As used herein, "
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to our expected Adjusted EBITDA, revenue and margin growth and sustainable positive free cash flow in future periods, our aviation-connectivity installations in future periods, the length and severity of COVID-19 or other catastrophic events and the related impact on both customer demands and supply chain functions, as well as our future consolidated financial position, results of operations and cash flows, the impact from the COVID-19 pandemic and the Boeing 737 MAX aircraft grounding on our financial performance, our business and financial-performance outlook, industry, business strategy, plans the potential sale of certain businesses and assets, potential restructuring activities, business and M&A integration activities, operating-expense and cost structure improvements and reductions and our ability to execute and realize the benefits of our cost-savings plans, international expansion, future technologies, future operations, financial covenant compliance, margins, profitability, future efficiencies, liquidity, ability to generate positive cash flow from operating activities, and other financial and operating information. The words "anticipate," "assume," "believe," "budget," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "will," "future" and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this Form 10-Q.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:
• the effect that the rapid spread of contagious illnesses, such as the coronavirus, is having and could continue to have on our business and results of operations; • our ability to successfully pursue and consummate financing, recapitalization, strategic transactions and other similar transactions to address the substantial doubt about the company's ability to continue as a going concern, and our ability to do so without filing for bankruptcy court protection; • the substantial risk that it may be necessary for us to seek protection under Chapter 11 of the United States Bankruptcy Code, which could make it difficult for us to retain management and other key personnel • our ability to anticipate and keep pace with rapid changes in customer needs and technology; • negative external perceptions that damage our reputation among potential customers, investors, employees, advisors and vendors; • service interruptions or delays, technology failures, damage to equipment or software defects or errors and the resulting impact on our reputation and ability to attract, retain and serve our customers; • the effect of cybersecurity attacks, data or privacy breaches, data or privacy theft, unauthorized access to our internal systems or connectivity or media and content systems, or phishing or hacking, on our business, our relationships with customers, vendors and our reputation; • our ability to timely remediate material weaknesses in our internal control over financial reporting; the effect of those weaknesses on our ability to report and forecast our operations and financial performance, and our ability to raise future capital or complete acquisitions through the use of Form S-3; and the impact of our remediation efforts (and associated management time and costs) on our liquidity and financial performance; • our ability to maintain effective disclosure controls and internal control over financial reporting; • our ability to execute on our operating-expense and cost-structure realignment plan and realize the benefits of those initiatives;
• our dependence on the travel industry;
• our ability to expand our international operations and the risks inherent in our international operations, especially in light of current and future trade and national-security disputes; • our ability to plan expenses and forecast revenue due to the long sales cycle of many of our Media & Content segment's products; • our dependence on our existing relationship and agreement with Southwest Airlines; • the timing and conditions surrounding the return to normal production and revenue service of the Boeing 737 MAX aircraft; • our ability to develop new products or services or enhance those we currently provide in our Media & Content segment; • our ability to accelerate dividends from, or dispose of our 49% interest inWireless Maritime Services, LLC ("WMS"); • our ability to integrate businesses or technologies we have acquired or may acquire in the future; • our ability to successfully divest or dispose of business that are deemed not to fit with our strategic plan; 42
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• the effect of future acts or threats of terrorism, threats to national security and other actual or potential conflicts, wars, geopolitical disputes or similar events on the use of Wi-Fi enabled devices on our aircraft and maritime vessels; • the effect of natural disasters, adverse weather conditions or other environmental incidents on our business; • the possibility that our insurance policies may not fully cover all loses we incur; • our ability to obtain new customers and renew agreements with existing customers; • our customers' solvency, inability to pay and/or delays in paying us for our services, and potential claims related to payments from customers received prior to such customers' insolvency proceedings; • our ability to retain and effectively integrate and train key members of senior management;
• our ability to recruit, train and retain highly skilled technical employees;
• our ability to receive the anticipated cash distributions or other benefits from our investment in the WMS; • the effect of a variety of complexU.S. and foreign tax laws and regimes due to the global nature of our business; • our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited; • our ability to continue to be able to make claims for e-business and multimedia tax credits inCanada ;
• our exposure to interest rate and foreign currency risks;
• the effect of political changes and developments globally, including Brexit, on our customers and our business; • our need to invest in and develop new broadband technologies and advanced communications and secure networking systems, products and services and antenna technologies as well as their market acceptance; • increased demand by customers for greater bandwidth, speed and performance and increased competition from new technologies and market entrants; • customer attrition due to direct arrangements between satellite providers and customers; • our reliance on "sole source" service providers and other third parties for key components and services that are integral to our product and service offerings; • the potential need to materially increase our investments in product development and equipment beyond our current investment expectations; • equipment failures or software defects or errors that may damage our reputation or result in claims in excess of our insurance or warranty coverage;
• satellite failures or degradations in satellite performance;
• our use of fixed-price contracts for satellite bandwidth and potential cost differentials that may lead to losses if the market price for our services declines relative to our committed cost; • our ability to plan expenses and forecast revenue due to the long sales cycle of many of our Connectivity segment's products; • increased on-board use of personal electronic devices and content accessed and downloaded prior to travel which may cause airlines to reduce investment in seatback entertainment systems; • increased competition in the in-flight entertainment ("IFE") and in-flight connectivity ("IFC") system supply chain; • pricing pressure from suppliers and customers in our Media & Content segment and a reduction in the aviation industry's use of intermediary content service providers (such as us); • a reduction in the volume or quality of content produced by studios, distributors or other content providers or their refusal to license content or other rights upon terms acceptable to us; • a reduction or elimination of the time between our receipt of content and it being made available to the rental or home viewing market (i.e., the "early release window"); • the refusal of content providers to license content to us, operational complexity and increased costs or reducing content that we offer due to challenges maintaining and tracking our music content licenses and rights related thereto, which could cause a decline in customer retention or inability to win new business; • our use of fixed-price contracts in our Media & Content segment that may lead to losses in the future if the market price for our services declines relative to our committed cost; • our ability to successfully implement a new enterprise resource planning system;
• our ability to protect our intellectual property;
• the effect on our business and customers due to disruption of the technology systems utilized in our business operations; • the costs to defend and/or settle current and potential future civil intellectual property lawsuits (including relating to music and other content infringement) and related claims for indemnification; • changes in regulations and our ability to obtain regulatory approvals to provide our services or to operate our business in particular countries or territorial waters; • compliance withU.S. and foreign regulatory agencies, including theFederal Aviation Administration ("FAA"), theU.S. Department of Treasury's Office of Foreign Asset Control ("OFAC"),Federal Communications Commission ("FCC "), andFederal Trade Commission ("FTC") and their foreign equivalents in the jurisdictions in which we and our customers operate; • regulation by foreign government agencies that increases our costs of providing services or requires us to change services; • changes in government regulation of the Internet, including e-commerce or online video distribution; 43
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• our ability to comply with trade, export, anti-money laundering and anti-bribery practices and data protection laws, especially theU.S. Foreign Corrupt Practices Act, theU.K. Bribery Act, the General Data Protection Regulation and the California Consumer Privacy Act. • changes in foreign and domestic civil aviation authorities' orders, airworthiness directives, or other regulations that restrict our customers' ability to operate aircraft on which we provide services; • our (along with our directors' and officers') exposure to civil stockholder litigation relating to our investor disclosures and the related costs of defending and insuring against such litigation; • uninsured or underinsured costs associated with stockholder litigation and any uninsured or underinsured indemnification obligations with respect to current and former executive officers and directors; • limitations on our cash flow available to make investments due to our substantial indebtedness and covenants set forth in our debt agreements, including a maximum consolidated first lien net leverage ratio covenant (the "Maximum First Lien Leverage") covenant and a minimum liquidity covenant (the "Minimum Liquidity") covenant, and our ability to generate sufficient cash flow to make principal and interest payments thereon, comply with our reporting and financial covenants, or fund our operations; • our ability to repay the principal amount of our bank debt, second lien notes dueJune 30, 2023 (the "Second Lien Notes") and/or 2.75% convertible senior notes due 2035 (the "Convertible Notes") at maturity or upon acceleration thereof, to raise the funds necessary to settle conversions of our Convertible Notes or to repurchase our Convertible Notes upon a fundamental change or on specified repurchase dates or due to future indebtedness;
• the conditional conversion of our Convertible Notes;
• the effect on our reported financial results of the accounting method for our Convertible Notes; • the impact of the fundamental change repurchase feature and change of control repurchase feature of the Securities Purchase Agreement on our price or potential as a takeover target; • the effect of the downgrade of our credit rating on our business, reputation and ability to raise capital; • our potential as a takeover target due to price depression of our common stock; • the dilution or price depression of our common stock that may occur as a result of the conversion of our Convertible Notes and/or Searchlight warrants; • our ability to meet the continued listing requirements of The Nasdaq Capital Market ("Nasdaq"), given our receipt of a notice from the Listing Qualifications staff (the "Staff") of Nasdaq that our market value of listed securities does not meet the minimum$35 million requirement pursuant to Nasdaq rules;
• conflicts between our interests and the interests of our largest stockholders;
• volatility of the market price of our securities;
• anti-takeover provisions contained in our charter and bylaws and our Shareholder Rights Plan; • the dilution of our common stock if we issue additional equity or convertible debt securities; • the possibility that we may experience delays in filing our periodicSEC reports due to our material weaknesses in our internal control over financial reporting, which would result in our ineligibility to use a registration statement on Form S-3 to register the offer and sale of securities in the future; • additional losses due to further impairment in the carrying value of our goodwill;
• changes in accounting standards, including the new credit loss standards; and,
• other risks and factors listed under "Risk Factors" in Part II, Item 1A of this Quarterly Report and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
The forward-looking statements herein speak only as of the date the statements
are made as of the filing date of this Form 10-
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Overview of the Company
We are a leading provider of media and satellite-based connectivity to
fast-growing, global mobility markets across air, sea and land. Our principal
operations and decision-making functions are located in
For the three months ended
Impacts from COVID-19 Pandemic and Recent Developments
In
Customer demand. 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. The pandemic is ongoing and dynamic in
nature and, to date, our customers have experienced temporary closures in key
regions globally. Growth in our overall business is principally dependent upon
the number of customers that purchase our services, our ability to negotiate
favorable economic terms with our customers and partners and the number of
travelers
CARES Act
On
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otherwise owed for wage payments made after
Our Operations: The COVID-19 pandemic has disrupted, and continues to disrupt, our day-to-day activities, including limiting our access to facilities and its employees. During the first quarter of 2020, the Company's management initiated its multi-year Transformation 2022 cost savings initiatives, which targets simplification and standardization, improved Connectivity network efficiency, labor and footprint rationalization among other improvements. During the second quarter of 2020, we reduced headcount and the utilization of contract labor and have planned additional reductions through early 2021 resulting in a 10% reduction in total headcount. Additionally, the Company's management is optimizing the cost of the workforce by utilizing lower cost locations and creating centralized Centers of Excellence, aimed at providing more efficient and focused services at lower cost. In addition to labor savings we will reduce facilities cost by enabling the further consolidation of offices. We are aggressively working with our third party partners to optimize cost and align service levels to the current requirements.
In response to the COVID-19 pandemic and related government restrictions
negatively impacting our operations, subsequent to
Liquidity and Cost Management 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 transactions. 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. For further discussion of this risk, please see Part II, Item IA "Risk Factors" of this Report.
On
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, with follow-on impact to the Company. As of
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contained in the Senior Secured Credit Agreement entered into on
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
The Company was in compliance with all lender covenants for the period ended
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
If the Company is unable to comply with the covenants contained in its debt 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 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:
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•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 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 our 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) submitted applications for
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 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. Please refer to Part I, Item 2 ("Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources").
Additionally, the covenants in our 2017 Credit Agreement include 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
Significant Transactions and Developments
Goodwill Impairment
For the quarter ended
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of
Impairment of Equity Method Investments
During the first quarter of 2020, in accordance with ASC 323,
Opportunities, Challenges and Risks
COVID-19
The length of COVID-19 outbreak and its impact on global travel and the broader travel industry is unknown and impossible to predict with certainty at this time. As a result, the full extent to which COVID-19 will impact our business and results of operations is unknown.
Overview
We believe our operating results and performance are driven by various factors
that affect the commercial travel industry and the mobility markets serving
hard-to-reach places on land, sea and in the air. These include general
macroeconomic trends affecting the mobility markets, such as travel and maritime
trends affecting our target user base, regulatory changes, competition and the
rate of customer adoption of our services as well as factors that affect
mobility Internet service providers in general. Growth in our overall business
is principally dependent upon the number of customers that purchase our
services, our ability to negotiate favorable economic terms with our customers
and partners and the number of travelers
Media & Content Segment During the first quarter of 2020, Media & Content revenue was down 15% over the prior-year quarter primarily due to the early impact of COVID-19 and a decline in content distribution. Our Media & Content segment is dependent upon a number of factors, including the growth of IFE systems (including both seatback installed and Wi-Fi IFE systems), our customers' demand for content and games across global mobility markets, the general availability of content to license from our studio partners, pricing from our competitors and our ability to manage the underlying economics of content licensing by studio. Current demand for these content and games across global mobility markets is low and experienced a significant decrease during the first quarter of 2020, primarily due to COVID-19, and our ability to get back to pre-COVID-19 volume levels will depend on the recovery of the airline industry and return of passenger demand and bookings.
Connectivity Segment For the first quarter of 2020, connectivity segment revenue was down 13% year-over-year driven primarily by lower equipment revenue due to few aircraft installations and the intentional declines in the land connectivity revenue as the Company exits activities with unfavorable cash flow profiles. In our Connectivity segment, the use of our connectivity equipment on our customers' aircraft
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is subject to regulatory approvals, such as a Supplemental Type Certificate, or
"STC," that are imposed by agencies such as the
Our Connectivity segment is dependent on satellite-capacity providers for
satellite bandwidth and certain equipment and servers required to deliver the
satellite data stream, rack space at the suppliers' data centers to house the
equipment and servers, and network operations service support. Through our
acquisition of
The growth of our Connectivity segment is dependent upon a number of factors, including the rates at which we increase the number of installed connectivity systems for new and existing customers, customer demand for connectivity services and the prices at (and pricing models under) which we can offer them, government regulations and approvals, customer adoption, take rates (or overall usage of our connectivity services by end-users), the general availability and pricing of satellite bandwidth globally, pricing pressures from our competitors, general travel industry trends, new and competing connectivity technologies, our ability to manage the underlying economics of connectivity services on a global basis and the security of those systems. The regulatory grounding of Boeing's 737 MAX aircraft type ("MAX aircraft") during 2019 and 2020, which was necessitated by flight incidents beyond our control and unrelated to passenger connectivity systems, imposes certain risks for us. Prior to the grounding, MAX aircraft represented approximately 1% of our total Connectivity service revenue.
The success of our business depends, in part, on the secure and uninterrupted performance of our information technology systems. An increasing number of companies have disclosed cybersecurity breaches, some of which have involved sophisticated and highly targeted attacks on their computer networks. Despite our efforts to prevent, detect and mitigate these threats, including continuously working to install new, and upgrade our existing, information technology systems and increasing employee awareness around phishing, spoofing, malware, and other cyber risks, there is no guarantee that such measures will be successful in protecting us from a cyber issue. We will respond to any reported cybersecurity threats as they are identified to us and work with our suppliers, customers and experts to quickly mitigate any threats, but we believe that cybersecurity risks are inherent in our industries and sectors and will continue to represent a significant reputational and business risk to our Connectivity segment's growth and prospects, and those of our overall industries and sectors.
Our cost of sales, the largest component of our operating expenses, varies from
period to period, particularly as a percentage of revenue, based upon the mix of
the underlying equipment and service revenue that we generate. Cost of sales
also varies period-to-period as we acquire new customers to grow our
Connectivity segment. We have increased our investment in satellite capacity
over
A substantial amount of our Connectivity segment's revenue is derived from
Southwest Airlines, a
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revenue visibility. The contract also provides for additional rate cards for ancillary services and the adoption of a fleet management plan.
Although current activities have been delayed due to COVID-19, we plan to
further expand our connectivity operations internationally to address
opportunities in non-
Adoption of Shareholder Rights Plan
On
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
Reverse Stock Split
On
On
On
On
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On
Material Weaknesses Our Annual Report disclosed numerous material weaknesses in our internal controls as a result of our failure to have an effective system of operations, including a robust ERP system. See Item 9A. Controls and Procedures of our Annual Report. We expect to continue to expend significant time and resources remediating material weaknesses in our internal control over financial reporting. These weaknesses relate our entity level control environment, financial statement close and reporting process, intercompany process, business combination, inventory, internally developed software, long lived assets, goodwill impairment, accounts payable and accrued liabilities, revenue processes, license fee accruals, income taxes, payroll and information technology processes.
We are strongly committed to addressing these material weaknesses, which we
believe will strengthen our business and continue to work on and enhance our
remediation plan. However, we are uncertain as to our timing to complete the
remediation, the extent to which such efforts will deplete our cash reserves and
our ability to succeed in the remediation. If we are unable to establish and
maintain effective internal control over financial reporting, we may not be able
to detect and prevent a material misstatement in our financial statements, and
we may be unable to timely file our periodic
Key Components of Condensed Consolidated Statements of Operations There have been no material changes to the key components of our condensed consolidated statements of operations as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Form 10-K.
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in
Recent Accounting Pronouncements
See Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a discussion on recent accounting pronouncements.
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RESULTS OF OPERATIONS
The following tables set forth our results of operations for the periods presented. The information in the tables below should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Form 10-Q. The period-to-period comparisons of financial results in the tables below are not necessarily indicative of future results.
Unaudited Condensed Consolidated Statement of Operations Data (in thousands)
Three Months Ended March 31, 2020 2019 Revenue$ 144,165 $ 166,619 Operating expenses: Cost of sales 120,807 134,194 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 (including cost of sales) 190,958 185,709 Loss from operations (46,793 ) (19,090 ) Other expense, net (33,006 ) (18,389 ) Loss before income taxes (79,799 ) (37,479 ) Income tax expense 1,126 130 Net loss$ (80,925 ) $ (37,609 )
The following table provides, for the periods presented, the depreciation expense included in the above line items (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$ 13,505 $ 14,153
The following table provides, for the periods presented, the stock-based compensation expense included in the above line items (in thousands):
Three Months Ended March 31, 2020 2019 Cost of sales $ 66$ 27 Sales and marketing 57 53 Product development 77 68 General and administrative 928 1,141 Total $ 1,128$ 1,289 53
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The following table provides, for the periods presented, our results of operations, as a percentage of revenue, for the periods presented:
Three Months Ended March 31, 2020 2019 Revenue 100 % 100 % Operating expenses: Cost of sales 84 % 81 % Sales and marketing 4 % 5 % Product development 4 % 4 % General and administrative 21 % 17 % Amortization of intangible assets 4 % 5 % Goodwill impairment 15 % - % Total operating expenses 132 % 111 % Loss from operations (32 )% (11 )% Other expense, net (23 )% (11 )% Loss before income taxes (55 )% (22 )% Income tax expense 1 % - % Net loss (56 )% (23 )% 54
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Three Months EndedMarch 31, 2020 and 2019
Operating Segments
Segment revenue, expenses and gross margin for the three months ended
Three Months Ended March 31, 2020 2019 Revenue: Media & Content Licensing and services$ 68,385 $ 80,010 Connectivity Services 67,260 70,468 Equipment 8,520 16,141 Total 75,780 86,609 Total revenue$ 144,165 $ 166,619 Cost of Sales: Media & Content Licensing and services$ 55,556 $ 57,669 Connectivity Services 57,728 65,600 Equipment 7,523 10,925 Total 65,251 76,525 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 ) Revenue
Media & Content
Media & Content operating segment revenue for the three months ended
Three Months Ended March 31, 2020 2019 Change Licensing and Services$ 68,385 $ 80,010 (15 )%
Media &
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Specifically, our media & content results were impacted by the following:
• Repricing and volume changes: Revenues decreased by
the early impact of the COVID-19 pandemic on ourAsian Pacific and Middle Eastern customer base of approximately$4.4 million , offset by a$0.9 million volume increase at a leading global airline; (ii) games and apps revenues decrease of$2.1 million due to lower volume across multiple customers; and (iii) updated contract terms that decreased revenue by$1.1 million .
• Aviation client wins and losses: Revenues decreased by
due to (i)$1.5 million lower advertising sales, (ii) a$3.4 million decrease in third-party distribution services to non-Global Eagle customers reflecting our ongoing reduction of third-party distribution revenue.
Connectivity
Connectivity operating segment revenue for the three months ended
Three Months Ended March 31, 2020 2019 Change Services$ 67,260 $ 70,468 (5 )% Equipment 8,520 16,141 (47 )% Total$ 75,780 $ 86,609 (13 )%
For purposes of our discussions within this MD&A section, we use the Maritime,
Enterprise and Government ("MEG") grouping name, which is a broader business
unit encompassing the same entities rolling into the Maritime & Land reporting
unit as discussed in Note 6.
Connectivity Services Revenue
Services revenue from our Connectivity operating segment decreased by
• MEG contract repricing and volume declines:
declines for certain MEG mobile network operator enterprise customers related to our strategic exit from that business line, and the loss of a government land customer inSouth America .
Connectivity Equipment Revenue
• Aviation customer volume: Equipment revenue from our Connectivity operating
segment decreased by$7.6 million , or 47%, to$8.5 million for the three months endedMarch 31, 2020 , compared to$16.1 million for the three months endedMarch 31, 2019 . The decrease was primarily due to a$5.3 million decline in equipment shipments for a majorNorth America customer due to COVID-19 related aircraft production and installation timetables. In addition, the completion of a major retrofit equipment program contributed$2.7 million of the overall decline in 2020. Cost of Sales
Media & Content
Media & Content operating segment cost of sales for the three months ended
Three Months Ended March 31, 2020 2019 Change Licensing and services$ 55,556 $ 57,669 (4 )%
Media & Content cost of sales decreased by
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Connectivity
Cost of sales for our Connectivity operating segment for the three months ended
Three Months Ended March 31, 2020 2019 Change Services$ 57,728 $ 65,600 (12 )% Equipment 7,523 10,925 (31 )% Total$ 65,251 $ 76,525 (15 )%
Connectivity services cost of sales decreased by
Maritime bandwidth cost decrease: (i) maritime and land satellite capacity
savings from contract renegotiations and cancellations for the three months
ended
As a percentage of Connectivity services revenue, Connectivity service cost of
sales decreased to 86% during the three months ended
The maritime and land business decrease was driven by bandwidth favorable re-negotiated rates and ongoing direct labor restructuring activities.
Equipment cost decrease: Connectivity equipment cost of sales decreased by
Other Operating Expenses
Other operating expenses for the three months ended
Three Months Ended March 31, 2020 2019 Change Sales and marketing $ 5,340$ 8,249 (35 )% Product development 5,963 6,979 (15 )% General and administrative 30,576 27,980 9 % Provision for legal settlements - 508 (100 )% Amortization of intangible assets 6,142 7,799 (21 )% Goodwill impairment 22,130 - 100 % Total$ 70,151 $ 51,515 36 %
Sales and Marketing
Sales and marketing expenses decreased by
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Product Development
Product development expenses decreased by
General and Administrative
General and administrative costs increased by
Provision for (Gain from) Legal Settlements
The provision for legal settlements decreased by
Amortization of Intangible Assets
Amortization expense decreased
Goodwill Impairment
For the quarter ended
Other (Expense) Income, net
Other expense for the three months ended
Three Months Ended March 31, 2020 2019 Change Interest expense, net$ (22,587 ) $ (21,277 ) 6 % Income (loss) from equity method investments including impairment losses (10,858 ) 2,129 (610 )% Change in fair value of derivatives 207 938 (78 )% Other income (expense), net 232 (179 ) (230 )% Total$ (33,006 ) $ (18,389 ) 79 %
Other expense, net increased
Income Tax Expense
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resulting from our foreign subsidiaries' contribution to pretax income, non-tax
deductible goodwill impairment, 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
NON -GAAP FINANCIAL MEASURES
To supplement our consolidated financial statements, which are prepared and
presented in accordance with accounting principles generally accepted in
EBITDA, Adjusted EBITDA and free cash flow are three of the primary measures used by our management and Board of Directors to understand and evaluate our financial performance and operating trends, including period to period comparisons, to prepare and approve our annual budget and to develop short- and long-term operational plans. Additionally, Adjusted EBITDA is one of the primary measures used by the Compensation Committee of our Board of Directors to establish the funding targets for (and if applicable subsequent funding of) our Annual Incentive Plan bonuses for our employees. We believe our presentation of EBITDA, Adjusted EBITDA and free cash flow is useful to investors both because it allows for greater transparency with respect to key metrics used by our management in their financial and operational decision-making and because our management frequently uses it in discussions with investors, commercial bankers, securities analysts and other users of our financial statements.
We define Adjusted EBITDA as EBITDA (net income (loss) before (a) interest
expense (income), (b) income tax expense (benefit) and (c) depreciation and
amortization), as further adjusted to exclude (when applicable in the
period) (1) change in fair value of financial instruments, (2) other (income)
expense, including (gains) losses from foreign-currency-transaction (gains) and
from other investments, which include impairment charges relating to our joint
ventures, (3) goodwill impairment expense, (4) stock-based compensation expense,
(5) strategic-transaction, integration and realignment expenses (as described
below), (6) auditor and third-party professional fees and expenses related to
our internal-control deficiencies (and the remediation thereof) and
complications in our audit process relating to our control environment, (7)
(gain) loss on disposal and impairment of fixed
assets, (8) non-ordinary-course legal expenses (as described below), (9) losses
related to significant customer bankruptcies or financial distress (as described
below) and (10) expenses incurred in connection with grounded aircraft resulting
from orders, airworthiness directives and other regulations issued by
"Losses related to significant customer bankruptcies or financial distress" includes (1) our provision for bad debt associated with significant bankruptcies or financial distress of our customers, (2) the costs (e.g., content acquisition fees) that we incurred to maintain service to those customers during their bankruptcy proceedings in order to preserve the customer relationship and (3) costs relating to providing services to customers for whom we recognize revenue on a cash basis due to their financial distress. "Non-ordinary-course legal expenses" includes third-party professional fees and expenses and estimated loss contingencies, provisions for legal settlements and other expenses associated with non-ordinary-course employment, corporate and intellectual-property-infringement disputes.
"Strategic-transaction, integration and realignment expenses" includes (1) transaction and procurement-related expenses and costs (including third-party professional fees) attributable to acquisition, financing, investment and other strategic-transaction activities (including for new product and proof-of-concept testing), (2) integration and realignment expenses and allowances, (3) employee-severance, -retention and -relocation expenses, (4) purchase-accounting adjustments for deferred revenue, costs and credits associated with companies and businesses that we have acquired through our M&A activities and (5) estimated loss contingencies, provisions for legal settlements and other expenses related to claims at companies or businesses that we acquired through our M&A activities for underlying liabilities that pre-dated our acquisition of those companies or businesses.
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We define free cash flow as cash flows from operating activities less capital expenditures. Free cash flow does not represent our residual cash flow available for discretionary expenditures, since we have mandatory debt service requirements and other non-discretionary expenditures that are not deducted from the measure.
The following table presents a reconciliation of Adjusted EBITDA for each of the periods presented (in thousands):
Three Months Ended March 31, 2020 2019 Net loss$ (80,925 ) $ (37,609 ) Interest expense, net 22,587 21,277 Income tax expense 1,126 130 Depreciation and amortization 19,712 21,952 EBITDA (37,500 ) 5,750 Depreciation and amortization from equity method investments 2,140 2,133 Change in fair value of financial instruments (207 ) (938 ) Other expense, net 647 178 Stock-based compensation expense 1,128 1,289 Goodwill impairment 22,130 - Equity method investment impairments 13,131 - Strategic-transaction, integration and realignment expenses 4,964 4,700 Internal-control and delayed audit expenses 3,324 3,453 Loss on disposal of fixed assets 453 164 Non-ordinary-course legal expenses 306 596 Losses on significant customer bankruptcies 2,620 1,164 Expenses incurred in connection with grounded aircraft 931 - Adjusted EBITDA$ 14,067 $ 18,489
The following table presents a reconciliation of Cash Flow from Operations to Free Cash Flow for each of the periods presented (in thousands):
Three Months Ended March 31, 2020 2019 Cash used in operations$ (3,690 ) $ (10,231 ) Purchases of property and equipment (1,477 ) (9,083 ) Free Cash Flow$ (5,167 ) $ (19,314 ) 60
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Selected financial data for the periods presented below were as follows (in thousands):
March 31, 2020 December 31, 2019
Cash and cash equivalents
630,476 668,580 Current portion of long-term debt 804,575 22,673 Long-term debt 16,805 773,062 Total stockholders' deficit$ (455,851 ) $ (375,154 )
The following reflects the financial condition of our business and operations as
of
As of
Anticipated Cash Requirements
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. However, at this time, it is not possible to fully determine the magnitude of the overall impact of the COVID-19 pandemic on our business. As such, the impact could have a material adverse effect on our overall business, financial condition, liquidity, results of operations, and cash flows.
Our principal sources of liquidity have historically been our debt and equity
issuances, and our cash and cash equivalents. Our long-term ability to continue
as a going concern is dependent on our ability to comply with the covenants in
our indebtedness, increase revenue, reduce costs and deliver satisfactory levels
of profitable operations. A substantial amount of our cash requirements are 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
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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 and significant related interest expense and uncertainty
related to the impact of COVID-19 on the results of operations. The Company was
in compliance with all lender covenants for the period ended
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
If the Company is unable to comply with the covenants contained in its debt agreements or obtain a waiver or an amendment from the lenders, or take other remedial measures, the Company will be in default under the credit facilities, which would enable 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 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 our 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
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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 we continue 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 we will be able to do so. Our ability to meet our obligations as they become due in the ordinary course of business for the next 12 months will depend on our ability to achieve improved results, our ability to generate and conserve cash, our ability to obtain necessary waivers from lenders and other equity stakeholders to achieve sufficient cash interest savings therefrom and our 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.
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
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 transactions. 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.
Seeking bankruptcy court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, during the period of time we are involved in a bankruptcy proceeding, our customers and suppliers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships.
Additionally, all of our indebtedness is senior to the existing common stock and preferred stock in our capital structure. As a result, we believe that seeking bankruptcy court protection under a Chapter 11 proceeding could cause the shares of our existing common stock to be canceled, result in a limited recovery, if any, for shareholders of our common stock, and would place shareholders of our common stock at significant risk of losing all of their investment in our shares. For further discussion of this risk, please see Part II, Item IA "Risk Factors" of this Report.
Amendments to Credit Agreement
On
Concurrent with entering into the Seventh Amendment to 2017 Credit Agreement, we
also entered into an amendment to the Securities Purchase Agreement (the "Second
Amendment to the Securities Purchase Agreement"), which, among other things,
removed our ability to make any cash interest payments under the Second Lien
Notes so long as such payments are prohibited by the terms of the 2017 Credit
Agreement, added collateral for the Second Lien Notes consistent with the
additional collateral provided under the 2017 Credit Agreement, and modified the
prepayment premium schedule to extend through maturity of the Second Lien Notes.
Please see Note 10. Financing Arrangements to our condensed consolidated
financial statements (Part IV, Item 15 of the
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On
Credit Rating
On
Cash and Cash Equivalents
Our cash and cash equivalents are maintained at several financial institutions.
Deposits held may exceed the amount of insurance provided on such deposits.
Generally, our deposits may be redeemed upon demand and are maintained with a
financial institution of reputable credit and, therefore, bear minimal credit
risk. As of
Sources and Uses of Cash-Three Months Ended
A summary of our cash flow activities for the three months ended
Three Months Ended March 31, 2020 2019 Net cash used in operating activities$ (3,690 ) $ (10,231 ) Net cash used in investing activities (1,477 ) (9,083 ) 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 51,868 Cash, Cash Equivalents and Restricted Cash at end of period$ 54,896 $ 33,745 64
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Three Months Ended
Three Months Ended
The remainder of our cash used in operating activities was as a result of net
cash outflows of
Three Months Ended
Three Months Ended
Net Cash Flows Provided by Financing Activities
Three Months Ended
Three Months Ended
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Long-Term Debt
As of
March 31, 2020 December 31, 2019
Senior secured term loan facility, due
80,615 43,315 Second lien notes, due June 2023 188,716 178,034 Convertible senior notes due 2035 82,500 82,500 Other debt 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 The aggregate contractual maturities of all borrowings, including finance leases, as ofMarch 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
The previous table excludes future purchase commitments with some of our
connectivity vendors to secure future inventory for our airline customers and
commitments related to ongoing engineering and antenna projects. At
As market conditions warrant, we may from time to time seek to purchase or
otherwise retire our outstanding debt in privately negotiated or open-market
transactions, by tender offer or otherwise. Subject to any applicable
limitations contained in the documents governing our indebtedness, any purchase
or retirement made by us may be funded by the use of cash on our balance sheet
or the incurrence of new secured or unsecured debt. The amounts involved in any
such transactions, individually or in the aggregate, may be material. Any such
purchase may be with respect to a substantial amount of a particular class of
debt, with the attendant reduction in the trading liquidity of such class. In
addition, any such purchases made at prices below the "adjusted issue price" (as
defined for
Covenant Compliance Under the 2017 Credit Agreement
Under the 2017 Credit Agreement, we are subject to a financial-reporting covenant ("Financial Reporting Covenant"), Minimum Liquidity covenant and a Maximum First Lien Leverage covenant, each of which is described in more detail in our 2019 Form 10-K and above, in addition to other customary covenants and restrictions set forth therein.
As noted above, the Company was in compliance with all lender covenants for the
period ended
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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
You should also refer to the section titled "Risks Related to Our Indebtedness" in Part I, Item 1A. Risk Factors in our 2019 Form 10-K, for an explanation of the consequences of our failure to satisfy these covenants.
Contractual Obligations
For a discussion of movie license and Internet protocol television commitments,
minimum lease obligations, satellite capacity, and other contractual commitments
as of
Off -Balance Sheet Arrangements
As of
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