UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
FOR THE TRANSITION PERIOD FROM __________ TO ________

COMMISSION FILE NUMBER 001-35176
geelogoa59.jpg
GLOBAL EAGLE ENTERTAINMENT INC.

(Exact name of registrant as specified in its charter)
Delaware
 
27-4757800
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
6080 Center Drive, Suite 1200
 
 
Los Angeles, California
 
90045
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (310) 437-6000
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class
 
Ticker
 
Name of exchange on which registered
Common Stock, $0.0001 par value
 
ENT
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Smaller reporting company
þ
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
(Outstanding as of June 30, 2020)
COMMON STOCK, $0.0001 PAR VALUE
 
3,753,807

SHARES


Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
ITEM 4.
 
 
 
 
ITEM 1.
 
 
ITEM 6.
 
 
 
 
 



Table of Contents

EXPLANATORY NOTE

On May 8, 2020, Global Eagle Entertainment Inc. (the “Company”) filed a Current Report on Form 8-K, and is filing this Quarterly Report on Form 10-Q (the “Quarterly Report”), in reliance on the Order of the Securities and Exchange Commission (the “SEC”), dated March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934 modifying exemptions from the reporting and proxy delivery requirements for public companies (Release No. 34-88465) (the “Order”).

In March 2020, the World Health Organization declared a pandemic resulting from the COVID-19 viral disease ("COVID-19").
The COVID-19 pandemic has disrupted, and continues to disrupt, the Company’s day-to-day activities, including limiting the Company’s access to facilities, as well as the day-to-day activities of the Company’s financial service providers. These disruptions have limited support from the Company’s staff and professional advisors.  This has, in turn, impacted the Company’s ability to complete and file this Quarterly Report by May 15, 2020, the original due date.



2

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS


3

Table of Contents


GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
March 31, 2020
 
December 31, 2019
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
54,193

 
$
23,964

Restricted cash
703

 
498

Accounts receivable, net
82,796

 
88,219

Inventories, net
25,343

 
26,695

Prepaid expenses
4,698

 
6,753

Other current assets
12,121

 
12,839

TOTAL CURRENT ASSETS
179,854

 
158,968

Content library
4,437

 
3,645

Property and equipment, net
132,769

 
145,295

Right-of-use assets, net
35,614

 
39,187

Goodwill
137,359

 
159,607

Intangible assets, net
49,275

 
55,483

Equity method investments
64,300

 
78,886

Other non-current assets
26,868

 
27,509

TOTAL ASSETS
$
630,476

 
$
668,580

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
188,513

 
$
178,930

Deferred revenue
9,535

 
12,317

Current portion of long-term debt and finance leases
804,575

 
15,678

Current portion of operating lease liabilities
7,169

 
8,319

Other current liabilities
10,090

 
7,081

TOTAL CURRENT LIABILITIES
1,019,882

 
222,325

Deferred revenue, non-current
86

 
86

Long-term debt and finance leases
16,805

 
757,384

Long-term operating lease liabilities
21,739

 
23,636

Deferred tax liabilities
4,019

 
5,894

Other non-current liabilities
23,796

 
34,409

TOTAL LIABILITIES
1,086,327

 
1,043,734

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ DEFICIT:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

Common stock, $0.0001 par value; 375,000,000 shares authorized, 3,989,188 and 3,837,920 shares issued, 3,867,043 and 3,715,775 shares outstanding, at March 31, 2020 and December 31, 2019, respectively
10

 
10

Treasury stock, 122,145 shares at March 31, 2020 and December 31, 2019
(30,659
)
 
(30,659
)
Additional paid-in capital
820,239

 
818,961

Subscriptions receivable
(597
)
 
(597
)
 Accumulated deficit
(1,245,113
)
 
(1,162,901
)
 Accumulated other comprehensive loss
269

 
32

TOTAL STOCKHOLDERS’ DEFICIT
(455,851
)
 
(375,154
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
630,476

 
$
668,580


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


4

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
 
 
 
Licensing and services
$
135,645

 
$
150,478

Equipment
8,520

 
16,141

Total revenue
144,165

 
166,619

Cost of sales:
 
 
 
Licensing and services
113,284

 
123,269

Equipment
7,523

 
10,925

Total cost of sales
120,807

 
134,194

Gross margin
23,358

 
32,425

Operating expenses:
 
 
 
Sales and marketing
5,340

 
8,249

Product development
5,963

 
6,979

General and administrative
30,576

 
27,980

Provision for legal settlements

 
508

Amortization of intangible assets
6,142

 
7,799

Goodwill impairment
22,130

 

Total operating expenses
70,151

 
51,515

Loss from operations
(46,793
)
 
(19,090
)
Other (expense) income:
 
 
 
Interest expense, net
(22,587
)
 
(21,277
)
Income (loss) from equity method investments including impairment losses
(10,858
)
 
2,129

Change in fair value of derivatives
207

 
938

Other income (expense), net
232

 
(179
)
Loss before income taxes
(79,799
)
 
(37,479
)
Income tax expense
1,126

 
130

Net loss
$
(80,925
)
 
$
(37,609
)
 
 
 
 
Net loss per share – basic and diluted
$
(21.77
)
 
$
(10.23
)
Weighted average shares outstanding – basic and diluted
3,718

 
3,673


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


5

Table of Contents

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

 
 
Three Months Ended March 31,
 
 
2020
 
2019
Net loss
 
$
(80,925
)
 
$
(37,609
)
Other comprehensive income (loss):
 
 
 
 
Unrealized foreign currency translation adjustments
 
237

 
233

Comprehensive loss
 
$
(80,688
)
 
$
(37,376
)

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



6

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED)
(in thousands)

 
Common Stock
 
 Treasury Stock
 
Additional
 
Subscriptions
 
Accumulated
 
Accumulated Other
 
Total
 
Shares
 
Amount
 
Shares
 
 Amount
 
Paid-in Capital
 
Receivable
 
Deficit
 
Comprehensive Loss
 
Stockholders’ Deficit
Balance at December 31, 2019
3,838

 
$
10

 
(122
)
 
$
(30,659
)
 
$
818,961

 
$
(597
)
 
$
(1,162,901
)
 
$
32

 
$
(375,154
)
Restricted stock units vested and distributed, net of tax
29

 

 

 

 
(61
)
 

 

 

 
(61
)
Stock-based compensation

 

 

 

 
1,339

 

 

 

 
1,339

Impact of adoption of ASU 2016-02

 

 

 

 

 

 
(1,287
)
 

 
(1,287
)
Net loss

 

 

 

 

 

 
(80,925
)
 

 
(80,925
)
Unrealized foreign currency translation adjustments

 

 

 

 

 

 

 
237

 
237

Balance at March 31, 2020
3,867

 
$
10

 
(122
)
 
$
(30,659
)
 
$
820,239

 
$
(597
)
 
$
(1,245,113
)
 
$
269

 
$
(455,851
)

 
Common Stock
 
 Treasury Stock
 
Additional
 
Subscriptions
 
Accumulated
 
Accumulated Other
 
Total
 
Shares
 
Amount
 
Shares
 
 Amount
 
Paid-in Capital
 
Receivable
 
Deficit
 
Comprehensive Loss
 
Stockholders’ Deficit
Balance at December 31, 2018
3,793

 
$
10

 
(122
)
 
$
(30,659
)
 
$
814,488

 
$
(597
)
 
$
(1,009,458
)
 
$
(119
)
 
$
(226,335
)
Restricted stock units vested and distributed, net of tax
45

 

 

 

 
(117
)
 

 

 

 
(117
)
Stock-based compensation

 

 

 

 
2,389

 

 

 

 
2,389

Net loss

 

 

 

 

 

 
(37,609
)
 

 
(37,609
)
Tax effect relating to the beneficial conversion feature of Second Lien Notes

 

 

 

 
(2,688
)
 

 

 

 
(2,688
)
Unrealized foreign currency translation adjustments

 

 

 

 

 

 

 
233

 
233

Balance at March 31, 2019
3,838

 
$
10

 
(122
)
 
$
(30,659
)
 
$
814,072

 
$
(597
)
 
$
(1,047,067
)
 
$
114

 
$
(264,127
)

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


7

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


 
Three Months Ended March 31,
 
2020
 
2019
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(80,925
)
 
$
(37,609
)
Adjustments to reconcile net loss to net cash used in operations:
 
 
 
Depreciation and amortization
19,712

 
21,952

Amortization of right-of-use asset
1,933

 

Amortization of content library
2,134

 
1,974

Non-cash interest expense, net
7,953

 
6,868

Change in fair value of derivatives
(207
)
 
(938
)
Stock-based compensation
1,128

 
1,289

Impairment of goodwill
22,130

 

Tax effect of Second Lien Notes’ beneficial conversion feature

 
(2,688
)
Loss on disposal of fixed assets
453

 
164

(Gain) loss on equity method investments including impairment losses
10,858

 
(2,129
)
Provision for expected credit losses
2,987

 
393

Deferred income taxes
(1,870
)
 
(8
)
Other non-cash adjustments
(2,138
)
 
1,347

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,149

 
(9,567
)
Inventories
3,489

 
416

Prepaid expenses and other current assets
6,448

 
(2,979
)
Content library
(2,768
)
 
(647
)
Other non-current assets
522

 
(7,310
)
Accounts payable and accrued liabilities
9,616

 
9,473

Deferred revenue
(2,782
)
 
727

Other liabilities
(3,512
)
 
9,041

Net cash used in operating activities
(3,690
)
 
(10,231
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(1,477
)
 
(9,083
)
Net cash used in investing activities
(1,477
)
 
(9,083
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings on revolving credit facility
44,300

 
17,900

Repayment of revolving credit facility
(7,000
)
 
(21,000
)
Repayments of indebtedness
(2,070
)
 
(3,324
)
Borrowings from related party

 
7,350

Net cash provided by financing activities
35,230

 
926

Effects of exchange rate changes on cash, cash equivalents and restricted cash
371

 
265

Net increase (decrease) in cash, cash equivalents and restricted cash
30,434

 
(18,123
)
Cash, cash equivalents and restricted cash at beginning of period
24,462

 
39,955

Cash, cash equivalents and restricted cash at end of period
$
54,896

 
$
21,832

SIGNIFICANT NON-CASH ACTIVITIES:
 
 
 
Purchase consideration for equipment included in accounts payable
$
195

 
$
2,481

Conversion of PIK interest on our Second Lien Notes to additional principal
10,682

 
9,507

Financing of purchased satellite transponders included in property and equipment

 
8,500


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


8

Table of Contents



GLOBAL EAGLE ENTERTAINMENT INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Overview

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 around the globe.

Our Chief Executive Officer, the Company’s chief operating decision-maker (“CODM”), evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our two operating segments: (i) Media & Content, and (ii) Connectivity.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) included the Company’s conclusion that, factors evaluated by the Company, including historical losses and negative cash flows from operations, government and industry-imposed travel restrictions in the aviation and maritime industries the Company services, ability to maintain and meet debt covenants in future periods, and the Company’s ability to satisfy existing debt obligations and paydown past due accounts payable over the next year, raised substantial doubt as to the Company’ ability to continue as a going concern for a period within 12 months following May 15, 2020. In the Annual Report, the Company’s independent auditors also included a “going concern” explanatory paragraph in their report as of and for the year ended December 31, 2019. As a result, the Company was required to seek covenant amendments from its lenders as well as temporary deferral of principal and interest payments. Please refer to Note 2. Basis of Presentation and Summary of Significant Accounting Policies for the Company’s going concern assessment with respect to the quarter ended March 31, 2020 and additional details on covenant compliance and amendments.

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 unaudited condensed consolidated financial statements.

Basis of Presentation
In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company's audited consolidated financial statements for the year ended December 31, 2019, and include normal recurring adjustments necessary for the fair presentation of the Company's interim unaudited condensed consolidated financial statements for the three months ended March 31, 2020. The results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full 2020 fiscal year. The consolidated balance sheet as of December 31, 2019 has been derived from the Company's audited balance sheet included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on May 15, 2020 (the "2019 Form 10-K").

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete audited financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the 2019 Form 10-K.

Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Liquidity, Going Concern and Management’s Plan
The impact of the COVID-19 pandemic on the global travel industry created an urgent liquidity crisis for the airline, cruise ship and other maritime industries, which created follow-on impact for the Company. As of March 31, 2020, our principal source of liquidity was our cash and cash equivalents of approximately $54.2 million. In addition, we had approximately $0.7 million of restricted cash, which amount is excluded from the $54.2 million of cash and cash equivalents, and was attached to letters of credit between our subsidiaries and certain customers. Our cash is invested primarily in cash and money market funds in banking


9


institutions in the U.S., Canada and Europe and to a lesser extent in Asia Pacific. Our total debt balance increased from $773.1 million at December 31, 2019 to $821.4 million at March 31, 2020. This was primarily driven by the February 2020 draw down of the remaining $41.8 million under our Senior Secured Revolving Credit Facility (“Revolving Credit Facility”) with a corresponding increase in our cash on hand. As of June 30, 2020, we had approximately $30.7 million of cash and cash equivalents.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern, requires that an entity’s management evaluate whether there are relevant events and conditions that in aggregate initially indicate that it will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued, and therefore raise substantial doubt about the entity’s ability to continue as a going concern. The Company has evaluated events and conditions as further described below, including historical losses and negative cash flows from operations, government and industry-imposed travel restrictions in the aviation and maritime industries that the Company services, and the Company’s projected future violations of the covenants contained in its existing indebtedness, including the maximum consolidated first lien net leverage ratio (“Maximum First Lien Leverage”) and a covenant requiring it to maintain minimum levels of undrawn revolving commitments plus cash and cash equivalents (“Minimum Liquidity”) contained in its Senior Secured Credit Agreement entered into on January 6, 2017 (as amended, the “2017 Credit Agreement”). These events and conditions have raised substantial doubt of the Company’s ability to satisfy existing debt obligations and paydown past due accounts payable and other obligations as they become due in the next 12 months

Our customers in the airline, cruise ship and other maritime industries, have been heavily impacted by the COVID-19 pandemic, through travel restrictions, government and business-imposed shutdowns or other operating issues resulting from the pandemic. We continue to analyze the potential impacts of the conditions and events arising from the ongoing COVID-19 pandemic.

The Company’s principal sources of liquidity have historically been its debt and equity issuances, and its cash and cash equivalents. The Company’s long-term ability to continue as a going concern is dependent on its ability to comply with the covenants in its indebtedness, increase revenue, reduce costs and deliver satisfactory levels of profitable operations. A substantial amount of the Company's cash requirements is for debt service obligations. The Company has generated substantial historic operating losses.

The Company has incurred net losses and had negative cash flows from operations for the first quarter ended March 31, 2020 primarily as a result of the negative operating impact of COVID-19. Net cash used in operations was $3.7 million for the three months ended March 31, 2020 which included cash paid for interest of $14.6 million. Working capital deficiency “(defined as current assets less current liabilities)” increased by $776.7 million, to $840.0 million as of March 31, 2020, compared to $63.4 million as of December 31, 2019, primarily due to the classification of all applicable long term debt as current liabilities at March 31, 2020.

The Company's current forecast indicates it will continue to incur net losses and generate negative cash flows from operating activities as a result of the Company's indebtedness, significant related interest expense and significant decline in customer demand due to COVID-19, which negatively impacts the Company’s business and results of operations. The Company was in compliance with all lender covenants for the period ended March 31, 2020. However, in anticipation of failing the Maximum First Lien Leverage covenant, the Company sought and was granted a waiver over such covenant on April 15, 2020 in connection with the Tenth Amendment to the 2017 Credit Agreement (the “Tenth Amendment to 2017 Credit Agreement”), while the lenders added an additional covenant at that time, namely the Minimum Liquidity covenant. Moreover, based on current projections, management believes it is probable that the Company will not comply with the Minimum Liquidity covenant and the Maximum First Lien Leverage covenant in the 2017 Credit Agreement during the remainder of the fiscal year. Due to these factors and the cross-default provisions contained in our other debt, which would be triggered upon acceleration of debt under the 2017 Credit Agreement, effective as of the March 31, 2020 balance sheet, the Company classified all applicable long-term debt as current. This treatment follows the guidance of ASC 470-10-45 applicable to the classification of second lien debt and convertible notes when the obligation includes a subjective acceleration clause. The Company’s management determined that the likelihood of subjective acceleration is probable in the Company’s Securities Purchase Agreement governing the Second Lien Notes and Convertible Notes which allows the creditors to accelerate the scheduled maturities of the obligations under conditions that are not objectively determinable.

Additionally, the Company’s projected failure to comply with certain covenants in the 2017 Credit Agreement and the Securities Purchase Agreement governing our Second Lien Notes, which include covenants in the 2017 Credit Agreement requiring us to (i) satisfy the Maximum First Lien Leverage ratio, which ratio was waived for the fiscal quarter ended March 31, 2020 and (ii) maintain Minimum Liquidity, could result in an event of default on our debt. The Securities Purchase Agreement and the terms of the Company’s 2.75% Convertible Notes due 2035 (the “Convertible Notes”) do not include covenants related to maintenance of


10


Maximum First Lien Leverage or Minimum Liquidity; however, both the Securities Purchase Agreement and terms of the Convertible Notes contain cross-default provisions based on an acceleration of material indebtedness (including indebtedness under the 2017 Credit Agreement) and certain payment defaults under material indebtedness. As discussed above, on April 15, 2020, the Company entered into the Tenth Amendment to the 2017 Credit Agreement and obtained, among other amendments and waivers, a waiver to our Maximum First Lien Leverage covenant for the quarter ended March 31, 2020 and the addition of a Minimum Liquidity covenant. This Minimum Liquidity covenant imposes substantial limits on our ability to make investments in our business. In addition, we may be limited in our ability to pay all of our required debt and interest payments on our indebtedness and our other operating expenses while remaining in compliance with this Minimum Liquidity covenant.

If the Company is unable to comply with the covenants contained in its debt agreement or obtain a waiver or an amendment from its lenders, or take other remedial measures, the Company will be in default under the credit facilities, which would enable the lenders thereunder to accelerate the repayment of amounts outstanding and exercise remedies with respect to the collateral. If the Company’s lenders under our credit facilities demand immediate payment, we will not have sufficient cash to repay such indebtedness. In addition, as discussed above, certain payment defaults under our credit facilities or the lenders accelerating their claims thereunder would trigger cross-default provisions in our other indebtedness and certain other operating agreements.  Furthermore, failure to meet our borrowing conditions under our Revolving Credit Facility could materially and adversely impact our liquidity.

The Company’s management has plans in-place, and is working with outside advisors, to address the substantial doubt about the Company’s ability to continue as a going concern. Mitigating actions implemented in the first quarter include temporary salary reductions for all employees, including executive offices and the Company’s Board of Directors, negotiations with both customers and vendors to revise existing contracts to current activity levels and executing substantial reductions in capital expenditures and overall costs. Mitigating actions that continue to be implemented include:

Restructure debt covenants with lenders, including deferral of amortization and interest payments;
Continue reduction of overall workforce to match revenue streams;
Deferral of annual merit increases;
Relocation of worldwide operating facilities to reduce ongoing costs;
Renegotiation of satellite lease terms, bandwidth terminations and payment deferrals;
Negotiation of studio rate reductions and airline relief packages;
Pursue complete restructuring of our capital-and-cost structure;
Accelerate Wireless Maritime Services, LLC (“WMS”) dividend payments; and
Continue to pursue the disposition of the Company’s 49% interest in WMS.

In addition, the Company’s management is pursuing actions to maximize cash available to meet the Company’s obligations as they become due in the ordinary course of business, including (i) executing additional substantial reductions in expenses, capital expenditures and overall costs; (ii) applying for all eligible global government and other initiatives available to businesses or employees impacted by the COVID-19 pandemic, primarily through payroll and wage subsidies and deferrals; (iii) submitting applications for U.S. Treasury Loans through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. There is no assurance that our applications will be approved or that any sources of financings under the CARES Act will be available to us on favorable terms or at all; and (iv) accessing alternative sources of capital, in order to generate additional liquidity. These actions are intended to mitigate those conditions which raise substantial doubt of the Company’s ability to continue as a going concern. While the Company continues to work toward completing these items and taking other actions to create additional liquidity and comply with the payment and other covenants set forth in its debt agreements, there is no assurance that the Company will be able to do so. The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability to achieve improved results, its ability to generate and conserve cash, its ability to obtain necessary waivers from lenders and other equity stakeholders to achieve sufficient cash interest savings therefrom and its ability to complete other liquidity-generating transactions. Based on the uncertainty of achieving these actions the Company’s management has determined that the substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of this Quarterly Report on Form 10-Q has not been alleviated. The unaudited condensed consolidated financial statements do not include any adjustments that may result from the possible inability of the Company to continue as a going concern for at least the next 12 months from the issuance of these financial statements.

We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address our liquidity and capital structure, including strategic and refinancing alternatives to restructure our indebtedness in private


11


transactions. If the negative impact from COVID-19 continues, if the Company is unable to successfully complete the actions described in the paragraph above or otherwise generate incremental liquidity, or if there is not otherwise a material improvement in our business, results of operations and liquidity, we may be forced to further reduce or delay our business activities and capital expenditures, sell material assets, seek additional capital or be required to file for bankruptcy court protection. . Due to our current financial constraints, there is a substantial risk that it may be necessary for us to seek protection under Chapter 11 of the United States Bankruptcy Code.

Additionally, the 2017 Credit Agreement includes a requirement that we receive an opinion from our auditors in connection with our year-end audit that is not subject to a “going concern” or like qualification or exception. In addition to the waiver discussed above, the Tenth Amendment to the 2017 Credit Agreement also provided a waiver related to obtaining a “going concern” or like qualification or exception in the report of the Company’s independent registered public accounting firm for the Company’s year-end December 31, 2019 financial statements. We cannot be assured that we will be able to obtain additional covenant waivers or amendments in the future which may have a material adverse effect on the Company’s results of operations or liquidity.

Revenue Recognition
The Company accounts for a contract with a customer when an approved contract exists, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of substantially all of the consideration is probable. Revenue is recognized as the Company satisfies performance obligations by transferring a promised good or service to a customer (see further discussion in Note 3. Revenue Recognition).

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.

The Company’s management constrains the estimates to reduce the probability of a significant revenue reversal in future periods, allocates variable consideration to the identified performance obligations and recognizes revenue in the period the services are provided. Estimates are based on historical experience, anticipated future performance, market conditions and the best judgment at the time. For the three months ended March 31, 2020, the Company’s estimates included management’s assumptions for the impact of COVID-19, which includes significant decline in flight levels. A significant change in one or more of these estimates could affect the estimated contract value. For example, estimates of variable revenue within certain contracts require estimation of the number of sessions or megabytes that will be purchased over the contract term and the average revenue per connectivity session, which varies based on the connectivity options available to passengers on each airline. Estimated revenue under these contracts anticipates increases in take rates over time and assumes an average revenue per session consistent with our historical experience. The estimated contract revenue may differ significantly from the initial estimates to the extent actual take rates and average revenue per session differ from the Company’s historical experience.

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.

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 but evaluates it for impairment at the reporting unit level annually during the fourth quarter of each fiscal year (as of December 31 of that quarter) or when an event occurs or circumstances change that indicates the carrying value may not be recoverable. 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.



12


For the quarter ended March 31, 2020, the Company identified a triggering event due to a significant decline in the market capitalization of the Company and results of operations as result of the uncertainty related to the COVID-19 pandemic. Accordingly, the Company assessed the fair value of its three reporting units as of March 31, 2020 and recorded a goodwill impairment charge of $22.1 million related to its Maritime & Land Connectivity reporting unit. This impairment was primarily due to first quarter results resulting in a revised forecast for the reporting unit, due primarily to impacts of COVID-19 outbreak on our cruise and yacht channels, coupled with the loss of a Brazilian government customer and continuation of exiting the mobile network operation channel. Given these indicators, the Company then determined that there was a higher degree of uncertainty in achieving its financial projections for this unit and as such, performed a full revision of its forecasted cash flows to consider the impacts of COVID-19 (as further discussed below) and increased its discount rate, which reduced the fair value of the reporting unit.

To determine the fair value of our reporting units and test for impairment, we utilized an income approach (discounted cash flow method), as we believe this is the most direct approach to incorporate the specific economic attributes and risk profiles of our reporting units into our valuation model. Historically we have used the market approach, however, due to the uncertainty related to COVID-19, management did not use this method in the current quarter analysis. However, to the extent market indicators of fair value become available, we consider such market indicators as well as market participant assumptions in our discounted cash flow analysis and determination of fair value. The discounted cash flow methodology is based, to a large extent, on assumptions about future events, which may or may not occur as anticipated, and such deviations could have a significant impact on the calculated estimated fair values of our reporting units. These assumptions included the use of significant unobservable inputs, representative of a Level 3 fair value measurement, and included, but were not limited to, estimates of discount rates, future growth rates and terminal values for each reporting unit.
The discounted cash flow analysis for each of our reporting units included forecasted cash flows over a four-year forecast period (2020 through 2023), with our 2020 management budget used as the basis for our projections. These forecasted cash flows took into consideration historical and recent results, and near-term prospects and management’s outlook for the future. A terminal value was also calculated using a terminal value growth assumption to derive the annual cash flows after the discrete forecast period. A reporting unit specific discount rate was applied to the forecasted cash flows and terminal cash flows to determine the discounted future cash flows, or fair value, of each reporting unit. Our assessment took into consideration the changes in the projections discussed above and reflected the increased market risk surrounding the execution of those projections and adjusted our cost of capital assumptions to be in-line with recent market indicators for our company and industry. These increases in cost of capital and risk premium assumptions resulted in a significant increase in our discount rates utilized for purposes of determining our discounted cash flows and reduced the estimated fair values of our reporting units.
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, the amortization of the cost basis difference associated with the amortizable intangible assets, and impairment.

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 is a significant customer of, and 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


13


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 the date the Company acquired EMC and was subsequently adjusted for contributions, distributions, and net income (loss) attributable to Santander, and impairment. As a result of decreased demand due to COVID-19 and seeking additional cost savings initiatives, the Company is evaluating its ongoing participation in the equity method investment from an operating and ownership perspective.

Impairment of Equity Method Investments

To determine the fair value of our equity method investments and test for impairment, we utilized an income approach (discounted cash flow method), as we believe this is the most direct approach to incorporate the specific economic attributes and risk profiles of our businesses into our valuation model. We generally do not utilize a market approach given the lack of relevant information generated by market transactions involving comparable businesses. However, to the extent market indicators of fair value become available, we consider such market indicators as well as market participant assumptions in our discounted cash flow analysis and determination of fair value. The discounted cash flow methodology is based, to a large extent, on assumptions about future events, which may or may not occur as anticipated, and such deviations could have a significant impact on the calculated estimated fair values of our equity method investments. These assumptions included the use of significant unobservable inputs, representative of a Level 3 fair value measurement, and included, but were not limited to, estimates of discount rates, future growth rates and terminal values for each equity method investment.

During the first quarter of 2020, in accordance with ASC 323, Investments-Equity Method and Joint Ventures, the Company’s management completed an assessment of the recoverability of the equity method investments. They determined the carrying value of the interests in the WMS and Santander joint ventures exceeded their estimated fair value of the Company’s interests, which management concluded was other than temporary. The Company recorded an impairment charge of $10.1 million and $3.0 million relating to its WMS and Santander equity investments, respectively. This WMS impairment was primarily the result of lower than expected financial results for the quarter ended March 31, 2020 due to the uncertainty related to the impacts of the COVID-19 pandemic on the cruise industry. This resulted in a decline in operating performance which is not expected to be recovered in the foreseeable future, causing Company’s management to reduce the financial projections for the WMS business for the remainder of 2020 and beyond. The Santander impairment was primarily the result of a reduction in forecasted financial results for Santander due to the Company’s efforts to reduce costs by shifting certain teleport and related network operations support services away from this joint venture to other vendors. This resulted in a reduction in the financial projections for the remainder of 2020 and beyond. The other than temporary impairments recognized are in addition to the MEG Connectivity reporting unit goodwill impairment recognized for the quarter ended March 31, 2020.

The discounted cash flow analysis for each of our equity method investments included forecasted cash flows over a long-term forecast period (2020 through 2030). These forecasted cash flows took into consideration historical and recent results, a lack of sustained earnings, a deterioration of market conditions, primarily as a result of COVID-19, and management's prospective outlook. A terminal value was calculated using a terminal value growth assumption to derive the annual cash flows after the discrete forecast period. A specific discount rate was applied to the forecasted cash flows and terminal cash flows to determine the discounted future cash flows, or fair value, of each equity method investment. Our assessment took into consideration probability weighted scenarios using the above assumptions. We utilized an independent analysis to assist in our determination of fair value of our equity method investments.

Short-Term Investments
In March 2020, the Company purchased commercial paper with nominal value of $30.0 million for an initial investment of $29.9 million with maturities ranging from 29 to 71 days. Due to their short-term maturity, these investments were classified as cash and cash equivalents. At March 31, 2020, the amortized cost of the investment was $29.9 million. There were no credit losses on the investment as of March 31, 2020.

Income Taxes
Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences


14


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 Condensed Consolidated Statements of Operations.

Adoption of New Accounting Pronouncements
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.
The cumulative effect adjustment from using the modified retrospective approach for the adoption of ASC 326 impacted our unaudited condensed consolidated balance sheet as of January 1, 2020 by the recognition of allowance for credit losses as summarized below:
 
Balances at December 31, 2019
 
Impact of ASC 326
 
Balances Following Adoption of ASC 326
Assets
 
 
 
 
 
Accounts receivable
$
88,219

 
$
(503
)
 
$
87,716

Other current assets
$
12,839

 
$
(111
)
 
$
12,728

Other non-current assets
$
27,509

 
$
(673
)
 
$
26,836

Equity
 
 
 
 
 
Accumulated deficit
$
(1,162,901
)
 
$
(1,287
)
 
$
(1,164,188
)

Refer to Note 8. Credit Loss Reserve and Allowances for further details.

In November 2019, the FASB issued ASU No. 2019-8, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer, which expedites the improvement process of the amendments and increase stakeholder awareness in ASU 2018-07, Compensation - Stock Compensation (Topic 718); Improvements to Nonemployee Share-Based Payment Accounting. The Company adopted ASU No. 2019-18 beginning January 1, 2020. The adoption of this standard did not have a material impact on its unaudited condensed consolidated financial statements.

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, to provide clarifications on ASC 842 and to correct unintended application of the guidance. The amendments in this update include the following items brought to FASB’s attention through those interactions with stakeholders: (i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (ii) presentation on the statement of cash flows—sales-type and direct financing leases; and (iii) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The Company adopted ASU No. 2019-01 beginning January 1, 2020. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures for fair value measurements. The Company adopted ASU No. 2018-13 beginning January 1, 2020. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.


15


Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of ASU 2020-04 is to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. More specifically, the amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. This guidance was effective upon issuance, as a result the Company adopted the guidance in the first quarter of fiscal 2020 and there was no financial impact on the Condensed Consolidated Financial Statements upon adoption.

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force). The new guidance clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire investments. The ASU is effective for the Company beginning December 15, 2020, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which identifies, evaluates and improves areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The ASU is effective for the Company beginning January 1, 2021, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

Note 3.    Revenue Recognition

The Company accounts for a contract with a customer when an approved contract exists, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of substantially all of the consideration is probable. Revenue is recognized as the Company satisfies performance obligations by transferring a promised good or service to a customer.

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.

Our assessments regarding the timing of transfer of control and revenue recognition for our two operating segments are summarized below:

Media & Content – specific to the sale and/or licensing of media content and the related technical services, such as digital delivery of media advertising, encoding of video and music products, development of graphical interfaces and provision of materials, we consider control to have transferred when: (i) the content has been delivered, and (ii) the services required under the contract have been performed. Revenue recognition is dependent on the nature of the customer contract. Content licenses to customers are typically categorized into usage-based or flat fee-based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures, revenue is recognized upon the available date of the license, typically at the beginning of each cycle, or straight-line over the license period.

Connectivity – we provide satellite-based Internet services and related technical and network support services, as well as the physical equipment to enable connectivity.

(i) For Aviation, the revenue is recognized over time as control is transferred to the customer (i.e. the airline), which occurs continuously as customers receive the bandwidth services. Equipment revenue is recognized when control passes to the customer, which is at the later of shipment of the equipment to the customer or obtaining regulatory certification for the operation of such equipment, as applicable.



16


(ii) For Maritime and Land, revenue is recognized over time as the customer receives the bandwidth services. Equipment revenue is recognized when control passes to the customer, which is typically from shipment of the equipment to the customer. In bandwidth arrangements where the equipment is leased, equipment revenue is determined and recognized in accordance with the assessed lease classification.

Certain of the Company’s contracts involve a revenue sharing or reseller arrangement to distribute the connectivity services. The Company assesses these services under the principal versus agent criteria and determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.

The following table represents a disaggregation of the Company’s revenue from contracts with customers for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Revenue:
 
 
 
 
Media & Content
 
 
 
 
Licensing & Services
 
$
68,385

 
$
80,010

Total Media & Content
 
68,385

 
80,010

 
 
 
 
 
Connectivity
 
 
 
 
Aviation Services
 
30,706

 
31,241

Aviation Equipment
 
6,403

 
14,060

Maritime & Land Services
 
36,554

 
39,227

Maritime & Land Equipment
 
2,117

 
2,081

Total Connectivity
 
75,780

 
86,609

 
 
 
 
 
Total revenue
 
$
144,165

 
$
166,619


Contract Assets and Liabilities
Aviation connectivity contracts involve performance obligations primarily relating to the delivery of equipment and services. Equipment is delivered upfront with payment due upon delivery. Services are rendered to the customer over time and are typically paid for upfront or as the services are delivered. Aviation connectivity revenue is allocated based upon standalone selling price (“SSP”). The primary method used to estimate the SSP is the expected cost-plus margin approach. When the SSP exceeds the revenue allocation, the revenue to which the Company is entitled is contingent on performing the ongoing connectivity services and the Company records a contract asset accordingly.

The following table summarizes the significant changes in the balance for contract assets during the quarter ended March 31, 2020 (in thousands):
 
 
Contract Assets
Balance as of December 31, 2019
 
$
14,431

Costs deferred for revenue recognized in excess of billings
 
1,355

Costs included in the beginning balance recognized
 
(3,187
)
Balance as of March 31, 2020
 
$
12,599

 
 
 
Current contract assets
 
$
2,159

Non-current contract assets
 
10,440

Balance as of March 31, 2020
 
$
12,599




17


The Company may invoice upfront for services recognized over time or for contracts in which it has unsatisfied performance obligations. Contract payment terms are generally 30 to 45 days. When the timing of invoicing differs from the timing of revenue recognition, the Company determines its contracts to include a financing component when the contractual term is for more than a year.

The following table summarizes the significant changes in the balance for contract liabilities, included within “Other non-current liabilities” in our unaudited condensed consolidated balance sheet, during the three months ended March 31, 2020 (in thousands):
 
 
Contract Liabilities
Balance as of December 31, 2019
 
$
12,403

Revenue recognized that was included in the contract liability balance at the beginning of the period
 
(6,723
)
Increase due to cash received, excluding amounts recognized as revenue during the period
 
3,941

Balance as of March 31, 2020
 
$
9,621

 
 
 
Deferred revenue, current
 
$
9,535

Deferred revenue, non-current
 
86

Balance as of March 31, 2020
 
$
9,621


As of March 31, 2020, the Company had $956.3 million of remaining performance obligations, which it also refers to as total backlog. The Company expects to recognize approximately 20% of its remaining performance obligations as revenue in 2020 approximately 19% in 2021, 16% by 2022, and the remaining balance thereafter. $2.7 million and $3.5 million of services revenue was recognized during the three months ended March 31, 2020 and 2019, respectively, and was included in the deferred revenue balances at the beginning of the respective period.

Accounts Receivable, net
The Company extends credit to its customers from time to time. The Company maintains an allowance for doubtful accounts for estimated losses resulting from its customers’ inability to make required payments. Management analyzes the age of customer balances, historical bad debt experience, customer creditworthiness and changes in customer payment terms when making estimates of the collectability of its accounts receivable balances. If management 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):
 
March 31,
 
December 31,
 
2020
 
2019
Accounts receivable, gross
$
91,289

 
$
94,995

Less: Allowance for doubtful accounts
(8,493
)
 
(6,776
)
Accounts receivable, net
$
82,796

 
$
88,219


Refer to Note 8. Credit Loss Reserve and Allowances for further details.

Capitalized Contract Costs
Certain of the Company’s sales incentive programs meet the requirements to be capitalized as incremental costs of obtaining a contract. The Company recognizes an asset for the incremental costs if it expects the benefit of those costs to be longer than one year and amortize those costs over the expected customer life. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less.

Additionally, the Company capitalizes assets associated with costs incurred to fulfill a contract with a customer. For example, the Company capitalizes the costs incurred to obtain necessary Supplemental Type Certificates or other customer-specific certifications for its aviation, maritime and land customers.



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The following table summarizes the significant changes in the contract assets balances during the period ended March 31, 2020 (in thousands):
 
Contract Assets
 
Costs to Obtain
 
Costs to Fulfill
 
Total
Balance as of December 31, 2019
$
387

 
$
5,256

 
$
5,643

Capitalization during the period
50

 
226

 
276

Amortization during the period
(29
)
 
(104
)
 
(133
)
Balance as of March 31, 2020
$
408

 
$
5,378

 
$
5,786


Contract assets are included within Other non-current assets on the Company’s Condensed Consolidated Balance Sheets.

Practical Expedients, Policy Elections and Exemptions
In circumstances where shipping and handling activities occur subsequent to the transfer of control, the Company has elected to treat shipping and handling as a fulfillment activity rather than a service to the customer.    

The Company has made a policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (e.g., sales, use, value added, and some excise taxes).

The Company applies a practical expedient to expense costs as incurred for incremental costs to obtain a contract when the amortization period would have been one year or less and did not evaluate contracts of one year or less for variable consideration.

Note 4.    Leases

Our leasing operations consist of various arrangements, where we act either (i) as the lessee (primarily related to our corporate and regional offices, teleport co-location arrangements and a commitment for satellite bandwidth capacity), or (ii) as the lessor (for our owned equipment rented to connectivity customers). The following describes the nature of our various leasing arrangements and the impact to our statement of operations for the three months ended March 31, 2020:

Real Estate Operating Leases (as a Lessee)
The Company has operating leases for office facilities throughout the United States and around the world. Upon inception of a contract, the Company evaluates if the contract, or part of the contract, contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases include both a right-of-use asset and a lease liability. The right-of-use asset represents the Company’s right to use the underlying asset in the lease, and it also includes prepaid lease payments. The lease liability represents the present value of the remaining lease payments discounted using the incremental borrowing rate (“IBR”). Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost. The Company has elected to combine lease and non-lease components, if applicable.

The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total lease expense for the three months ended March 31, 2020 and 2019, was $1.4 million and $1.6 million, respectively.

The Company’s leases have remaining lease terms of one year to 10.0 years. Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of 12 months or less, the Company has made an accounting policy election to not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet.

Teleport Co-Location Operating Leases (as a Lessee)
The Company engages certain bandwidth providers for teleport co-location services to deliver bandwidth to our network. These co-location service agreements typically include provisions for physical rack space at a third-party teleport facility. We have determined that the space provided for our equipment constitutes an operating lease.

These leases have remaining lease terms of one year to 8.0 years as of March 31, 2020. The Company records lease expense on a straight-line basis over the lease term as part of cost of sales -- licensing and services. Total lease expense for the three months ended March 31, 2020 and 2019, was $0.5 million and $0 million, respectively.



19


Satellite Bandwidth Finance Lease (as a Lessee)
The Company maintains agreements with satellite service providers to provide for satellite bandwidth capacity. The Company evaluates these arrangements for embedded leases when the Company has the right to control the use of a significant portion of the identified asset. The Company has elected to separate the lease and non-lease components.

Bandwidth Operating Leases
The Company records right-of-use assets and lease liabilities for certain bandwidth capacity arrangements meeting the operating lease classification. These leases have remaining lease terms of one year to 2.0 years as of March 31, 2020. The Company records lease expense on a straight-line basis over the lease term as part of Cost of Sales - Licensing and Services. Total lease expense for the three months ended March 31, 2020 and 2019, was $0.3 million and $0 million, respectively.

For leases with a term of 12 months or less, the Company has made an accounting policy election to not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet.

Bandwidth Finance Lease
During the quarter ended June 30, 2019, the Company modified an existing arrangement for bandwidth capacity that provided us with the right to control a significant portion of the identified asset. The modified agreement met the criteria of finance lease classification.

This finance lease has a remaining lease term of 6.25 years as of March 31, 2020. The Company records amortization of right-of-use assets and interest accretion on finance lease liabilities as part of cost of sales -- licensing and services and interest expense, net, respectively. The following table provides the components of the finance lease cost for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Amortization of right-of-use asset, net of lease incentive and contract liability credits
$
420

 
$

Interest accretion on finance lease liabilities
383

 

Total lease cost
$
803

 
$


Other Arrangements (as a Lessee)
The Company leases certain computer software, equipment and co-location facilities under finance leases that expire on various dates through 2022, for which the outstanding lease liability balance was assessed as not material as of March 31, 2020.

The Company reviews the carrying value of its right-of-use assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the estimated future undiscounted cash flows, excluding financing costs. If the Company determines that an impairment exists, any related impairment loss is estimated based on fair values.

Equipment Held by Customers (as a Lessor)
The Company either sells or leases certain equipment (including antennas, modems and routers, among others) as part of the bandwidth service to our Maritime and Land Connectivity customers. We account for existing equipment lease transactions as operating leases. We recognize lease payments for operating leases as licensing and services revenue in its condensed consolidated statement of operations on a straight-line basis over the lease term.

We assess new equipment lease arrangements or modifications to existing equipment lease arrangements for operating or sales-type lease classification. We recognize investments in leases for sales-type leases when the risk and rewards of ownership are not fully transferred to the customer due to our continued involvement with the equipment. We allocate the total consideration in a contract assessed with a sales-type lease using the expected cost-plus margin and residual methods for the lease and non-lease components, respectively.



20


The service revenues (with embedded operating equipment leases) and recognized revenues on sales-type equipment leases in which the Company acts as the lessor for the three months ended March 31, 2020 and 2019, is presented in the following table (in thousands):
 
Three Months Ended March 31
 
2020
 
2019
Bandwidth service and equipment revenues(1)
$
26,023

 
$
34,107

Earned revenues on sales-type leases at commencement(2)
103

 
333

Total Licensing and Service Revenues -- Maritime and Land Connectivity
$
26,126

 
$
34,440

(1) This is presented as part of Revenues -- Licensing and services in our condensed consolidated statement of operations, and includes the equipment lease component that is embedded in the overall bandwidth service arrangement. Since we adopted the practical expedient to not separate the lease and non-lease components as allowed with the ASC 842 implementation as of January 1, 2019, we will continue to classify existing embedded equipment arrangements as operating leases, to the extent unmodified.
(2) This includes the equipment lease revenues recognized at commencement date of the customer equipment arrangements classified as sales-type leases. As equipment leasing is a standard component in our connectivity business model, we present equipment revenues relating to these sales-type leases on a gross basis, and recognize a corresponding cost of sales equal to the net book value of the leased equipment. Interest income component is considered immaterial.

Supplemental Cash Flow Information, Weighted-Average Remaining Lease Term and Discount Rate
Because the rate implicit in each lease is not readily determinable, the Company uses its IBR to determine the present value of the lease payments. The following table discloses the weighted-average remaining lease term and IBR, as well as supplemental cash flow information (in thousands):
 
Three Months Ended March 31, 2020
Supplemental cash flow information
 
Cash paid for amounts included in the measurement of operating lease liabilities
$
2,028

Cash paid for amounts included in the measurement of finance lease liabilities
$
940

Right-of-use-assets obtained in exchange for operating lease obligations
Immaterial

Right-of-use-assets obtained in exchange for finance lease obligations
$

Weighted average remaining lease term -- real estate operating leases
7.01 years

Weighted average remaining lease term -- teleport co-location operating leases
4.59 years

Weighted average remaining lease term -- satellite capacity operating leases
0.75 years

Weighted average remaining lease term -- finance lease
6.25 years

Weighted average IBR -- real estate operating leases
9.90
%
Weighted average IBR -- teleport co-location operating leases
8.89
%
Weighted average IBR -- teleport satellite capacity operating leases
7.24
%
Weighted average IBR -- finance lease
8.30
%



21


Annual Future Minimum Lease Payments
The following table reflects a summary of Annual future minimum lease payments and the Company’s lease assets as of March 31, 2020 (in thousands):
 
As a Lessee
 
As a Lessor
Years Ending December 31,
Real Estate
 
Satellite Capacity
 
Satellite Capacity
 
Teleport
Co-Location
 
Total
 
Equipment Held by Customers
Lease Classification
Operating
 
Finance
 
Operating
 
Operating

 
 
Sales-Type
2020 (remaining nine months)
$
3,815

 
$
2,819

 
$
1,034

 
$
1,443

 
$
9,111

 
$
382

2021
5,153

 
3,758

 

 
1,793

 
10,704

 
503

2022
4,541

 
3,758

 

 
1,468

 
9,767

 
425

2023
3,616

 
3,758

 

 
561

 
7,935

 
261

2024
3,621

 
3,758

 

 
550

 
7,929

 
180

Thereafter
10,825

 
5,638

 

 
1,009

 
17,472

 
43

Total Future Lease Payments
$
31,571

 
$
23,489

 
$
1,034

 
$
6,824

 
$
62,918

 
$
1,794

Less: Imputed interest
(9,232
)
 
(5,084
)
 
(24
)
 
(1,266
)
 
(15,606
)
 
(273
)
Present Value of Lease Liabilities
$
22,339

 
$
18,405

 
$
1,010

 
$
5,558

 
$
47,312

 
 
Net Investment in Sales-Type Leases
 
 
 
 
 
 
 
 
 
 
$
1,521


In response to the COVID-19 pandemic and related government restrictions negatively impacting our operations, subsequent to March 31, 2020, we began renegotiating certain lease agreements to obtain rent relief in the near term, in order to help offset the negative financial impacts of COVID-19. On April 10, 2020, the Financial Accounting Standards Board ("FASB") staff issued a question-and-answer document providing guidance for lease concessions provided to lessees in response to the effects of COVID-19. Such guidance allows lessees to make an election not to evaluate whether a lease concession provided by a lessor should be accounted for as a lease modification in the event the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We intend to elect this practical expedient in our accounting for any lease concessions provided for our real estate lease agreements.

The book value of the equipment held by customers under operating leases, which are classified as “Equipment” in Note 5- Property & Equipment, is as follows:
 
March 31, 2020
 
December 31, 2019
Equipment
 
 
 
Gross balance
$
55,961

 
$
57,369

Accumulated depreciation
(32,554
)
 
(30,692
)
Net Book Value
$
23,407

 
$
26,677




22


Note 5.    Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Leasehold improvements
$
11,340

 
$
11,319

Furniture and fixtures
2,672

 
2,683

Equipment
158,138

 
157,259

Computer equipment
15,425

 
16,993

Computer software
52,690

 
51,939

Automobiles
298

 
301

Buildings
7,087

 
7,088

Albatross (Company-owned aircraft)
456

 
456

Satellite transponders
70,100

 
70,100

Construction in-progress
1,150

 
1,499

Total property and equipment
$
319,356

 
$
319,637

Accumulated depreciation
(186,587
)
 
(174,342
)
Property and equipment, net
$
132,769

 
$
145,295


Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Cost of sales
$
9,628

 
$
8,934

Sales and marketing
522

 
1,002

Product development
571

 
835

General and administrative
2,784

 
3,382

Total depreciation expense
$
13,505

 
$
14,153




23


Note 6.    Goodwill
    
We have three separate reporting units for purposes of our goodwill impairment testing. The changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
 
Aviation Connectivity
 
Maritime & Land Connectivity
 
Media & Content
 
Total
 
 
 
 
 
 
 
 
Gross carrying amount
$
98,022

 
$
209,130

 
$
83,455

 
$
390,607

Accumulated impairment loss
(44,000
)
 
(187,000
)
 

 
(231,000
)
 
54,022

 
22,130

 
83,455

 
159,607

Impairment loss

 
(22,130
)
 

 
(22,130
)
Foreign currency translation adjustments

 

 
(118
)
 
(118
)
Balance March 31, 2020
$
54,022

 
$

 
$
83,337

 
$
137,359

 
 
 
 
 
 
 
 
Gross carrying amount
$
98,022

 
$
209,130

 
$
83,337

 
$
390,489

Accumulated impairment loss

(44,000
)
 
(209,130
)
 

 
(253,130
)
Balance March 31, 2020
$
54,022

 
$

 
$
83,337

 
$
137,359


Goodwill Impairment
Goodwill and equity method investments are non-financial instruments that are measured at fair value on a non-recurring basis. In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance was adopted during the first quarter of 2017, and therefore, our interim goodwill impairment tests as of March 31, 2020 were performed using only a Step 1 test.
As of March 31, 2020, the cumulative impairment write-offs relating to our Aviation Connectivity and our Maritime & Land Connectivity reporting units was $44.0 million and $209.1 million, respectively. The Company is required to test goodwill for impairment on an annual basis and, if current events or circumstances require, on an interim basis. Our next annual impairment evaluation is scheduled during the fourth quarter of 2020.



24


Note 7.    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 been assigned useful lives ranging from 2.0 to 10.0 years (weighted average of 7.5 years).

Intangible assets, net consisted of the following (dollars in thousands):
 
 
 
March 31, 2020
 
Weighted Average Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Existing technology -- software
5.2 years
 
$
36,799

 
$
32,263

 
$
4,536

Developed technology
8.0 years
 
7,317

 
5,945

 
1,372

Customer relationships
8.7 years
 
138,358

 
95,259

 
43,099

Backlog
3.0 years
 
18,300

 
18,300

 

Other
5.1 years
 
1,248

 
980

 
268

Total
 
 
$
202,022

 
$
152,747

 
$
49,275


 
 
 
December 31, 2019
 
Weighted Average Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
Existing technology -- software
5.2 years
 
$
36,799

 
$
30,487

 
$
6,312

Developed technology
8.0 years
 
7,317

 
5,716

 
1,601

Customer relationships
8.7 years
 
138,358

 
91,124

 
47,234

Backlog
3.0 years
 
18,300

 
18,300

 

Other
5.1 years
 
1,249

 
913

 
336

Total
 
 
$
202,023

 
$
146,540

 
$
55,483


We expect to record amortization of intangible assets as follows (in thousands):
Year ending December 31,       
Amount
2020 (remaining nine months)
$
16,056

2021
13,824

2022
7,907

2023
6,890

2024
4,230

Thereafter
368

Total
$
49,275

    
We recorded amortization expense of $6.2 million and $7.8 million for the three months ended March 31, 2020 and 2019, respectively.

Note 8.    Credit Loss Reserve and Allowances

Upon adoption of ASC 326 as of January 1, 2020, the Company implemented an expected credit loss allowance methodology for accounts receivable using historical collection experience, current and future economic and market conditions, and a review of


25


the current status of each customer’s trade accounts receivables. As a part of the implementation, the Company analyzed the prior history of credit losses on accounts receivable separately for each of the two business segments Media & Content and Connectivity, and within each segment, separately for Aviation, Land and Maritime verticals. Our business is managed between Media & Content and Connectivity, and therefore, it was deemed appropriate to first analyze losses separately for the two based on the nature of these segments and related customer base. Further, the Company noted that historically customers between the aviation, land and maritime groups exhibit common risk characteristics based upon the industries for which they operate in and believed a further breakdown of segments across aviation, land and maritime verticals was appropriate. The analysis resulted in the Company analyzing history of credit losses on accounts receivable for a total of six aggregation points and determining loss rates for each based on a five-year period average.

The Company used the average historical loss rates in estimating credit loss reserve. Additionally, the Company estimates loss reserve based on the aging of the accounts receivable balances and the financial condition of customers and provides for specific allowance amounts for those customers that have a higher probability of default. We regularly monitor the collection status of accounts receivable through account reconciliation, dispute resolution, payment tracking, customer’s financial condition and macroeconomic conditions. We write-off balances when determined to be uncollectible. We apply a similar methodology towards our current and non-current contract asset balances, which shares some common risks with accounts receivable. Specifically, for the three months ended March 31, 2020, we have reviewed and considered the current and future economic and market conditions resulting from the COVID-19 pandemic in determining our estimated credit losses.

A summary of our allowances for credit losses were as follows (in thousands):
 
Accounts Receivable
 
Prepaid and Other Current Assets
 
Other Non-Current Assets
 
Total
Balance at January 1, 2020
$
6,776

 
$

 
$

 
$
6,776

Cumulative-effect adjustment of ASC 326 adoption
503

 
111

 
672

 
1,286

Current-period provision for expected credit losses(1)
2,950

 
4

 
33

 
2,987

Write-offs and dispositions
(866
)
 

 

 
(866
)
Foreign currency rate changes
(870
)
 

 

 
(870
)
Balance at March 31, 2020
$
8,493

 
$
115

 
$
705

 
$
9,313


(1) The current-period provision for expected credit losses was due primarily to the impact of COVID-19. One international airline partner in particular accounted for approximately 45% of the provision recorded during the three-month period ended March 31, 2020 and three other airline partners accounted for approximately 43% of the provision recorded during the same period because of financial distress caused by COVID-19. We will continue to monitor the financial conditions of all customers and will record additional credit losses in the future, as appropriate.
 

Note 9.    Equity Method Investments

The following is the summarized balance sheet information for the Company’s interests in the WMS and Santander joint ventures. These equity method investments on an aggregated basis as of March 31, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
 
December 31, 2019
Current assets
$
45,489

 
$
50,588

Non-current assets
24,635

 
25,370

Current liabilities
13,623

 
26,593

Non-current liabilities
9,866

 
2,207




26

Table of Contents



The following is the summarized results of operations information for these equity method investments on an aggregated basis for the three months ended March 31, 2020 and 2019 (in thousands):    
 
Three Months Ended March 31,
 
2020
 
2019
Revenue
$
30,877

 
$
32,100

Net income
7,088

 
6,887


The carrying values of the Company’s equity interests in WMS and Santander as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Carrying value in our equity method investments
$
64,300

 
$
78,886


As of March 31, 2020, there was an aggregate difference of $41.4 million between the carrying amounts 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.

Note 10.    Financing Arrangements

Covenant Compliance
Please refer to Note 2. Summary of Significant Accounting Policies for additional details regarding covenant compliance.

Long-Term Debt

A summary of our borrowings as of March 31, 2020 and December 31, 2019 is set forth below (in thousands):
 
March 31, 2020
 
December 31, 2019
Senior secured term loan facility, due January 2023(+)
$
504,680

 
$
506,037

Senior secured revolving credit facility, due January 2022(+)(1)
80,615

 
43,315

Convertible senior notes due 2035(2)
82,500

 
82,500

Second Lien Notes, due June 2023(3)
188,716

 
178,034

Other debts(4)
22,937

 
23,685

Unamortized bond discounts, fair value adjustments and issue costs, net
(58,068
)
 
(60,509
)
Total carrying value of debt
821,380

 
773,062

Less: current portion, net
(804,575
)
 
(15,678
)
Total non-current
$
16,805

 
$
757,384

(+) This facility is a component of the 2017 Credit Agreement.
(1) As of March 31, 2020, the available balance under our $85.0 million Revolving Credit Facility is $0.0 million (net of outstanding letters of credit). The 2017 Credit Agreement 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 March 31, 2020, we had outstanding letters of credit of $4.4 million under the 2017 Credit Agreement.
(2) The principal amount outstanding of the 2.75% convertible senior notes due 2035 (the “Convertible Notes”) as set forth in the foregoing table was $82.5 million as of March 31, 2020. The carrying amount, net of debt issuance costs and associated discount, was $71.3 million and $71.1 million as of March 31, 2020 and December 31, 2019, respectively.
(3) The principal amount outstanding of the second lien notes due June 30, 2023 (the “Second Lien Notes”) as set forth in the foregoing table was $188.7 million as of March 31, 2020. The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital”.
(4) As of March 31, 2020, Other debts primarily consisted of (i) $3.4 million remaining financed amount for transponder purchases, which was payable April 2020, and remains unpaid at filing date; and (ii) $18.4 million of finance lease liability relating to an assessed right-of-use over a satellite bandwidth capacity (refer to Note 4. Leases for further details).



27


The aggregate contractual maturities of all borrowings, including finance leases, subsequent to March 31, 2020 were as follows (in thousands):
Years Ending December 31,
Amount
2020 (remaining nine months)
$
13,633

2021
29,818

2022
110,564

2023
633,974

2024
3,236

Thereafter
88,223

Total
$
879,448


Reclassification of Long-Term Debt to Current
Although the Company entered into the Tenth Amendment to the 2017 Credit Agreement as a result of which it was not required to comply with the Maximum First Lien Leverage covenant for the period ended March 31, 2020, it was in compliance with all covenants under its debt agreements as of March 31, 2020. Based on current projections, management believes it is probable that the Company will not comply with the Minimum Liquidity covenant and the Maximum First Lien Leverage covenant in the 2017 Credit Agreement during the remainder of the fiscal year. Based on the above and the cross-default provisions contained in our other debt, which would be triggered upon acceleration of debt under the 2017 Credit Agreement, at March 31, 2020 the Company classified all applicable long-term debt as current. See Note 2. Summary of Significant Accounting Policies for further details.

Revolving Credit Facility Drawdown
On February 28, 2020, as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, we further leveraged our balance sheet, and executed a drawdown of the remaining $41.8 million under our Revolving Credit Facility (the “Drawdown”) with a corresponding increase in our cash on hand. Following the Drawdown, we have no remaining borrowing under the Revolving Credit Facility. As of March 31, 2020 we had approximately $54.2 million of cash and cash equivalents, excluding restricted cash of approximately $0.7 million.

Note 11.    Related Party Transactions

Loan Advances in lieu of Future Payouts from WMS
In February 2019, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately $7.4 million, accruing interest at 6.5% per annum, 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 and accrued but unpaid interest on the demand promissory note has been repaid in full. The outstanding demand promissory note would 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 entire principal balance of this promissory note together with all accrued but unpaid interest is due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2020 and (iii) the date of acceleration of the promissory note as a result of the occurrence of an event of default. The promissory note was reduced to zero in the third quarter of 2019 for distribution amount waived. During the three months ended March 31, 2020, WMS approved a deemed dividend to the Company totaling $3.7 million, which was distributed in cash to the Company in the second quarter of 2020.
Due to Santander
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 condensed consolidated statements of operations. During each of the three months ending March 31, 2020 and 2019, the Company purchased approximately $1.1 million from Santander for teleport and related network support services. As of March 31, 2020 and December 31, 2019, the Company owed Santander approximately $1.3 million and $1.8 million, respectively, which is included in accounts payable and accrued liabilities in the condensed consolidated balance sheets for their teleport services and related network operations support services.



28


Amended and Restated Registration Rights Agreement
When we consummated our business combination in January 2013 with Row 44 and Advanced Inflight Alliance AG, we entered into an amended and restated registration rights agreement with Par Investment Partners, L.P. (“PAR”), entities affiliated with Putnam Investments, Global Eagle Acquisition LLC (the “Sponsor”) and a current member of our board of directors (“Board of Directors” or “Board”), Harry E. Sloan and our then Board member, Jeff Sagansky, both of whom were affiliated with the Sponsor. Under that agreement, we agreed to register the resale of securities held by such parties (the “registrable securities”) and to sell those registrable securities pursuant to an effective registration statement in a variety of manners, including in underwritten offerings. We also agreed to pay the security holders’ expenses in connection with their exercise of their registration rights.

In addition, the amended and restated registration rights agreement restricts our ability to grant registration rights to a third party on parity with or senior to those held by the “holders” (as defined under that agreement) without the consent of holders of at least a majority of the “registrable securities” under that agreement. In April 2018, we entered into a consent to the amended and restated registration rights agreement with PAR whereby PAR (as a holder of a majority of registrable securities thereunder) consented to the registration rights that we provided to Searchlight Capital Partners, L.P. (“Searchlight”) as part of its investment in us.

According to a Schedule 13G/A filed on February 7, 2018, and a Schedule 13D/A filed on June 6, 2019, respectively, neither Putnam Investments nor PAR hold more than 5% of our outstanding common stock, and as such each has ceased to be a related party. Furthermore, Mr. Sagansky ceased being a related party on June 24, 2019 when he retired from our Board. Mr. Sloan continues to be a related party.

Second Lien Amendment
In addition, on April 15, 2020, we entered into a Third Amendment to Securities Purchase Agreement (the “Third Amendment to Securities Purchase Agreement”) among the Company, the guarantors party thereto, and each purchaser party thereto. The Third Amendment to Securities Purchase Agreement amended the Securities Purchase Agreement, dated as of March 8, 2018, by and among the Company, Searchlight II TBO, L.P., Searchlight II TBO-W, L.P., and Cortland Capital Market Services LLC, as collateral agent, and modified the Securities Purchase Agreement, including with respect to the following terms:

The deadline for delivery of audited consolidated annual financial statements of the Company for the fiscal year ended December 31, 2019 was extended from the date that is 120 days after the end of such fiscal year until the date that is 30 days after May 15, 2020 (as such deadline may be extended from time to time by an order of the U.S. Securities Exchange Commission), and such financial statements may be subject to a “going concern” qualification.
The deadline for delivery of unaudited consolidated quarterly financial statements of the Company for fiscal quarter ended March 31, 2020 was extended from the date that is 60 days after the end of such fiscal quarter until the date that is 15 days after June 29, 2020 (as such deadline may be extended from time to time by an order of the U.S. Securities Exchange Commission).
The deadline for delivery of a consolidated budget for fiscal year 2020 in respect of such fiscal year was extended from 120 days after the end of the 2019 fiscal year until June 1, 2020. Pursuant to the Second Lien Amendment, the noteholders consented to the First Lien Amendment (as defined below) and to the transactions contemplated thereby.

The Third Amendment to Securities Purchase Agreement is attached to the December 31, 2019 Annual Report on Form 10-K as Exhibit 10.22.

Subscription Receivable with Former Employee
A former employee is party to 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 8,956 shares of the Company’s common stock) to secure his obligations to repay the loan. As of March 31, 2020 and December 31, 2019, 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 three months ended March 31, 2020 and March 31, 2019 were not material. The Company has been making ongoing assessments regarding the collectability of this note and the subscription receivable balance and has been in litigation with the former employee to recover the loan and to address his allegations that we breached related settlement agreements with him in 2014 and 2015. On December 16, 2019, following trial in the Superior Court of California for the County of Los Angeles, the jury returned a verdict in favor of the Company regarding the employee’s obligation to repay the note and a


29


mixed verdict regarding the alleged breach of two claimed settlement agreements between the parties. On February 24, 2020, the Court entered judgement deeming the Company the prevailing party in the lawsuit and, among other things, providing for a net monetary award in favor of the Company of approximately $0.5 million, which award represents the full value of the note and associated interest offset by the amount the employee claimed he would have saved under the purported 2015 settlement agreement. On May 6, 2020, the former employee filed a Notice of Appeal; the Company cross-appealed on June 2, 2020. In addition, the Company filed a motion for attorneys’ fees in the trial court for over $0.9 million, which has been set for hearing on September 9, 2020. The Company will continue making assessments regarding the collectability of our monetary award as the appeals process progresses.

Note 12.    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 minimum commitments under movie and IPTV arrangements as of March 31, 2020 (in thousands):
Years Ending December 31,
Amount
2020 (remaining nine months)
$
33,562

2021
7,588

2022
2,466

Total
$
43,616


Satellite Bandwidth Capacity
The Company maintains agreements with satellite service providers to provide for satellite capacity. Except when an arrangement is assessed to meet the definition of a finance lease in accordance with ASC 842, in which case the expensing pattern is front-loaded, the Company expenses these satellite fees in the month the service is provided as a charge to licensing and services cost of sales.

The following is a schedule of future minimum satellite costs, across all connectivity end-markets and including the satellite bandwidth arrangement assessed as a finance lease, as of March 31, 2020 (in thousands):
Years Ending December 31,
Amount
2020 (remaining nine months)
$
65,874

2021
49,903

2022
34,527

2023
33,032

2024
33,032

Thereafter
58,355

Total Future Payments
$
274,723


Other Commitments
In the normal course of business, we enter into future purchase commitments with some of our connectivity vendors to secure future inventory for our customers and engineering and antenna project developments. As of March 31, 2020, we also had outstanding letters of credit in the amount of $4.4 million, of which $4.4 million was issued under the letter of credit facility under the 2017 Credit Agreement.

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 and finally adjudicated. We record accruals for loss contingencies when our management concludes it is probable that a


30


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 condensed 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”), our indirect subsidiary, for copyright infringement and related claims and unspecified money damages. 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 72,000 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 20,000 additional shares of our common stock when and if our closing price of our common stock exceeds $250.00 per share and 16,000 additional shares of our common stock when and if the closing price of our common stock exceeds $300.00 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, except for BMG Rights Management (US) LLC (“BMG”) as described in the following paragraph. Other than in respect of the BMG litigation (the loss probability and liability estimate of which we discuss in the following paragraph), 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 amount for these loss contingencies. If initiated however, we intend to vigorously defend ourselves against these claims.

On May 3, 2018, BMG filed suit in the United States District Court for the Central District of California against us and IFP for copyright infringement and related claims and unspecified money damages. On December 3, 2019, the case was dismissed with prejudice pursuant to a settlement agreement with BMG for an aggregate payment of $5.5 million, to be paid over time, as follows: $0.5 million within 14 days of the execution of the settlement agreement; $1.5 million on or before each of December 31, 2019, June 30, 2020, and June 30, 2021; and $0.5 million on or before June 30, 2022. We have booked an accrual for this legal settlement in the amount of $3.5 million as of December 31, 2019.

SwiftAir Litigation. On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44 and Southwest Airlines for breach of contract,  quantum meruit , unjust enrichment and several other contract- and tort/statutory-based claims 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 Row 44’s portal on Southwest Airlines so that SwiftAir could market a destination deal product to Southwest Airlines’ passengers. In 2013, after Southwest Airlines decided not to proceed further with the destination deal product, Row 44 terminated its contract with SwiftAir. In its lawsuit, SwiftAir sought approximately $9.0 million in monetary damages (plus punitive and other extra-contractual damages) from Row 44 and Southwest Airlines. In 2017, the court granted Row 44’s motion for summary judgment as to SwiftAir’s tort/statutory-based claims. In January 2018, the court granted Row 44’s motions in limine  that limited SwiftAir’s contract damages claims against Row 44 to nominal damages. Southwest Airlines however remained exposed to all of SwiftAir’s compensatory damages claims.  On September 9, 2019, following a three-week trial, the jury returned a full defense verdict in favor of Row 44 and Southwest Airlines. On October 1, 2019, the Court entered judgment against SwiftAir; notice of entry of judgment was given on October 10, 2019. On October 15, 2019, Row 44 filed its memorandum of costs and it intends to file a motion for attorneys’ fees and non-statutory costs and expenses.

On October 25 and 28, 2019, SwiftAir filed motions for a new trial and judgment notwithstanding the verdict, respectively, which were set for hearing on December 6, 2019. Row 44 filed a motion for attorneys’ fees and costs, which was also set for hearing on December 6, 2019. At that December 6, 2019 hearing, the trial court denied SwiftAir’s motions and took Row 44’s motion for attorneys’ fees and costs under submission. On March 2, 2020, the trial court granted Row 44’s motion in the amount of $2.2 million for fees and $0.1 million for costs. SwiftAir filed a Notice of Appeal as to both Row 44 and Southwest Airlines; its opening brief on appeal will be due between 40 days after the Reporter’s Transcript is complete. Separately, Southwest Airlines has sought indemnification from Row 44 in connection with its defense of SwiftAir’s claim (and for any loss that it may face). Row 44 provided partial indemnity until the trial court granted its motion for summary adjudication on certain issues in June 2017, at which


31


time it ceased paying for any of Southwest’s attorneys’ fees. We intend to vigorously defend against any claims in this matter. We do not believe that a material loss relating to this matter is probable, and due to the speculative nature of SwiftAir’s potential post-trial motions and appeal (and its damages claims), we are currently unable to estimate the amount of any potential loss; as such, we have not accrued any amount for this loss contingency.

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 accrual. 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 13.    Equity Transactions    

Shareholder Rights Plan
On March 19, 2020, our Board adopted a stockholder rights plan, as set forth in a Rights Agreement between the Company and American Stock Transfer and Trust Company, LLC (the “Rights Plan”) and issued the rights contemplated thereby (the “Rights”) on March 30, 2020. The Rights Plan is intended to promote the fair and equal treatment of all of our stockholders and ensure that no person or group can gain control of us through open market accumulation or other tactics without paying a control premium and potentially disadvantaging the interest of all stockholders. The Rights Plan ensures that our Board has sufficient time to exercise its fiduciary duties to make informed judgments about the actions of third parties that may not be in the best interests of us and our stockholders.

In general terms, the Rights will become exercisable if a person or group becomes the beneficial owner of 20% or more of the Company’s outstanding Common Stock. Stockholders who beneficially owned 20% or more of Global Eagle’s outstanding common stock prior to the issuance of the December 31, 2019 earnings release will not trigger the exercisability of the Rights so long as they do not acquire beneficial ownership of any additional shares of common stock at a time when they still beneficially own 20% or more of such common stock, subject to certain exceptions as described in the Rights Plan. In the event that the Rights become exercisable due to the triggering ownership threshold being crossed, each Right will entitle its holder to purchase a number of shares of Common Stock or equivalent securities having a market value at that time of twice the Right’s purchase price. The Rights Plan is attached to the December 31, 2019 Annual Report on Form 10-K as Exhibit 4.14.

Common Stock
On April 15, 2020, the Board of Directors approved a reverse stock split of the Company’s outstanding and authorized shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the number of the Company’s issued and outstanding shares of common stock was decreased from 92,944,935 to 3,717,797, all with a par value of $0.0001. The effective date of the Reverse Stock Split was April 16, 2020. The Reverse Stock Split affected all stockholders uniformly and did not alter any stockholder’s percentage interest in the Company’s common stock, except for adjustments that resulted from the treatment of fractional shares as follows: (i) no fractional shares were issued as a result of the Reverse Stock Split; and (ii) stockholders who would have been entitled to a fractional share as a result of the Reverse Stock Split instead received a cash payment from the transfer agent in an amount equal to the fractional share multiplied by the closing price of our common stock the day before the Reverse Stock Split became effective. All share and per share amounts presented in these financial statements, have been adjusted for this Reverse Stock Split.

2013 Equity Plan
Under the Company’s 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of the Company’s Board of Directors, was able to grant up to 440,000 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. The Company ceased using the 2013 Equity Plan for new equity issuances in December 2017, upon receiving stockholder approval of the Company’s new 2017 Omnibus Long-Term Incentive Plan (as amended, the “2017 Omnibus Plan”), although the Company continues to have outstanding previously granted equity awards issued under the 2013 Equity Plan. These previously granted awards represent the right to receive 282,812 shares of the Company’s common stock (as of January 18, 2018) if and when they later vest and/or are exercised. See “2017 Equity Plan” immediately below.



32


2017 Equity Plan
On December 21, 2017, the Company’s stockholders approved the 2017 Omnibus Plan. The Company had 83,914 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 became available for grant thereunder. The 2017 Omnibus Plan separately made available 260,000 shares of the Company’s 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 the 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.

On June 25, 2018, the Company’s stockholders approved an amendment and restatement of the 2017 Equity Plan that increased by 80,000 the number of shares of the Company’s common stock authorized for issuance thereunder.
 
Stock Repurchase Program
In March 2016, our Board of Directors authorized a stock repurchase program under which we may repurchase up to $50.0 million of our common stock. Under the stock repurchase program, we 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 we repurchase our 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. We measure all potential buybacks against other potential uses of capital that may arise from time to time. The repurchase program does not obligate us to repurchase any specific number of shares, and may be suspended or discontinued at any time. We expect to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. We did not repurchase any shares of our common stock during the three months ended March 31, 2020 and 2019. As of March 31, 2020, the remaining authorization under the stock repurchase plan was $44.8 million.

Stock-Based Compensation Expense
Stock-based compensation expense related to our directors and other personnel for the three months ended March 31, 2020 and 2019 was as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Cost of services
$
66

 
$
27

Sales and marketing
57

 
53

Product development
77

 
68

General and administrative
928

 
1,141

Total
$
1,128

 
$
1,289

Total stock-based compensation expense includes the revaluation adjustment related to the Company’s cash-settled phantom stock options, which are accounted for as liability awards and are re-measured at fair value each reporting period. Compensation expense is recognized over the requisite service period.

Note 14.    Income Taxes

The Company recorded income tax provision of $1.1 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. The tax provision for the three months ended March 31, 2020 is primarily attributable to foreign income taxes resulting from our foreign subsidiaries' contribution to pretax income, withholding taxes, changes in valuation allowance, and deferred tax expense on amortization of indefinite-lived intangible assets. The tax provision for the three months ended March 31, 2019 was primarily attributable to the foreign withholding taxes, foreign income taxes resulting from the foreign subsidiaries' contribution to pretax income, basis difference in convertible debt and effects of permanent differences.

Due to uncertainty as to the realization of benefits from the Company's U.S. and certain international net deferred tax assets, including net operating loss carryforwards, the Company has a full valuation allowance reserved against such net deferred tax assets. The Company intends to continue to maintain a full valuation allowance on certain jurisdictions’ net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.


33



As of March 31, 2020, and December 31, 2019, the liability for income taxes associated with uncertain tax positions was $6.3 million and $7.7 million, respectively. As of March 31, 2020, and December 31, 2019, the Company had accrued $6.2 million and $6.4 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. This change may be the result of settlement of ongoing foreign audits.

Note 15.    Segment Information

Our business comprises two operating segments:

Media & Content: selects, manages, provides lab services and distributes wholly owned and licensed media content, video and music programming, advertising, applications and interactive games to the airline, maritime and other “away from home” non-theatrical markets.

Connectivity: provides customers, including their passengers, crew, remote workers and soldiers, as applicable, with (i) Wi-Fi connectivity via C, Ka and Ku-band satellite and terrestrial wireless 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 and passenger service delivery.

Our Chief Executive Officer, the Company’s 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. However, historical results may not be indicative of future results because 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.



34


The following table summarizes revenue and gross margin by our reportable segments for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
 
 
 
Media & Content -- Licensing and Services
$
68,385

 
$
80,010

Connectivity -- Services
67,260

 
70,468

Connectivity -- Equipment
8,520

 
16,141

Total revenue
$
144,165

 
$
166,619

Cost of sales:
 
 
 
Media & Content -- Licensing and Services
$
55,556

 
$
57,669

Connectivity -- Services
57,728

 
65,600

Connectivity -- Equipment
7,523

 
10,925

Total cost of sales
$
120,807

 
$
134,194

Gross Margin:
 
 
 
Media & Content
$
12,829

 
$
22,341

Connectivity
10,529

 
10,084

Total Gross Margin
23,358

 
32,425

Other operating expenses
70,151

 
51,515

Loss from operations
$
(46,793
)
 
$
(19,090
)

The Company’s total assets by segment were as follows (in thousands):
 
 
March 31, 2020
 
December 31, 2019
Media & Content
 
$
300,205

 
$
316,340

Connectivity
 
279,799

 
331,368

Total segment assets
 
580,004

 
647,708

Corporate assets
 
50,472

 
20,872

Total assets
 
$
630,476

 
$
668,580


Note 16.    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 measurements. 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 that 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.


35



Due to the short-term nature, carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2020, and December 31, 2019, respectively (dollar values in thousands, other than per-share values):
 
Balance Sheet Location
 
March 31, 2020
 
Quotes Prices in Active Markets
(Level 1)
 
 Significant Other Observable Inputs
(Level 2)
 
 Significant Other Unobservable Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
 
 
Contingently issuable shares (1)
Accounts payable and accrued liabilities
 
$
98

 
$

 
$

 
$
98

Phantom stock options (2)
Other non-current liabilities
 
243

 

 

 
243

Total
 
 
$
341

 
$

 
$

 
$
341

 
Balance Sheet Location
 
December 31, 2019
 
Quotes Prices in Active Markets
(Level 1)
 
 Significant Other Observable Inputs
(Level 2)
 
 Significant Other Unobservable Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
 
 
Contingently issuable shares (1)
Accounts payable and accrued liabilities
 
$
305

 
$

 
$

 
$
305

Phantom stock options (2)
Other non-current liabilities
 
464

 

 

 
464

Total
 
 
$
769

 
$

 
$

 
$
769

(1) In connection with the Sound-Recording Settlements (as described in Note 10. Commitments and Contingencies above), the Company is obligated to issue to UMG (as defined in that Note) 20,000 shares of its common stock when and if the closing price of the Company's common stock exceeds $250.00 per share and an additional 16,000 shares of common stock when and if the closing price of the Company’s common stock exceeds $300.00 per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.
(2) Our cash-settled phantom stock options are accounted for as liability awards and are re-measured at fair value each reporting period with changes flowing through statement of operations. As of March 31, 2020, the aggregate estimated fair value of our cash-settled phantom stock options was $0.2 million, of which the amortized portion recognized as a liability in our condensed consolidated balance sheet was $0.2 million.

The following table shows the carrying amounts and the fair values of our long-term debt in the condensed consolidated financial statements at March 31, 2020 and December 31, 2019, respectively (in thousands):
 
March 31, 2020
 
December 31, 2019
 
Carrying Amount(7)
 
Fair Value
 
Carrying Amount (7)
 
Fair Value
Senior secured term loan facility, due January 2023 (+)(1)
$
485,405

 
$
317,948

 
$
485,166

 
$
454,168

Senior secured revolving credit facility, due January 2022 (+)(2)
80,615

 
80,615

 
43,315

 
43,315

Convertible senior notes due 2035 (1)(3)
71,302

 
5,775

 
71,126

 
37,125

Second Lien Notes, due June 2023(4)(5)
161,121

 
23,058

 
149,772

 
99,922

Other debt (6)
22,937

 
22,937

 
23,683

 
23,685

 
$
821,380

 
$
450,333

 
$
773,062

 
$
658,215

(+)
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 quoted prices of the instrument in a similar over-the-counter market.
(2)
The estimated fair value is considered to approximate carrying value and is classified as Level 3 financial instruments.
(3)
The fair value of the 2.75% Convertible Notes is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at $13.0 million, and is included in the condensed consolidated balance sheets within “Additional paid-in capital”. The principal amount outstanding of the Convertible Notes was $82.5 million as of March 31, 2020, and the carrying amount in the foregoing table reflects this outstanding principal amount net of debt issuance costs and discount associated with the equity component.
(4)
The principal amount outstanding of the Second Lien Notes, due June 2023 as set forth in the foregoing table was $188.7 million as of March 31, 2020, and includes $38.7 million of payment-in-kind (“PIK”) interest converted to principal since debt issuance. The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital” (see Note 10. Financing Arrangements).


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(5)
The fair value of the Second Lien Notes was determined based on a Black-Derman-Toy interest rate Lattice model. The key inputs of the valuation model contain certain Level 3 inputs.
(6)
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments. For March 31, 2020, Other debts primarily consisted of (i) $3.4 million financing for transponder purchases, which was payable April 2020, and remains unpaid at filing date; and (ii) $18.4 million of finance lease liability relating to an assessed right-of-use over a satellite bandwidth capacity (refer to Note 4. Leases for further details).
(7)
The carrying amounts presented above at March 31, 2020 and December 31, 2019 are net of $58.1 million and $60.5 million of unamortized bond discounts and issuance costs, respectively.

Non-financial Assets Measured at Fair Value on a Nonrecurring Basis
The Company measures certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible, equity method investments and intangible assets, in connection with periodic evaluations for potential impairment. The Company estimates the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.

In the first quarter of 2020, the long-term operating plan for the Maritime & Land Connectivity reporting unit was updated to reflect current expectations for future growth and profitability, which were lower than previous expectations. Due to lowered expectations, the Company tested the Maritime and Land Segment goodwill for impairment three quarters prior to the annual evaluation. Step 1 test results indicated that the estimated fair value of the reporting unit was less than the carrying value. This impairment was primarily due to lower than expected financial results of the reporting unit during the three months ended March 31, 2020 due primarily to impacts of COVID-19 outbreak on our cruise and yacht channels, coupled with the loss of a Brazilian government customer and  continuation of exiting the mobile network operation channel. Given these indicators, the Company then determined 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.

In our Step 2 analysis, we used a combination of the expected present value of future cash flows (income approach) and comparable public companies (market approach) to determine the fair value of the reporting unit. The fair value analysis took into account recent and expected operating performance as well as the overall decline in the Maritime industry. Within our Maritime & Land Segment, the Company recognized a goodwill impairment charge of $22.1 million in Q1 2020. (see Note 2. Summary of Significant Accounting Policies for previous discussion about approach to estimating fair value for these level-3 assets).

The Company determined the carrying value of the interests in the WMS and Santander Teleport S.L. (“Santander”) joint ventures exceeded their estimated fair value of the Company’s interests, which management concluded was other than temporary. The Company recorded an impairment charge of $10.1 million and $3.0 million relating to its WMS and Santander equity investments, respectively. This WMS impairment was primarily the result of lower than expected financial results for the quarter ended March 31, 2020 due to the uncertainty related to the impacts of the COVID-19 pandemic on the cruise industry.
Note 17.    Concentrations

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

As of March 31, 2020, and 2019, we maintained our cash and cash equivalents primarily with major U.S. financial institutions and foreign banks. Deposits with these institutions at times exceeded the federally insured limits, which potentially subjects us to concentration of credit risk. We have not historically experienced any losses related to these balances and believe that there is minimal risk of any such losses.

As of March 31, 2020, approximately $4.8 million of our total cash and cash equivalents of $54.2 million was held by our foreign subsidiaries. If we repatriate these funds 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 that any such repatriation would create a tax liability in the U.S. or have a material impact on our effective tax rate.



37


Customer Concentration
A substantial portion of our revenue is generated through arrangements with Southwest Airlines, Inc. (“Southwest Airlines”). As of March 31, 2020 and 2019, the percentage of revenue generated through this customer was as follows:
 
Three Months Ended March 31,
 
2020
 
2019
Southwest Airlines as a percentage of total revenue
20
%
 
21
%
Southwest Airlines as a percentage of Connectivity revenue
38
%
 
39
%

No other customer accounted for greater than 10% of total revenue for the periods presented. Accounts receivable from Southwest Airlines represented 16% and 17% of the total accounts receivable as of each of March 31, 2020 and December 31, 2019, respectively.

Note 18.    Net Results Per Share

Basic loss per share 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. Common stock to be issued upon the exercise of warrant instruments classified as a liability is not included in the calculation of diluted loss per share because the effect of including such shares is anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share of common stock. All per share amounts presented below, have been adjusted for the Reverse Stock Split. (in thousands, except per share amounts):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Net loss (numerator):
 
 
 
 
Net loss – basic and diluted
 
$
(80,925
)
 
$
(37,609
)
Shares (denominator):
 
 
 
 
Weighted-average shares – basic and diluted
 
3,718

 
3,673

Diluted
 
$
(21.77
)
 
$
(10.23
)

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):
 
Three Months Ended March 31,
 
2020
 
2019
Employee stock options
203

 
205

Restricted and performance stock units