (2)
7,284

 
7,284

 

 

Total financial liabilities
$
13,849

 
$
7,284

 
$

 
$
6,565


 
December 31, 2015
 
Quotes Prices in Active Markets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability   (1)
$
9,652

 
$

 
$

 
$
9,652

Public SPAC Warrants (2)
24,076

 
24,076

 

 

Total financial liabilities
$
33,728

 
$
24,076

 
$

 
$
9,652



16

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

(1) Includes  $6.6 million and $9.7 million  as of June 30, 2016 and December 31, 2015 , respectively, of earn-out liability for the Company's acquisitions of Western Outdoor Interactive Pvt. Ltd. ("WOI"), certain assets of RMG Networks Holding Corporation (the "RMG Assets"), navAero AB ("navAero") and Marks Systems, Inc. (doing business as masFlight ("masFlight")) assumed in business combinations for the year ended  December 31, 2015 .
(2) Includes 6,173,228 warrants issued in our initial public offering to non-sponsor shareholders.

The following table presents the fair value roll-forward reconciliation of level 3 assets and liabilities measured at fair value basis for the six months ended June 30, 2016 (in thousands):

 
Earn-Out Liability
Balance, December 31, 2015
$
9,652

  Change in value
(3,087
)
Balance, June 30, 2016
$
6,565

    
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  June 30, 2016 and December 31, 2015  fair values of the earn-out liabilities were comprised of earn-out liabilities associated with WOI, the RMG Assets, navAero and masFlight business combinations. 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 them to present value. The sum of the discounted weighted average probabilities was used to arrive at the fair value of the earn-out liability. The current and non-current portions of the total earn-out liabilities are included in accounts payable and accrued liabilities and other non-current liabilities, respectively, on the condensed consolidated balance sheets. The Company recorded income from the change in the fair value of these earn-out liabilities during the three and six months ended June 30, 2016 of $ 2.5 million and $ 3.1 million , respectively.

Derivative Warrants . The fair value of the outstanding Public SPAC Warrants issued in our initial public offering, recorded as derivative warrant liabilities, is determined by the Company using the quoted market prices for the Public SPAC 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 SPAC Warrants to determine the fair value. The Company recorded income from the change in the fair value of these warrants during the three and six months ended June 30, 2016 of $10.9 million and $16.8 million , respectively. The Company recorded income from the change in the fair value of these warrants during the three and six months ended June 30, 2015 of $14.8 million and $15.7 million , respectively.

Financial Liabilities. The following table shows both the carrying amounts, which approximate the fair values, of the Company's financial liabilities in the condensed consolidated financial statements at June 30, 2016 and December 31, 2015 , respectively (in thousands):

 
June 30, 2016
 
December 31, 2015
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 
 
 
 
 
 
Convertible senior notes (1)
$
68,679

 
$
61,104

 
$
68,335

 
$
78,557

Notes payable
$
1,781

 
$
1,781

 
$
2,229

 
$
2,229

(1) The fair value of the convertible senior notes is exclusive 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 11).
 
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 notes in an over-the-counter market as of June 30, 2016 .

17

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

    
Notes Payable

The fair value of our notes payable is considered to approximate their carrying value given the short term nature of their maturity.

Adoption of New Accounting Pronouncements and Reclassification of Debt Issuance Costs

In April 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2015-03,  Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs , amending the existing accounting standards for the presentation of debt issuance costs in the statement of financial position. The amendment requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the treatment of a debt discount. We adopted this new guidance in the first quarter of 2016 as required, applying it on a retrospective basis for all balance sheet periods presented.

This change in accounting principle will result in a more transparent presentation of debt as debt issuance costs are similar in nature to debt discounts and in effect reduce the proceeds of borrowings as well as impact the effective interest rate on the related debt. Prior to this change in accounting principle, debt issuance costs were included in "Other non-current assets" in the consolidated balance sheets.

The table below shows the effect of the reclassification of unamortized debt issuance costs associated with our convertible senior notes in our previously reported consolidated balance sheet as of December 31, 2015 (in thousands):
    
 
As presented December 31, 2015
 
Reclassifications
 
As adjusted December 31, 2015
Other non-current assets
$
13,702

 
$
(1,678
)
 
$
12,024

Notes payable and accrued interest, non-current
71,493

 
(1,678
)
 
69,815


In September 2015, the FASB issued 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 was effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2015. The adoption of ASU 2015-16 did not have a material impact on the Company's consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02,  Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 amends the consolidation guidance for variable interest entities and voting interest entities, among other items, by eliminating the consolidation model previously applied to limited partnerships, emphasizing the risk of loss when determining a controlling financial interest and reducing the frequency of the application of related-party guidance when determining a controlling financial interest. ASU 2015-02 is effective for periods beginning after December 15, 2015, for public companies. The adoption of ASU 2015-02 did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 781), Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amends and simplifies the accounting for share-based payment awards in three areas; (1) income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the impact of this standard on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842) ("ASU 2016-02"). This update will require lease assets and lease liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements.

18

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

ASU 2016-02 is effective for the Company commencing in the first quarter of fiscal 2019 and must be adopted using a modified retrospective transition, and provides for certain practical expedients. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 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.

In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers ("ASU 2014-09"), which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The original effective date for ASU 2014-09 would have required the Company to adopt this standard beginning in the first quarter of 2017. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company may not adopt the standard until the first quarter of 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on our consolidated financial statements.

Note 3. Business Combinations

During the quarter ended September 30, 2015, the Company completed four acquisitions. The following table summarizes the preliminary fair value of the assets and liabilities assumed in the acquisitions (in thousands):

 
Weighted Average Useful Life (Years)
 
Amounts at December 31, 2015 (Preliminary)
 
Adjustments
 
Purchase Price Allocation, as Adjusted
Goodwill
 
 
$
41,093

 
$
(812
)
 
$
40,281

Customer relationships
7.6
 
14,000

 

 
14,000

Developed technology
5.7
 
21,900

 

 
21,900

Trade name
5.0
 
200

 

 
200

Accounts receivable
 
 
6,450

 

 
6,450

Property and equipment
 
 
1,783

 

 
1,783

Deferred tax liability
 
 
(11,047
)
 

 
(11,047
)
Accrued expenses
 
 
(4,379
)
 

 
(4,379
)
Other liabilities assumed, net of assets acquired
 
 
(1,669
)
 
812

 
(857
)
Total consideration transferred
 
 
$
68,331

 
$

 
$
68,331


During the six months ended   June 30, 2016 , the Company revised its analysis of the fair value of its acquisitions. The revised analysis related to a pre-acquisition contingency that was subsequently identified relating to a change in the Company's ability to recover amounts held in escrow by the seller of the RMG Assets. Due to the preliminary nature of the financial results prior to each of the acquisitions in 2015, the Company was unable to provide an accurate assessment of certain deferred tax assets, deferred tax liabilities and estimated income taxes payable for the period(s) prior to each acquisition date. These balances were finalized during the six months ended June 30, 2016 .


19

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 period presented (in thousands).
Balance at December 31, 2015
$
93,796

Adjustment to RMG goodwill
(812
)
Currency translation adjustment
53

Balance at June 30, 2016
$
93,037


Note 5. Content Library and Intangible Assets, net

As a result of the business combinations in 2013, 2014 and 2015 (the "Business Combination"), the Company acquired definite-lived intangible assets that are primarily amortized on a straight-line basis. The Company's definite-lived intangible assets have assigned useful lives ranging from  1.5  to  8 years (weighted average of 5.5 years).

Content library and intangible assets, net at June 30, 2016 , consisted of the following (in thousands):

 
Weighted Average Useful Lives
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets:
 
 
 
 
 
 
 
Definite life:
 
 
 
 
 
 
 
Existing technology - software
5.8 years
 
$
24,475

 
$
5,160

 
$
19,315

Existing technology - games
5 years
 
12,331

 
8,426

 
3,905

Developed technology
8 years
 
7,317

 
2,515

 
4,802

Customer relationships
7.5 years
 
133,637

 
60,821

 
72,816

Other
3.7 years
 
7,414

 
5,657

 
1,757

Content library (acquired in Business Combination)
1.5 years
(1)  
14,298

 
14,298

 

Content library (acquired post Business Combination)
1.5 years
 
57,844

 
37,315

 
20,529

Total intangible assets
 
 
$
257,316

 
$
134,192

 
$
123,124



20

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

Content library and intangible assets, net at December 31, 2015 , consisted of the following (in thousands):

 
Weighted Average Useful Lives
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets:
 
 
 
 
 
 
 
Definite life:
 
 
 
 
 
 
 
Existing technology - software
5.8 years
 
$
24,474

 
$
2,978

 
$
21,496

Existing technology - games
5.0 years
 
12,331

 
7,193

 
5,138

Developed technology
8.0 years
 
7,317

 
2,058

 
5,259

Customer relationships
7.5 years
 
133,566

 
50,184

 
83,382

Other
3.7 years
 
7,399

 
4,990

 
2,409

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

 
14,298

 

Content library (acquired post Business Combination)
1.5 years
(1)  
49,599

 
33,516

 
16,083

Total intangible assets
 
 
$
248,984

 
$
115,217

 
$
133,767

    
(1) Useful estimate based upon the content library acquired in the business combination in which the Company acquired Row 44, Inc. ("Row 44") and 86% of the shares of Advanced Inflight Alliance AG ("AIA"), which approximates historical experience.

The Company expects to record amortization of the content library and intangible assets as follows (in thousands):

Year ending December 31,        
Amount
2016 (remaining six months)
$
20,088

2017
39,564

2018
21,523

2019
15,834

2020
14,362

Thereafter
11,753

Total
$
123,124


The Company recorded amortization expense of $7.5 million and $14.9 million for the three and six months ended June 30, 2016 , respectively and $6.0 million and $12.0 million for the three and six months ended June 30, 2015 , respectively. Amortization expense excludes the amortization of the content library, which is included in cost of sales.

Note 6. Available For Sale (“AFS”) Securities
    
During the six months ended   June 30, 2016 , the Company purchased and sold AFS securities for proceeds of approximately  $7.7 million  and recognized a de minimis gain from the sale.

Note 7.    Commitments and Contingencies

Movie License and Internet Protocol Television (IPTV) Commitments
In the ordinary course of business, the Company has certain long-term commitments, including license fees and guaranteed minimum payments owed to 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.

21

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 on various dates through 2025 . The Company also leases certain facilities and vehicles under month-to-month arrangements. Total rent expense for the three months ended June 30, 2016 and 2015 was $1.3 million and $1.1 million , respectively. Total rent expense for the six months ended June 30, 2016 and 2015 was $2.4 million and $2.1 million , respectively. The Company is responsible for certain operating expenses in connection with these leases.
     
Satellite Cost Commitments

During the six months ended June 30, 2016 and 2015 , the Company maintained agreements with satellite service providers to provide for satellite capacity over Russia, the North Atlantic and for expansion of its existing capacity in the U.S. and Europe. 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”) to 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 pre-payment of $4.0 million as well as one additional pre-payment of $4.5 million due and paid in January 2016. 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 first $4.0 million SES prepayment to HNS. The upfront $4.0 million pre-payment was applied to certain service fees through February 2016, while the $4.5 million prepayment made in January 2016 will be applied to certain future services expected to launch in 2017. In March 2016, the Company and HNS entered into an additional agreement under which HNS will deliver satellite connectivity for the Company’s next-generation, multi-band airborne services utilizing the high-throughput Ka-band Jupiter constellation of satellites. There is no cost commitment under this contract at this time because the Company has not commenced Ka-band operations to date and costs are based on actual usage. 
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 April 20, 2016, that court issued a decision granting UMG’s motion for partial summary judgment, finding that the Company and IFP willfully infringed UMG’s copyrights. On July 1, 2014, American Airlines, Inc. (“American”) filed suit in Texas State Court against IFP, and filed an amended complaint on October 29, 2014, for breach of contract and seeking a declaration that IFP must defend and indemnify American against claims that UMG and others may assert against American for copyright infringement insofar as such claims arise out of American’s use of content provided by IFP. The American lawsuit seeks unspecified money damages and liquidated damages, as well as attorney’s fees. IFP has counterclaimed on the basis that it believes it previously reached a settlement with American on this matter. IFP intends to vigorously defend itself against the American lawsuit and prosecute its counterclaims.
During the three months ended June 30, 2016 , the Company engaged in settlement negotiations with major record labels, including UMG, to settle sound-recording liabilities (the “Sound-Recording Settlements”). In addition, the Company engaged in settlement negotiations with airlines regarding related liabilities. As a result of these Sound-Recording Settlements and related negotiations, the Company has recorded a liability totaling approximately $45.8 million in the aggregate (as of June 30, 2016 ), which is comprised of future stock and cash payments. As a result of the Sound-Recording Settlements (one of which was executed on August 8, 2016), the Company recorded an increase to its legal settlement accruals and expenses totaling $38.1 million during the three months ended June 30, 2016 .
On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44 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 June 30, 2016 , the potential range of loss related to this matter cannot be determined.

22

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

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 certain of the above matters cannot be predicted with certainty, the Company does not believe, based on current knowledge, that the outcome of these 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.
Earn-out and Equipment Purchase Commitments

Through the acquisitions of WOI, the RMG Assets, masFlight and navAero, the Company assumed certain obligations with respect to future contingent earn-outs. As of  June 30, 2016 and December 31, 2015 , the total liability was approximately  $6.6 million and $9.7 million , respectively, with potential payouts on specified dates through 2020. Through its normal course of business, the Company enters into future purchase commitments with its equipment vendors to secure future inventory for its customers.

Note 8. Related Party Transactions

Loan Agreement

On February 24, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with a third party that provides in-flight entertainment systems to airlines (the "Loan Party"). The Loan Party is majority-owned by PAR Investment Partners, L.P., or PAR, who beneficially owned approximately  37%  of our outstanding shares of common stock as of June 30, 2016 . The Chairman of the Company's Board of Directors is also a Managing Partner of PAR and a member of the board of directors of the Loan Party.

The Loan Agreement provides for extensions of credit by the Company to the Loan Party of up to $5.0 million . The Company's Board of Directors considered the entry into the Loan Agreement under the Company’s policies and procedures regarding related person transactions, and determined that it was appropriate and in the best interests of the Company and its stockholders to enter into the Loan Agreement due to the Loan Party’s position as a supplier to flydubai, a Connectivity customer of the Company, and the Loan Party’s future business prospects. Our Board of Directors further determined that the parties’ relationships did not give rise to any material conflict of interest in entering into the Loan Agreement.

The Loan Agreement qualifies the Loan Party as a variable interest entity to the Company. In accordance with ASC 810, Consolidation , the Company was not deemed to be the primary beneficiary of the Loan Party as the Company does not hold any power over the Loan Party's activities that most significantly impact its economic performance. Therefore, the Loan Party is not subject to consolidation. The maximum exposure to loss as a result of the Loan Agreement is the outstanding principal balance and any accrued interest thereon.

The borrowings under the Loan Agreement are evidenced by a senior secured promissory note (the "Note") and bear interest at a per annum rate of 15% . The outstanding principal and accrued interest thereon are payable in full December 31, 2016. As of June 30, 2016 , the outstanding principal balance of the loan was $4.5 million , inclusive of a $0.1 million origination fee. Accrued interest receivable under the Note as of June 30, 2016 was approximately $0.2 million . As a result of information provided by the Loan Party subsequent June 30, 2016, the Company impaired the Note during the three months ended June 30, 2016 and wrote off the outstanding principal balance of the Note and accrued interest receivable.     

Subscription Receivable with Employee

The Company has an agreement with a former officer of Row 44 to stock-settle his note receivable and accrued interest, which amounted to  $0.5 million , in exchange for certain shares of the Company's common stock held by the officer. As of  June 30, 2016 and December 31, 2015 , the balance of the former officer’s receivable amounted to  $0.5 million  and is presented as subscriptions receivable. The Company recognizes interest income when earned, using the simple interest method. Interest amounts recognized by the Company during the three and six months ended June 30, 2016 and June 30, 2015 were not material. The Company makes ongoing assessments regarding the collectability of the notes receivable and subscriptions receivable balances.

23

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

    
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 member of management sold his interest in the office during the third quarter of 2015. There were no unpaid lease liabilities as of June 30, 2016 and December 31, 2015 . The Company recognized rent expense of $0.1 million each for the three and six months ended June 30, 2016 and 2015 , respectively.

Office Lease Agreement with Employee

In connection with the acquisition of substantially all of the assets of Post Modern Edit, LLC and related entities ("PMG") in 2013, the Company acquired an office lease in a building 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 through March 2015. The lease terminates on March 31, 2024. The total rental expense incurred during the three and six months ended June 30, 2016 and 2015 was $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 quarter ended March 31, 2015, the Company further modified the PMG Earn Out to accelerate the payment of the remaining $0.6 million payment to April 2015. As the PMG Earn Out was settled in 2015, there was  no  outstanding balance on the PMG Earn Out as of  June 30, 2016 .

masFlight Earn-Out

In August 2015, the Company acquired masFlight for approximately  $10.3 million  in cash and $9.3 million  in contingent consideration. As a portion of the contingent consideration is subject to future employment of certain employees of masFlight, certain contingent consideration is recorded as compensation expense prospective to the acquisition date. During the three months ended June 30, 2016 , the Company recognized a reduction in compensation expense of $0.5 million relating to the masFlight contingent consideration. As of June 30, 2016 , the earn-out compensation liability was $0.3 million .

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 one of the former managing directors at Entertainment in Motion, a wholly owned subsidiary. The earn-out liability was paid and fully settled during the year ended December 31, 2015. As of  June 30, 2016 , there was  no  outstanding balance owed on this earn-out.


24

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

Note 9. Common Stock, Stock Options and Warrants     

Stock Repurchase Program

In March 2016, the Company's Board of Directors (the "Board") authorized a stock repurchase program under which the Company may repurchase up to $50.0 million of its common stock. Under the stock repurchase program, the Company may repurchase shares from time to time using a variety of methods, which may include open-market purchases and privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. The Company measures all potential buybacks against other potential uses of capital which may arise from time to time. The repurchase program does not obligate the Company to repurchase any specific number of shares, and may be suspended or discontinued at any time. The Company expects to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. During the three months ended June 30, 2016 , the Company repurchased 0.6 million shares of its common stock for consideration of $5.2 million in the aggregate. As of June 30, 2016 , the remaining authorization under the stock repurchase plan was $44.8 million .

Warrants Repurchase Program

During the year ended December 31, 2014, the Board authorized a warrant repurchase program under which the Company may repurchase GEE's Public SPAC Warrants for an aggregate purchase price, payable in cash and/or shares of common stock, of up to  $25.0 million  (inclusive of certain prior warrant purchases). In August 2015, the Board authorized an additional  $20.0 million for this repurchase program. As of  June 30, 2016 and December 31, 2015 $16.7 million  was available to repurchase GEE's Public SPAC Warrants 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.

Stock Options

Under the Company's 2013 Amended and Restated Equity Incentive Plan, (as amended, the "Plan"), the Administrator of the Plan, which is the compensation committee of the Company's Board of Directors, may grant up to  11,000,000  stock options, restricted stock, restricted stock units (RSUs) 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. The exercise price of stock option awards granted is equal to the per share closing price of the common stock on the date the options were granted. Stock option awards generally vest over one to four years, expire five to seven years from the date of grant and certain stock option and RSU awards have accelerated vesting provisions in the event of a change in control and certain termination provisions.

Fair values of the stock options at June 30, 2016 and 2015 were determined using the Black-Scholes model and the following weighted average assumptions:

 
Six Months Ended June 30,
 
2016
 
2015
Common stock price on grant date
$8.45
 
$13.14
Expected life (in years)
3.9

 
4.0

Risk-free interest rate
1.12
%
 
1.31
%
Expected stock volatility
45.0
%
 
50.0
%
Expected dividend yield
%
 
%
Fair value of stock options granted
$2.97
 
$5.37


25

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

Stock option activity for the six months ended June 30, 2016 is as follows:

Global Eagle Stock Option Plan
Shares (in thousands)
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2016
5,625

 
$
11.20

 

 


Granted
937

 
$
8.45

 

 
 
Exercised
(26
)
 
$
9.87

 

 
 
Forfeited
(246
)
 
$
11.51

 

 
 
Outstanding at June 30, 2016
6,290

 
$
10.78

 
2.99
 
$
2

Vested and expected to vest at June 30, 2016
5,665

 
$
10.77

 
2.89
 
$
1

Exercisable at June 30, 2016
3,220

 
$
10.79

 
2.33
 
$


Restricted Stock Units
    
Under the Plan, RSU awards that can be granted to employees, officers and consultants vest annually on each anniversary of the grant date and generally over a 4 -year term. RSUs granted to non-employee directors in 2016 and 2015 cliff-vest on the 13 month anniversary 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 following summarizes select information regarding our RSUs during the six months ended June 30, 2016 :

 
Units (in thousands)
 
Weighted Average Grant Date Fair Value
 
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2016
408

 
$
12.71

 
 
Granted
532

 
$
7.90

 
 
Vested
(43
)
 
$
13.23

 
 
Forfeited
(42
)
 
$
12.15

 
 
Balance nonvested at June 30, 2016
855

 
$
9.72

 
$
5,677

Vested and expected to vest at June, 2016
587

 
$
9.78

 
$
3,732


Stock-Based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards for the three and six months ended June 30, 2016 and 2015 was as follows (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of services
$
74

 
$
124

 
$
150

 
$
165

Sales and marketing expenses
112

 
338

 
279

 
364

Product development
246

 
196

 
494

 
509

General and administrative
1,761

 
894

 
3,339

 
3,064

Total stock-based compensation expense
$
2,193

 
$
1,552

 
$
4,262

 
$
4,102


26

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

 
Warrants

The following is a summary of the "Legacy Row 44 Warrants" outstanding as of June 30, 2016 . Our Legacy Row 44 Warrants are warrants issued by a legacy entity purchased as part of the Business Combination. The Legacy Row 44 Warrants were originally exercisable for shares of Row 44, but as a result of the Business Combination became exercisable for Company common stock.


Weighted Average Exercise Price per Warrant
 
Number of Warrants (as converted) (in thousands)
 
Weighted Average Remaining Life
(in years)
Legacy Row 44 Warrants (1)
$
8.79

 
690

 
0.72
Legacy Row 44 Warrants (2)
$
8.62

 
477

 
0.94
(1) Originally issuable for Row 44 common stock.
(2) Originally issuable for Row 44’s Series C preferred stock.
    
The following is a summary of Public SPAC Warrants outstanding as of June 30, 2016 . There was no activity for the three months ended June 30, 2016 .

Public SPAC Warrants
Number of Warrants (in thousands)
 
Weighted Average Exercise price
 
Weighted Average Remaining Contractual Term (in years)
Outstanding and exercisable at June 30, 2016
6,173

 
$
11.50

 
1.59

The Company accounts for its 6.2 million Public SPAC Warrants as derivative liabilities at  June 30, 2016 . During the three and six months ended June 30, 2016 and June 30, 2015 , the Company recorded income of approximately $10.9 million and $16.8 million , respectively, and $14.8 million  and $15.7 million , respectively, in the condensed consolidated statements of operations as a result of the remeasurement of these warrants. The fair value of warrants issued by the Company has been estimated using the warrants' quoted public market price. In the event the closing price of the Company's common stock is at or above  $17.50  for twenty of thirty consecutive trading days, the Company can redeem the  6.2 million  Public SPAC Warrants for $0.01 per warrant following a 30 -day notice period, during which period holders may exercise their warrants at  $11.50  per share, with estimated proceeds of approximately  $71.0 million , unless we decide, at our option, to make them exercisable on a cashless basis.

Note 10. Income Taxes
    
The Company recorded an income tax provision of $0.7 million and $1.3 million for the three months ended June 30, 2016 and 2015 , respectively, and $3.9 million and $0.6 million for the six months ended June 30, 2016 and 2015 , respectively. The tax provision for the six months ended June 30, 2016 is primarily attributable to changes in state and foreign income taxes resulting from fluctuations in the foreign subsidiaries’ contribution to pretax income, withholding taxes and effects of permanent differences. The tax provision for the six months ended June 30, 2015 was reduced by benefits realized from internal restructuring during the period.
Due to uncertainty as to the realization of benefits from the Company's U.S. and certain international net deferred tax assets, including net operating loss carryforwards, the Company has a full valuation allowance reserved against such net deferred tax assets. The Company intends to continue to maintain a full valuation allowance on certain jurisdictions' net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
As of June 30, 2016 and December 31, 2015 , the liability for income taxes associated with uncertain tax positions was $6.2 million and $4.6 million , respectively. The net increase in the liability during 2016 was primarily attributable to reserves for tax positions taken by one of the Company’s Canadian subsidiaries. As of June 30, 2016 and December 31, 2015 , the Company had accrued $1.7 million and $1.4 million , respectively, of interest and penalties related to uncertain tax positions. It is reasonably

27

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

possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly decrease within the next 12 months. This change may be the result of ongoing audits or the expiration of federal and state statutes of limitations for the assessment of taxes.

Note 11.     Notes Payable and Bank Debts

Convertible Senior Notes

In February 2015, the Company issued an aggregate principal amount of $82.5 million 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 pursuant to the terms of the Convertible Notes. In certain circumstances and subject to certain conditions, the Convertible Notes are convertible at an initial conversion rate of 53.9084 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $18.55 per share), subject to adjustment. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2034, only if one or more of the following conditions has been satisfied: 1) during any calendar quarter beginning after March 31, 2015 if the closing price of 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

28

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

recorded issuance costs of $1.8 million and $0.3 million to the liability component and equity component, respectively. Issuance costs, including fees paid to the initial purchasers who acted as intermediaries in the placement of the Convertible Notes, attributable to the liability component are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability and are 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 expense related to the amortization expense of the issuance costs associated with the liability component was not material during the three and six months ended June 30, 2016 .

As of June 30, 2016 and December 31, 2015 , the outstanding Convertible Notes balance, net of debt issuance costs and discount associated with the equity component, was $68.7 million and $68.3 million , respectively.

Bank Debt

With the acquisition of Travel Entertainment Group Equity Limited and subsidiaries ("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 commercial mortgage loan for $0.2 million matured and the remaining outstanding balance and accrued interest was repaid in October 2014. The $1.1 million mortgage letter matures in October 2032 and bears interest at a rate equal to 1.75% . Interest is paid on a monthly basis. There was no accrued interest on the mortgage letter as of June 30, 2016 and December 31, 2015 . As of June 30, 2016 and December 31, 2015 , there were $0.8 million and $0.9 million in borrowings outstanding under the remaining facility letter, respectively.

Citibank Loans

On December 22, 2014 , the Company entered into a Credit Agreement with Citibank (the "Citibank Credit Agreement"), providing for $2.4 million of term loans (the "Citibank Term Loans") and a revolving line of credit (the "Citibank Revolving Loans") in an amount not to exceed $20.0 million . The Citibank Term Loans bore interest at a floating rate based on LIBOR plus an applicable interest margin per annum and were to 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 was to be repaid at the end of each quarter. The outstanding balance of the Citibank Term Loans were prepayable in whole or in part at any time without penalty. As noted below, the Company repaid the outstanding balance and terminated the Citibank Credit Agreement on July 27, 2016

Debt issuance costs incurred in connection with the Citibank Term Loans totaled  $0.3 million and were being amortized to interest expense over the respective term of the loans. As of June 30, 2016 and December 31, 2015 , there were $1.0 million and $1.3 million , respectively, 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 debts as of June 30, 2016 (in thousands):

Years Ending December 31,
Amount
2016 (remaining six months)
$
716

2017
356

2018
49

2019
45

2020
41

Thereafter
83,074

Total
$
84,281


On July 27, 2016, in connection with the completion of the Emerging Markets Communications ("EMC") acquisition, the Company repaid all amounts outstanding under the Citibank Credit Agreement. In exchange for the payment in full of obligations under the Citibank Credit Agreement, the Company terminated that agreement and obtained a full release of any further obligations thereunder. See Note 14, Subsequent Events.

29

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

Note 12. Concentrations

Concentrations of Credit and Business Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable.

At June 30, 2016  and  December 31, 2015 , the Company's cash and cash equivalents were maintained primarily with major U.S. financial institutions and foreign banks. Deposits with these institutions at times exceed the federally insured limits, which potentially subjects the Company to concentration of credit risk. The Company has not experienced any losses related to these balances and believes that there is minimal risk.

A substantial portion of the Company's revenue is generated through arrangements with Southwest Airlines. The percentage of revenue generated through this customer (which represents more than 10% of our consolidated revenue) is as follows:

 
Six Months Ended June 30,
 
2016
 
2015
Southwest Airlines as a percentage of total revenue
24
%
 
25
%
Southwest Airlines as a percentage of Connectivity revenue
83
%
 
89
%

No other customer accounted for greater than 10% of total revenue for the two periods presented.

There were no accounts receivable balances from customers that represented more than 10% of total accounts receivable at June 30, 2016 and December 31, 2015 .

Note 13.     Restructuring

The Company records the cost reduction plan activities in accordance with the Accounting Standards Codification (ASC), including  ASC 420 Exit or Disposal Cost Obligations ASC 712 Compensation-Nonretirement Postemployment Benefits  and  ASC 360 Property, Plant and Equipment (Impairment or Disposal of Long-Lived Assets) .

During the third quarter ended September 30, 2014, the Company implemented a plan to improve operational efficiencies, which included the closure of its German-based operations and facilities, centralization of its international financial operations, and realignment of its international and U.S. tax structure (the “Restructuring Plan”). During 2014, in conjunction with the Restructuring Plan, the Company committed to a reduction in force. As of September 23, 2014, the Company communicated the reduction to affected employees. The Company completed the implementation of its Restructuring Plan before the end of 2015.

The Company incurred a total of $4.7 million of restructuring charges in connection with the Restructuring Plan, including:

(1)
$2.7 million total expenses relating to employee termination benefits, which primarily included severance and transitional-related expenses.

(2)
In connection with the closure of its German operations pursuant to the Restructuring Plan, the Company disposed of approximately 11,000 square feet of leased facilities in Duisburg and Munich, Germany, representing approximately 6% of its global facilities square footage. The Company incurred an aggregate of approximately $0.4 million of facilities disposal charges pursuant to the Restructuring Plan.

(3)
$1.6 million of legal and professional fees associated with the execution of the Restructuring Plan.


30

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

The following table summarizes the charges recorded related to the Restructuring Plan by type of activity (in thousands):

 
Six Months Ended 
 June 30,
 
2016
 
2015
Termination benefits
$

 
$
238

Leases and other contractual obligations

 
64

Other

 

Total Restructuring charges
$

 
$
302


The following table summarizes the charges and spending relating to the restructuring plan for the year ended December 31, 2015 (in thousands):

 
Termination Costs
 
Leases and other contractual obligations
 
Other
 
Total
Restructuring reserves as of January 1, 2015
$
809

 
$
39

 
$
1,076

 
$
1,924

 
 
 
 
 
 
 
 
Expense
238

 
107

 
66

 
411

Payments
(1,047
)
 
(146
)
 
(1,142
)
 
(2,335
)
Restructuring reserves as of December 31, 2015
$

 
$