Fair Value Measurements
|6 Months Ended|
Jun. 30, 2020
|Fair Value Disclosures [Abstract]|
|Fair Value Measurements||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.
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 June 30, 2020, and December 31, 2019, respectively (dollar values in thousands, other than per-share values):
(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 June 30, 2020, the aggregate estimated fair value of our cash-settled phantom stock options was $0.4 million, of which the amortized portion recognized as a liability in our condensed consolidated balance sheet was $0.4 million.
The following table shows the carrying amounts and the fair values of our long-term debt in the condensed consolidated financial statements at June 30, 2020 and December 31, 2019, respectively (in thousands):
(+) 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 June 30, 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 June 30, 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).
(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 June 30, 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) $17.8 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 June 30, 2020 and December 31, 2019 are net of $55.5 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 six months ended 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 six months ended June 30, 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 six months ended June 30, 2020 due to the uncertainty related to the impacts of the COVID-19 pandemic on the cruise industry.
The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef