Notes to Consolidated Financial Statements
Note 1. Business
Global Eagle Entertainment Inc. is a Delaware corporation headquartered in Los Angeles, California. Global Eagle (together with its subsidiaries, “Global Eagle”, or the “Company”, “we”, “us” or “our”) is a leading provider of media and satellite-based connectivity to fast growing, global mobility markets across air, land and sea. Global Eagle offers a fully integrated suite of rich media content and seamless connectivity solutions that cover the globe. As of
December 31, 2017
, its business was comprised of two operating segments: Media & Content and Connectivity, with the Connectivity segment encompassing the operations of the former Aviation Connectivity and Maritime & Land Connectivity segments as historically presented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. See
Note 16. Segment Information
for further discussion on the Company’s reportable segments.
Prior to the Company’s acquisition of Emerging Markets Communications (“EMC” and the acquisition, the “EMC Acquisition”) on July 27, 2016 (the “EMC Acquisition Date”), the Company’s business consisted of
two
operating segments: Content and Connectivity. (EMC was a communications services provider that offered land-based sites and marine vessels globally a multimedia platform delivering communications, Internet, live television, on-demand video, voice, cellular and 3G/LTE services. See Note 3. Business Combinations.) Following the EMC Acquisition, the acquired EMC business became a third operating segment, which the Company called Maritime & Land Connectivity, and the Company renamed its other
two
segments as Media & Content and Aviation Connectivity. In the second quarter of 2017, the Company reorganized its business from
three
operating segments back into
two
operating segments—Media & Content and Connectivity. However, we will continue to have three separate reporting units for purposes of our goodwill impairment testing. See below
and
Note 16. Segment Information
for further discussion on the Company’s reportable segments.
Media & Content
The Media & Content segment selects, manages, provides lab services and distributes wholly-owned and licensed media content, video and music programming, advertising, applications and video games to the airline, maritime and other “away from home” non-theatrical markets.
The Media & Content operations commenced on January 31, 2013, when the Company acquired
86%
of the issued and outstanding shares of Advanced Inflight Alliance AG (“AIA”) in January 2013.
Prior to January 31, 2013, the Company was known as Global Eagle Acquisition Corp. (“GEAC”), which was formed in February 2011 to effect a merger, capital stock exchange, asset acquisition or similar business combination with one or more businesses. Upon completion of the business combination with Row 44, Inc. (“Row 44”) and AIA, the Company changed its name from Global Eagle Acquisition Corp. to Global Eagle Entertainment Inc. In addition, the Company purchased substantially all the assets of Post Modern Edit, LLC and related companies (“PMG”) in July 2013 and completed the stock acquisition of the U.K. parent of the Travel Entertainment Group Equity Limited and subsidiaries (“IFES”) in October 2013. In 2013, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA’s shares to
94%
, and in April 2014, the Company acquired the remaining outstanding shares in AIA.
Connectivity
The Connectivity operating segment provides its customers, including their passengers and crew, with (i) Wi-Fi connectivity via L, C, Ka and Ku-band satellite transmissions that enable access to the Internet, live television, on-demand content, shopping and travel-related information and (ii) operational solutions that allow customers to improve the management of their internal operations.
The Connectivity segment operations commenced when the Company acquired all of the outstanding shares of common stock of Row 44 pursuant to a business combination transaction that closed on January 31, 2013 in which the Company acquired Row 44 and
86%
of the issued and outstanding shares of AIA.
The EMC Acquisition added maritime and land-based connectivity operations to the segment upon the consolidation of our prior Maritime & Land Connectivity segment with our prior Aviation Connectivity segment in the second quarter of 2017.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
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 consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements have been prepared on the basis of the Company having sufficient liquidity to fund its operations for at least the next twelve months from the issuance of these consolidated financial statements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40,
Presentation of Financial Statements - Going Concern
. The Company’s principal sources of liquidity have historically been its debt and equity issuances and its cash and cash equivalents (which cash and cash equivalents amounted to
$48.3 million
as of December 31, 2017). The Company’s internal plans and forecasts indicate that it will have sufficient liquidity to continue to fund its business and operations for at least the next twelve months in accordance with ASC Topic 205-40.
For the years ended
December 31, 2017
and
2016
, the Company adopted ASC Topic 205-40, which requires that an entity’s management evaluate whether there are relevant conditions and events that in aggregate raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued. Under this standard, the assessment by the entity’s management shall not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. Under ASC Topic 205-40, the first step of the assessment requires the entity to conclude that it will meet its obligations as they become due within one year after the date that the financial statements are issued, and the second step considers management’s mitigating measures in the event that management has concluded there is substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date the financial statements are issued.
The Company’s management completed the first step of the assessment required by ASC Topic 205-40, considering, among other things, the Company’s current financial condition, taking into account the
$150 million
investment by Searchlight subsequent to December 31, 2017, our filing of the 2017 Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2017 (which we filed concurrently on January 31, 2018 and consequently regained compliance with the continued listing requirements of the Nasdaq Stock Market) as well as negative factors such as its delay in achieving its anticipated acquisition synergies as well as its material weaknesses in its internal controls and the substantial time and resources that management must continue to dedicate to remediate and compensate for them; obligations coming due within the next 12 months; funds necessary to maintain its operations; and other conditions and events that may adversely affect the Company’s ability to meet its obligations within one year, such as a potential failure to satisfy its reporting obligations under its debt instruments as described below, history of recurring losses and cash used in operating activities, our negative working capital position as of December 31, 2017 and our substantial indebtedness. Following this assessment, the Company’s management believes that the Company has sufficient liquidity and access to funds to meet its obligations as they become due within one year after the date that the financial statements are issued. As such, management did not need to conduct a second-step assessment.
The assessment by the Company’s management that the Company will have sufficient liquidity to continue as a going concern is based on underlying estimates and assumptions, including that the Company: (i) timely files its periodic reports with the U.S. Securities and Exchange Commission (the “SEC”); (ii) services its indebtedness and complies with the covenants (including the financial-reporting covenants) in the agreements governing its indebtedness; and (iii) remains listed on The Nasdaq Stock Exchange.
If the Company is unable to satisfy the covenants and obligations contained in its 2017 Credit Agreement or Second Lien Notes (as defined below), in each case, obtain additional waivers (if needed), then its lenders could have the option to immediately accelerate all outstanding indebtedness, which the Company may not have the ability to repay. In addition, if the Company is unable to remain in compliance with Nasdaq’s listing requirements, then Nasdaq could determine to delist the Company’s common stock from Nasdaq, which would in turn constitute a “fundamental change” under the terms of the indenture governing its
2.75%
Convertible Notes (as described below) due 2035. This would give the noteholders the option to require the Company to repurchase all or a portion of their convertible notes at a repurchase price equal to 100% of the principal amount thereof. In this event, the Company may not have the ability to repurchase the tendered notes. If these events occur, then the Company could be required to repay its credit agreement debt and Convertible Notes as early as the first quarter of 2018.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
An acceleration or “fundamental change” repurchase event under the Company’s credit agreement, securities purchase agreement or indenture (as applicable) could materially and adversely affect the Company’s operating results, financial condition, liquidity and the carrying value of the Company’s assets and liabilities. The Company intends to satisfy its current and future debt service obligations with its existing cash and cash equivalents. However, the Company may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under its existing debt instruments in the event of an acceleration event or repurchase event (as applicable). In this event, funds from external sources may not be available on acceptable terms, if at all.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements of prior years and the accompanying notes to conform to the current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned and controlled subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The results of acquired businesses are included in the consolidated financial statements from the date of acquisition. Earnings or losses attributable to any non-controlling interests in a Company subsidiary are included in Net loss in the Consolidated Statements of Operations. Any investments in affiliates over which the Company has the ability to exert significant influence but does not control and with respect to which it is not the primary beneficiary are accounted for using the equity method. As a result of the EMC Acquisition, the Company has two such equity affiliates. There were no equity method investments as of and for the year ended December 31, 2015.
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 liabilities associated with business combinations, legal settlements, valuation of media content library and equipment inventory, useful lives and impairment of property, plant 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.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of a sales arrangement exists, the services have been rendered or goods have been delivered, the sales price is fixed or determinable, and collectability is reasonably assured. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. The Company considers persuasive evidence of a sales arrangement to be the receipt of a signed contract or purchase order. Collectability is assessed based on a number of factors, including transaction history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash.
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 Company’s control. 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.
When the Company enters into revenue sharing arrangements where it acts as the principal, the Company recognizes the underlying revenue on a gross basis. In determining whether to report revenue gross for the fees received from its customers, the
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Company assesses whether it is the primary obligor, responsible for fulfillment, has the general inventory risk, bears credit risk and has latitude in establishing prices with its customers, and among other factors. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities.
The Company’s revenue is principally derived from the following sources:
Media & Content
Licensing & Services Revenue
. The Company curates and manages the licensing of content to the airline, maritime, and non-theatrical industries globally and provides associated services, such as technical services, delivery of digital media advertising, the encoding of video and music products, development of graphical interfaces or the provision of materials. Media & Content licensing revenue is principally generated through the sale or license of media content, video and music programming, applications and video games to customers in the aviation, maritime and non-theatrical markets. 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. In certain cases, the Company estimates licensing revenue from customers, typically for revenue based on usage, including fees based on number of flights or number of aircraft or pay-per-view. The Company believes it has the ability to reasonably estimate the amounts that will ultimately be collected and therefore recognizes these amounts when earned.
Revenue from the provision of Media & Content services 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. The Company assesses 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 the Company enters into revenue-sharing arrangements with its customers, such as those relating to advertising, and when we are considered the principal, the Company reports the underlying revenue on a gross basis in its Consolidated Statements of Operations, and records these revenue-sharing payments to its customers in service costs.
Connectivity
Services Revenue
. Services revenue for Connectivity includes satellite-based Internet services and related technical and network operational support and management services, live television, on-demand content, music streaming, shopping and click-through advertising revenue from travel-related information. The revenue is recognized after the service has been rendered and the customer can use such 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 revenue 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 licensing and services 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 reported amounts owed that typically occurs within thirty days of the end of the period end. For all years presented, the difference between the amounts recognized based on preliminary information and cash collected was not material.
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 purchase order or a fully executed customer-specific agreement. In cases where a customer has the contractual ability to return equipment within a specific time frame, the Company will provide for return reserves when and if necessary (based upon historical experience). The Company generally believes the acceptance clauses in our contracts are perfunctory and will recognize revenue upon shipment provided that all other criteria have been met including delivery of the Supplemental Type Certificates (“STC”). In certain cases where the Company sells its equipment to an aviation customer on a stand-alone basis, it may charge a fee for obtaining STC from the relevant aviation regulatory body which permits our equipment to operate on certain model/type of aircraft. To the extent that the Company contracts to charge STC
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
fees in equipment-only sales, the Company will record these fees as revenue upon obtaining the STC and delivery of the equipment. The Company recognized no STC fee revenue for the years ended
December 31, 2017
and
2015
and
$1.2 million
for the year ended
December 31, 2016
.
Cost of Sales
Media & Content
Cost of sales for Media & Content consist primarily of the costs to license or purchase media content, direct costs to service content for aviation, maritime and other non-theatrical markets, and advertising revenue-sharing payments to our customers. Included in the cost of sales, when applicable, is amortization expense associated with the purchase of film content libraries acquired in business combinations and, in the ordinary course of business, personnel, support and occupancy costs.
Connectivity
Cost of sales for Connectivity consists primarily of equipment fees paid to third-party manufacturers, royalty expense as a result of revenue-sharing arrangements, Internet connection, satellite charges and related network operational support costs, and other platform operating expenses, including depreciation of property and equipment and internally developed software, website development costs, hardware and services used to build and operate the Connectivity platform and personnel costs relating to information technology.
Sales and marketing
Sales and marketing expense is primarily comprised of personnel costs, 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 years ended
December 31, 2017
,
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, plant and equipment, net, in the Consolidated Balance Sheets.
The Company’s product development expenditures are focused on developing new products and services, and obtaining STC as required by the FAA for each model/type of aircraft prior to providing Connectivity services. To the extent that the Company is contracted to obtain STC, and customers reimburse these costs, the Company will record these reimbursements directly against its product development expenses.
Stock-Based Compensation
Stock-based awards are comprised principally of stock options, restricted stock units (“RSUs”) and beginning in 2016, performance-based RSU (“PSU”) awards. Stock-based awards are generally issued to certain senior management personnel and non-employee directors. 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, net of estimated forfeitures.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
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 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. The 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 exercise term of the stock option. The Company currently has no history or expectation of paying cash dividends on its common stock.
The grant date fair value of the time-vesting RSUs equals the closing price of the Company’s common stock on the grant date.
For PSU awards, the Company recognizes stock-based compensation expense over the requisite service period based on the grant date fair value of a unit multiplied by the number of units granted. The grant date fair value of a unit is computed using a Monte-Carlo simulation which uses a risk free interest rate based on the U.S. Treasury rate on the date of grant commensurate with the term of the performance period.
Stock option awards issued to non-employees (
e.g.
, consultants) 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
In March 2016 the Company’s Board of Directors authorized a stock repurchase program. 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. We did
no
t repurchase any shares of our common stock during the years ended
December 31, 2017
. During the year ended
December 31, 2016
the Company repurchased
0.6 million
shares of its common stock for aggregate consideration of
$5.2 million
. As of
December 31, 2017
the remaining authorization under the stock repurchase plan was
$44.8 million
.
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 that are secured by the Company’s cash for periods up to
three years
. Additionally, included in Restricted cash in the Consolidated Balance Sheet as of December 31, 2016, was cash held in an escrow account for a previous EMC acquisition that was released to the former stockholders of the acquired company during 2017. As of
December 31, 2017
and
2016
, the Company had restricted cash of
$3.6 million
and
$18.0 million
, respectively. There was no restricted cash held in Other non-current assets in the Consolidated Balance Sheets as of
December 31, 2017
or
2016
.
Accounts Receivable, net
The Company extends credit to its customers. An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company’s customers to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness and changes in customer payment terms when making estimates of the collectability of the Company’s accounts receivable balances. If the Company determines that the financial condition of any of its customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off. Accounts receivable consist of the following (in thousands):
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Accounts receivable, gross
|
$
|
122,225
|
|
|
$
|
130,583
|
|
Less: Allowance for doubtful accounts
|
(8,680
|
)
|
|
(10,091
|
)
|
Accounts receivable, net
|
$
|
113,545
|
|
|
$
|
120,492
|
|
Movements in the balance for bad debt reserve and sales allowance for the years ended
December 31, 2017
,
2016
, and
2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
10,091
|
|
|
$
|
8,640
|
|
|
$
|
7,468
|
|
Additions charged to statements of operations
|
2,788
|
|
|
2,624
|
|
|
1,172
|
|
Less: Bad debt write offs
|
(4,199
|
)
|
|
(1,173
|
)
|
|
—
|
|
Ending balance
|
$
|
8,680
|
|
|
$
|
10,091
|
|
|
$
|
8,640
|
|
Inventories
Equipment inventory, which is classified as finished goods, is comprised of individual equipment parts and assemblies. Subsequent to the Company’s adoption of ASU 2015-11, effective
January 1, 2017
, inventory is accounted for using the first-in, first-out method of accounting and is stated at the lower of cost or net realizable value. 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 net realizable value, based upon assumptions about future demand; and is charged to the provision for inventory, which is a component of cost of sales. At the point of the write-down 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.
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 the equipment warranty directly to the customer.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, a significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows the Company expects to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Assets to be disposed of would be separately presented on the Consolidated 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.
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. Other than as stated in Content Library below, no impairment losses were recorded during the years ended
December 31, 2017
and
2015
. During
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
the year ended
December 31, 2016
, the Company recorded an impairment loss of
$4.1 million
in the Consolidated Statements of Operations. The impairment loss represented the write-off of capitalized costs associated with internally developed software projects which were abandoned.
Content Library
Content library represents minimum guaranteed amounts to acquire distribution rights. We capitalize the amounts paid for the guarantees, and record an asset and liability for any remaining unpaid portion of the guarantee when the film is released for exploitation. Amounts owed in excess of the capitalized minimum guarantees are expensed when our revenue from exploiting the film right have fully recouped the minimum guarantee based on the contractual royalty rates. The useful life of licensed film rights within the content library corresponds to the respective period over which the film rights will be licensed. Capitalized film rights are amortized ratably over their expected revenue streams and included in cost of sales. We anticipate that
$7.6 million
of our capitalized film costs will be amortized within the next 12 months with the remainder being amortized in the subsequent two years. As of
December 31, 2017
, unamortized film costs for released films were not material due to the short duration of the exploitation period. Participations are accrued on an individual title basis and expensed in the proportion that the revenue is generated over the exploitation period. As of December 31, 2017, we expect to pay accrued participation liabilities of
$10.4 million
during the next 12 months. As of
December 31, 2017
and
2016
, the Company had minimum guarantee liabilities, current of
$0.8 million
and
$5.5 million
, respectively, which are included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets.
Content library is periodically tested for impairment, but no less than annually. The marketability of the individual film right can determine the fair value of such film and whether an impairment loss is necessary. If the fair value determined based on the estimated future cash flows for an individual film right is lower than its carrying amount as of the reporting date, an impairment loss is recognized in such period. For the years ended
December 31, 2017
,
2016
and 2015, the impairment charges for the content library were
$2.5 million
,
$3.1 million
and
$0.9 million
, respectively, included in Cost of sales in the Consolidated Statements of Operations.
Property, Plant and Equipment, net
Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Depreciation is recorded on a straight-line basis over the underlying assets’ useful lives. The estimated useful life of technical and operating equipment is
three
to
ten
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 depreciated on the straight-line method over
30 years
. Repairs and maintenance costs are expensed as incurred.
In 2013, the Company capitalized the costs of certain Connectivity equipment (in which the Company retains legal title) installed on aircraft of a single customer to facilitate expanded services over a
five
-year use period. The Company is amortizing this equipment over its
five
-year useful life period.
The Company installs connectivity equipment under agreements entered into with its customers. Generally, under these agreements, 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 the Company’s continuing involvement with the equipment, the term of the agreement with the customer and restrictions in the agreement regarding the customer’s use of the equipment. The assets are recorded as Property, plant and equipment, net, on the Consolidated Balance Sheets. The Company begins depreciating the assets when they are ready for their intended use over the
7.5
year term of the agreement which approximates the expected useful lives of the equipment.
Valuation of Goodwill and Intangible Assets
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination, and allocates the purchase price of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor contracts. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on projected financial information of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible liabilities are amortized into cost of sales ratably over their expected related revenue streams over their useful lives.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company does not amortize goodwill, and instead evaluates it for impairment at the reporting unit level annually during the fourth quarter of each fiscal year (as of October 1 of that quarter) or when an event occurs or circumstances change that indicates the carrying value may not be recoverable. During the first quarter of 2017, the Company adopted ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.
Under the then newly adopted guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the quantitative assessment (“Step 1”) remained unchanged versus the prior guidance. However, the requirement to complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
The Company periodically analyzes whether any indicators of impairment have occurred. As part of these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price, to its net book value. During the fourth quarter of 2016, due to a continuing significant decline in its stock price and other indicators of impairment that arose during the fourth quarter of 2016, the Company deemed it more appropriate to assess goodwill impairment as of December 31, 2016, rather than the historical testing date of October 1. As discussed below, we further evaluated goodwill for impairment as of March 31 and December 31, 2017.
In conjunction with the events occurring in the fourth quarter of 2016, and for purposes of its annual impairment testing at December 31, 2016, the Company updated its long-term business plan, which was used as the basis for estimating the future cash flows of its reporting units. That plan considered then current economic conditions and trends, estimated future operating results, the Company’s views of growth rates and then-anticipated future economic and regulatory conditions.
The Company determined that the fair value of the Media & Content and Aviation Connectivity reporting units exceeded their carrying values, but that the fair value of the Maritime & Land Connectivity reporting unit was below its carrying value. Therefore, the Company conducted step two of the impairment test for the Maritime & Land Connectivity reporting unit and determined the carrying value of goodwill in the Maritime & Land Connectivity reporting unit exceeded its implied fair value, resulting in an impairment charge of
$64.0 million
. This was as a result of reduced financial projections for the Maritime & Land Connectivity reporting unit, due to, among other things: lower than expected actual financial results from this business due to margin compression resulting from competition in the Company’s cellular backhaul land business in Africa, resulting in diminished financial performance relative to its original expectations; delayed new deal executions and slower than anticipated installations and upgrades, also resulting in diminished financial performance relative to its original expectations; and operational challenges in integrating a legacy EMC acquiree in 2015 into this reporting unit, resulting in delayed acquisition synergies. Given the foregoing, the Company determined there was greater uncertainty in achieving its prior financial projections and so applied a higher discount rate for purposes of its goodwill impairment analysis. The higher discount rate negatively affected the fair value of the Maritime & Land Connectivity reporting unit.
For the quarter ended March 31, 2017, the Company identified a triggering event due to a significant decline in the market capitalization of the Company. Accordingly, the Company assessed the fair value of its three reporting units as of
March 31, 2017
and as a result the Company recorded an additional goodwill impairment charge of
$78.0 million
related to its Maritime & Land Connectivity reporting unit. This additional impairment was primarily due to lower than expected financial results of the reporting unit during the three months ended March 31, 2017 due to delays in new maritime installations, slower than originally estimated execution of EMC Acquisition-related synergies and other events that occurred in the first quarter of 2017. Given these indicators, the Company determined, at that time, that there was a higher degree of uncertainty in achieving its financial projections for this unit and as such, increased its discount rate, which reduced the fair value of the unit.
For the quarter ended
December 31, 2017
, we again identified a triggering event due to a further decline in our market capitalization, which we believe was driven by investor uncertainty around our liquidity position and the previous delinquency of our SEC filing status. Consequently, we performed another assessment of the fair value of our three reporting units for the quarter ending
December 31, 2017
. In performing that reassessment, we adjusted the assumptions used in the impairment analysis and increased the discount rate used in the impairment model, which negatively impacted the fair value of the Maritime & Land Connectivity and Aviation Connectivity reporting units. Following this analysis, we determined that the fair value of the Media & Content reporting unit exceeded its carrying value, while the fair value of the Maritime & Land Connectivity and Aviation Connectivity reporting units were below their carrying values. As such, we recorded impairment charges of
$45.0 million
and
$44.0 million
in our Maritime & Land Connectivity and Aviation Connectivity reporting units,
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
respectively, during the fourth quarter of 2017. The key assumptions underlying our valuation model used for accounting purposes, as described above, were updated to reflect the delays in realizing anticipated EMC Acquisition-related synergies that impact both the Maritime & Land Connectivity and Aviation Connectivity reporting units. Additionally, network expansion to meet current and anticipated new customer demand caused a step-up in bandwidth costs in our Maritime & Land and Aviation Connectivity reporting units. Our total goodwill impairment recorded for the full year ended December 31, 2017 was
$167.0 million
. At December 31, 2017, our remaining amount of goodwill was
$159.7 million
, of which
$22.1 million
was associated with the Maritime & Land reporting unit. See
Note 5. Goodwill
.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition 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 methodologies, 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, non-controlling interests in an acquired business, if any, are recorded at their acquisition date fair values. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition. Refer to
Note 3. Business Combinations
for further information on the Company’s business acquisitions.
Investments in Equity Affiliates
Wireless Maritime Services, LLC (“WMS”)
In connection with the EMC Acquisition, the Company acquired a
49%
equity interest in WMS, which interest EMC owned at the time of the EMC Acquisition. The remaining
51%
equity interest in WMS is owned by an unaffiliated U.S. company (the “WMS third-party investor”), which is the managing member of WMS and is responsible for its day-to-day management and operations. Certain matters, including determination of capital contributions and distributions and business plan revisions, require approval of WMS’s board of directors, which consists of
five
voting members,
three
of which are appointed by the WMS third-party investor and
two
of which are appointed by the Company. Profits and losses for any fiscal year are allocated between the Company and the WMS third-party investor in proportion to their respective ownership interests, after giving effect to any special allocations made pursuant to the WMS operating agreement. EMC’s carrying value of the investment in WMS was adjusted to fair value as a result of the EMC Acquisition. The excess of the fair value over the underlying equity in net assets of WMS is primarily comprised of amortizable intangible assets and nonamortizable goodwill. The Company’s carrying value in its investment in WMS was subsequently adjusted for contributions, distributions. net income (loss) attributable to WMS, including the amortization of the cost basis difference associated with the amortizable intangible assets. During the fourth quarter of 2017, in accordance with ASC 323,
Investments—Equity Method and Joint Ventures
, we completed an assessment of the recoverability of our equity method investments. We determined that the fair value of our investment in Santander exceeded the carrying value; however, the carrying value of our interest in our WMS joint venture exceeded the estimated fair value of our interest, which management concluded was other than temporary, and accordingly we recorded an impairment charge of
$16.7 million
relating to our WMS equity investment. This WMS impairment was primarily as a result of lower than expected financial results for year ended
December 31, 2017
due to the loss of a roaming partner. This resulted in a decline in revenue and margin which is not expected to recover in the foreseeable future, causing us to reduce our financial projections for the WMS business for 2018 and beyond.
Santander Teleport S.L. (“Santander”)
Also in connection with the EMC Acquisition, the Company acquired an equity interest in a teleport in Santander, Spain, which provides various telecommunication services, including teleport and terrestrial services. (EMC owned this interest at the time of the EMC Acquisition). The Company holds a
49%
equity interest in Santander and the remaining
51%
is held by an unaffiliated Spanish company (the “Santander third-party investor”). The Santander third-party investor is responsible for the day-to-day management and operations of Santander. Some matters—such as the determination of capital contributions, capital expenditures over budget and distributions—require approval of Santander’s board of directors, which consists of
five
voting members,
three
of which are appointed by the Santander third-party investor and
two
of which are appointed by the Company. Profits and losses for any fiscal year are allocated between the Company and the Santander third-party investor in proportion to their respective ownership interests. The carrying value of the Company’s investment in Santander approximated its fair value on
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
the date the Company acquired EMC and was subsequently adjusted for contributions, distributions, and net income (loss) attributable to Santander.
On a periodic basis, the Company assesses whether there are any indicators that the value of its investments may be impaired, in accordance with FASB Accounting Standards Codification (“ASC”) 323,
Investment—Equity Method and Joint Ventures
. When circumstances indicate there may have been a reduction in the value of an equity method investment, we evaluate the equity method investment and any advances made for impairment by estimating our ability to recover our investment from future expected cash flows. If we determine the loss in value is other than temporary, we recognize an impairment charge to reflect the equity investment and any advances made at fair value. During the fourth quarter of 2017 we recorded an impairment charge of
$16.7 million
, adjusting the carrying value of our equity investment in WMS. See
Note 7. Equity Method Investments
.
Deferred Revenue
Deferred revenue consists substantially of amounts received from customers in advance of the Company’s performance service period and of 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 a majority of arrangements is straight line over the remaining contractual term or estimated customer life of an agreement.
Derivative Financial Instruments
The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. The accounting for changes in the fair value of a derivative instrument depends upon whether the derivative has been formally designated as (and qualifies as part of) a hedging relationship under the applicable accounting standards and, further, on the type of hedging relationship. The Company’s derivatives that are not designated (and so do not qualify) as hedges are adjusted to fair value through current earnings.
The Company’s warrants issued in its initial public offering in 2011 to its non-sponsor shareholders (“Public SPAC Warrants”) and its contingently issuable shares issuable in partial consideration for its Sound Recording Settlements (as described in
Note 10. Commitments and Contingencies
qualify as derivatives. These derivatives are not designated (and do not qualify) as hedges. As a result, the Company accounts for such derivatives as liability instruments that are adjusted to fair value at each reporting period. Changes in fair value of such derivatives are recognized in earnings.
Net Income (Loss) Per Share
Basic income (loss) per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted income (loss) 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 consist of stock options, restricted stock units (including performance stock units), liability warrants, warrants issued to third parties and accounted for as equity instruments, convertible senior notes and contingently issuable shares, have been excluded from the diluted income (loss) per share calculation when the effect of including such shares is anti-dilutive. 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.
Foreign Currency Translation
The Company translates the assets and liabilities of its non-U.S.-dollar-functional-currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets. The Company’s subsidiaries that use the U.S. dollar as their functional currency re-measure monetary assets and liabilities at exchange rates in effect at the end of each period, and re-measure inventories, property and nonmonetary assets and liabilities at historical rates.
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
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the Company’s position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits (UTBs) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company recognizes both accrued interest and penalties associated with uncertain tax positions as a component of Income tax (benefit) expense in the Consolidated Statements of Operations.
In December 2017, the United States enacted new U.S. federal tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.
The Tax Act also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). Many of these provisions, including the tax on GILTI, the BEAT, and the deduction for FDII, do not apply to the Company until 2018. The Company is assessing the impact of the provisions of the Act which do not apply until 2018.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.
In accordance with SAB118, we have estimated the impacts of the Tax Act using information known or knowable at this time, including an income tax benefit of
$4.6 million
in the year ended December 31, 2017 reflecting the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent and
no
estimated tax impact related to the estimated repatriation tax charge of
$41.9 million
, fully offset by the utilization of net operating loss carryforwards and corresponding release of valuation allowance. Our management is still evaluating the effects of the Tax Act provisions, and the assessment does not purport to disclose all change of the Tax Act that could have material positive or negative impacts on our current or future tax positions.
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, on a non-recurring basis, the Company may be required to record other assets and liabilities at fair value. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write-downs resulting from impairment of assets.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis as of
December 31, 2017
, and
2016
, respectively (in thousands, except as presented in footnotes to the tables):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Quotes Prices in Active Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Earn-out liability
(1)
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114
|
|
Liability warrants
(2)
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Contingently issuable shares
(3)
|
1,448
|
|
|
—
|
|
|
—
|
|
|
1,448
|
|
Total
|
$
|
1,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Quotes Prices in Active Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Earn-out liability
(1)
|
$
|
1,987
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,987
|
|
Liability warrants
(2)
|
433
|
|
|
—
|
|
|
—
|
|
|
433
|
|
Contingently issuable shares
(3)
|
4,545
|
|
|
—
|
|
|
—
|
|
|
4,545
|
|
Total
|
$
|
6,965
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,965
|
|
|
|
(1)
|
Represents aggregate earn-out liabilities for the Company’s acquisitions of WOI, RMG, navAero and masFlight assumed in business combinations for the year ended December 31, 2015.
|
|
|
(2)
|
Includes
6,173,228
Public SPAC Warrants at
December 31, 2017
and
2016
.
|
|
|
(3)
|
In connection with the Sound Recording Settlements, (as described below in
Note 10. Commitments and Contingencies
) the Company is obligated to issue to UMG (as defined in that Note)
500,000
shares of its common stock when and if the closing price of the Company's common stock exceeds
$10.00
per share and an additional
400,000
shares of common stock when and if the closing price of the Company’s common stock exceeds
$12.00
per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.
|
Public SPAC Warrants
. Through the quarter ended September 30, 2016, the fair value of the outstanding Public SPAC Warrants issued in the Company’s initial public offering in 2011 (which were recorded as derivative warrant liabilities) was determined by the Company using the quoted market prices for the Public SPAC Warrants traded over the counter. During the quarter ended December 31, 2016, the Company determined that there was a significant decrease in transaction volume and level of trading activity for the Public SPAC Warrants. As a result, the Company transferred the Public SPAC Warrants from Level 1 to Level 3 of the valuation hierarchy and determined the fair value using the Black-Scholes option pricing model at the end of the reporting period. For the years ended
December 31, 2017
and
2016
, due to the change in the fair value of these warrants, the Company recorded income of
$0.4 million
and
$23.6 million
, respectively. The Public SPAC Warrants are included in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheets. The change in value of these Public SPAC warrants is included in Change in fair value of derivatives in the Consolidated Statements of Operations. The following tables present the fair value roll-forward reconciliation of Level 3 assets and liabilities measured at fair value for the years ended
December 31, 2017
,
2016
and
2015
, respectively (in thousands):
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Warrants (Level 1)
|
|
Liability Warrants (Level 3)
|
|
Contingently Issuable Shares
(Level 3)
|
|
Earn-Out Liabilities (Level 3)
|
Balance, December 31, 2015
|
$
|
24,076
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,652
|
|
Fair value of contingently issuable shares associated with sound recording litigation settlement
|
—
|
|
|
—
|
|
|
6,417
|
|
|
—
|
|
Payments of earn-out liability
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,127
|
)
|
Transfer-in
|
—
|
|
|
6,235
|
|
|
—
|
|
|
—
|
|
Transfer-out
|
(6,235
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in value
|
(17,841
|
)
|
|
(5,802
|
)
|
|
(1,872
|
)
|
|
(3,538
|
)
|
Balance, December 31, 2016
|
—
|
|
|
433
|
|
|
4,545
|
|
|
1,987
|
|
Payments of earn-out liability
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,937
|
)
|
Change in value
|
—
|
|
|
(413
|
)
|
|
(3,097
|
)
|
|
64
|
|
Balance, December 31, 2017
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
1,448
|
|
|
$
|
114
|
|
The valuation methodology used to estimate the fair value of the financial instruments in the tables above is summarized as follows:
Earn-Out Liability
. The earn-out liabilities are estimated using the income approach. Based on the respective purchase agreements, management estimated the present value of best case, base case, and worst case scenarios. 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 earn-out liabilities are included in Accounts payable and accrued liabilities and Other non-current liabilities, respectively, on the Consolidated Balance Sheets. The change in value of these earn-out liabilities is included in General and administrative expenses in the Consolidated Statements of Operations.
Contingently Issuable Shares
. The liabilities for these contingently issuable shares are included in Accounts payable and accrued liabilities on the
December 31, 2017
Consolidated Balance Sheet. The fair values of these contingently issuable shares were determined using a quantitative put option method. The change in the fair value of the contingently issuable shares are included in change in fair value of derivatives in the
December 31, 2017
Consolidated Statement of Operations.
The following table presents information about significant unobservable inputs related to Level 3 financial liabilities as of
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Warrants
|
|
Contingently Issuable Shares
|
Assumed liquidation company share price
|
N/A
|
|
|
$
|
10.00
|
|
|
$
|
12.00
|
|
Common stock price at December 31, 2017
|
$
|
2.29
|
|
|
$
|
2.29
|
|
|
$
|
2.29
|
|
Exercise price
|
$
|
11.50
|
|
|
N/A
|
|
|
N/A
|
|
Estimated term (in years)
|
0.09
|
|
|
10.25
|
|
|
11.52
|
|
Expected stock volatility
|
199.4
|
%
|
|
54.0
|
%
|
|
54.0
|
%
|
Risk free rate
|
1.9
|
%
|
|
N/A
|
|
|
N/A
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Implied discount for lack of marketability
(1)
|
—
|
%
|
|
29.5
|
%
|
|
30.1
|
%
|
|
|
(1)
|
A discount for lack of marketability was applied to the resulting values as the shares, when issued, may not initially be registered with the SEC.
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Summary of the Fair Values of Other Financial Instruments
Our other current financial assets and liabilities are recorded at book value, which approximate their fair values due to their short term nature.
The following table shows the carrying amounts of the Company’s long-term debt in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Senior secured first lien term loan facility, due July 2021
(*)(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
263,980
|
|
|
$
|
260,020
|
|
Senior secured revolving credit facility, due July 2020
(*)(1)
|
—
|
|
|
—
|
|
|
55,500
|
|
|
52,932
|
|
Senior secured second lien term loan facility, due July 2022
(*)(1)
|
—
|
|
|
—
|
|
|
92,000
|
|
|
88,780
|
|
Senior secured term loan facility, due January 2023
(+)(1)
|
490,625
|
|
|
486,945
|
|
|
—
|
|
|
—
|
|
Senior secured revolving credit facility, due January 2022
(+)(3)
|
78,000
|
|
|
78,000
|
|
|
—
|
|
|
—
|
|
2.75% convertible senior notes due 2035
(1) (2) (4)
|
82,500
|
|
|
43,313
|
|
|
82,500
|
|
|
67,444
|
|
Other debt
(3)
|
9,075
|
|
|
9,075
|
|
|
3,299
|
|
|
3,299
|
|
Unamortized bond discounts and issue costs
|
(41,136
|
)
|
|
—
|
|
|
(26,979
|
)
|
|
—
|
|
|
$
|
619,064
|
|
|
$
|
617,333
|
|
|
$
|
470,300
|
|
|
$
|
472,475
|
|
(*) In connection with the EMC Acquisition, the Company assumed legacy EMC credit agreement indebtedness, including this facility. This legacy EMC indebtedness was subsequently replaced by the 2017 Credit Agreement (as described in
Note 10. Financing Arrangements
).
(+) This facility is a component of the 2017 Credit Agreement
|
|
(1)
|
The estimated fair value is classified as Level 2 financial instrument and was determined based on the quoted prices of the instrument in an over-the-counter market.
|
|
|
(2)
|
The fair value of the
2.75%
convertible senior notes due 2035 is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at
$13.0 million
, and is included in the consolidated balance sheets within “Additional paid-in capital” (see
Note 13. Common Stock, Stock-Based Awards and Warrants
).
|
|
|
(3)
|
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments.
|
|
|
(4)
|
The principal amount outstanding of the
2.75%
convertible senior notes due 2035 as set forth in the foregoing table was
$82.5 million
as of December 31, 2017, and is not the carrying amount of this indebtedness (
i.e.
, outstanding principal amount net of debt issuance costs and discount associated with the equity component). The carrying value of this indebtedness as of December 31, 2017 was
$69.7 million
.
|
Adoption of New Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminated Step 2 from the goodwill impairment test. Under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This pronouncement is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017 and we elected to early adopt this new guidance in the first quarter of 2017. During the three months ended March 31, 2017 we recorded an impairment of goodwill in the amount of
$78.0 million
related to our Maritime & Land reporting unit and impairment charges of
$45.0 million
and
$44.0 million
in our Maritime & Land Connectivity and Aviation Connectivity reporting units, respectively during the three months ended
December 31, 2017
. See
Note 5. Goodwill
.
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)
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We adopted this standard effective January 1, 2017. The adoption of this standard resulted in a cumulative-effect adjustment of
$0.3 million
to accumulated deficit and additional paid-in capital, which we recorded in the three month period ended March 31, 2017.
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. We adopted this standard effective January 1, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). This update will require lease assets and lease liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements. ASU 2016-02 must be adopted using a modified retrospective transition, and provides for certain practical expedients. We have decided to adopt ASU 2016-02 effective in the first quarter of 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“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 we expect to be entitled in exchange for those goods or services. Further, the guidance requires enhanced 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 us 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 will adopt the standard effective the first quarter of 2018. We will adopt the standard under the modified retrospective method with the cumulative effect of adoption being reflected as an adjustment to beginning retained earnings in the Quarterly Report on Form 10-Q for the period ended March 31, 2018.
We continue to dedicate significant resources to the ASU 2014-09 transition project, including engaging third-party service providers to assist in the evaluation and implementation. We are finalizing our evaluation of the adoption impact on our consolidated financial statements. Based on our assessment to date, we believe the following areas may be impacted:
|
|
•
|
We have assessed the number of performance obligations in our contracts with customers and noted no significant changes as compared to unit of accounting under existing revenue guidance.
|
|
|
•
|
We will be required to use a variable consideration model which requires us to estimate (and constrain) variable service revenue, and allocate total contract consideration among all performance obligations. Additionally, estimates used in the recognition of revenue under the new standard will be updated as new facts and circumstances warrant, which may cause differences in the trend of revenue recognition as compared to that reported under the current standard. The Company expects this change to primarily impact the Connectivity segment.
|
|
|
•
|
The timing of recognition for certain content licenses will change as the new standard requires us to apply the sales or usage based royalties exception. Compared to existing guidance, revenue recognition will be deferred depending on when the customer’s subsequent sales or usage occurs. Additionally, revenue from games & apps contracts will be accelerated because the new standard changes the requirement for vendor-specific objective evidence, which previously resulted in revenue recognized ratably over the service period. The Company expects these changes to primarily impact the Media & Content segment.
|
|
|
•
|
Costs to obtain or fulfill a contract with a customer, including costs incurred to service contracts and certain sales commissions, will require capitalization and amortization over the anticipated service period. These include costs to obtain Supplemental Type Certificates (“STCs”), which were previously expensed.
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Additionally, the adoption of the standard will result in additional disclosures in our notes to the Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220)
, which permits a reclassification from accumulated other comprehensive income to retained earnings for the stranded income tax effects of the Tax Cuts and Jobs Act ("the Tax Act"). The amendment also requires certain new disclosures about these stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for reporting periods for which financial statements have not yet been issued. The new guidance would be applied retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which requires an entity to account for the effects of a modification unless (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendment is effective for annual periods, and interim periods, within those annual periods, beginning after December 15, 2017. We will adopt the amendment effective January 1, 2018. The Company does not expect the adoption to have a material impact upon the financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. These amendments clarify the definition of a business and are effective for all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expect the adoption of this guidance to significantly impact the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
, which requires that a statement of cash flows explains the change during the period in cash, cash equivalents, and amounts generally described as restricted cash. Amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We will adopt the standard effective January 1, 2018. Management is currently evaluating the impact of this standard on its consolidated financial statements and does not believe it will have a material impact on our Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,
which requires the recognition of income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Current GAAP prohibits the recognition of those tax effects until the asset has been sold to an outside party. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.We will adopt the standard for our first fiscal quarter of 2018. We are currently evaluating the impact of this standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”), which amends Accounting Standards Codification (“ASC”) 230, Statement of Cash Flows, the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. We will adopt the standard effective January 1, 2018 and do not believe it will have a material impact on our Consolidated Financial Statements.
Note 3. Business Combinations
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
2017 Acquisitions
The Company did not consummate any acquisitions or business combinations during the year ended
December 31, 2017
.
2016 Acquisition
Emerging Markets Communications
On July 27, 2016, the Company completed the EMC Acquisition. The acquisition date fair value consideration transferred to the member unit holders of EMC for all of their membership interests totaled approximately
$165.0 million
. This acquisition was intended to provide growth opportunities by expanding into a complementary maritime market in order to realize synergies by leveraging existing infrastructure and suppliers to achieve efficiencies and cost savings resulting from removing overlap in existing network infrastructure, reduced bandwidth costs, lower development expenses and integrating internal operations. The acquisition was also intended to achieve cross-selling opportunities for the Company’s content, digital media and operations solutions products into the maritime market.
The consideration for the EMC Acquisition consisted of the following (in thousands, except share amounts in the footnotes to the table):
|
|
|
|
|
|
Amount
|
Cash consideration paid to seller
|
$
|
100,454
|
|
Issuance of 5,466,886 shares of Company common stock
(1)
|
40,607
|
|
Deferred consideration
(2)
|
25,000
|
|
Settlement of pre-existing relationship
|
228
|
|
Working capital settlement adjustment
(3)
|
(1,250
|
)
|
Total
|
$
|
165,039
|
|
|
|
(1)
|
The fair value of the Company’s common stock issued as consideration was measured based on the stock price upon closing of the transaction on July 27, 2016, less a
7.5%
discount for restriction on transferability.
|
|
|
(2)
|
On July 27, 2017, the Company elected to pay such amount in
5,080,049
newly issued shares of its common stock to the former unit holder of EMC.
|
|
|
(3)
|
In June 2017, the Company finalized the working capital adjustments with the EMC seller, which resulted in the release to the Company of
$1.3 million
from a working capital adjustment escrow.
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
The following is a summary of the purchase price allocation to the fair values of the identifiable assets acquired and the liabilities assumed at the EMC Acquisition date (dollars in thousands):
|
|
|
|
|
|
|
|
Weighted Average Useful Life (Years)
(2)
|
|
Final
|
Cash and cash equivalents
|
|
|
$
|
8,208
|
|
Restricted cash
|
|
|
16,257
|
|
Other current assets
|
|
|
60,625
|
|
Property, plant and equipment
|
|
|
82,220
|
|
Equity method investments
(1)
|
|
|
152,700
|
|
Intangible assets:
|
|
|
|
Completed technology
|
3.4
|
|
18,500
|
|
Customer relationships
|
8.0
|
|
47,700
|
|
Backlog
|
3.0
|
|
18,300
|
|
Trademarks
|
5.0
|
|
1,000
|
|
Other non-current assets
|
|
|
2,321
|
|
Accounts payable and accrued liabilities
|
|
|
(68,864
|
)
|
Debt, including current
|
|
|
(371,990
|
)
|
Deferred tax liabilities, net
|
|
|
(71,954
|
)
|
Unfavorable vendor contracts, including current
|
|
|
(13,500
|
)
|
Deferred revenue, including current
|
|
|
(4,602
|
)
|
Other non-current liabilities
|
|
|
(9,479
|
)
|
Fair value of net assets acquired
|
|
|
(132,558
|
)
|
Consideration transferred
(3)
|
|
|
165,039
|
|
Goodwill
|
|
|
$
|
297,597
|
|
|
|
(1)
|
Represents
49%
investments in WMS and Santander.
|
|
|
(2)
|
The weighted average useful life in total is
5.9
years.
|
|
|
(3)
|
In June 2017, the Company finalized the working capital adjustments with the EMC seller, which resulted in the release to the Company of
$1.3 million
from a working capital adjustment escrow which reduced the Goodwill recorded. See
Note 5. Goodwill
.
|
Goodwill arising from the EMC Acquisition was allocated primarily to Maritime & Land Connectivity reporting unit, which was established as a result of the EMC Acquisition, and the remaining was allocated to the existing Aviation Connectivity and Media & Content reporting units based on the assessment of expected synergies these reporting units would benefit as a result of the EMC Acquisition. See
Note 5. Goodwill
for the amount allocated to each reporting unit. The allocation of fair value resulted in tax deductible goodwill of
$74.9 million
.
For the year ended
December 31, 2016
, we recorded
$15.4 million
of transaction costs related to the EMC Acquisition, primarily consisting of legal and advisory fees, which were classified in General and administrative in the Consolidated Statements of Operations. No transaction costs were recorded during the
year ended December 31, 2017
.
The revenue and net loss of EMC included in the Company’s Consolidated Statements of Operations were
$73.2 million
and
$94.8 million
, respectively, from the acquisition date through December 31, 2016.
2015 Acquisitions
During the year ended December 31, 2015, the Company completed
four
acquisitions discussed further below. The fair values of these acquisitions are set forth in the table below as of
December 31, 2016
. During the three months ended March 31, 2016, the Company revised its analysis of the fair value of the RMG asset acquisition. The revised analysis related to a pre-acquisition contingency that was subsequently identified resulting in the Company’s ability to recover amounts held in escrow by the seller
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
of the RMG Assets. The fair value of the assets and liabilities of these acquisitions were finalized during the six months ended June 30, 2016.
The following table summarizes the fair value of the assets acquired and liabilities assumed in the acquisitions (dollars in thousands):
|
|
|
|
|
|
|
|
Weighted Average Useful Life (Years)
(1)
|
|
(Final)
December 31, 2016
|
Goodwill
|
|
|
$
|
40,281
|
|
Customer relationships
|
7.6
|
|
14,000
|
|
Developed technology
|
5.7
|
|
21,900
|
|
Trade name
|
5.0
|
|
200
|
|
Accounts receivable
|
|
|
6,450
|
|
Property and equipment
|
|
|
1,783
|
|
Deferred tax liability
|
|
|
(11,047
|
)
|
Accrued expenses
|
|
|
(4,379
|
)
|
Other liabilities assumed, net of assets acquired
|
|
|
(857
|
)
|
Total consideration transferred
|
|
|
$
|
68,331
|
|
|
|
(1)
|
The weighted average useful life in total is
6.4
years.
|
Pro forma results of operations for these
four
acquisitions have not been presented because the effects of these business combinations, individually and in aggregate, are not material to our Consolidated Statements of Operations.
WOI Stock Purchase
On July 1, 2015, the Company acquired WOI for approximately
$38.3 million
in cash and
$3.1 million
in contingent consideration. WOI produces and licenses games and applications for global in-flight entertainment, provides technical services to third parties for global in-flight entertainment user interfaces. The acquisition was intended to augment and diversify the Company’s Media & Content operating segment. The goodwill recorded for the WOI acquisition was
$19.6 million
. Key factors that contributed to the recognition of WOI goodwill were trained workforce, expansion of international operations, the opportunity to consolidate and complement existing content operations, and the opportunity to generate future synergies within the existing Media & Content business. As a result of the stock purchase of WOI, the goodwill is not deductible for tax purposes.
Significant other assets and net liabilities assumed and included in the table above were approximately
$4.1 million
in accounts receivable,
$9.1 million
of deferred tax liabilities and
$1.8 million
of fixed assets that included
two
long-term office buildings lease arrangements. The net tax liability is made up of short-term deferred tax assets of
$0.2 million
and long-term deferred tax liabilities of
$9.3 million
, largely driven by the tax impact of the fair value of the intangible assets. The Company incurred approximately
$0.5 million
in transaction costs associated with the WOI purchase. The sellers of WOI have the opportunity to receive an additional
$5.0 million
in cash if, among other things, WOI achieves certain revenue and earnings targets within the first and second annual anniversaries of the closing date (the “WOI earn-out”). The fair value of the WOI earn-out as of the acquisition date was approximately
$3.1 million
. During the years ended
December 31, 2017
and
2016
, the Company paid additional consideration of
$0.9 million
and
$2.5 million
, respectively, upon the achievement of the first and second year revenue and earnings targets. The WOI earn-out was paid off as of
December 31, 2017
.
RMG Asset Acquisition
On July 1, 2015, the Company acquired certain assets and assumed certain liabilities of RMG Networks Holding Corporation (“RMG”) for approximately
$1.4 million
in cash. These assets were integrated into the Company’s advertising and sponsorship team, which provides digital media advertising and related services through executive clubs, in-flight entertainment systems, in-flight Wi-Fi portals and in private terminals. The acquisition is intended to enhance the Company’s digital media offerings within
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
its Media & Content operating segment. The goodwill recorded for the acquisition of assets from RMG, after the adjustment recorded during the measurement period, was
$1.4 million
. Key factors that contributed to the recognition of goodwill were the opportunity to expand the Company’s digital media offerings to the travel industry, the opportunity to consolidate and complement existing Media & Content operations, and the opportunity to generate future synergies with our existing business. As a result of the asset purchase, the goodwill is deductible for tax purposes.
Significant other assets and net liabilities assumed and included in the table above were approximately
$2.2 million
in accounts receivable,
$3.1 million
of revenue share liabilities and a
$1.3 million
provision for losses on a specific loss contract expiring in December 2015. The Company incurred approximately
$0.2 million
in transaction costs associated with the acquisition of assets from RMG.
navAero, Inc. Stock Purchase
On August 4, 2015, the Company acquired NavAero Holding AB (“navAero”) for approximately
$4.8 million
in cash and
$0.3 million
in contingent consideration. navAero is engaged in developing and commercializing technologies to enable and deploy electronic flight bag solutions for the commercial aviation market, which allows airlines to improve their in-flight operations. The acquisition is intended to enhance the Company’s Connectivity operating segment. The goodwill recorded for the navAero acquisition was
$3.2 million
. Key factors that contributed to the recognition of navAero goodwill were trained workforce, expansion of international operations, the opportunity to expand into new product and technology offerings within the airline industry, and to a lesser extent the opportunity to generate future synergies with our existing business. As a result of the stock purchase of navAero, the goodwill is not deductible for tax purposes.
Significant other assets and net liabilities assumed included a net tax liability of
$0.5 million
, which is made up of short-term deferred tax assets of
$0.1 million
and long-term deferred tax liabilities of
$0.6 million
. The Company incurred approximately
$0.3 million
in transaction costs associated with the navAero purchase. The sellers of navAero had the opportunity to receive an additional
$1.0 million
in cash if navAero achieves certain revenue targets through December 31, 2016 (the “navAero earn-out”). We made a final earn-out payment of
$0.2 million
during the year ended
December 31, 2017
such that
zero
remaining liability existed as of
December 31, 2017
.
masFlight, Inc. Stock Purchase
On August 4, 2015, the Company acquired Marks Systems, Inc. doing business as masFlight for approximately
$10.3 million
in cash and
$9.3 million
in contingent consideration. The acquisition was completed as a merger resulting in the acquisition subsidiary, masFlight Inc. (“masFlight”) as the surviving corporation. masFlight pioneered the adoption of cloud-based technologies to collect, compile, link, validate and host a variety of information and offer a single solution enabling airlines to analyze predictive data to run their operations more effectively and efficiently. The acquisition is intended to enhance the Company’s Connectivity operating segment. The goodwill recorded for the masFlight acquisition was
$16.1 million
. Key factors that contributed to the recognition of masFlight goodwill were trained workforce, expansion into new operations data solutions offerings, the opportunity to consolidate and complement current connectivity operations within the airline industry as well as expand into new industries, and the opportunity to generate future savings through synergies with our existing business. As a result of the acquisition, the goodwill is not deductible for tax purposes.
Significant other assets and net liabilities assumed included a net tax liability of
$1.4 million
, which is made up of net short-term deferred tax assets of
$0.3 million
and long-term deferred tax liabilities of
$1.7 million
. The Company incurred approximately
$0.3 million
in transaction costs associated with the masFlight purchase. The sellers of masFlight have the opportunity to receive up to an additional
$20.0 million
in cash if, among other things, masFlight achieves certain operational, revenue and earnings targets at various dates through December 31, 2019. As a portion of the contingent consideration is subject to future employment of certain key employee of masFlight, certain contingent consideration will be recorded as compensation expense after the acquisition date. The fair value of masFlight contingent consideration as of the acquisition date was
$9.3 million
. During the year ended
December 31, 2017
and
2016
, consideration totaling
$0.8 million
and
$1.7 million
, respectively, was paid to the sellers upon the achievement of the targets. As of
December 31, 2017
and
2016
, the fair value of the contingent consideration of
$0.1 million
and
$0.9 million
was included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Note 4. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Leasehold improvements
|
$
|
6,869
|
|
|
$
|
5,737
|
|
Furniture and fixtures
|
2,187
|
|
|
1,332
|
|
Equipment
(3)
|
128,046
|
|
|
86,339
|
|
Computer equipment
|
10,661
|
|
|
8,002
|
|
Computer software
(1)
|
31,518
|
|
|
18,207
|
|
Automobiles
|
311
|
|
|
325
|
|
Buildings
|
6,744
|
|
|
7,039
|
|
Albatross (aircraft)
|
447
|
|
|
425
|
|
Satellite transponder
(2)
|
79,097
|
|
|
62,131
|
|
Construction in-progress
(3)
|
3,370
|
|
|
8,380
|
|
Total property, plant, and equipment
|
269,250
|
|
|
197,917
|
|
Accumulated depreciation
(1) (2) (3)
|
(74,221
|
)
|
|
(31,868
|
)
|
Property, plant and equipment, net
|
$
|
195,029
|
|
|
$
|
166,049
|
|
|
|
(1)
|
Includes computer software acquired under capital leases of
$1.0 million
as
December 31, 2017
and
2016
, net of and related accumulated amortization of
$0.7 million
and
$0.4 million
as of
December 31, 2017
and
2016
, respectively.
|
|
|
(2)
|
Includes satellite transponders acquired under capital leases of
$2.0 million
and the related accumulated depreciation of
$0.6 million
and
$0.6 million
as of
December 31, 2017
and 2016, respectively.
|
|
|
(3)
|
Includes internally developed software of
$18.1 million
and
$10.7 million
and related accumulated amortization of
$11.4 million
and
$6.3 million
as of
December 31, 2017
and
2016
, respectively. Amortization expense for the years ended
December 31, 2017
,
2016
and
2015
was
$5.1 million
,
$3.6 million
and
$1.7 million
, respectively. Impairment loss for the year ended December 31, 2016 was
$4.1 million
included in the Consolidated Statements of Operations. There were
no
impairment losses during the years ended December 31, 2017 and
2015
. During the years ended
December 31, 2017
,
2016
and
2015
, the Company capitalized software development costs totaling
$7.4 million
,
$5.0 million
and
$3.3 million
, respectively.
|
Depreciation expense for property, plant and equipment, including software amortization expense and amortization of assets under capital leases, for the years ended
December 31, 2017
,
2016
, and
2015
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Consolidated Statement of Operations Classification:
|
|
|
|
|
|
Cost of sales
|
$
|
29,798
|
|
|
$
|
10,855
|
|
|
$
|
2,957
|
|
Sales and marketing
|
3,219
|
|
|
1,793
|
|
|
893
|
|
Product development
|
3,478
|
|
|
2,186
|
|
|
1,443
|
|
General and administrative
|
10,009
|
|
|
6,677
|
|
|
4,154
|
|
Total
|
$
|
46,504
|
|
|
$
|
21,511
|
|
|
$
|
9,447
|
|
Note 5. Goodwill
The changes in the carrying amounts of goodwill by reporting unit are as follows (in thousands):
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation Connectivity
|
|
Maritime & Land Connectivity
|
|
Media & Content
|
|
Total
|
Balance as of December 31, 2015
|
$
|
19,273
|
|
|
$
|
—
|
|
|
$
|
74,523
|
|
|
$
|
93,796
|
|
Goodwill related to the EMC acquisition
|
78,764
|
|
|
210,380
|
|
|
9,703
|
|
|
298,847
|
|
Impairment loss
|
—
|
|
|
(64,000
|
)
|
|
—
|
|
|
(64,000
|
)
|
Adjustment to RMG goodwill
|
—
|
|
|
—
|
|
|
(812
|
)
|
|
(812
|
)
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Balance as of December 31, 2016
|
98,037
|
|
|
146,380
|
|
|
83,419
|
|
|
327,836
|
|
Impairment loss
|
(44,000
|
)
|
|
(123,000
|
)
|
|
—
|
|
|
(167,000
|
)
|
Settlement received related to acquisition
|
—
|
|
|
(1,250
|
)
|
|
—
|
|
|
(1,250
|
)
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
110
|
|
|
110
|
|
Balance as of December 31, 2017
|
$
|
54,037
|
|
|
$
|
22,130
|
|
|
$
|
83,529
|
|
|
$
|
159,696
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
98,037
|
|
|
$
|
209,130
|
|
|
$
|
83,529
|
|
|
$
|
390,696
|
|
Accumulated impairment loss
|
(44,000
|
)
|
|
(187,000
|
)
|
|
—
|
|
|
(231,000
|
)
|
Balance as of December 31, 2017, net
|
$
|
54,037
|
|
|
$
|
22,130
|
|
|
$
|
83,529
|
|
|
$
|
159,696
|
|
Refer to
Note 3. Business Combinations
for the details of goodwill that arose from the EMC Acquisition in 2016 and WOI, RMG, navAero and masFlight acquisitions in 2015 and for changes during those years affecting goodwill. During the year ended
December 31, 2017
we determined that goodwill relating to our Maritime & Land Connectivity and Aviation Connectivity reporting units was impaired and we recognized an impairment loss of
$123.0 million
and
$44.0 million
, respectively. During the year ended
December 31, 2016
we recorded an impairment loss of
$64.0 million
to our Maritime & Land Connectivity reporting unit. There was
no
goodwill impairment recognized in the year ended
December 31, 2015
. Refer to
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
for details regarding the goodwill impairment losses.
On June 29, 2017, we received
$1.3 million
from the seller of the EMC business, relating to the working capital adjustment escrow in the EMC purchase agreement. The receipt was recorded as a purchase price accounting measurement period adjustment reducing the goodwill balance.
As of
December 31, 2017
our Maritime & Land reporting unit, which is included in our Connectivity segment, had negative carrying amounts of assets. As of
December 31, 2017
, remaining goodwill allocated to this reporting unit was
$22.1 million
.
Note 6. Intangible Assets, net
As a result of historical business combinations, the Company acquired finite-lived intangible assets that are primarily amortized on a straight-line basis, which approximate their expected cash flow patterns. The Company’s finite-lived intangible assets have assigned useful lives ranging from
2.0
to
10.0
years.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Intangible assets, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Weighted Average Useful Lives
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Existing technology - software
|
4.8 years
|
|
$
|
42,999
|
|
|
$
|
20,209
|
|
|
$
|
22,790
|
|
Existing technology - games
|
5.0 years
|
|
12,331
|
|
|
12,125
|
|
|
206
|
|
Developed technology
|
8.0 years
|
|
7,317
|
|
|
3,887
|
|
|
3,430
|
|
Customer relationships
|
7.9 years
|
|
170,716
|
|
|
85,160
|
|
|
85,556
|
|
Backlog
|
3.0 years
|
|
18,300
|
|
|
8,642
|
|
|
9,658
|
|
Other
|
4.5 years
|
|
2,746
|
|
|
1,804
|
|
|
942
|
|
Total
|
|
|
$
|
254,409
|
|
|
$
|
131,827
|
|
|
$
|
122,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Weighted Average Useful Lives
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Existing technology - software
|
4.8 years
|
|
$
|
43,019
|
|
|
$
|
9,842
|
|
|
$
|
33,177
|
|
Existing technology - games
|
5.0 years
|
|
12,331
|
|
|
9,659
|
|
|
2,672
|
|
Developed technology
|
8.0 years
|
|
7,317
|
|
|
2,973
|
|
|
4,344
|
|
Customer relationships
|
7.9 years
|
|
170,716
|
|
|
61,579
|
|
|
109,137
|
|
Backlog
|
3.0 years
|
|
18,300
|
|
|
2,542
|
|
|
15,758
|
|
Other
|
4.5 years
|
|
3,702
|
|
|
2,070
|
|
|
1,632
|
|
Total
|
|
|
$
|
255,385
|
|
|
$
|
88,665
|
|
|
$
|
166,720
|
|
The Company expects to record amortization of the intangible assets as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018
|
$
|
38,443
|
|
2019
|
28,647
|
|
2020
|
22,263
|
|
2021
|
13,824
|
|
2022
|
7,907
|
|
Thereafter
|
11,498
|
|
Total
|
$
|
122,582
|
|
The Company recorded amortization expense of
$44.0 million
,
$35.6 million
and
$27.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. In addition, amortization expense of
$0.2 million
from content library (acquired in a business combination) is included in cost of sales in the Consolidated Statements of Operations for the year ended December 31,
2015
.
Note 7. Equity Method Investments
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
In connection with the EMC Acquisition, the Company acquired
49%
interests in WMS and Santander. During the fourth quarter of 2017, in accordance with ASC 323,
Investments—Equity Method and Joint Ventures
, we completed an assessment of the recoverability of our equity method investments. We determined that the fair value of our investment in Santander exceeded the carrying value; however, the carrying value of our interest in our WMS joint venture exceeded the estimated fair value of our interest and accordingly we recorded an impairment charge of
$16.7 million
relating to our WMS equity investment. This WMS impairment was primarily as a result of lower than expected financial results for year ended
December 31, 2017
due to the loss of a roaming partner. This resulted in a decline in revenue and margin which is not expected to recover in the foreseeable future, causing us to reduce our financial projections for the WMS business for 2018 and beyond.
Following is the summarized financial information for such equity method investments on an aggregated basis from the EMC Acquisition Date through
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Current assets
|
$
|
35,859
|
|
|
$
|
30,837
|
|
Non-current assets
|
21,009
|
|
|
21,822
|
|
Current liabilities
|
15,151
|
|
|
20,455
|
|
Non-current liabilities
|
1,056
|
|
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Revenue
|
$
|
133,419
|
|
|
$
|
64,637
|
|
Operating expenses
|
111,458
|
|
|
51,240
|
|
Net income
|
21,961
|
|
|
13,397
|
|
The carrying values of the Company’s equity interests in WMS and Santander as of
December 31, 2017
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Carrying value in our equity method investments
(1)
|
$
|
137,299
|
|
|
$
|
156,527
|
|
(1)
Includes the impact of the WMS impairment charge of
$16.7 million
.
As of
December 31, 2017
, there was an aggregate difference of
$118.1 million
between the carrying amounts (inclusive of the impact of the impairment loss) of these investments and the amounts of underlying equity in net assets in these investments. The difference was determined by applying the acquisition method of accounting in connection with the EMC Acquisition and is being amortized ratably over the life of the related acquired intangible assets. The weighted-average life of the intangible assets at the time of the EMC Acquisition in total was
14.9 years
.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Note 8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Accounts payable
|
$
|
102,893
|
|
|
$
|
67,562
|
|
Content license and royalties
|
37,177
|
|
|
53,008
|
|
Deferred consideration for EMC Acquisition
|
—
|
|
|
25,000
|
|
Accrued legal settlements
|
13,322
|
|
|
17,291
|
|
Accrued payroll obligations
|
7,577
|
|
|
12,251
|
|
Deferred acquisition earn-out liability
|
—
|
|
|
1,883
|
|
Other accrued expenses
|
44,067
|
|
|
63,349
|
|
Total
|
$
|
205,036
|
|
|
$
|
240,344
|
|
Note 9. Financing Arrangements
The following table sets forth the summary of the Company’s outstanding indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Senior secured term loan facility, due July 2021
(1)
|
$
|
—
|
|
|
$
|
263,980
|
|
Senior secured revolving credit facility, due July 2020
(1)
|
—
|
|
|
55,500
|
|
Senior secured term loan facility, due July 2022
(1)
|
—
|
|
|
92,000
|
|
Senior secured term loan facility, due January 2023
(2)
|
490,625
|
|
|
|
Senior secured revolving credit facility, due January 2022
(2)
|
78,000
|
|
|
|
2.75% convertible senior notes, due February 2035
(3)
|
82,500
|
|
|
82,500
|
|
Other debt
|
9,075
|
|
|
3,299
|
|
Unamortized bond discounts, fair value adjustments and issue costs, net
|
(41,136
|
)
|
|
(26,979
|
)
|
Total carrying value of debt
|
619,064
|
|
|
470,300
|
|
Less: current portion, net
|
(20,106
|
)
|
|
(2,069
|
)
|
Total non-current
|
$
|
598,958
|
|
|
$
|
468,231
|
|
(1)
In connection with the EMC Acquisition, the Company assumed legacy EMC credit agreement indebtedness, including this facility. This legacy EMC indebtedness was subsequently replaced by the 2017 Credit Agreement (as described in
Note 10. Financing Arrangements
).
(2)
This facility is a component of the 2017 Credit Agreement.
(3)
The principal amount outstanding of the
2.75%
convertible senior notes due 2035 as set forth in the foregoing table was
$82.5 million
as of December 31, 2017, and are not the carrying amounts of this indebtedness (
i.e.
, outstanding principal amount net of debt issuance costs and discount associated with the equity component).
Senior Secured Credit Agreement (2017 Credit Agreement)
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
On
January 6, 2017
, we entered into a senior secured credit agreement (“2017 Credit Agreement”) that provides for aggregate principal borrowings of up to
$585 million
, consisting of a
$500 million
term-loan facility (the “2017 Term Loans”) maturing
January 6, 2023
and a
$85 million
revolving credit facility (the “2017 Revolving Loans”) maturing
January 6, 2022
. (As of the date of the filing of this Form 10-K, we have fully drawn the term-loan facility and—other than approximately
$1 million
of availability that we are reserving for foreign currency fluctuations on outstanding letters of credit—have also fully drawn the revolving credit facility.) We used the proceeds of borrowings under the 2017 Credit Agreement to repay the then outstanding balance under a former EMC credit facility assumed in the EMC Acquisition and terminated the former credit facility assumed from EMC. In connection with this January 2017 refinancing, we recorded a loss on extinguishment of debt in the amount of
$14.4 million
during the first quarter of 2017.
The 2017 Term Loans initially bore interest on the outstanding principal amount thereof at a rate per annum equal to (i) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) plus
6.00%
or (ii) the Base Rate (as defined in the 2017 Credit Agreement) plus
5.00%
or (iii) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) for each Interest Period (as defined in the 2017 Credit Agreement) plus
6.00%
. The 2017 Credit Agreement initially required quarterly principal payments equal to
0.25%
of the original aggregate principal amount of the 2017 Term Loans, with such payments reduced for prepayments in accordance with the terms of the 2017 Credit Agreement. The 2017 Revolving Loans initially bore interest at a rate per annum equal to (i) the Base Rate plus
5.00%
or (ii) the Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus
6.00%
until the delivery of financial statements for the first full fiscal quarter ending after the date of the 2017 Credit Agreement (“Closing Date”). After the delivery of those financial statements, 2017 Revolving Loans bear interest at a rate based on the Base Rate, Eurocurrency Rate or EURIBOR (each as defined in the 2017 Credit Agreement) plus an interest-rate spread thereon that varies based on the Consolidated First Lien Net Leverage Ratio (as defined in the 2017 Credit Agreement). The spread thereon initially ranged from
4.50%
to
5.00%
for the Base Rate and
5.50%
to
6.00%
for the Eurocurrency Rate and EURIBOR. In May 2017 and October 2017, the interest rates and required quarterly principal payments for the 2017 Term Loans and the interest rates and interest-rate spreads for the 2017 Revolving Loans were amended as described below under
Amendments and Waivers under the 2017 Credit Agreement
.
The 2017 Credit Agreement also provides for the issuance of letters of credit in the amount equal to the lesser of
$15.0 million
and the aggregate amount of the then-remaining revolving loan commitment. As of
December 31, 2017
, we had outstanding letters of credit of
$5.9 million
under the 2017 Credit Agreement.
Certain of our subsidiaries are guarantors of our obligations under the 2017 Credit Agreement. In addition, the 2017 Credit Agreement is secured by substantially all of our tangible and intangible assets, including a pledge of all of the outstanding capital stock of substantially all of our domestic subsidiaries and
65%
of the shares or equity interests of foreign subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things: create or incur liens on assets; make any investments, loans or advances; incur additional indebtedness, engage in mergers, dissolutions, liquidations or consolidations; engage in transactions with affiliates; make dispositions; and declare or make dividend payments. The 2017 Credit Agreement requires us to maintain compliance with a maximum consolidated first lien net leverage ratio, as set forth in the 2017 Credit Agreement. In addition, the 2017 Credit Agreement contains representations and warranties as to whether a material adverse effect on us has occurred since January 6, 2017, the closing date of the 2017 Credit Agreement. One of the conditions to drawing on the revolving credit facility is confirmation that the representations and warranties in the 2017 Credit Agreement are true on the date of borrowing, and if we are unable to make that confirmation, including that no material adverse effect has occurred, we will be unable to draw down further on the revolver.
Amendments and Waivers under the 2017 Credit Agreement
Following the Company’s failure to timely file its Annual Report on Form 10-K for the year ended December 31, 2016 and in connection with the Company’s failure to file its subsequent Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2017, the Company entered into a series of amendments and waivers under the 2017 Credit Agreement (the “Credit Agreement Amendments”) with respect to the violations resulting from such filing delinquencies. The Company entered into the most recent of such amendments on December 22, 2017. As amended by the Credit Agreement Amendments, the 2017 Credit Agreement, currently provides for the following terms with respect to the indebtedness governed thereby:
|
|
•
|
Initial Term Loans (as defined in the 2017 Credit Agreement) now bear interest on the outstanding amount at a rate per annum equal to either (i) the Base Rate plus
6.50%
or (ii) the Eurocurrency Rate for each Interest Period plus
7.50%
.
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
•
|
Revolving Loans (as defined in the 2017 Credit Agreement) now bear interest at a rate equal to either (i) the Base Rate plus
6.50%
or (ii) the Eurocurrency Rate or EURIBOR plus
7.50%
until the Company delivers its unaudited financial statements for the quarter ending March 31, 2018. After the delivery of those unaudited financial statements, the 2017 Revolving Loans will bear interest at a rate based on the Base Rate, Eurocurrency Rate or EURIBOR plus an interest-rate spread thereon that varies on the Consolidated First Lien Net Leverage Ratio. The spread thereon will range from
6.00%
to
6.50%
for the Base Rate and
7.00%
to
7.50%
for the Eurocurrency Rate and EURIBOR.
|
|
|
•
|
The “non-call period” on the 2017 Term Loans has been extended to January 31, 2020. In connection with the Credit Agreement Amendments, the Company paid an aggregate
$13.2 million
to the lenders consenting to such amendments.
|
We further amended the 2017 Credit Agreement on March 8, 2018 in connection with the Searchlight investment. See
Note 19. Subsequent Events
for a description of that amendment.
2.75% Convertible Senior Notes due 2035
In February 2015, we issued an aggregate principal amount of
$82.5 million
of convertible senior notes due 2035 (the “Convertible Notes”) in a private placement. The Convertible Notes were issued at par, pay interest semi-annually in arrears at an annual rate of
2.75%
and mature on February 15, 2035, unless earlier repurchased, redeemed or converted pursuant to the terms of the Convertible Notes. In certain circumstances and subject to certain conditions, the Convertible Notes are convertible at an initial conversion rate of
53.9084
shares of common stock per
$1,000
principal amount of notes (which represents an initial conversion price of approximately
$18.55
per share), subject to adjustment. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2034, only if one or more of the following conditions has been satisfied: (1) during any calendar quarter beginning after March 31, 2015 if the closing price of our common stock equals or exceeds
130%
of the respective conversion price per share during a defined period at the end of the previous quarter, (2) during the
five
consecutive business day period immediately following any
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 our common stock and the conversion rate on each such trading day; (3) if specified corporate transactions occur, or (4) if we call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date. On or after November 15, 2034, until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes at any time, regardless of the foregoing circumstances.
On February 20, 2022, February 20, 2025 and February 20, 2030 or if we undergo a “fundamental change” (as defined in the indenture governing the Convertible Notes (the “Indenture”)), subject to certain conditions, a holder will have the option to require us to repurchase all or a portion of its Convertible Notes for cash at a repurchase price equal to
100%
of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date. If our common stock ceases to be listed or quoted on Nasdaq, this would constitute a “fundamental change,” as defined in the Indenture, and the holders of the Convertible Notes would have the right to require us to repurchase all or a portion of their convertible notes at a repurchase price equal to
100%
of the principal amount of our convertible notes to be repurchased. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) or if we deliver a redemption notice prior to February 20, 2022, we will, in certain circumstances, increase the conversion rate for a holder that converts its Convertible Notes in connection with such make-whole fundamental change or redemption notice, as the case may be.
The Company may not redeem the Convertible Notes prior to February 20, 2019. The Company may, at its option, redeem all or part of the Convertible Notes at any time (i) on or after February 20, 2019 if the last reported sale price per share of our common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days during any
30
consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide written notice of redemption and (ii) on or after February 20, 2022 regardless of the sale price condition described in clause (i), in each case, at a redemption price equal to
100%
of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Upon conversion of any Convertible Note, we shall pay or deliver to the converting noteholder cash, shares of common stock or a combination of cash and shares of our common stock, at our election.
The Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component of
$69.5 million
was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component was calculated to be
$13.0 million
, and represents the conversion option which was determined by deducting the fair value of the liability component from the principal amount of the notes. This difference
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
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, we allocated the total amount of issuance costs incurred to the liability and equity components based on their relative values. We recorded issuance costs of
$1.8 million
and
$0.3 million
to the liability and equity components, respectively. Issuance costs, including fees paid to the initial purchasers who acted as intermediaries in the placement of the Convertible Notes, attributable to the liability component are presented in the Consolidated Balance Sheets as a direct deduction from the carrying amount of the debt instrument and are amortized to interest expense over the term of the Convertible Notes in the Consolidated Statements of Operations. The issuance costs attributable to the equity component are netted with the equity component and included within Additional paid-in capital in the 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 or twelve months ended December 31, 2017.
As of December 31, 2017 and 2016, the outstanding principal on the Convertible Notes was
$82.5 million
, and the outstanding Convertible Notes balance, net of debt issuance costs and discount associated with the equity component, was
$69.7 million
and
$69.0 million
, respectively. Subsequent to March 31, 2017, we became non-compliant with our obligations under the Indenture relating to the delivery to the Indenture trustee of our 2016 annual financial statements and interim financial statements for the quarters ended March 31, June 30 and September 30, 2017 and such non-compliance constituted an Event of Default (as defined in the Indenture) under the Indenture. As a result, immediately after the occurrence of the Event of Default and through such time as the noncompliance was continuing, we incurred additional interest on the Convertible Notes at a rate equal to (i)
0.25%
per annum of the principal amount of the Convertible Notes outstanding for each day during the first 90 days after the occurrence of each Event of Default and (ii)
0.50%
per annum of the principal amount of the Convertible Notes outstanding from the 91st day until the 180th day following the occurrence of each such Event of Default. (The Company cured its non-compliance relating to the delivery of the 2016 annual financial statements by filing its 2016 Form 10-K on November 17, 2017 and relating to the delivery of the March 31, June 30 and September 30, 2017 financial statements by filing the delinquent Form 10-Qs on January 31, 2018. However, the maximum additional interest was capped at
0.50%
per annum irrespective of how many Events of Default are in existence at any time for our failure to deliver any required financial statements. The aggregate penalty interest incurred during this period of non-compliance was approximately
$0.2 million
.
Other Debt
With the acquisition of Travel Entertainment Group Equity Limited and subsidiaries (“IFES”) on October 18, 2013, the Company assumed a
$1.1 million
mortgage maturing in October 2032 that bears interest at a rate equal to
1.75%
per annum. Interest is paid on a monthly basis. There was no accrued interest owing on the mortgage as of December 31, 2017 and 2016. As of December 31, 2017 and 2016, there was
$0.7 million
due on the principal amount of the mortgage.
In connection with the EMC Acquisition, the Company assumed approximately
$1.1 million
of capital lease obligations. The Company also entered into an additional
$1.0 million
capital lease obligation during 2016. These leases expire at various dates through 2020. As of December 31, 2017 and 2016, we had
$1.6 million
and
$2.0 million
of capital lease obligations, respectively, included in Other debt. Other debt also includes an equipment financing arrangement totaling
$0.4 million
as of December 31, 2017, which is to mature in June 2019.
In December 2017, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately
$6.4 million
and concurrently signed an agreement to waive future dividends or other such distributions by WMS to the Company until such time as the outstanding principal on the demand promissory note has been repaid in full. The outstanding demand promissory note will be reduced dollar-for-dollar by any such distribution amounts waived. The Company may prepay the promissory note at any time without prepayment penalty. The unpaid principal of the promissory note bears interest at
2.64%
, and all interest calculated under the promissory note commences upon the occurrence of an “Event of Default,” which includes, for example, the Company’s breach of the note or the WMS operating agreement, Company insolvency events and material judgments against the Company. The entire principal balance of this promissory note together with all accrued but unpaid interest shall be due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2019 and (iii) the date of acceleration of the promissory note as a result of the occurrence of an event of default. The note has been included within current portion of long-term debt in the consolidated balance sheet as of
December 31, 2017
.
The aggregate contractual maturities of all borrowings due subsequent to
December 31, 2017
, are as follows (in thousands):
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018
|
$
|
20,106
|
|
2019
|
22,372
|
|
2020
|
25,405
|
|
2021
|
25,044
|
|
2022
|
103,045
|
|
Thereafter
|
464,228
|
|
Total
|
$
|
660,200
|
|
Note 10. Commitments and Contingencies
Movie License and Internet Protocol Television (“IPTV”) Commitments
In the ordinary course of business, we have long-term commitments, such as license fees and guaranteed minimum payments owed to content providers. In addition, we have long-term arrangements with service and television providers to license and provide content and IPTV services that are subject to future guaranteed minimum payments from us to the licensor.
The following is a schedule of future unconditional minimum commitments under movie and IPTV arrangements as of December 31, 2017 (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018
|
$
|
30,295
|
|
2019
|
17,984
|
|
2020
|
9,397
|
|
2021
|
3,486
|
|
2022
|
500
|
|
Thereafter
|
—
|
|
Total minimum payments
|
$
|
61,662
|
|
Operating Lease Commitments
The Company leases its operating facilities under non-cancelable operating leases that expire on various dates through
2025
. Certain operating leases provide us with the option to renew for additional periods. Where operating leases contain escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. Some of our operating leases require the payment of real estate taxes or other occupancy costs, which may be subject to escalation. The Company also leases some facilities and vehicles under month-to-month arrangements.
The following is a schedule of future minimum lease payments under operating leases as of December 31, 2017 (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018
|
$
|
5,618
|
|
2019
|
4,758
|
|
2020
|
3,472
|
|
2021
|
3,373
|
|
2022
|
2,942
|
|
Thereafter
|
5,023
|
|
Total minimum lease payments
|
$
|
25,186
|
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Total rent expense for the year ended
December 31, 2017
,
2016
, and
2015
was
$7.3 million
,
$5.6 million
and
$4.4 million
, respectively. We are responsible for certain operating expenses in connection with these leases.
Capital Leases
The Company leases certain computer software and equipment under capital leases that expire on various dates through 2020. The current portion and non-current portion of capital lease obligations are included in Current portion of long-term debt and Long-term debt, respectively, on the Consolidated Balance Sheets. As of December 31, 2017, future minimum lease payments under these capital leases were as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018
|
$
|
931
|
|
2019
|
772
|
|
2020
|
371
|
|
Total minimum lease payments
|
2,074
|
|
Less: amount representing interest
|
(108
|
)
|
Present value of net minimum lease payments
|
1,966
|
|
Less current portion
|
(874
|
)
|
Capital lease obligation, non-current
|
$
|
1,092
|
|
Satellite Capacity Commitments
The Company maintains agreements with satellite service providers to provide for satellite capacity. The Company expenses these satellite fees in the month the service is provided as a charge to licensing and services cost of sales.
In connection with the EMC Acquisition, the Company assumed several contractual commitments for satellite services. During the third quarter of 2016, EMC entered into an amendment to its existing service agreement with one of its satellite service providers. Under this amendment, the amount of committed satellite bandwidth was significantly increased and our total contract commitment was increased by
$40 million
.
The following is a schedule of future unconditional minimum satellite costs as of
December 31, 2017
(in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018
|
$
|
106,101
|
|
2019
|
93,951
|
|
2020
|
71,267
|
|
2021
|
39,595
|
|
2022
|
35,658
|
|
Thereafter
|
125,534
|
|
Total minimum payments
|
$
|
472,106
|
|
Other Commitments
In connection with the EMC Acquisition, the Company was obligated to pay the EMC seller up to an additional
$25.0 million
on the first anniversary date in, at the Company’s option, (a) cash, (b) newly issued shares of Company common stock or (c) a combination of cash and newly issued shares of Company common stock. On July 27, 2017, we elected to satisfy this obligation wholly in newly issued shares of our common stock, and satisfied the obligation by issuing
5,080,049
shares of common stock at that time to the EMC seller.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Through the acquisitions of WOI, RMG, masFlight and navAero in 2015, the Company agreed to future contingent earn-out obligations relating to future performance of those businesses. As of
December 31, 2017
and
2016
, the total liability was approximately
$0.1 million
and
$2.0 million
, respectively, with potential payouts on specified dates through 2020.
In the normal course of business, the Company enters into future purchase commitments with some of its connectivity vendors to secure future inventory for its airlines customers and the development pertaining to engineering and antenna projects. At
December 31, 2017
, the Company also had outstanding letters of credit in the amount of
$7.1 million
, of which
$6.0 million
issued under the letter of credit facility under the 2017 Credit Agreement. See
Note 8. Financing Arrangements
.
Contingencies
We are subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated. We record accruals for loss contingencies when our management concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. On a regular basis, our management evaluates developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously. While it is not possible to accurately predict or determine the eventual outcomes of these matters, an adverse determination in one or more of these matters could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Some of our legal proceedings as well as other matters that our management believes could become significant are discussed below:
|
|
•
|
Music Infringement and Related Claims
. On May 6, 2014, UMG Recordings, Inc., Capitol Records, Universal Music Corp. and entities affiliated with the foregoing (collectively, “UMG”) filed suit in the United States District Court for the Central District of California against us and Inflight Productions Ltd. (“IFP”) for copyright infringement and related claims and unspecified money damages. IFP is a direct subsidiary of Global Entertainment AG (formally AIA) and as such is our indirect subsidiary. In August 2016, we entered into settlement agreements with major record labels and publishers, including UMG, to settle music copyright infringement and related claims (the “Sound Recording Settlements”). As a result of the Sound Recording Settlements, we paid approximately
$18.0 million
in cash and issued approximately
1.8 million
shares of our common stock to settle lawsuits and other claims. Under the settlement agreement with UMG, we paid UMG an additional
$5.0 million
in cash in March 2017 and agreed to issue
500,000
additional shares of our common stock when and if our closing price of our common stock exceeds
$10.00
per share and
400,000
additional shares of our common stock when and if the closing price of our common stock exceeds
$12.00
per share. In 2016, we received notices from several other music rights holders and associations acting on their behalf regarding potential claims that we infringed their music rights and the rights of artists that they represent. To date, none of these rights holders or associations has initiated litigation against us. We believe that a loss relating to these matters is probable, but we believe that it is unlikely to be material and therefore have accrued an immaterial reserve for these loss contingencies. If initiated however, we intend to vigorously defend ourselves against these claims.
|
|
|
•
|
SwiftAir Litigation
. On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44 and one of its airline customers for breach of contract, quantum meruit, unjust enrichment and similar claims and money damages in the Superior Court of California for the County of Los Angeles. SwiftAir and Row 44 had a contractual relationship whereby Row 44 agreed to give SwiftAir access to its portal for one of its airline customers so that SwiftAir could market its destination deal product to the airline customer’s passengers. In 2013, after Row 44’s customer decided not to proceed with SwiftAir’s destination deal product, Row 44 terminated the contract. In its lawsuit, SwiftAir seeks approximately
$9 million
in monetary damages against Row 44 and its airline customer. The Court has scheduled the trial for this matter in September 2018. We believe that a material loss relating to this matter is reasonably possible, but we are currently unable to estimate the amount of the potential loss at this time due to the speculative nature of the claimed damages and the varying theories under which damages could be measured, and as such have not accrued a reserve for this loss contingency. We intend to vigorously defend ourselves against this claim.
|
|
|
•
|
STM Litigation
. On April 12, 2016, STM Atlantic N.V. and STM Group, Inc. (jointly, the “STM Sellers”) filed a breach-of-contract action in Delaware Superior Court against EMC relating to EMC’s 2013 acquisition of STM Norway AS, STMEA (FZE), Vodanet Telecomuniçacões Ltda. and STM Networks from the STM Sellers. The STM Sellers alleged, among other things, that EMC breached earn-out provisions in the purchase agreement by failing to develop and sell sat-link technology following the acquisition closing. We believed that a material loss relating to this matter was reasonably possible, but we were previously unable to estimate the amount of such loss, and as such did not accrue a reserve for this loss contingency. In February 2018, EMC settled the lawsuit with STM Sellers, and pursuant to the
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
purchase agreement whereby we purchased the EMC business, the seller of the EMC business indemnified us in full for this claim and all related legal expenses.
|
|
•
|
Securities Class Action Litigation
. On February 23, 2017 and on March 17, 2017, following our announcement that we anticipated a delay in our 2016 Form 10-K filing and that our former CEO and former CFO would separate from us, three putative securities class action lawsuits were filed in United States District Court for the Central District of California. These lawsuits alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act against us, our former CEO and two of our former CFOs. The plaintiffs voluntarily dismissed two of these lawsuits. The third lawsuit, brought by putative stockholder M&M Hart Living Trust and Randi Williams (the “
Hart
complaint”), alleged that we and the other defendants made misrepresentations and/or omitted material information about the EMC Acquisition, our projected financial performance and synergies following that acquisition, and the impact of that acquisition on our internal controls over financial reporting. The plaintiffs sought unspecified damages, attorneys’ fees and costs. On November 2, 2017, the Court granted our and the other defendants’ motion to dismiss the
Hart
complaint, and dismissed the action with prejudice. On November 30, 2017, the plaintiffs filed a motion to alter or amend the Court’s previous judgment of dismissal to permit them to file a further amended complaint. On January 8, 2018 the Court denied the plaintiffs’ motion to alter or amend the previous judgment. On January 29, 2018, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit from the Court’s denial of the plaintiffs’ motion to alter or amend the judgment. We believe that a loss relating to this matter is probable, but we believe that it is unlikely to be material and therefore have accrued an immaterial reserve for this loss contingency. We intend to vigorously defend ourselves against this claim.
|
In addition, from time to time, we are or may be party to various additional legal matters incidental to the conduct of our business. Some of the outstanding legal matters include speculative claims for indeterminate amounts of damages, for which we have not recorded any contingency reserve. Additionally, we have determined that other legal matters are likely not material to our financial statements, and as such have not discussed those matters above. Although we cannot predict with certainty the ultimate resolution of these speculative and immaterial matters, based on our current knowledge, we do not believe that the outcome of any of these matters will have a material adverse effect on our financial statements.
Note 11. Related Party Transactions
Loan Agreement with Lumexis
On February 24, 2016, we entered into a loan agreement (the “Loan Agreement”) with Lumexis Corporation (“Lumexis”), a company that provided in-flight entertainment systems to airlines. Lumexis was at the time majority-owned by PAR Investment Partners, L.P. (“PAR”), which beneficially owned approximately
26.5%
of our outstanding shares of common stock as of
March 14, 2018
. At the time we entered into the Loan Agreement, the Chair of our Board of Directors was also a Managing Partner of PAR and a member of Lumexis’s board of directors.
The Loan Agreement provided for extensions of credit by us to Lumexis of up to
$5.0 million
. Our Board of Directors considered the Loan Agreement under our policies and procedures regarding related person transactions, and determined that it was appropriate and in our best interests and our stockholders to enter into the Loan Agreement due to Lumexis’ position as an important supplier to flydubai (one of our connectivity customers) and to another airline that was a potential customer, and in light of Lumexis’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. Our Board Chair recused himself from discussions regarding the Loan Agreement and did not vote on whether we should enter into the transaction.
The Loan Agreement qualifies Lumexis as our variable interest entity. In accordance with ASC 810,
Consolidation
, we were not deemed to be the primary beneficiary of Lumexis because we did not hold any power over Lumexis’s activities that most significantly impacted its economic performance. Therefore, Lumexis was not subject to consolidation into our financial reporting. The maximum exposure to loss as a result of the Loan Agreement was the outstanding principal balance of the loan and any accrued interest thereon.
The borrowings under the Loan Agreement were evidenced by a senior secured promissory note (the “Note”) and bore interest at a per annum rate of
15%
. The outstanding principal and accrued interest thereon were payable in full on December 31, 2016. As a result of information provided by Lumexis, in June 2016 as to the note’s collectability and Lumexis’s insolvency, our management impaired the value of Note during the three months ended June 30, 2016 and discontinued accruing interest receivable.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
On December 5, 2016, we, Lumexis and PAR entered into a Partial Cancellation of Debt and Acceptance of Collateral, which provided a transfer of certain assets in the amount of
$0.2 million
to us in partial satisfaction of the Lumexis’ principal amount of the outstanding debt. On January 6, 2017, we—as the senior-most secured creditor of Lumexis—then foreclosed on substantially all of Lumexis’s remaining assets pursuant to a public foreclosure auction. Subsequent to
June 30, 2017
, during the third quarter of 2017, the Company entered into an arrangement with flydubai to sell to flydubai certain of the assets acquired on January 6, 2017. The arrangement resulted in a recovery of approximately
$0.2 million
during the
year ended December 31, 2017
.
Due from WMS
In connection with the EMC Acquisition, the Company acquired a
49%
equity interest in WMS. The Company accounts for its interest in WMS using the equity method and includes the Company’s share of WMS’s profits or losses in Income from equity method investments in the Consolidated Statements of Operations. During the year ended
December 31, 2017
, sales to WMS were approximately
$1.2 million
for the Company’s services provided to WMS for WMS’s onboard cellular equipment under the terms of the WMS operating agreement and an associated master services agreement with WMS. These sales are included in Revenue in the Consolidated Statements of Operations. During the period from the EMC Acquisition date through
December 31, 2016
, the Company’s sales to WMS were approximately
$0.7 million
. As of
December 31, 2017
and
2016
, we had a balance due from WMS of
$0.1 million
and
$0.1 million
, respectively, included in Accounts receivable, net in the Consolidated Balance Sheets.
Note Payable to WMS
In December 2017, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately
$6.4 million
and concurrently signed an agreement to waive future dividends or other such distributions by WMS to the Company until such time as the outstanding principal on the demand promissory note has been repaid in full. The outstanding demand promissory note will be reduced dollar-for-dollar by any such distribution amounts waived. The Company may prepay the promissory note at any time without prepayment penalty. The unpaid principal of the promissory note bears interest at
2.64%
, and all interest calculated under the promissory note commences upon the occurrence of an “Event of Default,” which includes, for example, the Company’s breach of the note or the WMS operating agreement, Company insolvency events and material judgments against the Company. The entire principal balance of this promissory note together with all accrued but unpaid interest shall be due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2019 and (iii) the date of acceleration of the promissory note as a result of the occurrence of an event of default. The note has been included within current portion of long-term debt in the consolidated balance sheet as of
December 31, 2017
.
Due to Santander
Also in connection with the EMC Acquisition, the Company acquired a
49%
equity interest in Santander. The Company accounts for its interest in Santander using the equity method and includes our share of Santander’s profits or losses in Income from equity method investments in the Consolidated Statements of Operations. During the year ended
December 31, 2017
the Company purchased approximately
$3.4 million
from Santander for their Teleport services and related network operations support services. During the period from the EMC Acquisition date through
December 31, 2016
, the Company purchased approximately
$1.3 million
in Teleport services and related operations support services from Santander. As of
December 31, 2017
and
2016
the Company owed Santander approximately
$0.9 million
and
$0.8 million
, respectively, which is included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets for their teleport services and related network operations support services.
Transactions with TRIO Connect, LLC and its Affiliates
In July 2015, EMC divested its interest in TRIO Connect, LLC (“TRIO”), a joint venture formed to commercialize EMC’s ARABSAT Ka Band contract, such that TRIO became then owned by funds affiliated with ABRY Partners (a former EMC majority owner and one of our current significant stockholders), Abel Avellan (our former President and Chief Strategy Officer, who left the Company in April 2017) and other equity holders not affiliated with us. Global Eagle did not acquire the TRIO business as a part of the EMC Acquisition.
Prior to the EMC Acquisition, EMC and its subsidiaries had collectively made various loans to TRIO and its affiliated entities in an aggregate principal of approximately
$5.7 million
. Also, prior to the EMC Acquisition, STMEA (FZE), a wholly-owned subsidiary of TRIO, had made equipment sales and provided employee payroll services to EMC and its subsidiaries in an aggregate amount equal to approximately
$4.9 million
. After applying the trade payables against the outstanding loan amounts, TRIO and its affiliates collectively owed EMC and its subsidiaries approximately
$0.8 million
(as of July 2016). Due to the deterioration of
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
TRIO’s financial condition, EMC determined the remaining balance was uncollectible and fully impaired the value of the loan receivable prior to the EMC Acquisition. The Company did not pay any consideration for the loan receivable in the EMC Acquisition, although the Company did assume the receivable in the EMC Acquisition. The Company believes that the receivable is now uncollectible, and as such expects to forgive it in full in the near future.
In addition, immediately following the EMC Acquisition, EMC’s employees in the UAE were managed and employed by TRIO’s UAE entity. Because EMC did not have its own entity in UAE at the time we acquired EMC, the Company (through EMC) entered into a transition services agreement with TRIO whereby TRIO would continue to employ the UAE employees for the Company’s benefit—and “second” them to the Company at cost—until the Company formed its own licensed UAE subsidiary. For the three-month period (July 2016 to October 2016) following the EMC Acquisition, the Company paid to TRIO approximately
$0.6 million
for payroll related services and expenses for the “seconded” employees. The Company did not pay any further amounts under the transition services agreement after October 2016.
Between October 2016 and August 2017, the Company made payments to TRIO totaling
$0.4 million
for equipment purchases and service fees in connection with various customer contracts. In September 2017, the Company made additional equipment purchases totaling
$0.4 million
for customer orders and for inventory purposes. All of these purchase transactions were on arms’-length pricing and terms.
Subscription Receivable with Former Employee
A former employee is the issuer of a Secured Promissory Note dated July 15, 2011, pursuant to which the former employee agreed to pay the Company (as successor to Row 44, Inc., which is a Company subsidiary) a principal sum of approximately
$0.4 million
, plus interest thereon at a rate of
6%
per annum. The former employee granted the Company a security interest in shares of Row 44 held by him (which Row 44 shares were subsequently converted into
223,893
shares of the Company’s common stock) to secure his obligations to repay the loan. As of December 31, 2017 and 2016, the balance of the note (with interest) was approximately
$0.6 million
, which is presented as a subscription receivable. We recognize interest income on the note when earned (using the simple interest method) but have not collected any interest payments since the origination of the note. Interest income recognized by the Company during the twelve months December 31, 2017 and 2016 was not material. The Company makes ongoing assessments regarding the collectability of this note and the subscription receivable balance.
masFlight Earn-Out
In August 2015, the Company acquired masFlight for approximately
$10.3 million
in cash and
$9.3 million
in contingent consideration. A former executive of masFlight (Joshua Marks) is now an executive officer of the Company. As a portion of the contingent consideration is subject to future employment of certain employees of masFlight, such contingent consideration is recorded as compensation expense subsequent to the acquisition date. During the twelve months ended December 31, 2017, we recognized compensation expense of less than
$0.1 million
relating to the masFlight contingent consideration. As of December 31, 2017, the remaining earn-out compensation liability was approximately
$0.1 million
, the beneficiaries of which include Mr. Marks and other former masFlight equityholders. This compensation liability was terminated in August 2017 without any required payment by us relating thereto.
Registration Rights Agreement
In connection with the closing of its business combination with Row 44 and Advanced Inflight Alliance AG, the Company entered into an amended and restated registration rights agreement, dated January 31, 2013 by and among the Company, Global Eagle Acquisition LLC (the “Sponsor”), Par Investment Partners, L.P. (“PAR”), Putnam Capital Spectrum Fund and Putnam Equity Spectrum Fund, and the members of the Sponsor signatory thereto, including Harry E. Sloan and Jeff Sagansky, pursuant to which the parties thereto obtained the right to cause the Company to register the resale of certain securities held by them (the “registrable securities”) and to sell such registrable securities pursuant to an effective registration statement in a variety of manners, including in underwritten offerings, all on the terms and conditions set forth therein. The Company is required under the terms of the amended and restated registration rights agreement to pay the expenses in connection with the exercise of these rights.
Note 12. Common Stock, Stock-Based Awards and Warrants
Common Stock
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Issuance of Common Stock
The Company issued approximately
5.5 million
shares of its common stock in connection with the EMC Acquisition on July 27, 2016. On the first anniversary of the EMC Acquisition, on July 27, 2017, the Company issued to the former member unit holders approximately
5.0 million
additional shares of the Company’s common stock. Pursuant to the EMC purchase agreement,
50%
of the newly issued shares were valued at
$8.40
per share, and the other
50%
were valued at the volume-weighted average price of a share of Company common stock measured
two
days prior to the first anniversary date.
Furthermore, in August 2016, the Company issued approximately
1.8 million
shares of its common stock as partial consideration for the Sound Recording Settlements. The Company is obligated to issue an additional
500,000
shares of its common stock to UMG in connection with the litigation when and if the share price of the Company’s common stock exceeds
$10.00
per share and an additional
400,000
shares of its common stock when and if the closing price exceeds
$12.00
per share (together, the “Supplemental Shares”) at any time in the future if the share price reaches these price thresholds. In lieu of issuing the Supplemental Shares of the Company’s common stock upon exceeding the respective share price thresholds, the Company may pay the equivalent in cash at its sole discretion. If the Company were to experience a liquidation event, as defined in the settlement documentation, and if the equivalent liquidation price per share at that time exceeds one or both of the share price thresholds, the Company is obligated to pay the equivalent liquidation price per share in cash in lieu of issuing the Supplemental Shares. See
Note 10. Commitments and Contingencies
for a further description of the Sound Recording Settlements.
During the year ended
December 31, 2015
,
257,058
of Row 44 warrants were exchanged for
93,161
shares of common stock.
During the year ended
December 31, 2015
, the Company issued
1,337,760
shares of common stock in exchange for the surrender of Public SPAC Warrants for
3,957,280
shares of the Company’s common stock.
2013 Equity Plan
Under our 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of our Board of Directors, was able to grant up to
11,000,000
shares (through stock options, restricted stock, restricted stock units (“RSUs”)) (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants. We ceased using the 2013 Equity Plan for new equity issuances in December 2017 upon receiving stockholder approval of our new 2017 Omnibus Long-Term Incentive Plan, although we continue to have outstanding previously granted equity awards issued under the 2013 Equity Plan. These previously granted awards represent the right to receive
7,070,298
shares of our common stock (as of January 18, 2018) if and when they later vest and/or are exercised. See “2017 Equity Plan” immediately below.
2017 Equity Plan
On December 21, 2017, our stockholders approved a new 2017 Omnibus Long-Term Incentive Plan (the “2017 Omnibus Plan”). We had
2,097,846
shares remaining shares available for issuance under the 2013 Equity Plan (as of that date) and those shares rolled into the 2017 Omnibus Plan and are now available for grant thereunder. The 2017 Omnibus Plan separately made available
6,500,000
shares of our common stock for new issuance thereunder, in addition to those rolled over from the 2013 Equity Plan. The Administrator of the 2017 Omnibus Plan, which is the Compensation Committee of our Board of Directors, may grant share awards (through stock options, restricted stock, RSUs (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants.
Stock Repurchase Program
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
In March 2016, the Company’s Board of Directors 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 that may arise from time to time. The repurchase program does not obligate the Company to repurchase any specific number of shares, and may be suspended or discontinued at any time. The Company expects to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. The Company did not repurchase any shares of its common stock during the
year ended December 31, 2017
. During the year ended
December 31, 2016
the Company repurchased
0.6 million
shares of its common stock for aggregate consideration of
$5.2 million
. As of
December 31, 2017
the remaining authorization under the stock repurchase plan was
$44.8 million
.
Stock-Based Awards
EMC Employment Inducement Awards
On July 27, 2016, the Company granted its then President and Chief Strategy Officer the following stock-based awards: (i) non-qualified stock options to purchase
450,000
shares of the Company’s common stock (the “Option Award”), (ii) an award of
275,000
restricted stock units (the “Stock Award”), and (iii)
175,000
shares of fully-vested restricted stock. Such compensation expense is recorded in general and administrative in the Consolidated Statement of Operations for the year ended
December 31, 2017
. Mr. Avellan terminated his employment with the Company in April 2017. Under the terms of his consulting agreement, Mr. Avellan received continued vesting on his outstanding equity awards through the date of cessation of those consulting services. Mr. Avellan ceased providing consulting services to the Company in November 2017.
The exercise price per share of the Option Award was equal to the closing price of the Company’s stock on the EMC Acquisition Date. Each of the Option Award and the Stock Award are subject to the terms and conditions applicable to such awards granted under the Company’s 2016 Inducement and Retention Stock Plan for EMC Employees (effective as of the date thereof as it may be amended from time to time, the “Inducement Equity Plan”). Subject to continued vesting due to his consulting relationship with the Company, one-third of the Option Awards vested on July 27, 2017, with the remainder vesting monthly on a pro rata basis thereafter over the next
two
years until fully vested. Subject to continued vesting due to his consulting relationship with the Company through each vesting date, the restricted stock units will vest in three equal annual installments, with the first installment vested on July 27, 2017 and the remaining installments vesting annually thereafter. Both the Option Award and the Stock Award are subject to automatic vesting provisions in the event of a change in control as provided for under the terms of the employment agreement.
In addition, in connection with the EMC Acquisition, the Company granted certain other EMC employees, in the aggregate, nonqualified stock options to purchase
72,600
shares of the Company’s common stock and
73,750
restricted stock units as employment inducement awards. The exercise price per share of the nonqualified stock options was equal to the closing price of the Company’s stock on the EMC Acquisition Date. The options are subject to continuous employment and vested with respect to one-fourth of the underlying shares on July 27, 2017, with the remainder vesting monthly on a pro rata basis thereafter over the next
three
years until fully vested. Subject to continuous employment through each vesting date, the restricted stock units will vest in four equal installments, with the first installment vested on July 27, 2017 and the remaining installments vesting annually thereafter.
Stock Options
The exercise price of stock option awards granted is generally equal to the per share closing price of the common stock on the date the options were granted. Employee stock option grants generally have
five
- and
seven
- year terms (depending on when they were issued) and employee stock options generally vest
1/4th
on the anniversary of the vesting commencement date and
1/36th
monthly thereafter, over a
four
-year period. Stock options granted to the Company’s Board of Directors have
five
- and
seven
- year terms (depending on when they were issued) and vest 25% per quarter during the calendar year. In 2017, the Board’s Compensation Committee determined that it would only issue RSUs (vesting on the earlier of the next annual meeting of stockholders and 12 months) as part of its director compensation program. Certain stock option awards have accelerated vesting provisions in the event of a change in control or termination without cause.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
The fair values of stock options issued were determined on the grant date using the Black-Scholes option pricing model and the following level 3 assumptions for the years ended
December 31, 2017
,
2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Common stock price on grant date
|
$
|
2.74
|
|
|
$
|
8.34
|
|
|
$
|
12.91
|
|
Expected life (in years)
|
4.75
|
|
|
3.91
|
|
|
3.77
|
|
Risk-free interest rate
|
2.26
|
%
|
|
1.15
|
%
|
|
1.28
|
%
|
Expected stock volatility
|
52
|
%
|
|
44
|
%
|
|
43
|
%
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Fair value of stock options granted
|
$
|
0.93
|
|
|
$
|
2.93
|
|
|
$
|
4.41
|
|
The total intrinsic value of options exercised during the year ended December 31, 2015 was
$2.5 million
. There was
no
significant intrinsic value of options exercised during the year ended
December 31, 2017
and 2016.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Stock option activity for year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Balance unexercised at January 1, 2017
|
6,723
|
|
|
$
|
10.37
|
|
|
2.70
|
|
$
|
59
|
|
Granted
|
2,115
|
|
|
$
|
4.63
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
(1,761
|
)
|
|
$
|
9.95
|
|
|
|
|
|
Balance unexercised at December 31, 2017
|
7,077
|
|
|
$
|
8.76
|
|
|
2.60
|
|
$
|
—
|
|
Exercisable at December 31, 2017
|
4,794
|
|
|
$
|
9.92
|
|
|
1.58
|
|
$
|
—
|
|
Vested and expected to vest after December 31, 2017
|
7,077
|
|
|
$
|
8.76
|
|
|
2.60
|
|
$
|
—
|
|
The following is a summary of the Company’s stock options outstanding at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
Number Outstanding
(in thousands)
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
(in thousands)
|
|
Weighted Average Exercise Price
|
$16.70 - $16.70
|
21
|
|
|
0.14
|
|
$
|
16.70
|
|
|
21
|
|
|
$
|
16.70
|
|
$13.26 - $16.06
|
183
|
|
|
1.89
|
|
$
|
14.30
|
|
|
139
|
|
|
$
|
14.55
|
|
$12.51 - $13.15
|
1,015
|
|
|
2.09
|
|
$
|
12.95
|
|
|
780
|
|
|
$
|
12.98
|
|
$10.57 - $11.43
|
808
|
|
|
1.22
|
|
$
|
10.76
|
|
|
731
|
|
|
$
|
10.76
|
|
$10.00 - $10.00
|
1,345
|
|
|
0.33
|
|
$
|
10.00
|
|
|
1,345
|
|
|
$
|
10.00
|
|
$9.31 - $9.79
|
425
|
|
|
0.38
|
|
$
|
9.62
|
|
|
425
|
|
|
$
|
9.62
|
|
$6.34 - 9.25
|
1,021
|
|
|
2.83
|
|
$
|
8.77
|
|
|
637
|
|
|
$
|
8.73
|
|
$6.22 - $6.22
|
1,000
|
|
|
3.67
|
|
$
|
6.22
|
|
|
530
|
|
|
$
|
6.22
|
|
$6.18 - $6.18
|
144
|
|
|
3.02
|
|
$
|
6.18
|
|
|
67
|
|
|
$
|
6.18
|
|
$3.21 - $3.21
|
1,115
|
|
|
6.61
|
|
$
|
3.21
|
|
|
119
|
|
|
$
|
3.21
|
|
|
7,077
|
|
|
2.60
|
|
$
|
8.76
|
|
|
4,794
|
|
|
$
|
9.92
|
|
Restricted Stock Units (“RSU”)
Under the 2013 Equity Plan and associated form of award agreement, our time vesting RSU awards to employees generally vest annually on each anniversary of the grant date and generally over a
four
-year term. The time-vesting 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 the time-vesting RSUs generally equals the closing price of the Company’s common stock on the grant date.
During the years ended
December 31, 2017
and
2016
, the Company granted
268,000
RSUs and
38,000
RSUs, respectively, to the Board of Directors that fully vest on the
13
month anniversary of the grant date. The Company also granted
3,643,000
RSUs and
1,580,000
RSUs, respectively, to certain employees that vest 1/4
th
on the grant anniversary date over a
four
-year term during the years ended
December 31, 2017
and
2016
, respectively.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
RSU activity during the year ended
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Intrinsic Value (in thousands)
|
Balance nonvested at January 1, 2017
|
1,638
|
|
|
$
|
8.60
|
|
|
$
|
10,579
|
|
Granted
|
3,911
|
|
|
$
|
2.67
|
|
|
|
Vested
|
(368
|
)
|
|
$
|
8.64
|
|
|
|
Forfeited
|
(590
|
)
|
|
$
|
8.48
|
|
|
|
Balance nonvested at December 31, 2017
|
4,591
|
|
|
$
|
3.56
|
|
|
$
|
10,512
|
|
Vested and expected to vest at December 31, 2017
|
4,533
|
|
|
$
|
3.47
|
|
|
$
|
10,381
|
|
The total fair value of RSUs vested during the years ended
December 31, 2017
,
2016
and
2015
was
$1.2 million
,
$2.1 million
and
$0.6 million
, respectively.
Performance Based Restricted Units (“PSU”)
Under the 2013 Equity Plan, in October 2016, the Board of Directors issued new performance based PSU awards, which give the recipient the right to receive Company common stock based on the Company’s total stockholder return relative to the Russell 2000 index during the
three
-year period beginning from date of grant and ending on the third anniversary of the grant date.
The compensation expense recognized for the awards is based on the grant date fair value of a unit that is determined using Monte-Carlo simulation multiplied by the number of units granted. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of units greater or less than the number of units granted. In general, participants vest in their PSU awards at the end of the performance period with continuous employment or service during the period.
During the year ended December 31, 2017, the Company granted
526,100
PSUs with a weighted-average grant date fair value of
$2.81
per unit and using a risk free rate of
1.89%
. As of December 31, 2017, there were
683,320
nonvested PSUs outstanding. During the year ended December 31, 2016, the Company granted
235,188
PSUs with a weighted-average grant date fair value of
$9.93
per unit and using a risk free rate of
1.02%
. As of December 31, 2016, there were
235,188
nonvested PSUs outstanding. There were
no
PSUs outstanding as of December 31, 2015.
Stock-Based Compensation Expense
Stock-based compensation expense related to all employee and, where applicable, non-employee stock-based awards was as follows for the years ended
December 31, 2017
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Consolidated Statement of Operations Classification:
|
|
|
|
|
|
Cost of sales
|
$
|
300
|
|
|
$
|
313
|
|
|
$
|
322
|
|
Sales and marketing
|
423
|
|
|
629
|
|
|
701
|
|
Product development
|
634
|
|
|
994
|
|
|
1,020
|
|
General and administrative
|
6,228
|
|
|
8,811
|
|
|
6,192
|
|
Total
|
$
|
7,585
|
|
|
$
|
10,747
|
|
|
$
|
8,235
|
|
As of
December 31, 2017
, the Company had approximately
$29.6 million
of unrecognized employee related stock-based compensation, which it expects to recognize over a weighted-average period of approximately
2.77 years
.
Warrants
Legacy Row 44 Warrants
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
In conjunction with the business combination with Row 44 and Advanced Inflight Alliance AG in January 31, 2013, the Company converted
21,062,500
Row 44 warrants to warrants to purchase up to
721,897
shares of the Company’s common stock (“Legacy Row 44 Warrants”). During the
year ended December 31, 2017
all remaining Legacy Row 44 Warrants expired.
Public SPAC Warrants
The following is a summary of Public SPAC Warrants for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants (in thousands)
|
|
Weighted Average Exercise price
|
|
Weighted Average Remaining Contractual Term (in years)
|
Outstanding at January 1, 2017
|
6,173
|
|
|
$
|
11.50
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
Purchased
|
—
|
|
|
—
|
|
|
|
Exchanged for Global Eagle common stock
|
—
|
|
|
—
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
6,173
|
|
|
$
|
11.50
|
|
|
0.09
|
As of
December 31, 2017
and
2016
, the Company accounted for its
6,173,228
Public SPAC Warrants as derivative liabilities in the Consolidated Balance Sheets. During the years ended
December 31, 2017
,
2016
and
2015
, the Company recorded approximately
$0.4 million
,
$23.6 million
and
$11.9 million
in Change in fair value of derivatives in the Consolidated Statements of Operations as a result of the remeasurement of these warrants at the respective balance sheet dates. As of
December 31, 2017
the fair value of warrants issued by the Company was estimated using the Black-Scholes option pricing model. The Public SPAC Warrants had a five-year term and expired on January 31, 2018.
Warrants Repurchase Program
During the year ended
December 31,
2014
the Board of Directors authorized the Company to repurchase Public SPAC Warrants for an aggregate purchase price, payable in cash and/or shares of common stock, of up to
$25.0 million
(inclusive of prior warrant purchases). In August 2015, the Board of Directors increased this amount by an additional
$20.0 million
. As of
December 31, 2017
,
$16.7 million
remained available for warrant repurchases under this authorization. The amount the Company spends (and the number of Public SPAC Warrants repurchased) varies based on a variety of factors including the warrant price. The Company did not repurchase any warrants during the years ended
December 31, 2017
or
2016
.
During 2015, the Company issued
1,337,760
shares of common stock in exchange for the surrender of Public SPAC Warrants exercisable for
3,957,280
shares of the Company’s common stock.
Note 13. Employee Benefit Plans
The Company has two defined contribution plans under Section 401(k) of the Internal Revenue Code (“401(k)”) covering full-time domestic employees who meet certain eligibility requirements, the Global Eagle Entertainment Retirement Plan ("GEE 401(k) Plan”) and the Emerging Markets Communications Volume Submitter Defined Contribution Plan (the “EMC 401(k) Plan”).
Under the GEE 401(k) Plan, eligible employees may defer up to
100%
of their eligible compensation on either a pre-tax or after-tax Roth 401(k) basis, or up to the annual maximum allowed by the Internal Revenue Service (“IRS”). The Company may, but is not obligated to, match a portion of the employee contributions up to a defined maximum. The Company began matching employee contributions in 2016.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Under the EMC 401(k) Plan, eligible EMC employees may defer up to 100% of their eligible compensation on either a pre-tax or after-tax Roth 401(k) basis, or up to the annual maximum allowed by the internal Revenue Service (“IRS”). EMC makes a matching contribution in accordance with a prescribed matching formula.
For the years ended
December 31, 2017
and
2016
, the Company recognized a total expense of
$1.2 million
and
$0.7 million
, respectively, for matching contribution for both 401(k) plans. The Company did not make any matching contributions to the GEE 401(k) Plan during the year ended
December 31, 2015
.
Note 14. Income Taxes
United States and foreign income (loss) from operations before income taxes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
(336,278
|
)
|
|
$
|
(119,549
|
)
|
|
$
|
(9,949
|
)
|
Foreign
|
(25,723
|
)
|
|
(38,294
|
)
|
|
9,444
|
|
Loss before income taxes
|
$
|
(362,001
|
)
|
|
$
|
(157,843
|
)
|
|
$
|
(505
|
)
|
The income tax provision based on the income (loss) from operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current provision:
|
|
|
|
|
|
Federal
|
$
|
(323
|
)
|
|
$
|
47
|
|
|
$
|
932
|
|
State
|
(136
|
)
|
|
227
|
|
|
355
|
|
Foreign
|
12,485
|
|
|
15,184
|
|
|
6,786
|
|
Total current provision
|
$
|
12,026
|
|
|
$
|
15,458
|
|
|
$
|
8,073
|
|
Deferred provision (benefit):
|
|
|
|
|
|
Federal
|
$
|
(9,173
|
)
|
|
$
|
(53,395
|
)
|
|
$
|
(2,691
|
)
|
State
|
(60
|
)
|
|
(2,070
|
)
|
|
—
|
|
Foreign
|
(7,680
|
)
|
|
(4,904
|
)
|
|
(3,761
|
)
|
Total deferred provision (benefit)
|
(16,913
|
)
|
|
(60,369
|
)
|
|
(6,452
|
)
|
Total income tax provision (benefit)
|
$
|
(4,887
|
)
|
|
$
|
(44,911
|
)
|
|
$
|
1,621
|
|
Income taxes differ from the amounts computed by applying the federal income tax rate of
35%
. A reconciliation of this difference is as follows (in thousands):
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Income tax benefit at federal statutory rate
|
$
|
(126,700
|
)
|
|
$
|
(55,245
|
)
|
|
$
|
(177
|
)
|
State income tax, net of federal benefit
|
(272
|
)
|
|
(1,898
|
)
|
|
418
|
|
Permanent items
|
3,623
|
|
|
1,781
|
|
|
9,123
|
|
Change in fair value of financial instruments
|
(1,102
|
)
|
|
(8,836
|
)
|
|
(3,847
|
)
|
Goodwill impairment
|
55,016
|
|
|
12,321
|
|
|
—
|
|
Sound-recording settlements
|
—
|
|
|
8,556
|
|
|
—
|
|
Stock-based compensation
|
2,660
|
|
|
229
|
|
|
375
|
|
Tax credits
|
(116
|
)
|
|
(590
|
)
|
|
(586
|
)
|
Other
|
1,608
|
|
|
2,977
|
|
|
746
|
|
Uncertain tax positions
|
(420
|
)
|
|
3,858
|
|
|
708
|
|
Withholding taxes
|
5,090
|
|
|
4,732
|
|
|
3,431
|
|
Rate differential
|
(12,187
|
)
|
|
(2,158
|
)
|
|
(3,200
|
)
|
Change in enacted tax rate
|
28,431
|
|
|
173
|
|
|
(1,371
|
)
|
Change in valuation allowance
|
39,482
|
|
|
(10,811
|
)
|
|
(3,999
|
)
|
Income tax provision (benefit)
|
$
|
(4,887
|
)
|
|
$
|
(44,911
|
)
|
|
$
|
1,621
|
|
Significant factors impacting the 2017 effective tax rate include goodwill impairment on non-tax deductible goodwill, the reduction of the U.S. federal corporate tax rate from
35%
to
21%
for future tax years, and valuation allowance on deferred tax assets.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Intangible assets and goodwill
|
$
|
15,272
|
|
|
$
|
20,196
|
|
Allowances and reserves
|
3,973
|
|
|
5,816
|
|
Accrued liabilities
|
5,135
|
|
|
8,793
|
|
Inventories
|
1,307
|
|
|
1,066
|
|
Investments in affiliates
|
—
|
|
|
—
|
|
Stock-based compensation
|
5,043
|
|
|
6,977
|
|
Tax credits
|
3,393
|
|
|
4,006
|
|
Net operating losses
|
98,249
|
|
|
68,489
|
|
Other
|
1,893
|
|
|
3,304
|
|
Total deferred tax assets
|
134,265
|
|
|
118,647
|
|
Less: valuation allowance
|
(85,393
|
)
|
|
(43,269
|
)
|
Net deferred tax assets
|
$
|
48,872
|
|
|
$
|
75,378
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
(11,345
|
)
|
|
$
|
(14,972
|
)
|
Intangible assets
|
(21,170
|
)
|
|
(37,590
|
)
|
Investments in affiliates
|
(28,530
|
)
|
|
(50,831
|
)
|
Debt costs
|
(2,696
|
)
|
|
(4,288
|
)
|
Other
|
(1,378
|
)
|
|
(854
|
)
|
Total deferred tax liabilities
|
(65,119
|
)
|
|
(108,535
|
)
|
Net deferred tax liabilities
|
$
|
(16,247
|
)
|
|
$
|
(33,157
|
)
|
In March 2016, the FASB issued ASU 2016-09 to update several aspects of the accounting for share-based payment transactions, including the income tax consequences and classification of awards. The Company adopted the provisions of this ASU effective January 1, 2017. The new standard eliminates the requirement that excess tax benefits be realized through a reduction in income taxes payable before a company can recognize them. As a result, the Company recorded a deferred tax asset of
$1.7 million
which was fully offset by a corresponding valuation allowance.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2017, the Company’s tax years for 2013 through 2016 are subject to examination by the tax authorities. With certain exceptions, as of December 31, 2017, the Company’s tax returns for certain past years are still subject to examination by taxing authorities and the use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.
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.
As of December 31, 2017, the Company has recorded a valuation allowance of
$59.4 million
and
$26.0 million
against its domestic and certain foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of December 31, 2016, the valuation allowance on domestic and foreign deferred tax assets were
$33.1 million
and
$10.2 million
, respectively.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
As of December 31, 2017 and 2016, the Company had federal NOL carry-forwards of
$283.5 million
and
$152.7 million
, respectively, and in addition, the Company had State NOL carry-forwards of
$146.2 million
and
$84.9 million
, respectively. In addition, the Company had foreign NOL carry-forward from various jurisdictions of
$124.0 million
and
$56.4 million
as of December 31, 2017 and 2016, respectively. The Company’s federal, State and foreign NOLs will begin to expire during the fiscal years ending in December 31, 2019, 2027, and 2033 respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable.
The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382.
Prior to the Tax Act, U.S. taxes were not provided for on cumulative earnings of the Company’s foreign subsidiaries as the Company had intended to invest the undistributed earnings indefinitely. However, as a result of the Tax Act, all of the accumulated earnings of its foreign subsidiaries were taxed for U.S. federal purposes. The Company has provisionally asserted that the
$105.2 million
earnings of its foreign subsidiaries will continue to be indefinitely reinvested. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional provisions for U.S. states not conforming to the federal Tax Act and foreign withholding taxes may be required. It is not practical to calculate the deferred taxes associated with these earnings because of the variability of multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax credits may be available to reduce federal income taxes in the event of distribution.
As of December 31, 2017 and 2016, the liability for income taxes associated with uncertain tax positions was
$8.7 million
and
$11.0 million
, respectively.
The net decrease in the liabilities during 2017 is primarily attributable to activity related to ongoing examinations by the Canada Revenue Agency regarding the taxability and presence of the subsidiary’s locations in Dubai and whether income derived from Dubai would have constituted taxable earnings subject to Canadian income tax. The net amounts of
$8.2 million
and
$10.7 million
as of December 31, 2017 and 2016, respectively, if recognized, would favorably affect the Company’s effective tax rate.
The following table summarizes the changes to unrecognized tax benefits for the years ended
December 31, 2017
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
11,048
|
|
|
$
|
4,637
|
|
|
$
|
4,237
|
|
Additions from business combinations
|
—
|
|
|
3,492
|
|
|
—
|
|
Increase to prior year positions
|
—
|
|
|
(34
|
)
|
|
—
|
|
Reversal of prior tax positions
|
(3,045
|
)
|
|
(147
|
)
|
|
—
|
|
Additions based on tax positions related to current year
|
725
|
|
|
3,100
|
|
|
400
|
|
Balance at end of year
|
$
|
8,728
|
|
|
$
|
11,048
|
|
|
$
|
4,637
|
|
The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of
December 31, 2017
,
2016
and
2015
, the Company had accrued
$6.5 million
,
$6.1 million
and
$1.4 million
, respectively, of interest and penalties related to uncertain tax positions.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly decrease within the next 12 months as a result of the ongoing audits.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
The following table summarizes the changes in the valuation allowance balance for the years ended
December 31, 2017
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
Amount
|
Balance at December 31, 2014
|
$
|
73,659
|
|
Acquired valuation allowance from business combination
|
(1,400
|
)
|
Decrease in valuation allowance
|
(19,060
|
)
|
Balance at December 31, 2015
|
53,199
|
|
Decrease in valuation allowance
|
(9,930
|
)
|
Balance at December 31, 2016
|
43,269
|
|
Increase in valuation allowance
|
42,124
|
|
Balance at December 31, 2017
|
$
|
85,393
|
|
Note 15. Segment Information
During the first quarter of 2017, the Company reported its operations through three reportable segments: Media & Content, Aviation Connectivity and Maritime & Land Connectivity. Prior to the EMC Acquisition in the third quarter of 2016, the Company operated through
two
operating segments: Media & Content and Connectivity. Following the EMC Acquisition, because the Company had acquired a significant number of new customers in different markets and geographic areas of operations and given a then-new management structure and corresponding organizational changes the Company re-evaluated its reportable segments and concluded that a change to its reportable segments was appropriate and consistent with how its chief operating decision maker (“CODM”) would manage the Company’s operations for purposes of evaluating financial performance and allocating resources. As such, during the fourth quarter of 2016, as a result of the EMC Acquisition, the Company formed a Maritime & Land Connectivity segment.
In the second quarter of 2017 however, following changes in our senior management (including our CODM) and organizational changes across our business, we reorganized our business from
three
operating segments back into
two
operating segments—Media & Content and Connectivity—primarily through integrating the business and operations of our former Aviation Connectivity segment with that of our former Maritime & Land Connectivity segment. Our CODM determined this was appropriate based on the similarities and synergies between these two segments relating to satellite bandwidth and equipment used in those businesses as well as on our restructured organizational reporting lines across our business departments.
The CODM evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our two segments. Total segment gross margin provides the CODM a measure to analyze operating performance of each of the Company’s operating segments and its enterprise value against historical data and competitors’ data, although historical results may not be indicative of future results, as operating performance is highly contingent on many factors, including customer tastes and preferences. All other financial information is reviewed by the CODM on a consolidated basis.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Revenue and contribution profit by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
Media & Content
|
|
|
|
|
|
Licensing & Services
|
$
|
298,935
|
|
|
$
|
318,064
|
|
|
$
|
308,067
|
|
Connectivity
|
|
|
|
|
|
Services
|
282,985
|
|
|
178,471
|
|
|
96,912
|
|
Equipment
|
37,549
|
|
|
33,220
|
|
|
21,051
|
|
Total
|
320,534
|
|
|
211,691
|
|
|
117,963
|
|
Total revenue
|
$
|
619,469
|
|
|
$
|
529,755
|
|
|
$
|
426,030
|
|
Contribution profit
(1)
:
|
|
|
|
|
|
Media & Content
|
$
|
81,026
|
|
|
$
|
104,036
|
|
|
$
|
104,374
|
|
Connectivity
|
76,323
|
|
|
60,249
|
|
|
42,500
|
|
Total contribution profit
|
157,349
|
|
|
164,285
|
|
|
146,874
|
|
Other operating expenses
|
437,157
|
|
|
326,948
|
|
|
155,685
|
|
Loss from operations
|
$
|
(279,808
|
)
|
|
$
|
(162,663
|
)
|
|
$
|
(8,811
|
)
|
|
|
(1)
|
Includes depreciation expense of
$0.6 million
(Media & Content) and
$29.2 million
(Connectivity) for the year ended
December 31, 2017
,
$0.7 million
(Media & Content) and
$10.2 million
(Connectivity) for the year ended
December 31, 2016
, and
$0.7 million
(Media & Content) and
$2.2 million
(Connectivity) for the year ended
December 31, 2015
. Also includes amortization expense of
$0.2 million
(Media & Content) for the year ended December 31, 2015.
|
The Company’s total assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Segment assets:
|
|
|
|
Media & Content
|
$
|
362,216
|
|
|
$
|
391,668
|
|
Connectivity
|
479,714
|
|
|
690,463
|
|
Total segment assets
|
841,930
|
|
|
1,082,131
|
|
Corporate assets
|
18,654
|
|
|
17,304
|
|
Total assets
|
$
|
860,584
|
|
|
$
|
1,099,435
|
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Geographical revenue by segment as presented below is based on the billing location of the customer. Revenue from external customers was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Media & Content:
|
|
|
|
|
|
United States and Canada
|
$
|
67,807
|
|
|
$
|
80,765
|
|
|
$
|
78,662
|
|
Europe
|
52,551
|
|
|
48,527
|
|
|
39,738
|
|
Asia and Middle East
|
149,644
|
|
|
152,758
|
|
|
155,818
|
|
Other
|
28,933
|
|
|
36,014
|
|
|
33,849
|
|
Total
|
$
|
298,935
|
|
|
$
|
318,064
|
|
|
$
|
308,067
|
|
Connectivity:
|
|
|
|
|
|
United States
|
$
|
195,363
|
|
|
$
|
150,532
|
|
|
$
|
102,598
|
|
Europe
|
77,102
|
|
|
37,319
|
|
|
14,833
|
|
Africa, Middle East and Asia
|
26,966
|
|
|
13,759
|
|
|
—
|
|
Other
|
21,103
|
|
|
10,081
|
|
|
532
|
|
Total
|
$
|
320,534
|
|
|
$
|
211,691
|
|
|
$
|
117,963
|
|
|
$
|
619,469
|
|
|
$
|
529,755
|
|
|
$
|
426,030
|
|
The following table summarizes net property, plant and equipment by country (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Media & Content:
|
|
|
|
United States and Canada
|
$
|
1,628
|
|
|
$
|
2,803
|
|
United Kingdom
|
4,531
|
|
|
3,023
|
|
India
|
1,745
|
|
|
2,013
|
|
Other
|
346
|
|
|
1,338
|
|
Total
|
$
|
8,250
|
|
|
$
|
9,177
|
|
Connectivity:
|
|
|
|
United States
|
$
|
162,133
|
|
|
$
|
130,924
|
|
Germany
|
15,316
|
|
|
16,321
|
|
Other
|
4,574
|
|
|
4,139
|
|
Total
|
$
|
182,023
|
|
|
$
|
151,384
|
|
Corporate
|
|
|
|
United States
|
$
|
4,756
|
|
|
$
|
5,488
|
|
Total
|
$
|
4,756
|
|
|
$
|
5,488
|
|
|
$
|
195,029
|
|
|
$
|
166,049
|
|
Note 16. 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.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
At
December 31, 2017
and
2016
, 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. Of our cash and cash equivalents as of
December 31, 2017
, approximately
$19.7 million
was held by our foreign subsidiaries. If these funds were repatriated for use in our U.S. operations, we may be required to pay income taxes in the U.S. on the repatriated amount at the tax rates then in effect, reducing the net cash proceeds to us after repatriation. In the event we elect to repatriate any of these funds we believe we have sufficient net operating losses for the foreseeable future to offset any repatriated income. As a result, we do not expect any such repatriation would create a tax liability in the U.S. or have a material impact on our effective tax rate.
A substantial portion of the Company’s revenue is generated through arrangements with Southwest Airlines. The Company may not be successful in renewing these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The percentage of revenue generated through the customer representing more than 10% of consolidated revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Southwest Airlines as percentage of total revenue
|
19
|
%
|
|
22
|
%
|
|
23
|
%
|
Southwest Airlines as percentage of total Connectivity revenue
|
36
|
%
|
|
54
|
%
|
|
85
|
%
|
No other customer accounted for revenue greater than 10% for the three years presented. Accounts receivable from Southwest Airlines represented
10%
,
12%
and
6%
of total accounts receivable at
December 31, 2017
,
2016
, and 2015, respectively.
Note 17. Net Loss Per Share
Basic (loss) income per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the period. Diluted loss 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 consist of stock options, restricted stock units (including performance stock units), liability warrants, warrants issued to third parties and accounted for as equity instruments convertible senior notes and contingently issuable shares, have been excluded from the diluted loss per share calculation when the effect of including such shares is anti-dilutive. As illustrated in the table below, the change in the fair value of the Company’s warrants and contingently issuable shares, 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 year ended December 31, 2017. Common stock to be issued upon the exercise of warrant instruments classified as a liability is included in the calculation of diluted loss per share when dilutive.
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted net loss per share of common stock (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss) (Numerator):
|
|
|
|
|
|
Net loss
|
$
|
(357,114
|
)
|
|
$
|
(112,932
|
)
|
|
$
|
(2,126
|
)
|
Less: adjustment for change in fair value on warrants liability for diluted EPS after assumed exercise of warrants liability
|
—
|
|
|
—
|
|
|
11,938
|
|
Net loss for dilutive EPS
|
$
|
(357,114
|
)
|
|
$
|
(112,932
|
)
|
|
$
|
(14,064
|
)
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
87,733
|
|
|
81,269
|
|
|
77,558
|
|
Dilutive effect of stock options and warrants
|
—
|
|
|
—
|
|
|
836
|
|
Weighted average common shares outstanding - diluted
|
87,733
|
|
|
81,269
|
|
|
78,394
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
Basic
|
$
|
(4.07
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
$
|
(4.07
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(0.18
|
)
|
The following weighted average common equivalent shares are excluded from the calculation of the Company’s net loss per share as their inclusion would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Employee stock options
|
6,061
|
|
|
6,203
|
|
|
3,200
|
|
Restricted stock units (including performance stock units)
|
1,364
|
|
|
306
|
|
|
44
|
|
Non-employees stock options
|
—
|
|
|
—
|
|
|
1
|
|
Equity warrants
(1)
|
353
|
|
|
1,165
|
|
|
430
|
|
Public SPAC Warrants
(2)
|
6,173
|
|
|
6,173
|
|
|
—
|
|
Convertible notes
|
4,447
|
|
|
4,447
|
|
|
3,850
|
|
EMC deferred consideration
(3)
|
2,795
|
|
|
1,428
|
|
|
—
|
|
Contingently issuable shares
(4)
|
900
|
|
|
354
|
|
|
—
|
|
|
|
(1)
|
These are Legacy Row 44 warrants originally issuable for Row 44 common stock and Row 44 Series C preferred stock, later became issuable for our Common Stock. During the six months ended
June 30, 2017
, these Legacy Row 44 warrants expired. See
Note 12. Common Stock, Share-Based Awards and Warrants
.
|
|
|
(3)
|
In connection with the EMC Acquisition on July 27, 2016 (the “EMC Acquisition Date”), we were obligated to pay
$25.0 million
in cash or stock, at our option, on July 27, 2017, which we elected to pay in
5,080,049
newly issued shares of our common stock on that date. See
Note 10. Commitments and Contingencies
. This EMC deferred consideration represents those shares.
|
|
|
(4)
|
In connection with a Sound Recording Settlement, we are obligated to issue
500,000
shares of our common stock when and if the closing price of our common stock exceeds
$10.00
per share, and
400,000
shares of our common stock when and if the closing price of our common stock exceeds
$12.00
per share. See
Note 10. Commitments and Contingencies
.
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Note 18. Quarterly Financial Data (Unaudited)
The following quarterly Consolidated Statements of Operations for the years
December 31, 2017
and
2016
are unaudited, and have been prepared on a basis consistent with our audited consolidated annual financial statements, and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Mar. 31, 2016
|
|
June 30, 2016
|
|
Sept. 30, 2016
(1)
|
|
Dec. 31, 2016
|
|
Mar. 31, 2017
|
|
June 30, 2017
|
|
Sept. 30, 2017
|
|
Dec. 31, 2017
|
Revenue
|
$
|
113,817
|
|
|
$
|
112,265
|
|
|
$
|
146,909
|
|
|
$
|
156,764
|
|
|
$
|
152,592
|
|
|
$
|
155,742
|
|
|
$
|
151,537
|
|
|
$
|
159,598
|
|
Cost of sales
|
76,768
|
|
|
75,086
|
|
|
103,348
|
|
|
110,268
|
|
|
110,540
|
|
|
118,090
|
|
|
112,951
|
|
|
120,539
|
|
Gross margin
|
37,049
|
|
|
37,179
|
|
|
43,561
|
|
|
46,496
|
|
|
42,052
|
|
|
37,652
|
|
|
38,586
|
|
|
39,059
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
4,672
|
|
|
6,491
|
|
|
8,390
|
|
|
11,388
|
|
|
11,012
|
|
|
10,029
|
|
|
9,332
|
|
|
10,565
|
|
Product development
(6)
|
8,746
|
|
|
8,416
|
|
|
7,916
|
|
|
12,640
|
|
|
7,649
|
|
|
7,942
|
|
|
11,328
|
|
|
8,689
|
|
General and administrative
(1) (2)
|
19,220
|
|
|
18,447
|
|
|
44,728
|
|
|
32,800
|
|
|
35,321
|
|
|
34,929
|
|
|
39,129
|
|
|
38,842
|
|
Provision for legal settlements
(2)
|
2,001
|
|
|
38,142
|
|
|
1,545
|
|
|
1,758
|
|
|
475
|
|
|
—
|
|
|
310
|
|
|
650
|
|
Amortization of intangible assets
|
7,403
|
|
|
7,486
|
|
|
9,166
|
|
|
11,593
|
|
|
11,008
|
|
|
10,860
|
|
|
10,981
|
|
|
11,106
|
|
Goodwill impairment
(7)
|
—
|
|
|
—
|
|
|
—
|
|
|
64,000
|
|
|
78,000
|
|
|
—
|
|
|
—
|
|
|
89,000
|
|
Total operating expenses
|
42,042
|
|
|
78,982
|
|
|
71,745
|
|
|
134,179
|
|
|
143,465
|
|
|
63,760
|
|
|
71,080
|
|
|
158,852
|
|
Income (loss) from operations
|
(4,993
|
)
|
|
(41,803
|
)
|
|
(28,184
|
)
|
|
(87,683
|
)
|
|
(101,413
|
)
|
|
(26,108
|
)
|
|
(32,494
|
)
|
|
(119,793
|
)
|
Interest expense, net
|
(804
|
)
|
|
(613
|
)
|
|
(6,412
|
)
|
|
(10,369
|
)
|
|
(10,964
|
)
|
|
(14,807
|
)
|
|
(18,164
|
)
|
|
(14,519
|
)
|
Loss from extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,389
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Income from equity method investments
(1) (9)
|
—
|
|
|
—
|
|
|
2,065
|
|
|
1,764
|
|
|
1,539
|
|
|
601
|
|
|
1,770
|
|
|
(16,334
|
)
|
Change in fair value of derivatives
|
5,865
|
|
|
10,926
|
|
|
1,191
|
|
|
7,533
|
|
|
2,920
|
|
|
(445
|
)
|
|
196
|
|
|
839
|
|
Other income (expense), net
(3)
|
680
|
|
|
(5,934
|
)
|
|
631
|
|
|
(1,703
|
)
|
|
(488
|
)
|
|
653
|
|
|
(123
|
)
|
|
(478
|
)
|
Income (loss) before income taxes
|
748
|
|
|
(37,424
|
)
|
|
(30,709
|
)
|
|
(90,458
|
)
|
|
(122,795
|
)
|
|
(40,106
|
)
|
|
(48,815
|
)
|
|
(150,285
|
)
|
Income tax expense (benefit)
(1)
|
3,160
|
|
|
736
|
|
|
(50,063
|
)
|
|
1,256
|
|
|
2,816
|
|
|
4,024
|
|
|
4,153
|
|
|
(15,880
|
)
|
Net income (loss)
|
$
|
(2,412
|
)
|
|
$
|
(38,160
|
)
|
|
$
|
19,354
|
|
|
$
|
(91,714
|
)
|
|
$
|
(125,611
|
)
|
|
$
|
(44,130
|
)
|
|
$
|
(52,968
|
)
|
|
$
|
(134,405
|
)
|
Net income (loss) per share
(4)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.03
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
0.23
|
|
|
$
|
(1.07
|
)
|
|
$
|
(1.47
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(1.51
|
)
|
Diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
0.23
|
|
|
$
|
(1.07
|
)
|
|
$
|
(1.47
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(1.51
|
)
|
Weighted average shares outstanding
(5)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
78,643
|
|
|
78,127
|
|
|
82,874
|
|
|
85,369
|
|
|
85,440
|
|
|
85,496
|
|
|
89,194
|
|
|
89,222
|
|
Diluted
|
78,643
|
|
|
78,127
|
|
|
85,081
|
|
|
85,369
|
|
|
85,440
|
|
|
85,496
|
|
|
89,194
|
|
|
89,222
|
|
|
|
(1)
|
On July 27, 2016, the Company acquired EMC (Maritime & Land Connectivity segment). The financial data for the quarter ended September 30, 2016 includes the operating results of EMC from the acquisition date through September 30, 2016. In connection with this acquisition, the Company released the valuation allowance due to the deferred tax liabilities created of
$53.9 million
, offset by foreign income taxes of
$4.8 million
resulting from the foreign subsidiaries’ contribution to pretax income, withholding taxes of
$2.7 million
and effects of permanent differences. Also, in connection with this acquisition, the Company acquired interests in two equity method investments. The related transaction and integration expenses of
$12.7 million
,
$1.9 million
and
$0.8 million
were incurred during the quarters ended September 30, 2016, June 30, 2016 and March 31, 2016, respectively, in General and administrative in the quarterly Consolidated Statements of Operations.
|
|
|
(2)
|
During the quarter ended June 30, 2016, the Company recorded a one-time charge of
$38.1 million
to settle sound recording liabilities under the Sound Recording Settlements. The Company also engaged in settlement negotiations with airlines regarding related liabilities. The presentation of the Provision for legal settlements for applicable prior quarters have been reclassified from General and administrative to conform with this presentation.
|
|
|
(3)
|
Other income (expense), net, for the quarter ended June 30, 2016 includes a one-time
$4.4 million
write-off of a related party note receivable and accrued interest and a
$0.9 million
impairment of internally developed software.
|
|
|
(4)
|
Quarterly and year-to-date computations of net income (loss) per common share amounts are calculated independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year.
|
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
|
|
(5)
|
During the quarter ended June 30, 2016, the Company repurchased
0.6 million
shares of its common stock for consideration of
$5.2 million
in the aggregate under the stock repurchase program authorized by the Board of Directors in March 2016. In connection with the EMC Acquisition on July 27, 2016, the Company issued approximately
5.5 million
shares of its common stock at the closing as part of the purchase price. On the first anniversary of the EMC Acquisition, on July 27, 2017, the Company issued to the EMC seller approximately
5.1 million
additional shares of the Company’s common stock. Pursuant to the EMC purchase agreement, 50% of the newly issued shares were valued at
$8.40
per share, and the other 50% was valued at the volume-weighted average price of a share of Company common stock measured two days prior to the first anniversary date. In addition, as a result of the Sound Recording Settlements entered into with major record labels and publishers in 2016, including UMG, the Company issued
1.8 million
shares of its common stock during the quarter ended September 30, 2016 as part of the settlement payments.
|
|
|
(6)
|
Product development for the quarter ended December 31, 2016 includes an impairment of internally developed software of
$3.2 million
.
|
|
|
(7)
|
During the quarter ended
December 31, 2017
we determined that goodwill relating to our Maritime & Land Connectivity and Aviation Connectivity reporting units was impaired and we recognized an impairment loss of
$45.0 million
and
$44.0 million
, respectively. Additionally, during the quarter ended March 31, 2017 we recorded a goodwill impairment loss of
$78.0 million
in our Maritime & Land Connectivity reporting unit. During the quarter ended
December 31, 2016
we recorded an impairment loss of
$64.0 million
to our Maritime & Land Connectivity reporting unit. See
Note 5. Goodwill
.
|
|
|
(8)
|
In January 2017 we entered into a new credit agreement consisting of a
$500 million
senior secured term loan facility and a
five
-year
$85 million
senior secured revolving credit facility and concurrently paid-off in full the indebtedness assumed upon the EMC Acquisition of
$412.4 million
. In connection with this refinancing transaction we incurred a loss on extinguishment of debt of
$14.4 million
recorded in the statement of operations during the quarter ended March 31, 2017. See
Note 9. Financing Arrangements
.
|
|
|
(9)
|
During the fourth quarter of 2017 we completed an assessment of the recoverability of our equity method investments and determined that the carrying value of our interest in WMS exceeded the estimated fair value of our interest and accordingly we recorded an impairment loss of
$16.7 million
. See
Note 7. Equity Method Investments
.
|
Note 19. Subsequent Events
Searchlight Investment
The Securities Purchase Agreement and the Notes
On March 8, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Searchlight II TBO, L.P. and Searchlight II TBO-W, L.P. (together, “Searchlight”). The investment transactions thereunder (the “Searchlight Transactions”) closed on March 27, 2018 (the “Closing Date”). Under the investment transaction, the Company sold to Searchlight II TBO, L.P.
$150,000,000
in aggregate principal amount of its Second Lien Notes (the “Notes”), and to Searchlight II TBO-W, L.P. warrants to acquire an aggregate of
18,065,775
shares of the Company’s common stock, par value
$0.0001
per share (the “Common Stock”), at an exercise price of
$0.01
per share (the “Penny Warrants”), and warrants to acquire an aggregate of
13,000,000
shares of Common Stock at an exercise price of
$1.57
per share (the “Market Warrants” and, together with the Penny Warrants, the “Warrants”), for aggregate price of
$150,000,000
.
The Company intends to use a portion of the proceeds from the sale of the Notes and the Warrants to repay the full
$78 million
outstanding principal balance on the Company’s revolving credit facility under its Credit Agreement (as defined below), following which the full facility will remain available to the Company. The Company anticipates using the remaining proceeds for growth initiatives and other general corporate purposes.
The Notes mature on June 30, 2023. Interest on the Notes will initially be payable in kind (compounded semi-annually) at a rate of
12.0%
per annum. Interest will automatically convert to accruing cash pay interest at a rate of
10.0%
per annum upon the earlier of (i) March 15, 2021 and (ii) the last day of the most recently ended fiscal quarter of the Company for which financial statements have been delivered pursuant to the terms of the Purchase Agreement for which the Company’s “total net leverage ratio” has decreased to
3.39
to 1.0. Our “total net leverage ratio” is as defined in the Purchase Agreement, and uses a “Consolidated EBITDA” definition from the Purchase Agreement that is different than the “Adjusted EBITDA” figure that we publicly report to our investors.
Each of the Company’s subsidiaries that guarantees the Company’s obligations under its 2017 Credit Agreement guarantee the Notes (the “Guarantors”) pursuant to a guaranty agreement (the “Guaranty”). The Notes and the guarantees thereof are subordinated in right of payment to the obligations of the Company and the Guarantors under the Credit Agreement and are secured by the same assets securing the obligations of the Company and the Guarantors under the Credit Agreement on a second lien basis, subject to the terms of an intercreditor and subordination agreement (the “Intercreditor Agreement”) among the Company, the Guarantors, the Administrative Agent and Cortland Capital Markets Services, as the collateral agent (the “Collateral Agent”).
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
Prior to the third anniversary of the Closing Date, the Company may redeem the Notes at a price equal to
100.0%
of the principal amount of the Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to (but excluding) the date of redemption. Thereafter, each Note will be redeemable at
105.0%
of the principal amount thereof from the third anniversary of the Closing Date until (and excluding) the fourth anniversary of the Closing Date, at
102.5%
of the principal amount thereof from the fourth anniversary of the Closing Date until (and excluding) the fifth anniversary of the Closing Date, and thereafter at
100.0%
of the principal amount thereof, plus, in each case, accrued and unpaid interest thereon, if any, to (but excluding) the redemption date. Upon a “change of control” (as defined in the Purchase Agreement), the Company must offer to purchase the Notes at a price in cash equal to
101%
of the principal amount of such Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of purchase.
The Purchase Agreement contains affirmative and negative covenants of the Company and its subsidiaries consistent with those in the Credit Agreement (including limitations on the amount of first lien indebtedness that may be incurred) and contains customary events of default, upon the occurrence and during the continuance of which the majority holders of the Notes may declare all obligations under the Notes to become immediately due and payable. There are no financial “maintenance covenants” in the Purchase Agreement or the Notes.
The Company made customary representations and warranties in the Purchase Agreement.
On the Closing Date, the Company and the Guarantors entered into a security agreement with the Collateral Agent (the “Security Agreement”). Under the Security Agreement, each of the Company and the Guarantors granted and pledged to the Collateral Agent, to secure the payment and performance in full of all of the obligations under the Notes, a security interest in substantially all of its respective assets, and all proceeds and products and supporting obligations in respect thereof, subject to customary limitations, exceptions, exclusions and qualifications, and the Security Agreement is subject to the terms of the Intercreditor Agreement.
Searchlight will not be permitted to transfer its Notes before January 1, 2021, except to its controlled affiliates.
The Warrants
The Warrants are exercisable at any time and from time to time after the Vesting Date (as defined below) until on or prior to the close of business on the tenth anniversary of the Closing Date. The Warrants vest and become exercisable on January 1, 2021 (the “Vesting Date”), if the 45-day volume-weighted average price of the Common Stock (as reported by Nasdaq) is at or above (i)
$4.00
, in the case of the Penny Warrants, and (ii)
$2.40
, in the case of the Market Warrants, in each case at any time following the Closing Date.
The holders of the Warrants cannot exercise the Warrants if and to the extent, as a result of such exercise, either (i) such holder’s (together with its affiliates) aggregate voting power on any matter that could be voted on by holders of the Common Stock would exceed
19.9%
of the maximum voting power outstanding or (ii) such holder (together with its affiliates) would beneficially own more than
19.9%
of the then outstanding Common Stock, subject to customary exceptions in connection with public sales or the consummation of a specified liquidity event described in the Warrants.
The Warrants also include customary anti-dilution adjustments.
Warrantholders Agreement
On the Closing Date, the Company and Searchlight II TBO-W, L.P. entered into a warrantholders agreement (the “Warrantholders Agreement”), which will set forth rights and obligations of the Company and Searchlight as a holder of the Warrants, as described below.
Board Representation
Pursuant to the terms of the Warrantholders Agreement, on the Closing Date, the Company increased the size of its board of directors (the “Board”) to eleven members, and appointed each of Eric Zinterhofer and Eric Sondag as Class III directors (as such term is used in the Company’s certificate of incorporation) of the Board, with a term expiring in 2020. For so long as Searchlight and its controlled affiliates beneficially own at least
25%
of the number of Penny Warrants issued on the Closing Date (and/or the respective shares of Common Stock issued in connection with the exercise of the Penny Warrants), Searchlight shall have the right
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
to nominate a number (rounded up to the nearest whole number) of individuals for election to the Board equal to the product of the following (such individuals, the “Searchlight Nominees”):
|
|
•
|
the number of directors then serving on the Board,
multiplied by
|
|
|
•
|
a fraction, the numerator of which is the total number of outstanding shares of Common Stock underlying the Penny Warrants beneficially owned by Searchlight (after giving effect to the exercise of the Penny Warrants) and the denominator of which is the sum of (A) the total number of outstanding shares of Common Stock plus (B) the number of shares of Common Stock underlying the Penny Warrants that have not yet been exercised;
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Searchlight will not be entitled to nominate more than one individual to the Board if it beneficially owns less than
50%
of the Penny Warrants (or the underlying shares of Common Stock) issued or issuable on the Closing Date. In no event will Searchlight be entitled to nominate more than two individuals to the Board.
Searchlight’s rights to Board representation terminate if Searchlight and its affiliates have an employee, member or partner (other than a limited partner who is an investor in Searchlight) who is a director or executive officer of a competitor of the Company, or if Searchlight has a portfolio company that is a competitor of the Company.
Stock Buy-back Restriction
Until the earlier of (i) the date on which Searchlight no longer beneficially owns at least
25%
of the number of Market Warrants issued on the Closing Date (and/or the respective shares of Common Stock issued in connection with the exercise of the Market Warrants) and (ii) January 1, 2021, without the prior consent of Searchlight, the Company will not directly or indirectly redeem, purchase or otherwise acquire (any such event, an “Acquisition”) any equity securities of the Company for a consideration per share (plus, in the case of any options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) greater than the market price (as defined in the Warrants) per share of Common Stock immediately prior to the earlier of (x) the announcement of such Acquisition or (y) such Acquisition.
Warrant Transfer Restrictions
Searchlight is not permitted to transfer its Warrants prior to January 1, 2021, except to its controlled affiliates or in connection with certain tender offers, exchange offers, mergers or similar transactions. The Warrants and the underlying shares of Common Stock are freely transferable by Searchlight on and after January 1, 2021.
Registration Rights
Searchlight has customary shelf, demand and piggyback registration rights with respect to the Common Stock (including shares of Common Stock issuable upon exercise of the Warrants) that it holds, including demand registrations and underwritten “shelf takedowns,” subject to specified restrictions, thresholds and the Company’s eligibility to use a registration statement on Form S-3.
Participation Rights
Until the earlier of (i) the fifth anniversary of the Closing Date and (ii) the date Searchlight no longer holds at least
50%
of the Penny Warrants (or the respective shares of Common Stock underlying such Penny Warrants), Searchlight has participation rights with respect to issuances of common equity securities by the Company, subject to exceptions. These rights entitle Searchlight to opt to participate in future issuances by the Company of common equity or common equity-linked securities, subject to customary exceptions.
Standstill
Until the earlier of (i) the 18-month anniversary of the Closing Date and (ii) the date on which Searchlight owns less than 10% of the outstanding Common Stock (directly or on an as-exercised basis), neither Searchlight nor its affiliates may (a) acquire any voting equity securities or material assets of the Company if Searchlight (together with its affiliates) would beneficially hold in the aggregate more than
9.9%
of the Company’s
2.75%
convertible senior notes due 2035 or
9.9%
of the Company’s Common Stock, (b) acquire all or a material part of the Company or its subsidiaries, (c) make, or in any way participate in any “proxy
Global Eagle Entertainment Inc.
Notes to Consolidated Financial Statements
contest” or other solicitation of proxies, (d) form, join or in any way participate in a “group” (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) with respect to any voting securities of the Company or any of its Subsidiaries, (e) seek to influence or control the Company’s management or policies, (f) directly or indirectly enter into any discussions, negotiations, arrangements or understandings with any other person with respect to any of the foregoing activities, (g) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection any of the foregoing activities or (h) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing.
Amendment to Senior Secured Credit Agreement
In connection with the Searchlight Transactions, on March 8, 2018, the Company entered into the Sixth Amendment to the Credit Agreement (the “Sixth Amendment”), among the Company, the Guarantors, the lenders party thereto and the Administrative Agent. The Sixth Amendment amends the terms of the Credit Agreement, in part, by:
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resetting the non-call period by modifying the definition of the “Relevant Call Date” to mean June 30, 2020;
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modifying the mandatory prepayments provision therein to require the Company, following the filing of its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and the delivery of a budget and certain projections for the 2018 fiscal year to Searchlight, to repay all then outstanding revolving credit loans outstanding under the Credit Agreement, including outstanding interest thereon;
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modifying the debt covenant therein to permit the incurrence of indebtedness in connection with the issuance of
$150,000,000
in aggregate principal amount of the Notes and any refinancing thereof and adding a corresponding exception to the lien covenant; and
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modifying the junior-debt-prepayments covenant therein to prohibit the Company from making interest payments in respect of the Notes in cash prior to the earlier of (i) March 15, 2021 and (ii) such time as the Company’s “total net leverage ratio” has decreased to
3.39
to 1.0. As noted above, our “total net leverage ratio” is as defined in the Purchase Agreement, and uses a “Consolidated EBITDA” definition from the Purchase Agreement that is different than the “Adjusted EBITDA” figure that we publicly report to our investors.
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The Company did not pay the lenders any fees in connection with the Sixth Amendment.
ITEM 16. FORM 10-K SUMMARY
None.
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