GLOBAL EAGLE ENTERTAINMENT INC. As used herein, "Global Eagle Entertainment ," "Global Eagle," the "Company," "our," "we," or "us" and similar terms includeGlobal Eagle Entertainment Inc. and its subsidiaries, unless the context indicates otherwise. 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, the impact of our filing for bankruptcy protection under Chapter 11, 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, 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 impact of our bankruptcy filing on our relationships with customers, investors, employees, advisors and vendors; •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 (including the proposed asset sale) and other similar transactions to address the substantial doubt about the company's ability to continue as a going concern; •our ability to satisfy the conditions to closing the proposed restructuring and proposed asset sale, including our ability to obtain requisite approvals from the federal bankruptcy court and 3rd parties; •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 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 (including theEuropean Union's travel ban on theU.S. ); •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; 47 -------------------------------------------------------------------------------- Table of Contents •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 ,Federal Communications Commission , 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; 48 -------------------------------------------------------------------------------- Table of Contents •changes in government regulation of the Internet, including e-commerce or online video distribution; •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 (including potentially in connection with our bankruptcy filing); •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 the DIP Credit Agreement and our other debt agreements, including a maximum consolidated first lien net leverage ratio 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, including any debtor-in-possession financing and any related financings, 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 negative impact of our proposed restructuring activities and proposed asset sale on the holders of our outstanding common stock or Convertible Notes,who are not expected to receive any consideration as a result of such transactions; •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; •the removal of our common stock from listing and registration on The Nasdaq Capital Market ("Nasdaq"); •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 potential significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell shares of our common stock and Convertible Notes as a result of the delisting of our common stock; •the possibility that we may experience delays in filing our periodicSEC reports due to our material weaknesses in our internal control over financial reporting; •additional losses due to further impairment in the carrying value of our goodwill; •changes in accounting 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-Q. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 49 -------------------------------------------------------------------------------- Table of Contents Overview of the Company We provide 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 inNorth America ,South America andEurope . We have two operating segments: (i) Media & Content and (ii) Connectivity. We generate revenue primarily through licensing and related services from our Media & Content segment and from the delivery of satellite-based Internet service and content to the aviation, maritime and land markets and the sale of equipment from our Connectivity segment. Our chief operating decision maker regularly analyzes revenue and profit on a segment basis, and our results of operations and pre-tax income or loss on a consolidated basis in order to understand the key business metrics driving our business. For the Six Months EndedJune 30, 2020 , we reported revenue of$227.2 million and a net loss of$139.0 million , compared to our reported revenue of$324.1 million , and a net loss of$76.1 million during the prior-year period. The net loss during the six months endedJune 30, 2020 was due in part to a non-cash impairment charge, as described below. In addition, for the six months endedJune 30, 2020 and 2019, one airline customer,Southwest Airlines, Inc. ("Southwest Airlines ") accounted for 25% and 20%, respectively, of our total revenue. Recent Developments Bankruptcy. OnJuly 22, 2020 , the Company and 16 of its wholly ownedU.S. subsidiaries (together with the Company, the "Debtors") commenced voluntary Chapter 11 proceedings under Chapter 11 ofthe United States , (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court "). The Chapter 11 proceedings are jointly administered under the caption In reGlobal Eagle Entertainment Inc. , et al. (the "Chapter 11 Cases"), Case No. 20-11835. The Debtors continue to operate their business as "debtors-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court . OnJuly 23, 2020 , the Debtors sought, and theBankruptcy Court granted on an interim basis, approval of various "first day" motions containing customary relief intended to assure the Debtors' ability to continue their ordinary course operations. Delisting from Nasdaq. On August [10], 2020, Nasdaq announced that it will delist the common stock of the Company and that the Company's common stock was suspended onAugust 4, 2020 and has not traded on Nasdaq since that time. The trading of the Company's common stock has transitioned to the OTC Bulletin Board or "pink sheets" market. The transition to over-the-counter markets is not expected to affect the Company's operations or business. OnAugust 11, 2020 , Nasdaq filed a Form 25-NSE with theSecurities and Exchange Commission (the "SEC") to complete the delisting of the Company's common stock from Nasdaq, which delisting will be effective ten calendar days later, at which time the Company will cease to file current and periodic reports with theSEC . Impact of COVID-19 Pandemic. InMarch 2020 , theWorld Health Organization declared a pandemic resulting from COVID-19. In response to COVID-19, local and national governments around the world instituted shelter-in-place and similar orders and travel restrictions, and airline and maritime travel decreased suddenly and dramatically. The COVID-19 pandemic is having, and will likely continue to have, a significant negative impact on several important aspects of our business. Our financial performance. The COVID-19 pandemic is having a significant negative impact on our financial performance, driven primarily by a decrease in flight levels, new aircraft shipments, cruise ship passengers and vessel usage, and a corresponding increase in reductions and deferrals of our contracts and an overall decrease in volume and usage. These factors have had a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in the six months ended of fiscal 2020, and will likely continue to negatively impact our results for the full fiscal year. Net loss for the six months ended 2020 was$139.0 million , an increase of$62.9 million which included non-cash impairments of$22.1 million goodwill related to the Maritime & Land Connectivity reporting unit,$13.1 million of equity method investments in WMS and Santander joint ventures and$4.4 million impairment of long-lived assets. The non-cash impairments were driven by a higher degree of uncertainty given the COVID-19 environment, as further described below. Meanwhile, the decline in our total revenue, from$324.1 million during the six months endedJune 30, 2019 to$227.2 million during the six months endedJune 30, 2020 , was driven primarily by the impact of COVID-19 and a production halt in January of the Boeing 737 MAX aircraft, which theFAA and other regulators had grounded during 2019-2020 following flight incidents.
Compensatory Arrangements. The Board of Directors (the "Board") of the Company and the Compensation Committee of the Board ("Compensation Committee") have conducted a comprehensive review of the Company's compensation program for
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certain key employees to determine whether it continues to effectively
incentivize and retain such employees in light of the ongoing impact of the
COVID-19 pandemic on the global travel industry and the follow-on impact for the
Company. After consulting with outside compensation advisors and outside legal
counsel, reviewing market data and benchmarking expected relative compensation
to the market data, on July 10, 2020 , the Board and Compensation Committee
approved incentives to be paid to certain key employees, including each of its
named executive officers, in an effort to retain and motivate such employees in
the face of unprecedented uncertainty and increased workload created by
COVID-19. The terms of the incentives are specified in a form letter agreement.
The incentives were paid in advance on July 14, 2020 to encourage the recipients
to remain with the Company and steer it through the escalating effects of the
pandemic and the resulting impact on the business and operations of the Company.
The after-tax portion of the paid incentives will be clawed back in full in the
event that the incentive is not earned. The incentive will be earned in full so
long as the recipient is employed by the Company on the earlier of July 14, 2021
or a "Change of Control" as defined in the form letter agreement. As a condition
to receiving the incentives, the recipients were required to forfeit and waive
all rights they may have under any existing retention incentives, the Annual
Incentive Plan for the 2020 performance year, outstanding stock options and
cash-settled stock appreciation rights, whether or not previously vested, and
any unvested restricted stock units or performance stock units. The incentive
amounts (expressed as a percentage of the applicable executive's base
compensation) were awarded to the Company's named executive officers: 125% for
Joshua Marks , Chief Executive Officer, 100% for Christian Mezger , Chief
Financial Officer, and 100% for Per Norén, President.
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 who use our services. In addition, certain of our customers have
ceased or delayed payment or filed for insolvency protection, and we are unable
to predict the speed of recovery of the travel sector necessary to mitigate
these ongoing risks. To date, customer purchasing activity has been
significantly impacted and we expect this to continue to negatively affect us.
We have a large concentration of customers that operate in the Asian, European,
Pacific, and Middle Eastern market regions which experienced shutdowns from the
COVID-19 pandemic well before domestic airline customers. As such we saw a
decline in customer demand in the six months ended June 30, 2020 which was
greater than that seen by the general airline industry in the U.S. The extent
and duration of the pandemic remains uncertain, and is expected to continue to
impact consumer purchasing activity if disruptions continue throughout the year,
which could continue to negatively impact us. Additionally, payments to certain
vendors have not been made in accordance with payment terms. To date, no
critical vendors have stopped providing goods or services. However, if a
critical vendor were to discontinue doing business with us, this could result in
further material adverse impacts on our results. We continue to monitor the
potential impact of the COVID-19 pandemic.
CARES Act. On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security
("CARES") Act was enacted in response to the COVID-19 pandemic. The CARES Act,
among other things, allows employers to defer payment of employer Social
Security taxes that are otherwise owed for wage payments made after March 27,
2020 , through the end of the calendar year. In addition, the CARES Act provides
for various grants, loans and other financial support for certain companies that
are affected by the COVID-19 pandemic. Accordingly, we have submitted
applications for U.S. Treasury Loans. The Company was denied relief for the
"national security loan program" portion of the CARES Act; however, its
application for the "air carriers and certain eligible businesses" portion of
the CARES Act remains outstanding. There is no assurance that our application(s)
will be approved or that any sources of financings under the CARES Act will be
available to us on favorable terms or at all. It is possible that further
regulatory guidance under the CARES Act will be forthcoming.
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 six months ended June 30, 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
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Table of Contents 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, during the quarter endedJune 30, 2020 , we renegotiated certain lease agreements to obtain rent relief in the near term, in order to help offset the negative financial impacts of COVID-19. As of the six months endedJune 30, 2020 , rent concession received was$0.7 million . OnApril 10, 2020 , theFinancial 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. See Note 4. Leases of the Consolidated Financial Statements for further details. Liquidity and Cost Management. We have engaged and continue our engagement with 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. Based on the advice of our advisors, onJuly 22, 2020 , we commenced voluntary Chapter 11 proceedings under Chapter 11 of the Bankruptcy Code. We are currently operating our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court . After we filed our Chapter 11 petitions, theBankruptcy Court granted certain interim relief requested by the Debtors enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits and to pay taxes and certain governmental fees and charges.The Bankruptcy Court has also approved our entry into an$80 million term loan debtor-in-possession credit facility that will be used to fund Chapter 11 expenses and general operating costs. Pursuant to an interim order of theBankruptcy Court , we have access to$30 million of the debtor-in-possession credit facility, and are seeking authority to access the remainder pursuant to a final hearing with theBankruptcy Court . As ofJune 30, 2020 , we had approximately$31.3 million of cash and cash equivalents. 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 ofJune 30, 2020 , our principal source of liquidity was our cash and cash equivalents of approximately$31.3 million . In addition, we had approximately$4.9 million of restricted cash, which amount is excluded from the$31.3 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 institutions in theU.S. ,Canada andEurope and to a lesser extent inAsia Pacific . Our total debt balance increased from$773.1 million atDecember 31, 2019 to$827.0 million atJune 30, 2020 . 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 six months endedJune 30, 2020 primarily as a result of the negative operating impact of COVID-19, managing working capital and cash interest and principal payments arising from the Company's substantial debt balance. Net cash used in operations was$24.7 million for the six months endedJune 30, 2020 which included cash paid for interest of$28.7 million . Working capital deficiency "(defined as current assets less current liabilities)" increased by$807.9 million , to$871.2 million as ofJune 30, 2020 , compared to$63.4 million as ofDecember 31, 2019 . 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'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 six months endedJune 30, 2020 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. In addition, as a result of our voluntary commencement of the Chapter 11 52 -------------------------------------------------------------------------------- Table of Contents proceedings, the Company is not currently subject to the debt covenants under the 2017 Credit Agreement. Mitigating actions that have been implemented or 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 continuing to pursue 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. 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.
Significant Transactions and Developments
Goodwill Impairment. For the six months endedJune 30, 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 ofJune 30, 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 lower than expected financial results of the reporting unit during the six months endedJune 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. As ofJune 30, 2020 , there is no remaining goodwill allocated to this reporting unit. Impairment of Equity Method Investments. During the six months endedJune 30, 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 theWMS 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 endedJune 30, 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 lower than expected forecasted financial results for the six months endedJune 30, 2020 due to management's review of reducing ongoing costs to service customers through this joint venture. This resulted in a reduction in the financial projections for the remainder of 2020 and beyond. The 53 -------------------------------------------------------------------------------- Table of Contents other than temporary impairments recognized are in addition to the MEG Connectivity reporting unit goodwill impairment recognized for the six months endedJune 30, 2020 .
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 travelerswho use our services. Growth in our margins is dependent on our ability to manage the costs associated with implementing and operating our services, including the costs of licensing, procuring and distributing content, equipment and satellite bandwidth service. Our ability to attract and retain customers is highly dependent on our ability to timely implement our services and continually improve our network and operations as technology changes and we experience increased network capacity constraints. Media & Content Segment. During the six months endedJune 30, 2020 , Media & Content revenue was down 42% over the period in prior-year primarily due to the 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 six months endedJune 30, 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, return of passenger demand and bookings, and a change in strategy to pre-packaged media. Connectivity Segment. For the six months endedJune 30, 2020 , connectivity segment revenue was down 19% year-over-year driven primarily by lower equipment revenue due to fewer aircraft installations driven by COVID-19 pandemic and regulatory grounding of Boeing's 737 MAX aircraft type ("MAX aircraft") during 2019 and early 2020 and slower rebound of productions after MAX aircraft was re-certified during 2020 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 is subject to regulatory approvals, such as a Supplemental Type Certificate, or "STC," that are imposed by agencies such as theFederal Aviation Administration ("FAA"), theEuropean Aviation Safety Agency ("EASA") and theCivil Aviation Administration of China ("CAAC"). The costs to obtain and/or validate an STC can be significant and vary by plane type and customer location. We have STCs to operate our equipment on several plane types, including The Boeing Company's ("Boeing") 737, 757, 767 and 777 aircraft families, and for the Airbus SE ("Airbus") A320 aircraft family. While we believe we will be successful in obtaining STC approvals in the future as needed, there is a risk that the applicable regulatory agencies do not approve or validate an STC on a timely basis, if at all, which could negatively impact our growth, relationships and ability to sell our connectivity services. To partially address the risk and costs of obtaining STCs in the future, we signed an agreement with Boeing to offer our connectivity equipment on a "line-fit basis" for Boeing's 737 and 787 models, and our connectivity equipment as an option on Boeing 737 airplanes. 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 ofEmerging Markets Communications ("EMC") onJuly 27, 2016 (the "EMC Acquisition"), we expanded the number of our major suppliers of satellite capacity and became a party to an agreement with Intelsat S.A. We also purchase radomes, satellite antenna systems and rings from key suppliers. Any interruption in supply from these important vendors (including manufacturing or global logistics disruption caused by contagious illness such as COVID-19) could have a material impact on our ability to sell equipment and/or provide connectivity services to our customers. In addition, some of our satellite-capacity providers (many of whom are well capitalized) have 54 -------------------------------------------------------------------------------- Table of Contents entered our markets and have begun competing with our service offerings, which has challenged our business relationships with them and created additional competition in our industry. 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 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. 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 overNorth America and theMiddle East to facilitate the growth of our existing and new connectivity customer base, which has included purchases of satellite transponders. Depending on the timing of our satellite expenditures, our cost of sales as a percentage of our revenue may fluctuate from period to period. A substantial amount of our Connectivity segment's revenue is derived from Southwest Airlines, aU.S. based airline. Our contract with Southwest Airlines provides for a term of services through 2025, and includes a commitment from Southwest for live television services. We have continued to install our connectivity systems on additional Southwest Airlines aircraft. Under the contract, we committed to deploy increased service capacity (and our patented technology) to deliver a significantly enhanced passenger experience. We utilize a "monthly recurring charge" revenue model with Southwest Airlines that provides us with long-term 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-
Nasdaq Common Stock Delisting. OnAugust 10, 2020 , Nasdaq announced that it will delist the common stock of the Company and that the Company's common stock was suspended onAugust 4, 2020 and has not traded on Nasdaq since that time. The trading of the Company's common stock has transitioned to the OTC Bulletin Board or "pink sheets" market. The transition to over-the-counter markets is not expected to affect the Company's operations or business. OnAugust 11, 2020 , Nasdaq filed a Form 25-NSE with theSEC to complete the delisting of the Company's common stock from Nasdaq, which delisting will be effective ten calendar days later, at which time, the Company will cease to file current and periodic reports with theSEC .
Nasdaq reached its decision that the Company is no longer suitable for listing
pursuant to Listing Rules 5101, 5110(b), and 5101-1, after the Company's
disclosure on
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Delaware . Taking into account the Company's desire to reduce operating expenses
and maximize the value of its estates, the Company does not intend to appeal
Nasdaq's determination.
The trading of the Company's common stock has transitioned to the OTC Bulletin
Board or "pink sheets" market. The transition to over-the-counter markets is not
expected to affect the Company's operations or business.
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. See Item 9A: Controls and Procedures
of our 2019 Form 10-K for a discussion of our material weaknesses and
remediation efforts.
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 the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the notes to the financial statements. Some of
those judgments can be subjective and complex, and therefore, actual results
could differ materially from those estimates under different assumptions or
conditions. A summary of our critical accounting policies is presented in Part
II, Item 7, of our 2019 Form 10-K. There were no other material changes to our
critical accounting policies during the six months ended June 30, 2020 .
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)
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenue $ 83,041 $ 157,467 $ 227,206 $ 324,086
Operating expenses:
Cost of sales 71,879 124,217 192,686 258,411
Sales and marketing 4,303 7,365 9,643 15,614
Product development 3,749 6,125 9,712 13,104
General and administrative 24,962 27,161 55,538 55,141
Provision for legal settlements - 25 - 533
Amortization of intangible assets 6,241 7,800 12,383 15,599
Goodwill and long-lived asset impairment 3,374 - 25,504 -
Total operating expenses (including cost
of sales) 42,629 48,476 112,780 99,991
Loss from operations (31,467) (15,226) (78,260) (34,316)
Other expense, net (26,412) (19,917) (59,418) (38,306)
Loss before income taxes (57,879) (35,143) (137,678) (72,622)
Income tax expense 154 3,317 1,280 3,447
Net loss $ (58,033) $ (38,460) $ (138,958) $ (76,069) The following table provides, for the periods presented, the depreciation expense included in the above line items (in thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Cost of sales $ 8,616 $ 8,662 $ 18,244 $ 17,596
Sales and marketing 419 912 941 1,914
Product development 377 772 948 1,607
General and administrative 2,966 3,378 5,750 6,760
Total $ 12,378 $ 13,724 $ 25,883 $ 27,877 The following table provides, for the periods presented, the stock-based compensation expense included in the above line items (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Cost of sales $ 55 $ 89 $ 121 $ 116
Sales and marketing 46 34 103 87
Product development 70 112 147 180
General and administrative 881 2,092 1,809 3,233
Total $ 1,052 $ 2,327 $ 2,180 $ 3,616
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Table of Contents The following table provides, for the periods presented, our results of operations, as a percentage of revenue, for the periods presented:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenue 100 % 100 % 100 % 100 %
Operating expenses:
Cost of sales 87 % 79 % 85 % 80 %
Sales and marketing 5 % 5 % 4 % 5 %
Product development 5 % 4 % 4 % 4 %
General and administrative 30 % 17 % 24 % 17 %
Amortization of intangible assets 8 % 5 % 5 % 5 %
Goodwill and long-lived asset impairment 4 % - % 11 % - %
Total operating expenses 51 % 31 % 50 % 31 %
Loss from operations (38) % (10) % (34) % (11) %
Other expense, net (32) % (13) % (26) % (12) %
Loss before income taxes (70) % (22) % (61) % (22) %
Income tax expense - % 2 % 1 % 1 %
Net loss (70) % (24) % (61) % (23) %
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Three Months Ended June 30, 2020 and 2019Operating Segments
Segment revenue, expenses and gross margin for the three and six months ended
Three Months Ended June 30,
2020 2019
Revenue:
Media & Content
Licensing and services $ 20,757 $ 74,013
Connectivity
Services 56,700 71,116
Equipment 5,584 12,338
Total 62,284 83,454
Total revenue $ 83,041 $ 157,467
Cost of Sales:
Media & Content
Licensing and services $ 21,929 $ 57,604
Connectivity
Services 45,843 58,704
Equipment 4,107 7,909
Total 49,950 66,613
Total cost of sales $ 71,879 $ 124,217
Gross margin:
Media & Content $ (1,172) $ 16,409
Connectivity 12,334 16,841
Total gross margin 11,162 33,250
Other operating expenses 42,629 48,476
Loss from operations $ (31,467) $ (15,226)
Revenue
Media & Content
Media & Content operating segment revenue for the three months ended June 30,
2020 and 2019 was as follows (in thousands, except for percentages):
Three Months Ended June 30,
2020 2019 Change
Licensing and Services $ 20,757 $ 74,013 (72) %
Media & Content Licensing and Services Revenue
Media & Content licensing and services revenue decreased by $53.3 million , or
72%, to $20.8 million for the three months ended June 30, 2020 , compared to
$74.0 million for the three months ended June 30, 2019 . The decrease was driven
by the onset of the COVID-19 pandemic on the majority of our customers; in
addition to declines in our third-party distribution services and digital media
services, including games and applications ("Apps"); and finally a change in
strategy to pre-packaged media.
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Specifically, our media & content results were impacted by the following:
•Timing and cycles: revenue decreased by $36.0 million primarily driven by
airline customers not taking new content or holding content cycles over amidst
general airline industry cost cutting efforts to offset the impact associated
with COVID-19.
•Repricing and volume changes: Revenues decreased by $7.2 million due to: (i)
$4,8 million decrease of revenue driven by the impact of the COVID-19 pandemic
which resulted fewer available content distributions and material decline of
in-flight entertainment demands; and (ii) a $0.6 million decrease of advertising
sales due to the temporary airport lounges closures; (iii) $1.3 million lower
advertising and gaming sales which primarily driven by decline of in-flight
entertainment demands during COVID-19 pandemic.
•Aviation client base changes: revenue decreased by
•One-time impacts: revenue decreased by$6.3 million primarily driven by$5.4 million games and apps related relief provided to our airline customers and$0.7 million sea-movie relief to our cruise customers and was partially offset by$0.7 million relief received by the Company and was reported as other revenue during the period.
Connectivity
Connectivity operating segment revenue for the three months ended
Three Months Ended June 30,
2020 2019 Change
Services $ 56,700 $ 71,116 (20) %
Equipment 5,584 12,338 (55) %
Total $ 62,284 $ 83,454 (25) %
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. Goodwill .
Connectivity Services Revenue
Services revenue from our Connectivity operating segment decreased by $14.4
million , or 20%, to $56.7 million for the three months ended June 30, 2020 ,
compared to $71.1 million for the three months ended June 30, 2019 , primarily
due to the following:
•MEG contract repricing and volume declines: $6.9 million due to repricing and
volume 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 in South America .
•COVID-19 related declines: $7.2 million due to sailing cancellations as a
result of the COVID-19 pandemic and relief provided to the cruise line industry
customers.
Connectivity Equipment Revenue
•Aviation customer volume: Equipment revenue from our Connectivity operating segment decreased by$6.8 million , or 55%, to$5.6 million for the three months endedJune 30, 2020 , compared to$12.3 million for the three months endedJune 30, 2019 . The decrease was primarily due to a$5.3 million decline in equipment shipments for a majorNorth America customer due to COVID-19 and regulatory grounding of Boeing's 737 MAX aircraft type related aircraft production and installation timetables. In addition, the completion of a major retrofit equipment program contributed$2.7 million of the overall decline in 2020. 60
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Table of Contents Cost of Sales Media & Content Media & Content operating segment cost of sales for the three months endedJune 30, 2020 and 2019 was as follows (in thousands, except for percentages): Three Months Ended June 30, 2020 2019 Change Licensing and services$ 21,929 $ 57,604 (62) % Media & Content cost of sales decreased by$35.7 million , or 62%, to$21.9 million for the three months endedJune 30, 2020 , compared to$57.6 million for the three months endedJune 30, 2019 . The decrease was primarily driven by decline of revenue which primarily reflecting COVID-19 related impact. Cost of sales as a percentage of Media & Content revenues increased to 106% for the three months endedJune 30, 2020 , compared to 78% for the three months endedJune 30, 2019 . Cost of sales was also impacted by vastly reduced availability of new content titles in distribution, declined licensing and royalty fees associated with held over content or cancellation of cycles during the three months endedJune 30, 2020 versus the year prior.
Connectivity
Cost of sales for our Connectivity operating segment for the three months endedJune 30, 2020 and 2019 was as follows (in thousands, except for percentages): Three Months Ended June 30, 2020 2019 Change Services$ 45,843 $ 58,704 (22) % Equipment 4,107 7,909 (48) % Total$ 49,950 $ 66,613 (25) % Connectivity services cost of sales decreased by$12.9 million , or 22%, to$45.8 million for the three months endedJune 30, 2020 , compared to$58.7 million for the three months endedJune 30, 2019 , primarily due to the following: •Maritime bandwidth cost decrease: (i) maritime and land satellite capacity savings from contract renegotiations and cancellations for the three months endedJune 30, 2020 amounting to$6.7 million ; (ii)$1.2 million decrease due to satellite capacity reduction from maritime and land customer losses for the three months endedJune 30, 2020 ; (iii)$1.5 million labor cost savings; and (iv) cost reduction of$1.7 million from decreased volume due to COVID-19 pandemic and COVID-19 relief received. As a percentage of Connectivity services revenue, Connectivity service cost of sales decreased to 81% during the three months endedJune 30, 2020 , compared to 83% for the three months endedJune 30, 2019 . The maritime and land business gross margin improvement was driven by favorable bandwidth contract re-negotiations and cancellations, and realizing savings from labor cost reductions implemented in 2019.
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$3.8 million , or 48%, to$4.1 million for the three months endedJune 30, 2020 compared to$7.9 million for the three months endedJune 30, 2019 . Connectivity equipment cost of sales increased as a percentage of Connectivity Equipment revenue to 74% during the three months endedJune 30, 2020 , compared to 64% for the three months endedJune 30, 2019 . Compared to the equivalent prior year period, this was primarily due to (i) a$3.4 million cost of sales decrease on lower equipment volume sold, and (ii) coupled with equipment mix sold during the quarter. 61
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Other operating expenses for the three months ended
Three Months Ended June 30,
2020 2019 Change
Sales and marketing $ 4,303 $ 7,365 (42) %
Product development 3,749 6,125 (39) %
General and administrative 24,962 27,161 (8) %
Provision for legal settlements - 25 (100) %
Amortization of intangible assets 6,241 7,800 (20) %
Goodwill and long-lived asset impairment 3,374 - 100 %
Total $ 42,629 $ 48,476 (12) %
Sales and Marketing
Sales and marketing expenses decreased by $3.1 million , or 42%, to $4.3 million
for the three months ended June 30, 2020 , compared to $7.4 million for the three
months ended June 30, 2019 . The reduction can be attributed to the following:
(i) $1.3 million decrease in employee cost due to headcount reductions; (ii)
$0.6 million decrease in adverting and marketing; (iii) $0.3 million decrease in
travel and entertainment expenses; and (iv) $0.1 million decrease in
professional and contractor services.
Product Development
Product development expenses decreased by $2.4 million , or 39%, to $3.7 million
for the three months ended June 30, 2020 , compared to $6.1 million for the three
months ended June 30, 2019 . The reduction can be attributed to the following:
(i) $1.1 million decrease in employee cost due to headcount reductions, (ii)
$0.7 million decrease in professional and outside services; and (iii) $0.1
million decrease in travel and entertainment expenses.
General and Administrative
General and administrative costs decreased by $2.2 million , or 8%, to $25.0
million during the three months ended June 30, 2020 , compared to $27.2 million
for the three months ended June 30, 2019 . The decrease can be attributed to the
following: (i) $2.3 million decrease in employee cost due to headcount
reductions; (ii) $0.6 million decrease in general administrative expenses
relating to the Company's restructuring initiatives; (iii) $0.4 million decrease
in provision for credit losses; and (iv) $0.2 million decrease in travel and
entertainment costs; (v) and partially offset by $1.3 million increase in
professional services which was due to pre-bankruptcy advisory.
Provision for (Gain from) Legal Settlements
No settlement occurred during the three months ended June 30, 2020. See Note
12. Commitments and Contingencies to our unaudited condensed consolidated
financial statements (Part I, Item 1 of this Form 10-Q) for a summary of our
ongoing litigation and other legal claims.
Amortization of Intangible Assets
Amortization expense decreased $1.6 million , or 20%, to $6.2 million during the
three months ended June 30, 2020 , compared to $7.8 million for the three months
ended June 30, 2019 . The decrease was due to a portion of our acquired
intangible assets from prior acquisitions becoming fully amortized during the
year.
Long-lived asset impairment
During the three months ended June 30, 2020 . The Company recognized a $3.4
million impairment loss relating primarily to re-valuation of our office
facilitates during our initiatives of relocation of worldwide operating
facilities to reduce ongoing costs. No long-live asset impairment was recognized
during the three months ended June 30, 2019 .
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Other (Expense) Income, net
Other expense for the three months ended June 30, 2020 and 2019 was as follows
(in thousands, except for percentages):
Three Months Ended June 30,
2020 2019 Change
Interest expense, net $ (22,884) $ (22,329) 2 %
Income (loss) from equity method investments
including impairment losses (2,015) 2,517 (180) %
Change in fair value of derivatives (18) - 100 %
Other income (expense), net (1,495) (105) 1,324 %
Total $ (26,412) $ (19,917) 33 %
Other expense, net increased $6.5 million , or 33%, to $26.4 million for the
three months ended June 30, 2020 , compared to other expense of $19.9 million for
the three months ended June 30, 2019 . This was driven primarily by (i) $4.5
million increase in loss recognized from equity method investments when compared
with same quarter of prior year which was primarily driven by the reduction of
services provided to the cruise industry due to the COVID-19 pandemic; (ii) $1.5
million increase in other expense which primarily driven by a $1.4 million
decrease in fair value of certain short-term investments; (iii) an increase in
net interest expense of $0.6 million due to increased borrowings when compared
with prior year
.
Income Tax Expense
The Company recorded income tax provision of $0.2 million and $3.3 million for
the three months ended June 30, 2020 and 2019, respectively. The tax provision
for the three months ended June 30, 2020 is primarily attributable to foreign
income taxes 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
June 30, 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.
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Six Months Ended June 30, 2020 and 2019Operating Segments
Segment revenue, expenses and gross margin for the six months ended
Six Months Ended June 30,
2020 2019
Revenue:
Media & Content
Licensing and services $ 89,142 $ 154,023
Connectivity
Services 123,960 141,584
Equipment 14,104 28,479
Total 138,064 170,063
Total revenue $ 227,206 $ 324,086
Cost of Sales:
Media & Content
Licensing and services $ 77,485 $ 115,273
Connectivity
Services 103,571 124,304
Equipment 11,630 18,834
Total 115,201 143,138
Total cost of sales $ 192,686 $ 258,411
Gross margin:
Media & Content $ 11,657 $ 38,750
Connectivity 22,863 26,925
Total gross margin 34,520 65,675
Other operating expenses 112,780 99,991
Loss from operations $ (78,260) $ (34,316)
Revenue
Media & Content
Media & Content operating segment revenue for the six months ended June 30, 2020
and 2019 was as follows (in thousands, except for percentages):
Six Months Ended June 30,
2020 2019 Change
Licensing and Services$ 89,142 $ 154,023
(42) %
Media &Content Licensing and Services Revenue Media & Content licensing and services revenue decreased by$64.9 million , or 42%, to$89.1 million for the six months endedJune 30, 2020 , compared to$154.0 million for the six months endedJune 30, 2019 . The decrease was driven by the COVID-19 pandemic on the majority of our customers, in addition to declines in our third-party distribution services and digital media services, including games and applications ("Apps").
Specifically, our media & content results were impacted by the following:
•Timing and cycles: revenue decreased by
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•Repricing and volume changes: Revenues decreased by $8.9 million due to: (i)
$6.9 million decrease of revenue driven by the impact of the COVID-19 pandemic
which resulted in fewer available content distributions and material decline of
in-flight entertainment demands; and (ii) an advertising revenue decrease of
$1.8 million due to temporary shut downs of airport lounges during COVID-19
pandemic.
•Aviation client base changes: Revenues decreased by $10.7 million primarily due
to (i) $5.0 million lower advertising and gaming sales which primarily driven by
material decline of in-flight entertainment demands during COVID-19 pandemic,
(ii) a $5.8 million decrease in third-party distribution services to non-Global
Eagle customers reflecting our ongoing reduction of third-party distribution
revenue.
•One-time impacts: revenue decreased by $7.3 million primarily driven by $5.4
million games and apps related concession and relief provided to our airline
customers and $0.8 million sea-movie relief to our cruise customers.
Connectivity
Connectivity operating segment revenue for the six months ended
Six Months Ended June 30,
2020 2019 Change
Services $ 123,960 $ 141,584 (12) %
Equipment 14,104 28,479 (50) %
Total $ 138,064 $ 170,063 (19) %
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. Goodwill .
Connectivity Services Revenue
Services revenue from our Connectivity operating segment decreased by $17.6
million , or 12%, to $124.0 million for the six months ended June 30, 2020 ,
compared to $141.6 million for the six months ended June 30, 2019 , primarily due
to the following:
•MEG contract repricing and volume declines: (i) $4.5 million due to volume
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 in South America ; and (ii) $7.7 million in cruise and yacht business
sector and (iii) $1.0 million reduction related to repair services which were
impacted by COVID-19 pandemic.
•Aviation customer declines: (i) $1.5 million reduction of revenue from an
airline customer due to its financial stress associated with COVID-19; and (ii)
$1.0 million decreased revenue from a decline repair station volume of aircraft
serviced. services impacted by COVID-19.
Connectivity Equipment Revenue
•Aviation customer volume: Equipment revenue from our Connectivity operating segment decreased by$14.4 million , or 50%, to$14.1 million for the six months endedJune 30, 2020 , compared to$28.5 million for the six months endedJune 30, 2019 . The decrease was primarily due to (i) a$9.5 million decline in equipment installation ramping down for a major North American customer and a European customer due to COVID-19 and the regulatory grounding of Boeing's 737 MAX aircraft production and installation timetables; (ii) the completion of a major retrofit equipment program contributed$2.7 million of the decrease; and (iii) reduced demand of$1.7 million in aircraft and$1.0 million in cruise equipment which were also due to COVID-19. 65 -------------------------------------------------------------------------------- Table of Contents Cost of Sales Media & Content Media & Content operating segment cost of sales for the six months endedJune 30, 2020 and 2019 was as follows (in thousands, except for percentages): Six Months Ended June 30, 2020 2019 Change Licensing and services$ 77,485 $ 115,273 (33) % Media & Content cost of sales decreased by$37.8 million , or 33%, to$77.5 million for the six months endedJune 30, 2020 , compared to$115.3 million for the six months endedJune 30, 2019 . The decrease was primarily driven by decline of revenue which primarily reflecting COVID-19 related impact. Cost of sales as a percentage of Media & Content revenues increased to 87% for the six months endedJune 30, 2020 , compared to 75% for the six months endedJune 30, 2019 . Cost of sales was also impacted by vastly reduced availability of new content titles in distribution, declined licensing and royalty fees associated with held over content or cancellation of cycles during the six months endedJune 30, 2020 versus the year prior.
Connectivity
Cost of sales for our Connectivity operating segment for the six months endedJune 30, 2020 and 2019 was as follows (in thousands, except for percentages): Six Months Ended June 30, 2020 2019 Change Services$ 103,571 $ 124,304 (17) % Equipment 11,630 18,834 (38) % Total$ 115,201 $ 143,138 (20) %
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 six months endedJune 30, 2020 amounting to$12.8 million ; (ii)$2.6 million decrease due to satellite capacity reduction from aviation customer demand due to COVID-19; and (iii)$1.5 million labor cost savings for the six months endedJune 30, 2020 . As a percentage of Connectivity services revenue, Connectivity service cost of sales decreased to 84% during the six months endedJune 30, 2020 , compared to 88% for the six months endedJune 30, 2019 . The maritime and land business gross margin improvement was driven by favorable bandwidth contract re-negotiations and cancellations, and realizing savings from labor cost reductions implemented in 2019.
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$7.2 million , or 38%, to$11.6 million for the six months endedJune 30, 2020 compared to$18.8 million for the six months endedMarch 31, 2019 . Connectivity equipment cost of sales increased as a percentage of Connectivity Equipment revenue to 82% during the six months endedJune 30, 2020 , compared to 66% for the six months endedMarch 31, 2019 . Compared to the equivalent prior year period, this was primarily due to a$6.1 million cost of sales decrease from lower equipment volume due to COVID-19 and regulatory grounding of Boeing's 737 MAX aircraft and a$1.1 million cost of sales decrease due to the repricing strategy which was discussed in the revenue section.. 66 -------------------------------------------------------------------------------- Table of Contents Other Operating Expenses
Other operating expenses for the six months ended
Six Months Ended June 30,
2020 2019 Change
Sales and marketing $ 9,643 $ 15,614 (38) %
Product development 9,712 13,104 (26) %
General and administrative 55,538 55,141 1 %
Provision for legal settlements - 533 (100) %
Amortization of intangible assets 12,383 15,599 (21) %
Goodwill and long-lived asset impairment 25,504 - 100 %
Total $ 112,780 $ 99,991 13 %
Sales and Marketing
Sales and marketing expenses decreased by $6.0 million , or 38%, to $9.6 million
for the six months ended June 30, 2020 , compared to $15.6 million for the six
months ended June 30, 2019 . The reduction can be attributed to the following:
(i) $3.1 million decrease in employee cost due to headcount reductions; (ii) 0.5
million in advertising and marketing; (iii) $0.3 million in professional
services; (iv) $0.5 million decrease in travel and entertainment expenses; (v)
$0.3 million decrease in professional and contractor services; and (vi) $0.3
million of reduced information technology related infrastructure costs.
Product Development
Product development expenses decreased by $3.4 million , or 26%, to $9.7 million
for the six months ended June 30, 2020 , compared to $13.1 million for the six
months ended June 30, 2019 . The reduction can be attributed to the following:
(i) $1.5 million decrease in employee cost due to headcount reductions, (ii)
$0.8 million decrease in professional and outside services; and (iii) $0.3
million decrease in travel and entertainment expenses.
General and Administrative
General and administrative costs increased by $0.4 million , or 1%, to $55.5
million during the six months ended June 30, 2020 , compared to $55.1 million for
the six months ended June 30, 2019 . The increase can be attributed to the
following: (i) $1.6 million for the provision of credit losses, reflecting
COVID-19 related uncertainty and collection risks; and (ii) $4.6 million
increase in professional services; partially offset by (i) $5.0 million decrease
in employee cost due to headcount reductions; and (ii) $0.6 million decrease in
travel and entertainment costs which primarily associated with COVID-19.
Provision for (Gain from) Legal Settlements
No settlements occurred during the six months ended June 30, 2020 . During the
six months ended June 30, 2019 provision for legal settlements was $0.5 million .
See Note 12. Commitments and Contingencies to our unaudited condensed
consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a
summary of our ongoing litigation and other legal claims.
Amortization of Intangible Assets
Amortization expense decreased $3.2 million , or 21%, to $12.4 million during the
six months ended June 30, 2020 , compared to $15.6 million for the six months
ended June 30, 2019 . The decrease was due to a portion of our acquired
intangible assets from prior acquisitions becoming fully amortized during the
year.
Goodwill and Long-Lived Asset Impairment
For the six months ended June 30, 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 six reporting
units as of June 30, 2020 and recorded a goodwill impairment charge of $22.1
million related to its Maritime & Land Connectivity reporting unit. This
impairment was primarily due to lower than expected financial results of the
reporting unit during the six months ended June 30, 2020 due primarily to
impacts of COVID-19 outbreak on our cruise and yacht channels, coupled with the
loss of a South American government customer and continuation of exiting the
mobile network operation channel. Given these indicators, the Company then
determined that there was a higher degree of uncertainty in achieving its
financial projections for this unit and as such, increased its discount rate,
which reduced the fair value of the unit.
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Other (Expense) Income, net Other expense for the six months endedJune 30, 2020 and 2019 was as follows (in thousands, except for percentages): Six Months Ended June 30, 2020 2019 Change Interest expense, net$ (45,471) $ (43,606) 4 % (Loss) income from equity method investments including impairment losses (12,873) 4,646 (377) % Change in fair value of derivatives 189 938 (80) % Other income (expense), net (1,263) (284) 345 % Total$ (59,418) $ (38,306) 55 % Other expense, net increased$21.1 million , or 55%, to$59.4 million for the six months endedJune 30, 2020 , compared to other expense of$38.3 million for the six months endedJune 30, 2019 . This was driven primarily by loss from equity method investments including impairment losses of$13.1 million impairment loss recorded atJune 30, 2020 and a$4.5 million decrease from results of operations recognized using equity method accounting of our investments. In addition, it is due to an increase in net interest expense of$1.9 million , or 4%, primarily attributable to: (i) Second Lien Notes, including the effect of PIK compounding as additional principal, (ii) Term Loan, for which we obtained additional borrowing capacity inJuly 2019 ; (iii) additional borrowings on our Revolving Credit Facility. Finally, a$1.4 million decrease in fair value of certain short-term investments which was partially offset by a$0.7 million decrease in the fair value of derivatives. Income Tax Expense The Company recorded income tax provision of$1.3 million and$3.4 million for the six months endedJune 30, 2020 and 2019, respectively. The tax provision for the six months endedJune 30, 2020 is primarily attributable to foreign income taxes 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 six months endedJune 30, 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. NON -GAAP FINANCIAL MEASURES To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted inthe United States , or GAAP, we present EBITDA, Adjusted EBITDA and free cash flow, which are non-GAAP financial measures, as measures of our performance. The presentations of EBITDA, Adjusted EBITDA and free cash flow are not intended to be considered in isolation from, or as a substitute for, or superior to, net income (loss), cash flows from operations or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities or any other measures of our cash flows or liquidity. For a reconciliation of EBITDA, Adjusted EBITDA and free cash flow to its most comparable measure under GAAP, please see the table entitled "Reconciliation of GAAP to Non-GAAP Measure" at the end of this Non-GAAP Financial Measures section. Further, we note that Adjusted EBITDA as presented herein is defined and calculated differently than the "Consolidated EBITDA" definition in our senior secured credit agreement and in our second lien notes, which Consolidated EBITDA definition we use for financial-covenant-compliance purposes and as a measure of our liquidity. EBITDA, Adjusted EBITDA and free cash flow are six 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. 68 -------------------------------------------------------------------------------- Table of Contents 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 byU.S. and foreign civil aviation authorities. Management does not consider these items to be indicative of our core operating results. "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. 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. 69
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The following table presents a reconciliation of Adjusted EBITDA for each of the
periods presented (in thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Net loss $ (58,033) $ (38,460) $ (138,958) $ (76,069)
Interest expense, net 22,884 22,329 45,471 43,606
Income tax expense 154 3,317 1,280 3,447
Depreciation and amortization 18,619 21,524 38,266 43,476
EBITDA (16,376) 8,710 (53,941) 14,460
Depreciation and amortization from equity
method investments 2,149 2,161 4,289 4,294
Change in fair value of financial
instruments 18 - (189) (938)
Other expense, net 1,495 105 2,142 284
Stock-based compensation expense 1,052 2,327 2,180 3,616
Goodwill impairment - - 22,130 -
Equity method investment impairments - - 13,131 -
Strategic-transaction, integration and
realignment expenses 7,666 5,202 12,630 9,902
Internal-control and delayed audit expenses 168 2,355 3,492 5,808
Impairment and loss on disposal of fixed
assets 3,915 193 4,368 357
Non-ordinary-course legal expenses 187 586 493 1,182
Losses on significant customer bankruptcies 64 775 2,684 1,939
Expenses incurred in connection with
grounded aircraft 606 332 1,537 332
Adjusted EBITDA $ 944 $ 22,746 $ 14,946 $ 41,236 The following table presents a reconciliation of Cash Flow from Operations to Free Cash Flow for each of the periods presented (in thousands):
Six Months
Ended
2020 2019
Cash (used in) provided by operations $ (24,704) $ 1,972
Purchases of property and equipment 2,142 13,442
Free Cash Flow $ (22,562) $ 15,414
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCESSelected financial data for the periods presented below were as follows (in thousands):
June 30, 2020 December
31, 2019
Cash and cash equivalents $ 31,255 $ 23,964
Total assets $ 567,981 $ 668,580
Current portion of long-term debt
Long-term debt $ 16,138 $ 757,384
Total stockholders' deficit
The following reflects the financial condition of our business and operations as ofJune 30, 2020 as well as material developments relating thereto through the date of filing of this Form 10-Q. As ofJune 30, 2020 , we had$503.3 million aggregate principal amount in senior secured term loans (the "Term Loans") outstanding under our Senior Secured Credit Agreement (the "2017 Credit Agreement");$80.6 million drawn under the 2017 Revolving Loans (excluding approximately$3.9 million in letters of credit outstanding thereunder);$188.7 million aggregate principal amount of outstanding Second Lien Notes, which amount includes$38.7 million of payment-in-kind ("PIK") interest converted to principal since issuance;$82.5 million aggregate principal amount of 2.75% convertible senior notes due 2035; and other debt outstanding of$27.3 million . Please see Note 10. Financing Arrangements to our unaudited condensed consolidated financial statements (Part I, Item 1 of this Form 10-Q) for a tabular presentation of our indebtedness.
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 six months endedJune 30, 2020 primarily as a result of the negative operating impact of COVID-19, managing working capital and cash interest and principal payments arising from the Company's substantial debt balance. Net cash used in operations was$24.7 for the six months endedJune 30, 2020 which included cash paid for interest of$28.7 million . Working capital deficiency increased by$807.9 million , to$871.2 million as ofJune 30, 2020 , primarily due to the classification of all applicable long term debt as current atJune 30, 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 and significant related interest expense and uncertainty related to the impact of COVID-19 on the results of operations. 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 six months endedJune 30, 2020 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; 71 -------------------------------------------------------------------------------- Table of Contents •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 continuing to pursue 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; and (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. 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. We have engaged and continue to be engaged with 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. Based on the advice of our advisors, onJuly 22, 2020 we commenced voluntary Chapter 11 proceedings under Chapter 11 of the Bankruptcy Code. We are currently operating our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court . After we filed our Chapter 11 petitions, theBankruptcy Court granted certain interim relief requested by the Debtors enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits and to pay taxes and certain governmental fees and charges.The Bankruptcy Court has also approved our entry into an$80 million term loan debtor-in-possession credit facility that will be used to fund Chapter 11 expenses and general operating costs. Pursuant to an interim order of theBankruptcy Court , we have access to$30 million of the debtor-in-possession credit facility, and are seeking authority to access the remainder pursuant to a final hearing with theBankruptcy Court . 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
OnJuly 19, 2019 , we entered into an amendment to the 2017 Credit Agreement (the "Seventh Amendment to 2017 Credit Agreement"), which, among other things, upsized the Term Loans by$40 million , reduced scheduled principal repayments over the subsequent six quarters by an aggregate amount of approximately$25.3 million and provided additional stock pledges 72 -------------------------------------------------------------------------------- Table of Contents (including the remaining 35% of the equity interests of first tier foreign subsidiaries that were previously not pledged) as collateral. Net of fees and expenses, the 2017 Credit Agreement Amendment resulted in approximately$60 million of incremental liquidity over the subsequent 18 months from theJuly 19, 2019 modification date. 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 theDecember 31, 2019 Form 10-K) for more information on the Seventh Amendment to 2017 Credit Agreement and the Second Amendment to the Securities Purchase Agreement. OnApril 7, 2020 , we entered into the Eighth Amendment to 2017 Credit Agreement, which modified the 2017 Credit Agreement by extending the delivery deadline, solely with respect to such financial statements to be provided for the fiscal year endedDecember 31, 2019 and such accompanying report and opinion from such independent registered public accounting firm, toApril 9, 2020 . OnApril 9, 2020 , we entered into the Ninth Amendment to 2017 Credit Agreement, which modified the 2017 Credit Agreement by extending the delivery deadline, solely with respect to such financial statements to be provided for the fiscal year endedDecember 31, 2019 and such accompanying report and opinion from such independent registered public accounting firm, toApril 16, 2020 .
On
•The deadline for delivery of audited consolidated annual financial statements of the Company for the fiscal year endedDecember 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 afterMay 15, 2020 (as such deadline may be extended from time to time by an order of theU.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 endedJune 30, 2020 was extended from the date that is 60 days after the end of such fiscal quarter until the date that is 15 days afterJune 29, 2020 (as such deadline may be extended from time to time by an order of theU.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 untilJune 1, 2020 . Pursuant to the Second Lien Amendment, the note-holders consented to the First Lien Amendment (as defined below) and to the transactions contemplated thereby.
As a result of our voluntary commencement of chapter 11 proceedings, the Company is not currently subject to be covenants under the 2017 Credit Agreement.
OnApril 15, 2020 , we entered into an amendment to our 2017 Credit Agreement (the "Tenth Amendment to 2017 Credit Agreement") that modified the Maximum First Lien Leverage covenant to exempt us from needing to comply therewith for the period ended onJune 30, 2020 . Additionally, in connection with the Tenth Amendment to 2017 Credit Agreement, we agreed to maintain undrawn revolving commitments plus cash and cash equivalents of the Company and its subsidiaries in an aggregate amount of not less than$17.5 million ("Minimum Liquidity"). Additionally, during the six months endedJune 30, 2020 we initiated actions to improve our cost structure included headcount reductions, reductions in discretionary spend such as professional services and travel and entertainment; and in the future, planned actions include the relocation of facilities, and a focus on re-engineering the Company's business processes in addition to supply chain and procurement savings. Our ability to satisfy our liquidity needs and comply with the other covenants under our existing indebtedness, including the Minimum Liquidity covenant and the Maximum First Lien Leverage covenant under the 2017 Credit Agreement, thereafter is dependent upon our ability to achieve the operating results that are reflected in our covenant calculation. Significant adverse conditions, 73 -------------------------------------------------------------------------------- Table of Contents which may result from increased contraction in the general economic environment, a downturn in the industry, changes in foreign and domestic civil aviation authorities' orders and other factors described in the Section "Cautionary Note Regarding Forward Looking Statements" and our description of "Risk Factors" in theDecember 31, 2019 Form 10-K may impact our ability to comply with the Minimum Liquidity covenant and achieve the required Maximum First Lien Leverage levels. Means for improving our profitability, among others, include renegotiation of bandwidth contracts, optimizing delivery of connectivity and content services provided, renewing and obtaining new customer contracts, and other operational actions to improve productivity and efficiency, all of which may not be within our control. If we are unable to achieve the improved results required to comply with these covenants, we may be required to take specific actions in addition to those described above, including but not limited to, additional reductions in headcount, targeted procurement initiatives to reduce operating costs and other operating costs, or alternatively, seeking an amendment or waiver from our lenders or taking other remedial measures.
On
•The timing of an occurrence of an event of default as a result of a failure to
pay interest on any loan due on
•The lenders have agreed to waive untilAugust 1, 2020 any default or event of default arising under the Credit Agreement as a result of any failure to timely pay interest on any loan due onJuly 9, 2020 . •In connection with the Eleventh Amendment, the Company agreed that so long as such interest remains unpaid, all loans outstanding under the Credit Agreement will accrue interest at the default rate (with any such default interest being payable no earlier thanAugust 1, 2020 ). The Eleventh Amendment was conditioned upon the Company's payment of an amendment fee (the "Amendment Fee") to the consenting lenders equal to 2.0% of the aggregate outstanding principal amount of Term B Loans held by such consenting lender on the date of the Eleventh Amendment, with such fee being payable in kind by adding the Amendment Fee to the outstanding principal amount of the Term B Loans held by such consenting lender (with such portion of the Amendment Fee thereafter being treated as outstanding principal of Term B Loans for all purposes under the Credit Agreement), and payment of related advisor costs and expenses. OnJuly 20, 2020 , the Company entered into the Twelfth Amendment to Credit Agreement. Pursuant to the Twelfth Amendment, the lenders have agreed to waive compliance with the Minimum Liquidity Covenant (as defined therein) for the period commencingJuly 20, 2020 untilAugust 1, 2020 . The Twelfth Amendment was conditioned upon the Company's payment of advisor costs and expenses. As a result of our voluntary commencement of chapter 11 proceedings, the Company is not currently subject to be covenants under the 2017 Credit Agreement.
Company Credit Rating
OnJuly 16, 2020 , Moody's Investors Service ("Moody's") downgraded the Company's corporate family rating from Caa2 to Ca as well as the Company's probability of default rating to Ca-PD/LD from Caa2-PD. Moody's also downgraded the rating on the Company's first lien facilities to Caa2 from B3. Moody's downgrades were primarily due to the Company'sJuly 10, 2020 announcement of not making interest payment of its Senior Credit Agreement which was due onJuly 9, 2020 . Another key driver of the downgrades is the impact of the COVID-19 pandemic on our operations.
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 ofJune 30, 2020 , andDecember 31, 2019 , approximately$6.9 million and$10.5 million of our cash and cash equivalents, respectively, were held by our foreign subsidiaries. InMarch 2020 , the Company purchased commercial papers with nominal value of$30.0 million for an initial investment of$29.9 million with maturities ranging from 29 to 71 days. The investment was classified as held-to-maturity. AtJune 30, 2020 , the amortized cost of the investment was approximately$5.1 million . There were no credit losses on the investment. 74
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Sources and Uses of Cash-Six Months Ended
A summary of our cash flow activities for the six months ended
Six
Months Ended
2020 2019
Net cash used in operating activities $ (24,704) $ 1,972
Net cash used in investing activities (2,142) (13,442)
Net cash provided by financing activities 38,206 (16,659)
Effects of exchange rate changes on cash, cash
equivalents and restricted cash 296 $ 199
Net increase (decrease) in cash, cash equivalents and restricted cash
11,656 (27,930)
Cash, Cash Equivalents and Restricted Cash at beginning of period
24,462 39,955
Cash, Cash Equivalents and Restricted Cash at end of period
$ 36,118 $ 12,025
Six Months EndedJune 30, 2020 Net cash used in our operating activities of$24.7 million primarily reflects our net loss of$139.0 million during the period and net non-cash charges of$109.5 million primarily related to the goodwill and long-lived asset impairment charges of$26.6 million , depreciation and amortization expenses of$38.3 million , a$16.4 million non-cash interest charge, and a$12.9 million loss on equity method investments including impairment losses, comprised of$13.1 million impairment loss offset by the gain on equity method investments of$0.3 million for the six months endedJune 30, 2020 . Additionally, we had net cash inflows of$4.7 million resulting from changes in working capital balances, primarily driven by reduced cash outflows in accounts payable and accrued expenses. Six Months EndedJune 30, 2019 Net cash provided by our operating activities of$2.0 million primarily reflects our net loss of$76.1 million during the period, which included net non-cash charges of$60.1 million primarily related to depreciation and amortization expenses of$43.5 million and a non cash interest expense of$14.2 million .
The remainder of our cash used in operating activities was as a result of net
cash inflows of
Six Months EndedJune 30, 2020 Net cash used in investing activities during the six months endedJune 30, 2020 of$2.1 million was due to purchases of property and equipment, principally relating to the purchase of expanded connectivity infrastructure to support our growth. Six Months EndedJune 30, 2019 Net cash used in investing activities during the six months endedJune 30, 2019 of$13.4 million was due to purchases of property, plant and equipment, principally relating to the purchase of expanded connectivity infrastructure to support our growth.
Net Cash Flows Provided by Financing Activities
Six Months EndedJune 30, 2020 Net cash provided by financing activities of$38.2 million was primarily due to higher borrowings over repayments under our 2017 Revolving. We borrowed$44.3 million on the 2017 Revolving Loans which was offset by repayments of$7.0 million on the 2017 Revolving Loans, as well as additional repayment of other loan and indebtedness of$4.1 million . we also borrowed$5.0 million from related parties. 75
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Six Months EndedJune 30, 2019 Net cash used in financing activities of$16.7 million was primarily due to borrowings from related parties of$7.4 million . In addition, we borrowed$34.7 million on the 2017 Revolving Loans which was offset by repayments of$46.3 million on the 2017 Revolving Loans, as well as additional repayments of indebtedness in the amount of$12.4 million .
Long-Term Debt
As of
June 30, 2020 December 31, 2019
Senior secured term loan facility, due January 2023 $ 503,323 $ 506,037
Senior secured revolving credit facility, due January 2022 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 27,345 23,685
Unamortized bond discounts, fair value adjustments and issue costs, net
(55,474) (60,509)
Total carrying value of debt 827,025 773,062
Less: current portion, net (810,887) (15,678)
Total non-current $ 16,138 $ 757,384
The aggregate contractual maturities of all borrowings, including finance
leases, as of June 30, 2020 were as follows (in thousands):
Years Ending December 31, Amount
2020 (remaining nine months) $ 11,615
2021 34,892
2022 110,566
2023 633,976
2024 3,238
Thereafter 88,212
Total $ 882,499
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 June 30,
2020 , we also had outstanding letters of credit in the amount of $4.4 million ,
of which $3.9 million was issued under the letter of credit facility under the
Senior Secured Credit Agreement that the Company entered into on January 6, 2017
(the "2017 Credit Agreement").
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 U.S. federal income tax purposes) may result in taxable cancellation
of indebtedness income to us, which amounts may be material, and in related
adverse tax consequences to us.
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.
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Table of Contents Contractual Obligations For a discussion of movie license and Internet protocol television commitments, minimum lease obligations, satellite capacity, and other contractual commitments as ofJune 30, 2020 and for periods subsequent thereto, see Note 12. Commitments and Contingencies to the unaudited condensed consolidated financial statements (contained in Part I, Item 1 of this Form 10-Q) for a discussion. Off -Balance Sheet Arrangements As ofJune 30, 2020 , we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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