10Q Document (Q3-2014)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2014
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE TRANSITION PERIOD FROM __________ TO ________
COMMISSION FILE NUMBER 001-35176
GLOBAL EAGLE ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
Delaware
 
27-4757800
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
4553 Glencoe Avenue
 
 
Los Angeles, California
 
90292
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (310) 437-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
 
(Outstanding as of November 7, 2014)
 
COMMON STOCK, $0.0001 PAR VALUE
 
 
76,260,293

SHARES*
 
* Excludes 3,053,634 shares held by Global Entertainment AG, a wholly-owned subsidiary of the registrant.

Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
INDEX TO FORM 10-Q

Item No.
 
Description
 
Page
 
 
 
 
 
 
 
PART I — Financial Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II — Other Information
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I — FINANCIAL INFORMATION

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2014
 
December 31,
2013
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
209,637

 
$
258,796

Accounts receivable, net
83,040

 
64,216

Content library, current
7,859

 
6,563

Inventories
11,820

 
15,481

Prepaid and other current assets
22,232

 
14,187

TOTAL CURRENT ASSETS:
334,588

 
359,243

Property, plant & equipment, net
22,544

 
20,797

Goodwill
53,032

 
52,345

Intangible assets
118,978

 
136,414

Other non-current assets
14,935

 
10,084

TOTAL ASSETS
$
544,077

 
$
578,883

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
98,054

 
$
81,961

Deferred revenue
11,831

 
11,190

Warrant liabilities
45,161

 
71,570

Notes payable and accrued interest
2,472

 
9,648

Deferred tax liabilities
410

 
1,192

Other current liabilities
12,191

 
7,561

TOTAL CURRENT LIABILITIES:
170,119

 
183,122

Deferred tax liabilities, non-current
24,086

 
25,186

Deferred revenue, non-current
6,951

 
5,808

Notes payable and accrued interest, non-current
985

 
1,153

Other non-current liabilities
6,580

 
7,430

TOTAL LIABILITIES
208,721

 
222,699

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
EQUITY:
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
—

 
—

Common stock, $0.0001 par value; 375,000,000 shares authorized, 79,301,427 and 55,902,114 shares issued, 76,247,793 and 52,848,480 shares outstanding, at September 30, 2014 and December 31, 2013, respectively
8

 
5

Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, 0 and 19,118,233 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
—

 
2

Treasury stock, 3,053,634 shares at September 30, 2014 and December 31, 2013
(30,659
)
 
(30,659
)
Additional paid-in capital
640,428

 
620,862

Subscriptions receivable
(497
)
 
(478
)
Accumulated deficit
(273,820
)
 
(243,943
)
Accumulated other comprehensive loss
(104
)
 
—

TOTAL GLOBAL EAGLE ENTERTAINMENT INC. STOCKHOLDERS' EQUITY
335,356

 
345,789

Non-controlling interest
—

 
10,395

TOTAL EQUITY
335,356

 
356,184

TOTAL LIABILITIES AND EQUITY
$
544,077

 
$
578,883


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

1
Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
102,623

 
$
74,518

 
$
286,736

 
$
179,862

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
73,618

 
54,002

 
213,341

 
139,571

Sales and marketing expenses
3,980

 
3,758

 
10,119

 
8,444

Product development
7,212

 
2,282

 
15,561

 
5,946

General and administrative
17,172

 
17,056

 
51,440

 
53,860

Amortization of intangible assets
6,049

 
4,221

 
18,613

 
8,470

Restructuring charges
2,606

 
—

 
2,606

 
—

Total operating expenses
110,637

 
81,319

 
311,680

 
216,291

Loss from operations
(8,014
)
 
(6,801
)
 
(24,944
)
 
(36,429
)
Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
175

 
(267
)
 
44

 
(726
)
Change in fair value of derivatives
(5,253
)
 
2,233

 
555

 
(7,107
)
Other income (expense), net
(984
)
 
601

 
(1,786
)
 
571

Income (loss) before income taxes
(14,076
)
 
(4,234
)
 
(26,131
)
 
(43,691
)
Income tax provision
1,454

 
1,161

 
3,552

 
1,754

Net income (loss)
(15,530
)
 
(5,395
)
 
(29,683
)
 
(45,445
)
Net income (loss) attributable to non-controlling interests
—

 
158

 
194

 
89

Net income (loss) attributable to Global Eagle Entertainment Inc. common stockholders
$
(15,530
)
 
$
(5,553
)
 
$
(29,877
)
 
$
(45,534
)
 
 
 
 
 
 
 
 
Net income (loss) per common share - basic
$
(0.21
)
 
$
(0.10
)
 
$
(0.41
)
 
$
(0.89
)
Net income (loss) per common share - diluted
$
(0.21
)
 
$
(0.10
)
 
$
(0.41
)
 
$
(0.89
)
 
 
 
 
 
 
 
 
Weighted average common shares - basic
72,877

 
55,166

 
72,284

 
51,106

Weighted average common shares - diluted
72,877

 
55,166

 
72,284

 
51,106


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

2
Table of Contents

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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
(15,530
)
 
$
(5,395
)
 
$
(29,683
)
 
$
(45,445
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation losses
(9
)
 
(134
)
 
(104
)
 
—

Unrealized gains (losses) on available for sale securities
 
 
 
 
 
 
 
Unrealized gain (loss) on available for sale securities
—

 
—

 
112

 
101

Less: reclassification adjustments for recognized gains included in net income
—

 
—

 
(112
)
 
(101
)
Unrealized gain (loss) on available for sale securities, net
—

 
—

 
—

 
—

Other comprehensive income (loss)
(9
)
 
(134
)
 
(104
)
 
—

Comprehensive income (loss)
(15,539
)
 
(5,529
)
 
(29,787
)
 
(45,445
)
Comprehensive income (loss) attributable to non-controlling interests
—

 
161

 
194

 
11

Comprehensive income (loss) attributable to Global Eagle Entertainment Inc. common stockholders
$
(15,539
)
 
$
(5,690
)
 
$
(29,981
)
 
$
(45,456
)

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


3
Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)
(In thousands)
 
Common Stock
 Common Stock Non-Voting
 Treasury Stock
Additional
Subscriptions
Accumulated
Accumulated Other
Total Global Eagle Entertainment Inc.
Non-Controlling
Total
 
Shares
Amount
 Shares
 Amount
Shares
 Amount
Paid-in Capital
Receivable
Deficit
Comprehensive Income
Stockholders' Equity
Interest
Equity
Balance at December 31, 2013
55,902

$
5

19,118

$
2

(3,054
)
$
(30,659
)
$
620,862

$
(478
)
$
(243,943
)
$
—

$
345,789

$
10,395

$
356,184

Conversion of non-voting common stock to voting common stock
19,118

2

(19,118
)
(2
)
—

—

—

—

—

—

—

—

—

Exercise of stock options and warrants
26

—

—

—

—

—

(159
)
—

—

—

(159
)
—

(159
)
Issuance of common stock to former Row 44 stockholders
28

—

—

—

—

—

345

—

—

—

345

—

345

Issuance of common stock in exchange for warrants, net of transaction fees of $362
4,227

1

—

—

—

—

24,046

—

—

—

24,047

—

24,047

Stock-based compensation


—

—

—

—

—

6,485

—

—

—

6,485

—

6,485

Interest income on subscription receivable
—

—

—

—

—

—

—

(19
)
—

—

(19
)
—

(19
)
Purchase of subsidiary share from non-
controlling interest shareholders
—

—

—

—

—

—

(11,151
)
—

—

—

(11,151
)
(10,589
)
(21,740
)
Other comprehensive income
—

—

—

—

—

—

—

—

—

(104
)
(104
)
—

(104
)
Net loss
—

—

—

—

—

—

—

—

(29,877
)
—

(29,877
)
194

(29,683
)
Balance at September 30, 2014
79,301

$
8

—

$
—

(3,054
)
$
(30,659
)
$
640,428

$
(497
)
$
(273,820
)
$
(104
)
$
335,356

$
—

$
335,356


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

4
Table of Contents

GLOBAL EAGLE ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(29,683
)
 
$
(45,445
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
26,023

 
20,375

Non-cash interest (income) expense, net
(19
)
 
—

Change in fair value of derivative financial instrument
(555
)
 
7,107

Stock-based compensation
6,485

 
1,902

Issuance of shares for working capital settlement
345

 
—

Gain on sale of available for sale securities
(112
)
 
—

Loss on equity method investments
1,300

 
—

Warrants for common stock issued for services
—

 
359

Deferred income taxes
(8,124
)
 
1,576

Others
—

 
(19
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(18,704
)
 
(1,477
)
Inventory and content library
(6,264
)
 
(9,260
)
Prepaid expenses and other current assets
(3,356
)
 
(2,442
)
Deposits and other assets
(2,446
)
 
(1,344
)
Accounts payable and accrued expenses
20,327

 
(20,728
)
Deferred revenue
1,784

 
839

Other long-term liabilities
945

 
—

NET CASH USED IN OPERATING ACTIVITIES
(12,054
)
 
(48,557
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(6,231
)
 
(10,025
)
PMG asset purchase, net of cash acquired
—

 
(10,563
)
Cash received from Row 44 Merger
—

 
159,227

Cash received from AIA Stock Purchase
—

 
22,136

Cash paid to acquire assets of Purple
(500
)
 
—

Purchase of investments
—

 
(1,500
)
Net proceeds from sale of available for sale securities
583

 
6,312

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(6,148
)
 
165,587

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Acquisition of non-controlling interest
(21,740
)
 
(15,379
)
Long-term borrowings, net of costs
16

 
—

Repayments of notes payable
(7,360
)
 
(3,613
)
Purchase of common stock warrants
(1,406
)
 
(795
)
Purchase of common stock
—

 
(1,069
)
Other financing activities, net
(363
)
 
(345
)
NET CASH USED IN FINANCING ACTIVITIES
(30,853
)
 
(21,201
)
Effects of exchange rate movements on cash and cash equivalents
(104
)
 
—

Net (decrease) increase in cash and cash equivalents
(49,159
)
 
95,829

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
258,796

 
2,088

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
209,637

 
$
97,917


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

5
Table of Contents

Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 1. Business

Global Eagle Entertainment Inc. ("GEE") is a Delaware corporation headquartered in Marina Del Rey, California. GEE together with its consolidated subsidiaries is referred to as the “Company”. The Company's business is focused on providing Wi-Fi Internet Connectivity and Content to the airline industry.

Connectivity

The Company's Connectivity service offering provides its airline partners and their passengers Wi-Fi connectivity over Ku-band satellite transmissions. The Company's Connectivity services are delivered through its wholly owned subsidiary, Row 44, Inc. ("Row 44"), which combines specialized network equipment, media applications and premium content services that allow airline passengers to access in-flight Internet, live television, on-demand content, shopping and travel-related information.

Content

The Company's Content services offering selects, manages, and distributes wholly-owned and licensed media content, video and music programming, applications, and video games to the airline industry through (i) its wholly-owned subsidiary, Global Entertainment AG, formerly known as Advanced Inflight Alliance AG ("AIA"), (ii) the business it acquired from Post Modern Edit, LLC and related entities (such business, which the Company operates through wholly-owned subsidiaries, is referred to herein as "PMG"), and (iii) its wholly-owned subsidiary, Travel Entertainment Group Equity Limited ("IFES").

Prior to January 31, 2013, the Company was known as Global Eagle Acquisition Corp. (“GEAC”), which was formed in February 2011 to effect a merger, capital stock exchange, asset acquisition or similar business combination with one or more businesses. Effective in the first quarter of 2013, and in conjunction with the business combination transaction (the "Business Combination") in which GEAC acquired Row 44 and 86% of the issued and outstanding shares of AIA, GEAC changed the Company's name from Global Eagle Acquisition Corp. to Global Eagle Entertainment Inc. In addition, on July 10, 2013, the Company purchased substantially all the assets of Post Modern Edit, LLC and related entities. Further, on October 18, 2013, the Company completed the stock acquisition of IFES. Refer to Note 3. Business Combinations for additional information. Following the Business Combination, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA's shares to 94% as of March 31, 2014, and in April 2014, the Company acquired the remaining outstanding shares in AIA.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements.

Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of September 30, 2014, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss for the three and nine month periods ended September 30, 2014 and 2013, the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2014 and 2013, and the condensed consolidated statement of stockholders' equity for the nine month period ended September 30, 2014 are unaudited.

Since Row 44 was deemed the accounting acquirer in the Business Combination consummated on January 31, 2013, the presented financial information for the three and nine months ended September 30, 2014 is only partially comparable to the financial information for the three and nine months ended September 30, 2013. The presented financial information for the three and nine months ended September 30, 2013 includes the financial information and activities of Row 44 for the period January 1, 2013 to September 30, 2013 (273 days) as well as the financial information and activities of GEE and AIA for the period January 31, 2013 to September 30, 2013 (243 days) and PMG for the period July 10, 2013 to September 30, 2013 (83 days). IFES was acquired subsequent to September 30, 2013, therefore its financial information is not included in the financial information for the three and nine months ended September 30, 2013. This lack of comparability needs to be taken into account when reading the condensed

6
Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

consolidated statements of operations, comprehensive income (loss) and cash flows. Furthermore, the presented financial information for the three and nine months ended September 30, 2013 also contains one-time costs that are directly associated with the Business Combination on January 31, 2013 such as professional fees to support the Company's complex legal, tax, statutory and reporting requirements following the Business Combination.

In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's statement of financial position as of September 30, 2014, its results of operations for the three and nine month periods ended September 30, 2014 and 2013, and its cash flows for the nine month periods ended September 30, 2014 and 2013. The results for the nine month period ended September 30, 2014 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2013 has been derived from the Company's audited financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 25, 2014, as amended by amendment No.1 on Form 10-K/A filed with the SEC on March 26, 2014 (as so amended, the "2013 Form 10-K").

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's 2013 Form 10-K.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Acquisitions are included in the Company's condensed consolidated financial statements from the date of the acquisition. The Company's purchase accounting for acquisitions resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All intercompany balances and transactions have been eliminated in consolidation, including AIA's historical investment in Row 44.

Investments that the Company has the ability to control, and where it is the primary beneficiary, are consolidated. Any non-controlling interests in a Company's subsidiary earnings or losses, such as in AIA before April 23, 2014, are included in net income (loss) attributable to non-controlling interests in the Company's condensed consolidated statements of operations. Any investments in affiliates over which the Company has the ability to exert significant influence, but does not control and it is not the primary beneficiary, such as its investment in Allegiant Systems, Inc., are accounted for using the equity method of accounting. Investments in affiliates for which the Company has no ability to exert significant influence are accounted for using the cost method of accounting.

Use of Estimates
 
The preparation of the Company's unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue (relative selling price of deliverables) and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, the assigned value of acquired assets and assumed and contingent liabilities associated with business combinations, valuation of media content inventory, useful lives and impairment of property and equipment, intangible assets, goodwill and other assets, the fair value of the Company's equity-based compensation awards, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Segments of the Company

The Company reports its operations under two segments, Connectivity and Content. The Company's Connectivity segment provides airline customers and their passengers Wi-Fi connectivity over Ku-band satellite transmissions through Row 44. The Company's Content segment selects, manages, and distributes owned and licensed media content, video and music programming, applications, and video games to the airline industry through AIA, PMG and IFES.


7
Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The decision to report two segments is principally based upon the Company's chief operating decision maker (“CODM”), and how the CODM manages the Company's operations as two segments from a consolidated basis for purposes of evaluating financial performance and allocating resources. The CODM reviews revenue, cost of sales expense, and contribution profit information separately for the Company's Connectivity and Content businesses. Total segment contribution profit provides the CODM, investors and equity analysts a measure to analyze operating performance of each of the Company's business segments and its enterprise value against historical data and competitors' data, although historical results may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences). All other financial information is reviewed by the CODM on a consolidated basis.

Segment revenue, expenses and contribution profit for the three and nine month periods ended September 30, 2014 and 2013 derived from the Company's Content and Connectivity segments were as follows (in thousands):

 
Three Months Ended September 30,
 
2014
 
2013
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing
$
60,907

 
—

 
$
60,907

 
$
44,645

 
$
—

 
$
44,645

Service
10,603

 
19,933

 
30,536

 
8,796

 
16,218

 
25,014

Equipment
—

 
11,180

 
11,180

 
—

 
4,859

 
4,859

Total revenue
71,510

 
31,113

 
102,623

 
53,441

 
21,077

 
74,518

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
50,596

 
23,022

 
73,618

 
38,809

 
15,193

 
54,002

Contribution profit
20,914

 
8,091

 
29,005

 
14,632

 
5,884

 
20,516

Other operating expenses
 
 
 
 
37,019

 
 
 
 
 
27,317

Loss from operations
 
 
 
 
$
(8,014
)
 
 
 
 
 
$
(6,801
)

 
Nine Months Ended September 30,
 
2014
 
2013
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing
$
172,375

 
—

 
$
172,375

 
$
106,353

 
$
—

 
$
106,353

Service
33,917

 
53,735

 
87,652

 
18,346

 
34,893

 
53,239

Equipment
349

 
26,360

 
26,709

 
—

 
20,270

 
20,270

Total revenue
206,641

 
80,095

 
286,736

 
124,699

 
55,163

 
179,862

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
149,475

 
63,866

 
213,341

 
92,158

 
47,413

 
139,571

Contribution profit
57,166

 
16,229

 
73,395

 
32,541

 
7,750

 
40,291

Other operating expenses
 
 
 
 
98,339

 
 
 
 
 
76,720

Loss from operations
 
 
 
 
$
(24,944
)
 
 
 
 
 
$
(36,429
)

Revenue Recognition

The Company recognizes revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. The Company considers persuasive evidence of a sales arrangement to be the receipt of a signed contract. Collectability is assessed based on a number of factors, including transaction history and the credit worthiness of a customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. The Company records cash received in advance of revenue recognition as deferred revenue.


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Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

For arrangements with multiple deliverables, the Company allocates revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The fair value of the selling price for a deliverable is determined using a hierarchy of (1) Company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price. The Company allocates any arrangement fee to each of the elements based on their relative selling prices.

When the Company enters into revenue sharing arrangements where it acts as the primary obligor, the Company recognizes the underlying revenue on a gross basis. In determining whether to report revenue gross for the amount of fees received from its customers, the Company assesses whether it maintains the principal relationship, whether it bears credit risk and whether it has latitude in establishing prices with the customers, among other factors.

The Company's revenue is principally derived from the following services:

Connectivity

Equipment Revenue. Equipment revenue is recognized when title and risk pass to the buyer, which is generally upon shipment or arrival at destination depending on the contractual arrangement with the customer. In determining whether an arrangement exists, the Company ensures that a binding arrangement is in place, such as a standard purchase order or a fully executed customer-specific agreement. In cases where a customer has the contractual ability to accept or return equipment within a specific time frame, the Company will provide for return reserves when and if necessary, based upon historical experience.

In certain cases where the Company sells its equipment on a stand-alone basis, it may charge a fee for obtaining Supplemental Type Certificates (“STCs”) obtained from the Federal Aviation Administration, which allow its equipment to operate on certain model/type of aircraft. To the extent that the Company contracts to charge STC fees in equipment-only sales, the Company will record these fees as revenue. Total STC fees recognized as revenue for the three and nine months ended September 30, 2014 were $0.3 million and $0.8 million, respectively. No STC fee revenue was recognized during the three and nine months ended September 30, 2013.

Included in equipment revenue are certain deferred obligations that exist pursuant to the Company's contractual arrangements which typically include, but are not limited to, technical support, regulatory support, network support and installation support. These support-based arrangements are customarily bundled with the Company's contracts and are accounted for as a single unit of account. To the extent that these support services have value on a standalone basis, the Company allocates revenue to each element in the arrangement based upon their relative fair values. Fair value is determined based upon the best estimate of the selling price, and the fair value of undelivered elements is deferred and recognized over the performance or contractual period and is included in equipment revenue. The most significant of the deferred obligations is typically network support, which includes 24/7 operational support for the airlines for which the Company incurs significant and periodic external and internal costs to deliver on a daily basis.

Service Revenue. Connectivity service revenue includes in-flight Wi-Fi Internet services, live television, on-demand content, music streaming, shopping and click-through advertising revenue from travel-related information. Service revenue is recognized after it has been rendered and the customer can use the service, which customarily is in the form of (i) enplanement for boarded passengers, (ii) usage by passengers, depending upon the specific contract, and/or (iii) other revenues such as advertising sponsorship. The Company assesses whether performance criteria have been met and whether its service fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or customer performance data in circumstances where that data is available.

In certain cases, the Company records service revenue based on available and preliminary information from its network operations. Amounts collected on the related receivables may vary from reported information based upon third party refinement of estimated and reported amounts owed that generally occurs typically within thirty days of the period end. For all years presented, the difference between the amounts recognized based on preliminary information and cash collected was not material.

Content

Licensing Revenue. Content licensing revenue is principally generated through the sale or license of media content, video and music programming, applications, and video games to the airlines, and to a lesser extent through various services such as

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

encoding and editing of media content. Revenue from the sale or license of content is recognized when the content has been delivered and the contractual performance obligations have been fulfilled, generally at the time a customer's license period begins. For arrangements in which the license period commences after the delivery of content, revenue is not recognized until the license period commences even if delivery and performance obligations have already occurred. In certain cases, the Company estimates licensing revenues from airline customers. The Company believes it has the ability to reasonably estimate the amounts that will ultimately be collected such that it recognizes these amounts when earned.

Services Revenue. Content services revenue, such as technical services, the encoding of video products, development of graphical interfaces or the provision of materials, are billed and recognized as services are performed.

Costs of Sales

Connectivity

Connectivity costs of sales consist primarily of equipment fees paid to third party manufacturers, certain revenue recognized by the Company and shared with its customers or partners as a result of its revenue-sharing arrangements, Internet connection and satellite charges and other platform operating expenses associated with the Company's Connectivity business, including depreciation of internally developed software, website development costs, and hardware used to build and operate the Company's Connectivity platform, and personnel costs relating to information technology.

Content

Content costs of sales consist primarily of the costs to license or purchase media content, and direct costs to service content for the airlines. Included in Content cost of sales is amortization expense associated with the purchase of film content libraries acquired in business combinations and in the ordinary course of business.

Product Development

Product research and software development costs, other than certain internal-use software costs qualifying for capitalization, are expensed as incurred. Costs of computer software or websites developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs of developing internal-use software incurred during the application and development stage, which include employee and outside consulting compensation and related expenses, costs of computer hardware and software, website development costs and costs incurred in developing additional features and functionality of the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized costs are generally amortized using the straight-line method over a three year estimated useful life, beginning in the period in which the software is ready for its intended use. Unamortized amounts are included in property and equipment, net in the accompanying consolidated balance sheets. Capitalized software development costs totaled $0.9 million and $2.4 million for the three and nine months ended September 30, 2014, respectively, and $0.3 million and $1.0 million for the three and nine months ended September 30, 2013, respectively.

The Company's product development expenditures are focused on developing new products and services, and obtaining STCs as required by the Federal Aviation Administration for each model/type of aircraft prior to providing Connectivity services. To the extent that the Company is contracted to obtain STCs, and customers reimburse these costs, the Company will record these reimbursements directly against its product development expenses.

Restructuring

The Company records the cost reduction plan activities in accordance with the Accounting Standards Codification (ASC), including ASC 420 Exit or Disposal Cost Obligations, ASC 712 Compensation-Nonretirement Postemployment Benefits and ASC 360 Property, Plant, and Equipment (Impairment or Disposal of Long-Lived Assets).

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, on a straight-line basis. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of stock options. The Company estimates fair value of share-based awards using the Black-Scholes model. This model requires the Company to estimate the expected volatility and the expected term

10
Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

of the stock options which are highly complex and subjective variables. The variables take into consideration, among other things, actual and projected employee stock option exercise behavior. The Company uses a predicted volatility of its stock price during the expected life of the options that is based on the historical performance of the Company's stock price as well as including an estimate using similar companies. Expected term is computed using the simplified method as the Company's best estimate given its lack of actual exercise history. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected term of the stock. Stock-based awards are comprised principally of stock options.

Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management believes that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based compensation award is re-measured each period until performance is complete, which is generally the vesting date.

Stock and Warrant Repurchases

Shares repurchased by the Company are accounted for when the transaction is settled. Repurchased shares held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from common stock at par value and from additional paid in capital for the excess of cash paid over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the repurchased shares.

Warrants classified as liability instruments when repurchased are accounted for at their fair value on the date the transaction is settled. Any excess of cash paid, or the value of common stock exchanged, over the fair value of warrant repurchases on the settlement date is recorded as an expense or gain in the Company’s consolidated statement of operations. During the nine months ended September 30, 2014, the Company repurchased or exchanged approximately 13.1 million of its Global Eagle public company warrants for total consideration of $1.4 million in cash and issuance of 4,227,187 shares of the Company's common stock with an aggregate fair value of $57.9 million. During the nine months ended September 30, 2013, the Company repurchased 0.5 million of its Global Eagle public company warrants for total consideration of $0.8 million, in cash.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents.

Restricted Cash

The Company maintains certain letters of credit agreements with its airlines partners, which are secured by the Company’s cash for periods of less than one year and up to three years. As of September 30, 2014 and December 31, 2013, the Company had restricted cash of $3.2 million and $3.3 million, respectively. As of September 30, 2014, $1.2 million and $2.0 million of restricted cash is included in other current and other non-current assets, respectively, in the consolidated balance sheets. As of December 31, 2013, $2.4 million and $0.9 million of restricted cash is included in other current and other non-current assets, respectively, in the consolidated balance sheets.

Derivative Financial Instruments and Hedges

All derivatives are accounted for on a fair value basis. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis. The change in fair value of derivatives is recorded through earnings. Cash flows from embedded derivatives subject to bifurcation are reported consistently with the host contracts within the statements of cash flows.

The Company sometimes uses derivative financial instruments such as interest rate swaps to hedge interest rate risks. These derivatives are recognized at fair value on the transaction date and subsequently remeasured at fair value. Derivatives are measured as financial assets when their fair value is positive and as financial liabilities when their fair value is negative. Gains or losses on changes in the fair value of derivatives are recognized immediately in its consolidated statement of operations as a component of other income (expense) as they do not qualify for hedge accounting.

Long-Lived Assets


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company evaluates the recoverability of its long-lived assets with finite useful lives, including its infinite lived intangible assets acquired in business combinations, for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. Through September 30, 2014, the Company has identified no such impairment loss. Assets to be disposed of would be separately presented on the balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized.

Inventory, net

Equipment inventory. Equipment inventory, which is classified as finished goods, is comprised of individual equipment parts and assemblies and are stated at the lower of cost or market. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market, based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of goods sold. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

At September 30, 2014 and December 31, 2013, there was approximately $7.5 million and $6.2 million, respectively, of deferred equipment costs included in inventory and other non-current assets. The deferred equipment costs pertain to certain costs expended in advance of services for one airline, and are being amortized ratably over the underlying term of the agreement through 2020.
    
The Company is not directly responsible for warranty costs related to equipment it sells to its customers. The vendors that supply each of the individual parts, which comprise the assemblies sold by the Company to customers, are responsible for equipment warranty directly to the customer.

Content Library

The content library was acquired in the AIA stock purchase and was recorded at fair value. The useful life of licensed film rights within the content library corresponds to the respective period over which the film rights will be licensed and generate revenues, generally a period of one year or less. Licensed film rights are amortized ratably over their expected revenue streams and included in cost of sales. Certain film rights in the Company's portfolio may be used in perpetuity under certain conditions. The content library is tested for impairment periodically, but no less than annually. Considering the marketability of the given film right, an impairment loss is recognized as necessary. If the estimated future cash flows for a given film right are lower than its carrying amount as of the reporting date, an impairment loss is recognized in such period.

Subsequent to the AIA stock purchase, additions to the content library represent minimum guaranteed amounts or flat fees to acquire film rights from film studios. Amounts owed in excess of the capitalized minimum guarantees are expensed and accrued as a liability when the Company's revenues from exploiting the film right have fully recouped the minimum guarantee based on the contractual royalty rates.

Property, Plant, & Equipment, net

Property, plant and equipment is measured at cost less accumulated depreciation and/or impairment losses. Straight-line depreciation is based on the underlying assets' useful lives. The estimated useful life of technical and operating equipment is 3 to

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Buildings are amortized on the straight-line method over 30 years.

Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company's financial statements with the resulting gain or loss reflected in the Company's results of operations. Repairs and maintenance costs are expensed as incurred. In the event that property and equipment is no longer in use, the Company will record a loss on disposal of the property and equipment, which is computed as the net remaining value (gross amount of property and equipment less accumulated depreciation expense) of the related equipment at the date of disposal.

During the nine months ended September 30, 2014, the Company purchased and capitalized less than $0.1 million of Connectivity equipment, which is installed on aircraft of a single customer to facilitate expanded services over a five-year period. The Company capitalized the costs of this equipment on its balance sheet as it retained legal title to the equipment over the five-year use period, and will amortize these costs over their five-year useful life period.

Intangible Assets and Goodwill

The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination, and allocates the purchase price of each acquired business to its respective net tangible and intangible assets. Acquired intangible assets principally include customer relationships, technology, and content library. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Amortization of film rights intangible assets with finite useful lives is recognized in the statements of operations under cost of sales.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, instead it is tested for impairment annually or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends or significant under-performance relative to expected historical or projected future results of operations.

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. The Company determined that it has two reporting units, Content and Connectivity. When testing goodwill for impairment, the Company first performs a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. The Company is required to perform step one only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of the Company's reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as the Company's software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

As of September 30, 2014 and December 31, 2013, goodwill of $53.0 million and $52.3 million was attributed to the Company's Content reporting unit. Through September 30, 2014, the Company has identified no impairment loss associated with its goodwill.

Business Acquisitions and Supplemental Pro Forma Information

The Company accounts for acquisitions of businesses using the purchase method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including,

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values. Additionally, any non-controlling interests in an acquired business are recorded at their acquisition date fair values. Business acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition.

On January 31, 2013, the Company completed the acquisition of 86% of the issued and outstanding shares of AIA, a media content distributor to the airline industry with corporate headquarters based in Munich, Germany. On July 9, 2013, the Company acquired substantially all of the assets of Post Modern Edit, LLC and related entities. On October 18, 2013, the Company completed the acquisition of 100% of the issued and outstanding shares of IFES. On August 2, 2014, the Company acquired substantially all of the assets of Purple Inflight Entertainment Private, Ltd. All of these acquisitions were accounted for as business combinations. Refer to Note 3. Business Combinations for further information on the acquisitions of AIA, PMG and IFES in 2013 and Purple in 2014.

Deferred Revenue and Costs

Deferred revenue consists substantially of amounts received from customers in advance of the Company's performance service period and fees deferred for future support services. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.

In the event the Company sells its equipment at or below its cost, and a portion of the related equipment revenue was allocated to other elements in the arrangement, the Company will defer an equal amount of such equipment costs on its balance sheets. Deferred costs are amortized to expense concurrent with the recognition of the related revenue and the expense is included in cost of sales.

Net Income (Loss) Per Share

Basic earnings (loss) per share (EPS) is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted-average number of common shares and the dilutive effect of contingent shares outstanding during the period. Potentially dilutive contingent shares, which primarily consist of stock options issued to employees and consultants, restricted stock units and warrants issued to third parties and accounted for as equity or liability instruments have been excluded from the diluted income (loss) per share calculation because their effect is anti-dilutive.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss) (numerator):
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(15,530
)
 
$
(5,395
)
 
$
(29,683
)
 
$
(45,445
)
Income allocable to non-controlling interests
 
—

 
158

 
194

 
89

Net income (loss) for basic EPS
 
(15,530
)
 
(5,553
)
 
(29,877
)
 
(45,534
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares (denominator):
 
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
 
72,877

 
55,166

 
72,284

 
51,106

Adjusted weighted-average share for diluted EPS
 
72,877

 
55,166

 
72,284

 
51,106

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
(0.21
)
 
$
(0.10
)
 
$
(0.41
)
 
$
(0.89
)
Diluted earnings (loss) per share
 
$
(0.21
)
 
$
(0.10
)
 
$
(0.41
)
 
$
(0.89
)

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


Securities not included in the calculation of diluted earnings (loss) per share were as follow:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Stock options and restricted stock units
 
4,434

 
4,002

 
1,816

 
3,079

Restricted stock units
 
13

 
—

 
—

 
—

Non-employees stock options
 
5

 
—

 
6

 
—

Equity warrants
 
445

 
7,536

 
1,378

 
7,520

Liability warrants
 
154

 
18,826

 
1,958

 
19,060


Foreign Currency

The vast majority of the Company's foreign subsidiaries’ customers are airlines and major US-based studios. As the standard currency of transacting for service revenue and related costs of the worldwide airline industry is the U.S. Dollar, the Company concluded that the financial position and results of operations of the majority of its foreign subsidiaries are determined using the US dollar currency as the functional currency. Current or liquid assets and liabilities of these subsidiaries are remeasured at the exchange rate in effect at each period end. Long term assets such as goodwill, purchased intangibles and property and equipment are remeasured at historical exchange rates. The vast majority of the income statement accounts are translated at the average rate of exchange prevailing during the period, with the exception of amortization and depreciation expense, which are remeasured using historical exchange rates. Adjustments arising from the fluctuations in exchange rates for the remeasurement of financial statements from period to period are included in the consolidated statements of operations.

Income Taxes

Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. Due to the uncertainty over its ability to realize future taxable income in certain jurisdictions, the Company has recorded a valuation allowance of $57.4 million and $48.9 million against its domestic deferred tax assets as of September 30, 2014 and December 31, 2013, respectively, and $1.7 million and $1.9 million against its foreign deferred tax assets as of September 30, 2014 and December 31, 2013, respectively.

The Company is subject to the accounting guidance for uncertain income tax positions. The Company's policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense.

Fair Value Measurements

The accounting guidance for fair value establishes a framework for measuring fair value and establishes a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•Level 1: Observable quoted prices in active markets for identical assets and liabilities.

•Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

•Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The assets and liabilities which are fair valued on a recurring basis are described below and contained in the following tables. In addition, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write downs resulting from impairment of assets.

The following tables summarize the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014, and December 31, 2013, respectively (in thousands):

 
September 30, 2014
 
Quotes Prices in Active Markets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability (1)
$
1,205

 
$
—

 
$
—

 
$
1,205

Global Eagle warrants (2)
45,161

 
45,161

 
—

 
—

Total financial liabilities
$
46,366

 
$
45,161

 
$
—

 
$
1,205


(1) Includes $1.1 million earn-out liability for EIM, a subsidiary of AIA assumed in the Business Combination.
(2) Includes 10,148,508 public warrants.

 
December 31, 2013
 
Quotes Prices in Active Markets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
 Significant Other Unobservable Inputs (Level 3)
Earn-out liability (1)
$
1,421

 
$
—

 
$
—

 
$
1,421

Global Eagle warrants (2)
71,570

 
71,570

 
—

 
—

Total financial liabilities
$
72,991

 
$
71,570

 
$
—

 
$
1,421


(1) Includes $1.4 million earn-out liability for EIM, a subsidiary of AIA assumed in the Business Combination.
(2) Includes 15,567,650 public warrants.

The valuation methodology used to estimate the fair value of the financial instruments in the table above is summarized as follows:

Earn-Out Liability. The fair value of the earn-out liability was largely comprised of an assumed obligation in the AIA stock purchase and is estimated by using the income approach. Based on the respective purchase agreements, management estimated best case, base case, and worst case scenarios and discounted it to a present value. The sum of the discounted weighted average probabilities was used to arrive at the fair value of the earn-out liability.

Derivative Warrants. The fair value of Global Eagle's warrants, recorded as derivative warrant liabilities, is determined by the Company using the quoted market prices for the Company's over the counter publicly traded warrants. On reporting dates where there are no active trades, the Company uses the last reported closing trade price of the warrants to determine the fair value. The Company recorded an income (loss) from the change in the fair value of these warrants during the three and nine months periods ended September 30, 2014 of $(5.3) million and $0.6 million, respectively. The Company also recorded an income (expense) for the change in fair value of these warrants during the three and nine months periods ended September 30, 2013 of approximately $2.2 million and $(7.1) million, respectively.


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table shows both the carrying amounts, which approximate the fair values, of the Company's financial assets and liabilities in the consolidated financial statements at September 30, 2014 and December 31, 2013, respectively (in thousands):

 
September 30, 2014
 
December 31, 2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 
 
 
 
 
 
Notes payable
$
3,457

 
$
3,457

 
$
10,801

 
$
10,801


Notes Payable

The Company classifies the notes payable within the level 2 of the fair value hierarchy because it uses discount rates for similar credit-rated companies that are publicly available and widely observable as an input to estimate fair value. The fair value presented above is calculated based on the present value of expected principal and interest cash flows given the short term nature of its maturity.

The following table presents the fair value roll-forward reconciliation of level 3 assets and liabilities measured at fair value basis for the period ended September 30, 2014, (in thousands):

 
Earn-Out Liability
Balance, December 31, 2013
$
1,421

Fair value of earn-out liability assumed in the Purple Inflight Entertainment's acquisition
136

  Change in value
875

Payment of 2013 EIM earn-out liability
$
(1,227
)
Balance, September 30, 2014
$
1,205


Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncement

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Further, an entity must provide certain disclosures if there is "substantial doubt about the entity's ability to continue as a going concern.” The new guidance becomes effective for the Company for fiscal years ending after December 15, 2016 and interim periods thereafter. The Company does not expect that the adoption of the new accounting guidance will have a material impact on its financial condition and results of operations.

In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.


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Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3. Business Combination

Accounting Treatment for the Business Combination

On January 31, 2013, the Business Combination was consummated, in which a merger subsidiary of GEAC merged with and into Row 44 (the "Row 44 Merger") with Row 44 surviving, and concurrently GEE acquired 86% of the issued and outstanding shares of AIA, which were held by PAR Investment Partners, L.P. ("PAR"). Row 44 was considered the acquirer for accounting purposes, and the Row 44 Merger was accounted for as a recapitalization. The AIA stock purchase was accounted for as an acquisition of a business because the Company obtained effective control of AIA. Since the Row 44 Merger was accounted for as a recapitalization, the assets and liabilities of Row 44 and GEAC are carried at historical cost, and no step-up in basis or any intangible assets or goodwill were recognized as a result. Under the acquisition method, the acquisition-date fair value of the gross consideration transferred to effect the AIA Stock Purchase was allocated to the assets acquired, the liabilities assumed, and non-controlling interest based on their estimated fair values. Transaction costs incurred in 2012 and in 2013 through January 31, 2013 of $16.4 million were attributable to the Business Combination and were recorded as reductions to retained earnings. In connection with the closing of the Row 44 Merger, the Company paid PAR $11.9 million under a backstop fee agreement. This was recorded as transaction costs reflected in operating results as a general and administrative expense in the three months ended March 31, 2013.

In the consolidated financial statements, the recapitalization of the number of shares of common stock attributable to Row 44 is reflected retroactive to all periods presented, and the number of shares of common stock that was used to calculate the Company's earnings per share for all periods prior to the Business Combination is reflective of the outstanding shares during such periods on an as-if converted basis.

Row 44 Merger

Pursuant to the Row 44 Merger, all shares of capital stock of Row 44 then outstanding were converted into the right to receive shares of common stock of the Company, and all options to purchase common stock of Row 44 then outstanding were net stock settled for shares of common stock of the Company. In exchange for the shares of Row 44, the Company issued at closing 23,405,785 shares of GEAC common stock to the Row 44 equity holders. AIA's ownership of 3,053,634 shares of GEE stock was deemed to be treasury stock when the AIA stock purchase was consummated concurrently.

The cash flows related to the Row 44 Merger in the Business Combination, as reported in the consolidated statements of cash flows within the investing section for the three months ended March 31, 2013, is summarized as follows (in thousands):

 
Amount
Operating cash
$
8

Add: cash held in trust
189,255

Less: cash paid for GEAC shares that were redeemed
(101,286
)
Add: cash received from backstop participants
71,250

Net cash received from Row 44 Merger
$
159,227


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Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

AIA Stock Purchase

The acquisition date fair value of the consideration transferred totaled $144.3 million. The fair value was determined based on the closing market price of the Company's common stock on January 31, 2013. The goodwill recorded for the AIA stock purchase was $35.4 million, and key factors that contributed to the recognition of AIA goodwill were principally the acquisition of a trained workforce, the opportunity to expand operations internationally within the airline industry, and the opportunity to generate future savings through synergies with the existing business. None of the goodwill is deductible for tax purposes. The following table summarizes the allocation of the AIA purchase price to the estimated fair values of the assets acquired and liabilities assumed in the AIA Stock Purchase (in thousands):
 
Amount
Goodwill
$
35,385

Existing technology – software
2,574

Existing technology – games
12,331

IPR&D
7,317

Customer relationships
80,758

Other intangibles
2,568

Content library
14,297

Accounts receivable, net of allowances
31,984

Deferred tax liability
(28,752
)
Current liabilities
(56,548
)
Other assets acquired, net of liabilities assumed
67,630

Net assets acquired
169,544

Less: Non-controlling interests
25,287

Total consideration transferred
$
144,257


As a result of the AIA Stock Purchase, a non-controlling interest was recorded on the Company's consolidated balance sheets. Following the Business Combination, the Company acquired additional outstanding shares of AIA to increase its ownership of AIA's shares to 94% as of December 31, 2013. In April 2014, the Company acquired the remaining outstanding shares in AIA for a total consideration of approximately $21.7 million, including approximately $0.6 million of transaction costs, of which approximately $18.2 million was paid in cash as of June 30, 2014. The purchase price and related acquisition costs of approximately $0.6 million exceeded the book value by approximately $11.2 million. This excess is reflected as a reduction in additional paid in capital. Subsequent to June 30, 2014, the Company paid off its remaining obligations of approximately $3.5 million.

As of and for the three months ended September 30, 2013, the remaining 6% of AIA shares was owned by others unrelated and independent of the Company. The fair value of the non-controlling interest was determined based upon the fair value of AIA common stock on the closing date. Since the acquisition date, the results of AIA have been included in the Company’s consolidated financial results for the eight months ended September 30, 2013, eleven months ended December 31, 2013 and nine months ended September 30, 2014.

PMG Asset Purchase

On July 9, 2013, the Company purchased substantially all the assets of Post Modern Edit, LLC and related entities to further expand its leadership in delivering media and content solutions to the global travel industry. Pursuant to the terms of the purchase, the Company acquired such assets of PMG in exchange for approximately $10.6 million in cash, 431,734 shares of common stock for a fair value of $4.4 million and the assumption of approximately $3.3 million in debt and $0.4 million in certain accrued obligations. In addition, the sellers of the PMG assets had the opportunity to receive an additional $5.0 million in cash if, among other things, the PMG business, combined with certain AIA businesses, achieve certain financial target milestones from the second half of 2013 through December 31, 2014 (the “PMG Earn Out”). In June 2014, the sellers of the PMG Assets waived the PMG Earn Out and certain other purchase obligations and PMG seller rights in exchange for cash consideration of $2.5 million (the “Additional PMG Consideration”).  Fifty percent of the Additional PMG Consideration was paid during the three months ended September 30, 2014, and the remaining $1.25 million is payable in four quarterly installments through the first half of 2015. Due to the fact that the PMG Earn Out was tied to the fulfillment of certain post-closing employment obligations by certain PMG executives, the Company was required to account for the PMG Earn Out as compensation to the sellers and it was recognized as

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

an expense, over the requisite service period.  During the three months ended March 31, 2014, the Company accrued for approximately $0.5 million of the PMG Earn Out obligation.  As the Additional PMG Consideration is not conditioned on future employment or services, the Company recorded an additional $1.3 million of expense during the three months ended September 30, 2014, bringing the total accrued liability for the Additional PMG Consideration to $2.5 million as of September 30, 2014. The goodwill recorded for the PMG asset purchase was $4.8 million, and key factors that contributed to the recognition of PMG goodwill were principally trained workforce, the opportunity to consolidate and complement existing AIA operations within the airline industry, and the opportunity to generate future savings through synergies with the existing business. As a result of the asset purchase of PMG, the goodwill is deductible for tax purposes.
As of December 31, 2013 and September 30, 2014, the Company held 151,420 of the total 431,734 shares issuable to the sellers in escrow, which are subject to certain standard warranties and representations and scheduled to be released to the sellers upon final settlement of certain post-closing terms.

The following table summarizes the fair value of the assets and liabilities assumed in the PMG asset purchase on July 10, 2013 (in thousands):

 
Amount
Goodwill
$
4,843

Trade names
1,171

Customer relationships
10,863

Non-compete
396

Fixed assets
3,284

Liabilities assumed, net of other assets acquired
(4,861
)
Total consideration transferred
$
15,696


Significant other assets and liabilities assumed, included in the table above, were $8.5 million of accounts receivable, $1.1 million of tape-stock inventory and prepaid assets, $1.1 million of restricted cash, $3.3 million of assumed indebtedness pertaining to debt assumed by the Company, and $12.6 million of accounts payable and accrued expenses outstanding and assumed at the purchase date. The Company incurred approximately $0.3 million in transaction costs associated with the PMG asset purchase.

IFES Stock Purchase

On October 18, 2013, the Company acquired IFES from GCP Capital Partners LLP and certain individuals for approximately $36.2 million in cash. IFES provides media content for use by airlines in in-flight entertainment and connectivity systems. The acquisition is intended to enhance the Company's Content operating segment.

The following table summarizes the preliminary fair value of the assets and liabilities assumed in the IFES asset purchase (in thousands):


 
Amount
Goodwill (1)
$
12,117

Trade names
341

Customer relationships
28,258

Fixed assets
3,498

Liabilities assumed, net of other assets acquired (1)
(7,968
)
Total consideration transferred
$
36,246

(1) Included in the table above are $0.5 million of deferred tax assets, $6.7 million of deferred tax liabilities and $1.2 million of accrued taxes payable as of the IFES acquisition date, which were prepared using best estimates available. Due to the preliminary nature of IFES financial results prior to the October 18, 2013 acquisition date, the Company was unable to provide an accurate assessment of certain deferred tax assets, deferred tax liabilities and estimated income taxes payable for the period(s) prior to the October 18, 2013 acquisition date. As a result, these balances were considered preliminary at such time and were finalized during the three months ending September 30, 2014.


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Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The goodwill recorded for the IFES acquisition was $12.1 million, and key factors that contributed to the recognition of IFES goodwill were principally trained workforce, expansion of international operations, the opportunity to consolidate and complement existing AIA and PMG operations within the airline industry, and the opportunity to generate future savings through synergies with the existing business. As a result of the stock purchase of IFES, the goodwill is not deductible for tax purposes. Significant other assets and net liabilities assumed and included in the table above were $8.0 million of accounts receivable, $0.2 million of prepaid and other current assets, $1.9 million positive cash balance, $11.0 million of accounts payable and accrued expenses outstanding and assumed at the purchase date, $1.3 million mortgage relating to the building acquired in the acquisition and a net tax liability for $6.2 million, of which $1.2 million of accrued taxes payable were recorded prior to the acquisition. The net tax liability is made up of a deferred tax asset of $0.5 million and deferred tax liabilities of $6.7 million. The Company incurred approximately $0.5 million in transaction costs associated with the IFES purchase.

As of June 30, 2014, accrued taxes payable and deferred tax liabilities of the IFES Asset Acquisition had been disclosed as preliminary. During the three months ended September 30, 2014, the Company finalized its analysis of the fair value of deferred tax liabilities and accrued taxes payable of IFES. The finalization of the tax provision resulted in changes made to provisional amounts recorded for the acquisition during the year, of $0.3 million, which retrospectively decreased the deferred tax asset by $0.4 million and increased deferred tax liability by $0.1 million on December 31, 2013, due to this new information, with a corresponding decrease to goodwill.

The following table summarizes the final fair value of the assets and liabilities assumed in the IFES asset purchase after the changes were made during the three months ended September 30, 2014 (in thousands):
 
Preliminary Allocation of Purchase Price
 
Adjustments
 
Purchase Price Allocation, as Adjusted
Goodwill
$
12,117

 
$
308

 
$
12,425

Trade names
341

 
—

 
341

Customer relationships
28,258

 
—

 
28,258

Fixed assets
3,498

 
—

 
3,498

Liabilities assumed, net of other assets acquired
(7,968
)
 
(308
)
 
(8,276
)
Total consideration transferred
$
36,246

 
—

 
$
36,246


Purple Inflight Entertainment Asset Purchase

On August 2, 2014, the Company purchased substantially all the assets of Purple Inflight Entertainment Private Ltd. ("Purple Inflight Entertainment" or "Purple") to further expand its leadership in delivering Indian content in local languages. Pursuant to the terms of the purchase, which was accounted for as a business combination, the Company acquired such assets of Purple in exchange for approximately $0.5 million in cash. In addition, the Company is obligated to make an additional payment to the former shareholders of Purple of $0.2 million contingent upon the renewal of the terms of certain supplier's contract. The estimated fair value of the contingent consideration obligation amounted to $0.1 million as of the acquisition date was determined using a probability factor of 70% for the renewal of the supplier's contract.

The Company preliminarily allocated the consideration to acquire Purple to finite-lived intangible asset (supplier's relationship) of $0.2 million with an estimated useful life of approximately one year, $0.4 million to goodwill and other net liabilities of less than $0.1 million.

     The fair values set forth above are subject to adjustments if additional information is obtained during the measurement period (a period of up to one year from the closing date) of this transaction that would change the fair value allocation as of the acquisition date.

Supplemental Pro Forma Information

The pro forma financial information as presented below is for informational purposes only and is not indicative of operations that would have been achieved from the acquisitions of AIA, PMG and IFES had they taken place at the beginning of 2013. Supplemental information on an unaudited pro forma basis, as if these acquisitions had been completed as of January 1, 2013, is as follows (in thousands, except per share data):

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 
Nine Months Ended September 30,
 
2014
 
2013
Revenues
$
286,736

 
$
247,507

Net loss
$
(29,683
)
 
$
(67,535
)

The unaudited pro forma supplemental information is based on estimates and assumptions that the Company believes are reasonable and reflect amortization of intangible assets as a result of the acquisitions. The pro forma results are not necessarily indicative of the results that would have been realized had the acquisitions been consummated as of the beginning of the periods presented. The pro forma amounts include the historical operating results of the Company, with adjustments directly attributable to the acquisitions. Included in the supplemental information for the nine months ended September 30, 2013 were certain one-time non-recurring fees associated with the Business Combination of approximately $34.5 million.

Note 4. Goodwill


The following table presents the changes in the Company’s goodwill balance for the periods presented (in thousands).
Balance at December 31, 2013
$
52,345

Adjustment to IFES goodwill
308

Goodwill arising from Purple Entertainment assets acquisition
379

Balance at September 30, 2014
$
53,032


Goodwill in 2013 arose from the acquisitions of AIA, PMG and IFES as detailed in Note 3. Business Combinations. No goodwill existed prior to 2013.

The Company's most recent annual impairment analysis was performed in the fourth quarter of the year ended December 31, 2013 and indicated that there was no impairment of goodwill at that time.

Note 5. Property, Plant, and Equipment, net

At September 30, 2014 and December 31, 2013, property, plant, and equipment, net consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Leasehold improvements
$
1,230

 
$
1,272

Furniture and fixtures
1,858

 
1,590

Equipment
18,820

 
15,362

Computer equipment
4,956

 
3,905

Computer software
5,226

 
2,985

Automobiles
288

 
297

Buildings
2,649

 
2,649

Albatross (aircraft)
425

 
385

Other
280

 
12

Total property, plant, and equipment
35,732

 
28,457

Accumulated depreciation
(13,188
)
 
(7,660
)
Property, plant, and equipment, net
$
22,544

 
$
20,797


Depreciation expense for property, plant, and equipment amounted to $1.8 million and $1.1 million for the three months ended September 30, 2014 and 2013, respectively, and $5.2 million and $2.4 million for the nine months ended September 30, 2014 and 2013, respectively.
 

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Table of Content
Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Depreciation expense, including software amortization expense, by classification for the three and nine months ended September 30, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Depreciation expense:
 
 
 
 
 
 
 
Cost of sales
$
567

 
$
546

 
$
2,197

 
$
1,256

Sales and marketing
163

 
—

 
377

 
—

Product development
295

 
18

 
580

 
51

General and administrative
809

 
542

 
2,016

 
1,050

Total depreciation expense
$
1,834

 
$
1,106

 
$
5,170

 
$
2,357

 
 
 
 
 
 
 
 

Note 6. Intangible Assets, net

As a result of the Business Combination, the Company acquired definite-lived intangible assets that are primarily amortized on a straight-line basis. The Company's definite-lived intangible assets have assigned useful lives ranging from 1.5 to 8.5 years (weighted average of 5.7 years).

Intangible assets, net at September 30, 2014, consisted of the following (in thousands):
 
 
 
September 30, 2014
 
Weighted Average Useful Lives
 
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Intangible assets:
 
 
 
 
 
Definite life:
 
 
 
 
 
Existing technology - software
7 years
 
$
2,575

$
(613
)
$
1,962

Existing technology - games
5 years
 
12,331

(4,110
)
8,221

IPR&D
8 years
 
7,317

(915
)
6,402

Customer relationships
7.1 years
 
119,879

(25,677
)
94,202

Other
3.5 years
 
6,508

(2,873
)
3,635

Content library (acquired post Business Combination)
1.5 years
(1
)
26,936

(15,282
)
11,654

Content library (acquired in the Business Combination)
1.5 years
 
14,298

(13,699
)
599

Total intangible assets
 
 
$
189,844

$
(63,169
)
$
126,675

(1) Useful estimate based upon the content library acquired in the Business Combination, which approximates historical experience.

Content library that is expected to be licensed and generates revenues within the next twelve months is classified as Content library, current, on the Company's condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013. The remainder of content library is classified and included within the intangible asset amount. The Company expects to record amortization of the intangible assets as follows (in thousands):


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Year ending December 31,       
Amount
2014 (remaining three months)
$
9,951

2015
31,177

2016
23,360

2017
19,179

2018
15,639

Thereafter
27,369

Total
$
126,675

The Company recorded amortization expense, excluding amortization of content library (acquired post business combination) of $6.5 million and $20.9 million for the three and nine months ended September 30, 2014, respectively, and $7.6 million and $18.0 million during the three and nine months ended September 30, 2013, respectively. Amortization expense excludes the amortization of the content library, which is included in cost of sales.

Note 7. Available For Sale (“AFS”) Securities

At March 31, 2014, the Company held $0.6 million of AFS equity securities at an unrealized gain of approximately $0.1 million. During the nine months September 30, 2014, the Company sold this investment for proceeds of approximately $0.6 million and recognized a gain of approximately $0.1 million.

At March 31, 2013, the Company held $7.1 million of AFS equity securities at an unrealized gain of $1.4 million. During the three months ended June 30, 2013, the Company sold this investment for proceeds of approximately $5.9 million and recorded a realized gain of approximately $0.1 million.

Note 8. Commitments and Contingencies


Operating Lease Commitments

Operating lease commitments include payments on outstanding, noncancelable, operating lease obligations. The Company leases its operating facilities under noncancelable operating leases that expire through 2017. The Company also leases certain facilities and vehicles under month-to-month arrangements. Total rent expense for the three months ended September 30, 2014 and 2013 was $1.1 million and $0.5 million, respectively. Rent expense for the nine months ended September 30, 2014 and 2013 was $3.0 million and $1.6 million respectively. The Company is responsible for certain operating expenses in connection with these leases.
     
Satellite Cost Commitments

During the nine months ended September 30, 2014 the Company had in place a Master Services Agreement ("MSA") with its satellite service provider to provide for satellite capacity over Russia, the North Atlantic and for expansion of its existing capacity in the US and Europe. As of September 30, 2014, the remaining MSA satellite cost commitments totaled up to $150.0 million through December 31, 2020. The Company expenses these satellite fees in the month the service is provided as a charge to cost of services.

Legal Matters

On December 28, 2012, Advanced Media Networks, L.L.C. filed suit in the United States District Court for the Central District of California against Row 44 and one of its customers which Row 44 has agreed to indemnify for allegedly infringing two of its patents and seeking injunctive relief and unspecified monetary damages. Row 44 is direct subsidiary of the Company. Based on currently available information, the Company believes it has strong defenses and intends to defend vigorously against this lawsuit, but the outcome of this matter is inherently uncertain and could have a materially adverse effect on its Connectivity business, financial condition and results of operations. As of September 30, 2014, the potential range of loss related to this matter cannot be determined.

On October 22, 2013, Arista Music, Sony Music Entertainment and certain parties believed to be related to the foregoing filed suit in the United States Direct Court for the Southern District of New York against Inflight Productions Ltd. (“IFP”), one of its customers and a third party unrelated to IFP for copyright infringement and related claims and unspecified money damages.

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

IFP is a direct subsidiary of AIA and an indirect subsidiary of the Company.  The matter settled in September 2014 and the case was dismissed with prejudice. The settlement included a monetary payment to the plaintiffs. 

On May 6, 2014, UMG Recordings, Inc., Capital Records, Universal Music Corp and entities affiliated with the foregoing (collectively, “UMG”) filed suit in the United States District Court for the Central District of California against the Company and IFP for copyright infringement and related claims and unspecified money damages. The Company is in the process of evaluating the merits of this matter, and intends to defend against it vigorously; however the outcome is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations. As of September 30, 2014, the potential range of loss related to this matter cannot be determined.

On August 14, 2014, SwiftAir, LLC filed suit against Row 44, Inc. and one of its customers for breach of contract, quantum meruit, unjust enrichment and similar claims and unspecified money damages in the Superior Court of California for the Country of Los Angeles.  SwiftAir and Row 44 had a contractual relationship, which Row 44 terminated in 2013, with respect to the provision of destination deal content to one of Row 44’s connectivity customers. The Company is in the process of evaluating the merits of this matter, and intends to defend against it vigorously; however the outcome is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations. As of September 30, 2014, the potential range of loss related to this matter cannot be determined.

During the three months ended September 30, 2014, the Company had legal settlement expense relating to potential claims arising in connection with litigation brought against the Company by a number of third third parties of $1.5 million. The full amount was expensed and included in general and administrative expenses during the three and nine months ended September 30, 2014.

While the resolution of the above matters cannot be predicted with certainty, the Company does not believe, based on current knowledge, that the outcome of the currently pending claims or legal proceedings in which the Company is currently involved will have a material adverse effect on the Company's financial statements.

Acquisitions

As a result of the AIA Stock Purchase, the Company assumed certain commitments. AIA’s long-term commitments include contracts for office space leases and operating equipment leases of $5.6 million, movie license fees of $23.1 million and certain guaranteed minimum payments owed to movie content providers of $7.5 million. In addition, as a result of the PMG asset purchase, the Company assumed obligations of $1.8 million associated with a 25-year operating lease agreement.

The operating lease contracts usually have a contract period from 1 to 5 years. The movie license contracts have a contract period of 3 years. Minimum payments for already signed contracts are mainly to be paid within 12 months. The EIM earn-out payments and the PMG additional consideration will be due in the years 2014 through 2016.

Note 9. Related Party Transactions

In connection with the closing of the Row 44 Merger, the Company paid PAR $11.9 million under a backstop fee agreement. This was recorded as transaction costs reflected in operating results as a general and administrative expense in the nine month period ended September 30, 2013.
  
Administrative Services

AIA's subsidiary, Entertainment in Motion (“EIM”), rents office space belonging to a company in which AIA's management has an ownership interest. There were no unpaid lease liabilities as of September 30, 2014 and December 31, 2013. The Company recognized rent expense of $60,000 and $180,000, each for the three and nine month periods ended September 30, 2014 and 2013, respectively. EIM also made a loan to one of its managing directors. As of September 30, 2014, the outstanding balance was less than $0.1 million.

Office Lease Agreement with Employee

In connection with the acquisition of PMG, the Company acquired an office lease that is currently being occupied and used as part of operations in Irvine, California. This building is majority owned by one of the founding members of PMG, who is currently an employee of the Company. The lease terminates on March 31, 2024. The total rental expense incurred during the three

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

and nine months periods ended September 30, 2014 were approximately $0.1 million and $0.2 million. For the three and nine months ended September 30, 2013, total rent expense incurred was less than $0.1 million

PMG Post-Closing Payment
    
In June 2014, the Company modified the PMG Earn Out to waive the PMG Earn Out and certain other purchase obligations and PMG seller rights in exchange for cash consideration of $2.5 million (the “Additional PMG Consideration”). Fifty percent of the additional PMG Consideration is payable after 10 days from closing, and the remaining $1.25 million paid in four quarterly installments through the first half of 2015. At September 30, 2014, the remaining outstanding balance was approximately $1.25 million.

AIA Noncontrolling Interests Acquisition
    
In April 2014, the Company acquired the remaining outstanding shares in AIA for a total cash consideration of approximately $21.7 million (the "AIA Consideration"). Included in the AIA Consideration was approximately $2.5 million owed to BF Ventures, an entity in which one of our directors owns an indirect stake of approximately 25%, which was paid in full during the three months ended September 30, 2014.

Warrant Exchange

In connection with the Company's offer for the exchange of the Company's outstanding public company warrants for common stock of the Company which closed on September 11, 2014, two members of the Company's board of directors exchanged 7,040,001 warrants for 2,346,446 shares of the Company's common stock with an aggregate value of $32.1 million.

Note 10. Common Stock, Stock Options and Warrants

Common Stock

On June 17, 2014, PAR Investment Partners, L.P. (“PAR”) converted 19,118,233 shares of non-voting common stock of the Company into an equal number of shares of the Company’s common stock, par value $0.0001 per share, in accordance with the terms of the non-voting common stock set forth in the Company’s Second Amended and Restated Certificate of Incorporation. The conversion was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof. No commission or other remuneration was paid or given directly or indirectly for soliciting the conversion. 
 
The common stock and non-voting common stock have identical rights, powers, preferences and privileges, except with respect to voting rights and conversion rights applicable to the non-voting common stock. Accordingly, the total number of outstanding shares of both common stock and non-voting common stock are used by the Company to compute basic and diluted net earnings (loss) per share. As a result of the conversion, the total number of outstanding shares of non-voting common stock decreased by 19,118,233, and the total number of outstanding shares of common stock increased by the same amount, with no shares of non-voting common stock remaining issued and outstanding. The conversion did not increase the aggregate number of outstanding shares of the Company’s capital stock.

In August 2014, the Company issued 28,161 shares of common stock as a working capital settlement to Row 44 former stockholders with an aggregate fair value of $0.3 million. The entire value was expensed during the three months ended September 30, 2014 and included in other income in other income (expense), net on the consolidated statements of operations.

Stock Options

In conjunction with the Business Combination, the Company adopted its 2013 Equity Incentive Plan, as amended, which was amended in December 2013 (as amended, the "Plan"). Under the Plan, the Administrator of the Plan, which is the compensation committee of the Company's board of directors, may grant up to 7,500,000 stock options, restricted stock, restricted stock units and other incentive awards to employees, officers, non-employee directors, and consultants, and such options or awards may be designated as incentive or non-qualified stock options at the discretion of the Administrator. Employee stock option grants have 5-year terms and vest 1/4th on the anniversary of the vesting commencement date and 1/36th monthly thereafter, over a 3-year period. Stock options granted to our Board of Directors have 5-year terms and vest monthly over two years from the vesting commencement date. Certain stock option awards have accelerated vesting provisions in the event of a change in control and/or termination without cause.


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Fair values of the stock options at September 30, 2014 and 2013 were determined using the Black-Scholes model and the following weighted average level 3 assumptions:
 
Nine Months Ended September 30,
 
2014
 
2013
Common stock price on grant date
$11.42
 
$9.82
Expected life (in years)
4.00

 
4.00

Risk-free interest rate
1.54
%
 
0.99
%
Expected stock volatility
59
%
 
55
%
Expected dividend yield
—
%
 
—
%
Fair value of stock options granted
$5.15
 
$4.13

Stock option activity for the nine months ended September 30, 2014 is as follows:

Global Eagle Stock Option Plan
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2014
5,285,000

 
$
10.86

 

 


Granted
1,885,000

 
$
11.42

 

 
 
Exercised
(117,708
)
 
$
9.33

 

 
 
Forfeited
(737,292
)
 
$
13.43

 

 
 
Outstanding at September 30, 2014
6,315,000

 
$
10.76

 
3.88
 
$
6.27

Vested and expected to vest at September 30, 2014
5,520,169

 
$
10.69

 
3.78
 
$
5.69

Exercisable at September 30, 2014
1,707,535

 
$
10.24

 
2.98
 
$
2.12


Restricted stock units

The grant date fair value of an RSU equaled the closing price of our common stock on the grant date. During the three months ended September 30, 2014, the Company granted certain employees performance units in the form of RSUs. A performance unit gives the recipient the right to receive common stock that is contingent upon achievement of specified pre-determined performance target for fiscal 2014 and the continuation of employment for a period of one year from the grant date. The number of shares issuable upon the completion of the performance period could be 0 shares, 38,843 shares or 77,687 share of the Company’s common stock contingent upon the level of achievement of the performance target. The following summarizes select information regarding our RSUs during the nine months ended September 30, 2014:

 
Units
 
Weighted Average Grant date Fair Value
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2014
—

 
$
—

 
 
Granted
127,687

 
$
14.54

 
 
Vested
—

 
$
—

 
 
Forfeited
—

 
$
—

 
 
Balance nonvested at September 30, 2014
127,687

 
$
14.54

 
$
1.43

Vested and expected to vest at September 30, 2014
105,911

 
$
14.54

 
$
1.19


Stock-based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards for the three and nine months ended September 30, 2014 and 2013 were as follow, (in thousands):


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of services
$
6

 
$
—

 
$
6

 
$
—

Sales and marketing expenses
14

 
—

 
14

 
—

Product development
53

 
—

 
53

 
—

General and administrative
1,823

 
526

 
6,412

 
1,902

Total stock-based compensation expense
$
1,896

 
$
526

 
$
6,485

 
$
1,902

 
Warrants

In conjunction with the Business Combination, on January 31, 2013, the Company converted 21,062,500 Row 44 warrants to warrants to purchase up to 721,600 shares of Global Eagle common stock. The following is a summary of all Row 44 warrants converted to warrants to purchase GEE common stock (exercise price per warrant and number of warrants presented using the conversion ratio to Global Eagle common stock used in the Row 44 Merger) outstanding at September 30, 2014:


Weighted Average Exercise Price per Warrant
 
Number of Warrants (as converted)
 
Weighted Average Remaining Life
(in years)
Common stock warrants
$
9.45

 
721,600

 
2.37
Series C Preferred stock warrants
$
8.74

 
734,451

 
2.68

The following is a summary of warrants originally issued by GEAC, including public and privately placed warrants, for the nine months ended September 30, 2014:

Global Eagle Warrants
 
Number of Warrants
 
Weighted Average Exercise price
 
Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2014
 
23,237,717

 
$
11.5

 
 
Granted
 
—

 
—

 
 
Exercised
 
(3,400
)
 
11.5

 
 
Purchased
 
(403,054
)
 
11.5

 
 
Exchanged
 
(12,682,755
)
 
11.5

 
 
Forfeited
 
—

 
—

 
 
Outstanding and exercisable at September 30, 2014
 
10,148,508

 
$
11.5

 
3.34

On September 11, 2014, the Company completed an offer to all holders of the Company’s outstanding warrants exercisable for shares of the Company’s common stock, that were originally issued by GEAC and which have an exercise price of $11.50 per share (the “Warrants”), to receive 0.3333 Shares in exchange for every Warrant tendered by the holders thereof (approximately one Share for every three Warrants tendered), up to a maximum of 15,000,000 Warrants. On September 11, 2014, the Company issued 4,227,187 shares of common stock in exchange for 12,682,755 Warrants and recognized a gain on the exchange of approximately $0.8 million included in change in fair value of financial instruction instruments in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014.

The Company accounts for 10,148,508 of GEAC's warrants as derivative liabilities at September 30, 2014. During the three and nine months ended September 30, 2014, the Company recorded approximately $5.3 million of expense and $0.6 million of income, respectively in the consolidated statements of operations as a result of the remeasurement of these warrants at balance sheet date until exercised. The fair value of warrants issued by the Company has been estimated using the warrants' quoted public market price. In the event the Company’s closing stock price is at or above $17.50 for twenty of thirty consecutive trading days,

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

the Company can call the 10,148,508 public warrants and force the holders to exercise their warrants at $11.50 per share, with estimated proceeds of approximately $116.7 million.

During the nine months ended September 30, 2014, the Board of Directors (the “Board”) authorized the Company to repurchase up to $25.0 million of GEE's public warrants. As of September 30, 2014, $23.6 million was available for warrants repurchases under this authorization. The amount the Company spends and the number of warrants repurchased varies based on a variety of factors including the stock price and blackout periods in which we are restricted from repurchasing warrants.

Note 11. Income Taxes

The Company is subject to income taxes in the U.S. and numerous state and foreign jurisdictions in which it operates. The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company's tax expense and in evaluating its tax positions including evaluating uncertainties.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
Income tax expense for the three months ended September 30, 2014 and 2013 was $1.5 million and $1.2 million respectively. For the nine months ended September 30, 2014 and 2013, income tax expense was $3.6 million and $1.8 million, respectively.
As of September 30, 2014 and December 31, 2013 the Company has recorded a valuation allowance of $59.1 million and $50.8 million against its domestic and foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of September 30, 2014, the valuation allowance on domestic and foreign deferred tax assets were $57.4 million and $1.7 million, respectively.
In connection with the acquisitions of AIA and IFES, the Company recorded net deferred tax liabilities of $22.2 million and $6.0 million, respectively.
As of September 30, 2014 and December 31, 2013, the Company had federal net operating loss carry-forwards ("NOLs") of $119.5 million and $102.2 million, respectively, and state net operating loss carry-forwards of $55.4 million and $58.9 million, respectively, which losses will begin to expire during the fiscal years ending in December 31, 2028 and 2018, respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three year period. In the event that an ownership change has occurred, or were to occur, utilization of the Company's NOLs would be subject to an annual limitation under Section 382 as determined by multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. The Company could experience an ownership change under Section 382 as a result of events in the past in combination with events in the future. If so, the use of the Company's NOLs, or a portion thereof, against future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization. Therefore, the Company could be liable for income taxes sooner than otherwise would be true if the Company were not subject to Section 382 limitations. The Company plans to perform a study to determine the extent of the limitation, if any. Any carry-forwards that expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance. Currently, the Company expects the utilization of our net operating loss and tax credit carry-forwards in the near term to be affected by certain limitations placed on these carry-forwards as a result of our previous ownership changes with PAR Capital.

As of September 30, 2014, the Company intends to reinvest the foreign earnings of its subsidiaries on an indefinite basis. As a result, deferred taxes have not been established for unremitted earnings of foreign subsidiaries.


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company is subject to the accounting guidance for uncertain income tax positions. The Company's policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense. The Company assumed and recorded approximately $3.2 million of liabilities for uncertain tax position including related interest and penalties as a result of Business Combination in 2013. Included in the $3.2 million liability at December 31, 2013 is an estimate for potential claims by the Canadian Revenue Agency (the “CRA”), which is currently investigating one of AIA’s Canadian subsidiaries for the tax years 2008 through 2012. The CRA is questioning the taxability and presence of the subsidiary’s locations in Dubai, United Arab Emirates, and whether income derived from Dubai would have constituted taxable earnings subject to Canadian income tax for the tax year ended December 31, 2008.

On November 4, 2014, the Company received an assessment notice comprising tax, interest and penalties from the Canadian Revenue Agency (CRA) for the tax years 2009 through 2011. Management is reviewing the assessment to determine if the underlying position proposed by the CRA has merit. As of September 30, 2014, the Company has not accrued tax expense with regard to the amount of this assessment. Although management believes the technical merit of the tax positions taken on the tax returns filed with the CRA for 2009 through 2011 meet a more-likely-than-not standard, any additional facts, circumstances and information provided for in the assessment may give rise to a material charge to the Company’s income tax provision and corresponding financial statements during the three months ending December 31, 2014 and beyond.

The Company does not expect its uncertain tax position to materially change through the end of 2014.  As of September 30, 2014, the Company has recorded a $1.7 million cumulative liability for uncertain income tax positions including accumulated interest and penalties of $0.7 million.

Note 12. Notes Payable and Bank Debts

Bank loan

AIA had an unsecured four-year loan of $15.9 million from UniCredit Bank AG, Munich, Germany. The loan was subject to initial repayment of $0.7 million and thereafter regular half-yearly repayments of $2.2 million, no prepayment penalties and variable interest based on the six-month Euribor plus 2.35%. In order to avoid any exposure to the risk from rising interest rates associated with variable interest obligations, a portion of the variable interest payments was converted into fixed interest obligations by means of interest rate swaps over the term of the loan.

Under the terms of the loan agreement, mandatory special loan payments were required under certain conditions. The provision regarding mandatory special loan payments resulted in a mandatory special loan payment of $1.4 million on June 30, 2013. As a result, the repayment period and thus the loan would end six months earlier than originally envisioned. These special loan payments result in a reclassification of the amount of the special loan payments to the current portion of the loan as of December 31, 2013.

As of December 31, 2013, the principal and accrued interest outstanding on the bank loan was $3.4 million. As of September 30, 2014, there were no outstanding principal or accrued interest balance on the note.

Subordinated bank loan

AIA held a note payable of $2.6 million for mezzanine financing obtained through a financing program of Capital Efficiency Group AG, Zug, Switzerland. This financing program matured in March 2014. The interest rate was 8.8% per year. A payment of 1% had to be made each year and interest of 7.8% on the principal had to be paid every quarter. As of September 30, 2014, there were no outstanding principal or accrued interest balance on the note.

Bank Debt

With the acquisition of PMG in July 2013, the Company assumed approximately $3.3 million of debt in the form a $1.5 million term loan (the “Term Loan”) and a $1.8 million line of credit (the “LOC”) with a bank. The Term Loan and LOC mature in October 2017 and 2014, respectively, and bear interest at a rate equal to the bank’s reference rate, which was approximately 5.00% during the quarter ended September 30, 2014, or the bank’s current prime rate. The LOC matures in December 2014, and bears interest. Interest is paid on a monthly basis. Accrued interest on the Term Loan and LOC was $0.0 million at September 30, 2014. As of September 30, 2014, the principal balance outstanding on the Term Loan and the LOC were $1.1 million and $1.3 million respectively.


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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

With the acquisition of IFES on October 18, 2013, the Company assumed approximately $1.3 million of debt in the form of two facility letters for a commercial mortgage loan with a bank for $0.2 million and $1.1 million. The mortgage letters mature in October 2014 and 2032, respectively, and bear interest at a rate equal to the bank’s base rate, which was approximately 3.25% during the year ended December 31, 2013. Interest is paid on a monthly basis. Accrued interest on the credit facilities was $0.0 million. As of September 30, 2014, there was $1.0 million in borrowings outstanding under facility letters.
 

The following is a schedule, by year, of future minimum principal payments required under notes payable and bank debts as of September 30, 2014 (in thousands):

Years Ending December 31,
Amount
2014 (remaining three months)
$
2,511

2015
124

2016
112

2017
101

2018
101

2019
507

Total
$
3,456


Note 13. Concentrations

Concentrations of Credit and Business Risk

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

At September 30, 2014 and December 31, 2013, the Company's cash and cash equivalents were maintained primarily with major U.S. financial institutions and foreign banks. Deposits with these institutions at times exceed the federally insured limits, which potentially subjects the Company to concentration of credit risk. The Company has not experienced any losses related to these balances and believes that there is minimal risk.

A substantial portion of the Company's revenue is generated through arrangements with one airline customer. The Company may not be successful in renewing these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The percentage of revenue generated through the customer representing more than 10% of consolidated revenue is as follows:

 
Nine Months Ended September 30,
 
2014
 
2013
Southwest Airlines
22
%
 
14
%

No other customer accounted for revenues greater than 10% for the two periods presented.

Note 14. Restructuring

The Company records the cost reduction plan activities in accordance with the Accounting Standards Codification (ASC), including ASC 420 Exit or Disposal Cost Obligations, ASC 712 Compensation-Nonretirement Postemployment Benefits and ASC 360 Property, Plant, and Equipment (Impairment or Disposal of Long-Lived Assets).

During the third quarter ended September 30, 2014, the Company implemented a plan to improve operational efficiencies, which included the closure of its German-based operations and facilities, centralization of its international financial operations, and realignment of its international and U.S. tax structure (the “Plan”). During the three months ended September 30, 2014 and in conjunction with the Plan, the Company committed to a reduction in force. As of September 23, 2014, the Company

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Global Eagle Entertainment Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

communicated the reduction to affected employees. The Company anticipates that it will substantially complete the implementation of its Plan by the first half of 2015.

The Company currently estimates that $4.7 million to $5.2 million of restructuring charges will be incurred in connection with the Plan, including:

(1)
The Company estimates that it will incur total expenses relating to employee termination benefits, which primarily include severance and transitional-related expenses, of approximately $2.7 million, all of which represents cash expenditures. Of this amount, the Company expects to record $0.4 to $0.7 million in the first quarter of 2015.

(2)
In connection with the closure of its German operations pursuant to the Plan, the Company expects disposals of approximately 11,000 square feet of leased facilities in Duisburg and Munich, Germany, representing approximately 6% of its global facilities square footage. The Company expects to incur approximately $0.5 million in the aggregate facilities disposal charges pursuant to the Plan, beginning in the three months ended September 30, 2014 and throughout the first quarter of 2015.

(3)
Beginning in the third quarter of 2014 through the first half of 2015, the Company anticipates incurring periodic restructuring expenditures in an aggregate amount of $1.5 to $2.0 million, comprised of legal and professional fees associated with the execution of the Plan.

The following table summarizes the charges recorded during the three and nine months ended September 30, 2014 related to the restructuring plan by type of activity (in thousands):
 
 
Termination benefits
 
Leases and other contractual obligations
 
Other
 
Total
 
 
 
 
 
 
 
 
 
Restructuring charges
 
$
2,029

 
$
336

 
$
241

 
$
2,606

Total Restructuring charges
 
$
2,029

 
$
336

 
$
241

 
$
2,606


The following table summarizes the charges and spending relating to the restructuring plan (in thousands):
 
 
Termination Costs
 
Leases and other contractual obligations
 
Other
 
Total
Restructuring reserves as of January 1, 2014
 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Expense
 
2,029

 
336

 
241

 
2,606

Payments
 
(973
)
 
(207
)
 
—

 
(1,180
)
Restructuring reserves as of September 30, 2014
 
$
1,056

 
$
129

 
$
241

 
$
1,426


Note 15. Subsequent Events

In October 2014, the Company entered into a ten-year agreement with SES S.A. for satellite capacity starting in the first half of 2015. The agreement with SES S.A. will provide the Company with global satellite coverage and the ability to participate in future technology improvements in Ku-band satellite solutions.





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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used herein, "Global Eagle Entertainment," "GEE," the "Company," "our," "we," or "us" and similar terms include Global Eagle Entertainment Inc. and it subsidiaries, unless the context indicates otherwise.    

Cautionary Note Regarding Forward-Looking Statements

We make forward-looking statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein within the meaning of the Securities Litigation Reform Act of 1995. These forward-looking statements relate to expectations or forecasts for future events, including without limitation our earnings, revenues, expenses or other future financial or business performance or strategies, or the impact of legal or regulatory matters on our business, results of operations or financial condition. These statements may be preceded by, followed by or include the words “may,” “might,” “will,” “will likely result,” “should,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “continue,” “target” or similar expressions.
  
These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and on our current expectations, forecasts and assumptions, and involve substantial risks and uncertainties. Actual results may vary materially from those expressed or implied by the forward looking statements herein due to a variety of factors, including: our ability to integrate our recently acquired businesses, the ability of the combined business to grow, including through acquisitions which we are able to successfully integrate, and the ability of our executive officers to manage growth profitably; the ability of our executive officers to recognize changing trends in the systems, services and business model requirements of our current and potential future customers; the ability of our customer Southwest Airlines to maintain a sponsor for its “TV Flies Free” offering and our ability to replicate this model through other sponsorship alliances; the ability of our content segment to provide unique content curation and delivery services attractive to non-theatrical customers, including the airlines; the outcome of any legal proceedings pending or that may be instituted against us, changes in laws or regulations that apply to us or our industry; our ability to recognize and timely implement future technologies in the content delivery space, including wireless content delivery, and the satellite connectivity space, including Ka-band system development and deployment; our ability to deliver end-to-end network performance sufficient to meet increasing airline customer and passenger demand; our ability to obtain and maintain international authorizations to operate our connectivity service over the airspace of foreign jurisdictions our customers utilize; our ability to expand our service offerings and deliver on our service roadmap; our ability to timely and cost-effectively identify and license television, audio and media content that airlines and/or and media content that passengers will purchase; general economic and technological circumstances in the satellite transponder market, including access to transponder space in capacity limited regions and successful launch of replacement transponder capacity where applicable; our ability to obtain and maintain licenses for content used on legacy installed in-flight entertainment systems and next generation in-flight entertainment systems; the loss of, or failure to realize benefits from, agreements with our airline partners; the loss of relationships with original equipment manufacturers or dealers; unfavorable economic conditions in the airline industry and economy as a whole and in particular arising from sanctions against Russia and the instability in the Middle East; our ability to expand our domestic or international operations, including our ability to grow our business with current and potential future airline partners or successfully partner with satellite service providers, including Hughes Network Systems and SES S.A.; our reliance on third-party satellite service providers and equipment and other suppliers, including single source providers and suppliers; the effects of service interruptions or delays, technology failures, material defects or errors in our software or hardware, damage to our network resources, disruption of our content delivery systems or geopolitical restrictions; the limited operating history of our connectivity and in-flight television and media products; costs associated with defending pending or future intellectual property infringement actions and other litigation or claims; increases in our projected capital expenditures due to, among other things, unexpected costs incurred in connection with the roll out of our technology roadmap or our international plan of expansion, including managing rapid changes in available competitive technologies and research and development of such technologies; fluctuation in our operating results; the demand for in-flight broadband Internet access services and market acceptance for our products and services; and other risks and uncertainties set forth herein and in our most recent Annual Report on Form 10-K, as amended, and any subsequently filed Quarterly Reports on Form 10-Q. We do not undertake any obligation to update forward-looking statements as a result of as a result of new information, future events or developments or otherwise.


The following discussion and analysis of our business and results of operations for the three and nine months ended September 30, 2014, and our financial conditions at that date, should be read in conjunction with the financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and our 2013 Form 10-K.


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Overview of the Company

We are a leading full service provider of connectivity and content to the worldwide airline industry. Our principal operations and decision-making functions are located in North America and Europe. We manage and report our businesses in two operating segments: Connectivity and Content. Our operating results are regularly reviewed by our chief operating decision makers by our Connectivity and Content operating segments, principally to make decisions about how we allocate our resources and to measure our segment and consolidated operating performance. We currently generate a majority of our revenue through the licensing of content and providing our Wi-Fi and Content services to the airline industry, and to a lesser extent through the sale of network equipment to airlines. Our chief operating decision makers regularly review revenue and contribution profit on a segment basis, and our results of operations and pre-tax income or loss on a consolidated basis in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report revenue and contribution profit for these segments separately.

For the nine months ended September 30, 2014 and 2013, we reported revenue of $286.7 million and $179.9 million, respectively. For the nine months ended September 30, 2014 and 2013, our Content operating segment accounted for 72% and 69% of our total revenue, respectively, and our Connectivity operating segment accounted for 28% and 31%, respectively. For the nine months ended September 30, 2014 and 2013, one airline customer, Southwest Airlines, accounted for 22% and 14% of our consolidated revenues, respectively.

Basis of Presentation

This analysis is presented on a consolidated basis. In addition, a brief description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed. Since Row 44 was deemed the accounting acquirer in the Business Combination consummated on January 31, 2013, the presented financial information for the three and nine months ended September 30, 2014 is only partially comparable to the financial information for the three and nine months ended September 30, 2013. The presented financial information for the nine months ended September 30, 2013 includes the financial information and activities of Row 44 for the period January 1, 2013 to September 30, 2013 (273 days) as well as the financial information and activities of GEE and AIA for the period January 31, 2013 to September 30, 2013 (243 days) and PMG for the period July 10, 2013 to September 30, 2013 (83 days). We acquired IFES subsequent to September 30, 2013, and its financial information is therefore not included in the September 30, 2013 financial information herein. This lack of comparability needs to be taken into account when reading the discussion and analysis of our results of operations and cash flows. Furthermore, the presented financial information for the three and nine months ended September 30, 2013 also contains one-time costs that are directly associated with our Business Combination on January 31, 2013 such as professional fees to support the Company's new and complex legal, tax, statutory and reporting requirements following the Business Combination.

Opportunities, Challenges and Risks

For the nine months ended September 30, 2014, we derived the majority of our revenue through the licensing and related services from our Content operating segment, and secondarily from Wi-Fi Internet service and the sale of equipment to airlines from our Connectivity operating segment. For the nine months periods ended September 30, 2014 and 2013, the vast majority of our equipment and Wi-Fi Internet service revenues were generated by two airlines, Southwest Airlines and Norwegian Air Shuttle.

We believe our operating results and performance are driven by various factors that affect the commercial airline industry, including general macroeconomic trends affecting the travel industry, trends affecting our target user base, regulatory changes, competition and the rate of passenger adoption of our services, as well as factors that affect Wi-Fi Internet service providers in general. Growth in our Content and Connectivity operating segments is principally dependent upon the number of airlines that implement our services, our ability to negotiate favorable economic terms with our customers and partners, and the number of passengers who 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 and distributing content, equipment and satellite service. Our ability to attract and retain new and existing customers will be highly dependent on our abilities to implement our services on a timely basis and continually improve our network and operations as technology changes and as we experience increased network capacity constraints as we continue to grow.

As technology continues to evolve, we believe that there are opportunities to expand our services by adding more content in a greater variety of formats. Currently, our Content and Connectivity operating segments are separate platforms; however, we believe there is an opportunity to diversify our revenue long-term by cross leveraging these services, including offering a greater variety of premium paid content across our Connectivity platform. For example, we acquired AIA, PMG and IFES in 2013 to

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accelerate our paid premium content opportunity. More recently, we developed a system, WISE, that enables airlines to provide in-cabin Wi-Fi delivery of content to airline passengers hand-held personal devices. Our first implementation of WISE launched on a commercial airline during the second quarter of 2014. In addition, we announced our restructuring plan in September 2014 (the “Plan”), and we expect to realize significant cost savings from the Plan and other initiatives as we integrate the operations of Row 44, AIA, PMG, and IFES throughout the first half of 2015. Conversely, the evolution of technology presents an inherent risk to our Content and Connectivity operating segments.  Today, we see large opportunities to expand our connectivity services in parts of the world where we will need to make substantial investments to improve our current service offerings. As a result, we expect to make significant product development investments to our existing connectivity technology solutions over the next twelve to eighteen months to address these opportunities. In addition, our Connectivity platform utilizes leading satellite Ku-band systems and equipment today; however, with the introduction and evolution of more competitive technologies such as GSM and Ka-band satellite solutions, our current technology may become obsolete, too expensive and or outdated.  In October 2014, we entered into a ten-year agreement with SES S.A. for satellite capacity starting in the first half of 2015. The agreement with SES S.A. will provide us with global satellite coverage and the ability to participate in future technology improvements in Ku-band satellite solutions. However, there is no guarantee that our existing or future satellite providers or solutions will be adequate to address our competitors, and as a result we may lose customers to our competitors who offer more technologically evolved and or less costly connectivity systems in the future.  In addition, the future growth in our Content operating segment relies heavily on our airline customers continuing to utilize onboard in-flight entertainment (“IFE”) systems for their passengers to watch media content.  With the emergence and increased use of hand-held personal devices by airline passengers, our airline customers may decide to decrease the media content onboard IFE systems, and/or discontinue the use of IFE systems indefinitely.  This would adversely impact the future growth of our Content operating segment.
 
The use of our connectivity equipment on our customer’s planes is subject to regulatory approvals, such as a Supplemental Type Certificate, or “STC” that are imposed by agencies such as the Federal Aviation Agency (“FAA”) and the European Aviation Safety Agency (“EASA”). The costs to obtain an STC can be significant, and vary by plane type and customer location. As of September 30, 2014, we have STCs to operate our equipment on several plane types, including Boeing’s 737 next generation family and the Boeing 757 family. Recently, we began work on an STC for Air China’s Boeing 777 and a separate STC for the Airbus A320 family, the costs of which have been in excess of $1.0 million as of September 30, 2014. While we believe we will be successful in obtaining the Air China STC approval, there is a risk that neither the FAA nor EASA will approve this STC on a timely basis, if at all, and as a result, it could negatively impact our growth, relationships, and ability to deploy our future connectivity services with Air China and or other customers. To partially address the risk and costs of obtaining STCs in the future, we recently signed an agreement with Boeing to commence the process for offering our connectivity equipment on a line-fit basis for Boeing’s 737 MAX and 787 models. We also expect to undertake similar line-fit initiatives with other plane manufacturers such as Airbus in the near term. As a result, we expect to incur significant product development expenses over the next twelve to eighteen months as we invest in these long-term line-fit opportunities, which we believe will improve our long term ability to onboard our connectivity equipment on new plane types in a more scalable and cost-effective manner.
    
In April 2014, the Company completed the purchase of the remaining 6.0% of the outstanding shares of AIA not already owned by us for an aggregate cash consideration of approximately $21.7 million, including approximately $0.6 million of transaction costs. In September 2014, we announced our Plan to restructure our operations. Beginning in the third quarter of 2014, we incurred approximately $2.6 million in restructuring charges and we expect to incur significant professional fees and personnel costs pursuant to the Plan and additional initiatives to integrate the operations of AIA through the first half of 2015.  We also expect to realize significant cost savings as a result of integrating the operations of AIA over the same period.

In August 2014, the Company purchased substantially all the assets of Purple Inflight Entertainment Private Ltd. (“Purple”) in exchange for approximately $0.5 million in cash. The Company acquired the assets of Purple to further expand its leadership in delivering Indian-based content. While we believe that a part of the future revenue growth in our content business will come from increased licensing of foreign-based content, there is no guarantee that our customers will purchase more foreign-based content in the future.

The success of our Content segment depends in part on our ability to offer audio and music programming to our airline customers and passengers. We have been and currently are subject to lawsuits by parties claiming that certain audio and music programming offerings infringe the copyright and other intellectual property rights of such parties, and we may be subject to additional audio and music programming rights lawsuits in the future.  We have incurred costs to defend and settle such lawsuits to-date, and may incur additional costs in the future. We may also be subject to injunctive relief and our having to pay damages.

We are significantly dependent on certain key suppliers. As of September 30, 2014, the Connectivity operating segment purchased its satellite bandwidth from a single supplier, Hughes Network Systems, which also provides us with certain equipment and servers required to deliver the satellite stream, rack space at the supplier's data centers to house the equipment and servers and network operations service support. In October 2014, we announced a long-term agreement with SES S.A committing to the

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purchase additional satellite capacity over the term of the agreement. We also purchase radomes, satellite antenna systems and rings from single suppliers. Any interruption in supply from these significant vendors could have a material impact on our ability to provide connectivity services to airline customers. In addition and to the extent that we cannot grow our Connectivity customer base to cover our minimum bandwidth commitments in the future, our Connectivity cost of sales, as a percentage of corresponding revenue, could decline when compared to historical results.

Our consolidated cost of sales, the largest component of our operating expenses, can vary from period to period, particularly as a percentage of revenue, based upon the mix of the underlying equipment and service revenues we generate. For example and during the three months ended June 30, 2014, we implemented new Content-related services for two new significant airline customers, which negatively impacted our Content contribution margin during the three months ended June 30, 2014 when compared to the three months ended March 31, 2014. Contribution margins for new Content customers are generally small in the early phases of Content services, but typically grow as we implement new and value-added services over time. As a result, we expect that our Content costs of sales as a percentage of our Content revenue will continue to improve throughout the remainder of 2014 when compared to three months ended June 30, 2014 largely due to the expected growth of our Content services revenue over the same period.

In July 2013, our customer Southwest Airlines announced “TV Flies Free” under which Southwest passengers using Internet-ready personal devices have free access to live television and up to 75 on-demand shows on the airline's Wi-Fi-enabled aircraft powered by GEE. TV Flies Free is currently sponsored by DISH Network Corporation through December 31, 2014. Although DISH has indicated that it will not be continuing its full sponsorship, under the current terms and beyond 2014, discussions currently are taking place with alternative potential sponsors, and we are optimistic that, at a minimum, a significant portion of the current level of sponsorship will be provided by one or more parties in 2015.  A significant amount of the revenue we generate from the TV Flies Free program is indirectly provided by the program’s sponsor.  Should sponsorship revenue not be available to Southwest Airlines from DISH or other parties, Southwest Airlines is under no contractual obligation to offer free access to live television and on-demand shows to its passengers, but would be obligated to pay us for the service if it wished to make the service available for free to its passengers. The level of revenues we receive from Southwest Airlines for live television and on-demand shows will depend on the availability of sponsorship revenue and Southwest Airlines’ decision on whether or not to make the product available for free to its passengers in the absence of sponsorship revenue.

In connection with our Business Combination in the first quarter of 2013, we assumed approximately $22.0 million of accrued expense obligations and incurred an incremental $12.0 million in one-time fees associated with the transaction. We incurred approximately $3.5 million of additional operating expenses in the fourth quarter of 2013 related to the addition of personnel, professional fees and systems to build our infrastructure to support our public company compliance and certain corporate alignment initiatives in the latter half of 2013. We believe that factors such as these will continue to constrain our operating margin growth in the short-term as we increase our investment in new business initiatives, such as restructuring efforts under our Plan and other integration activities of our 2013 acquisitions of AIA, PMG and IFES throughout the remainder of 2014 through the first half of 2015 to support future growth.

For the nine months ended September 30, 2014, a substantial amount of our Connectivity revenue was derived from airlines located in the United States. While our Connectivity revenue is primarily generated through airlines based in the United States today, we believe that there is an opportunity in the longer term for us to significantly expand our Connectivity operating segment's service offerings to airlines based in countries outside of the United States. More recently, we began installing our Connectivity services on two airlines based in Russia, and we recently announced partnerships with China Telecom Communications Co., LTD and IP Star International PTE Limited, an affiliate of Thaicom, to jointly work to expand our Connectivity services within the broader Asia market. We plan to further expand our Connectivity operations internationally to address this opportunity. As we expand our business internationally, we may incur additional expenses associated with this growth initiative.

Key Components of Consolidated Statements of Operations

The following briefly describes certain key components of revenue and expenses as presented in our consolidated statements of operations.

Revenue

Our revenue is derived from our Connectivity and Content operating segments.

Connectivity Segment


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We currently generate our Connectivity revenue through the sale of equipment and through our Wi-Fi Internet and related service offerings. Our equipment revenue is based on the sale and corresponding support of Row 44's connectivity equipment to its commercial airline customers. Our service revenue is based on the fees paid by airlines and/or airline passengers for the delivery of in-flight services, such as Internet access and live television, and to a lesser extent from revenue sharing arrangements with commercial airlines for Internet based services used by their passengers, such as shopping.

Where we enter into revenue sharing arrangements with our customers, and we act as the primary obligor, we report the underlying revenue on a gross basis in our consolidated statements of operations, and record the revenue-sharing payments to our customers in costs of sales. In determining whether to report revenue gross for the amount of fees received from our customers, we assess whether we maintain the principal relationship, bear credit risk and have latitude in establishing prices with the airlines.

Included in our Connectivity service revenue are periodic service level credits, which vary from airline to airline and are based on the contracted service levels we provide over any given period.

Content Segment

A significant amount of our Content revenue is generated from licensing of acquired and third party media content, video and music programming, applications, and video games to the airline industry, and secondarily from services ranging from selection, purchase, production, customer support and technical adjustment of content in connection with the integration and servicing of in-flight entertainment programs. Our Content licensing revenue is based upon individual licensing agreements with the airlines to deliver and air content over specified terms. Content services revenue, such as technical services, the encoding of video products, development of graphical interfaces or the provision of materials, is priced on specific services contracted for and recognized as services are performed.

Operating Expenses

Operating expenses consist of cost of sales, sales and marketing, product development, general and administrative, and amortization of intangible assets. Included in our operating expenses are stock based compensation and depreciation expenses associated with our capital expenditures.

Cost of Sales

Connectivity Segment Cost of Sales

Connectivity segment cost of sales consists of the costs of our equipment and services.

Equipment. Equipment cost of sales are substantially comprised of the costs paid to procure our equipment for services. Equipment costs are principally comprised of the costs we pay to third parties to facilitate our equipment orders, and are originally classified as inventory on our balance sheet upon receipt of goods. Upon sale, equipment costs of sales are recorded when title and risk of loss pass to the customer, which is aligned with our equipment revenue recognition. As we near the completion of equipping the current Southwest Airlines fleet for our services in 2014, we expect that equipment costs of sales will decline in the first half of 2015 as compared to first half of 2014 and 2013.

Services. Service costs of sales principally consist of the costs of satellite service and support, revenue recognized by us and shared with others as a result of our revenue-sharing arrangements, Internet connection and co-location charges and other platform operating expenses including depreciation of the systems and hardware used to build and operate our platform; and personnel costs related to our network operations, customer service and information technology. As we continue to build out our Connectivity services platform and expand our satellite coverage globally, including our recent announcement with SES S.A. to expand our existing satellite coverage over the next ten years, we anticipate that our service costs will increase when compared to historical periods. Our services cost of sales are dependent on a number of factors, including the amount of satellite coverage and bandwidth required to operate our services and the number of partners we share our corresponding revenue with.

Content Segment Cost of Sales

Content segment cost of sales principally consists of licensing fees paid to acquire content rights for the airline industry, and to a lesser extent service and personnel costs to support our Content business.

Sales and Marketing


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Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations, advertising, marketing and general promotional expenditures. Fluctuations in our sales and marketing expenses are generally the result of our efforts to support the growth in our businesses, including expenses required to support the expansion of our direct sales force. We currently anticipate that our sales and marketing expenses will continue to increase in the near term when compared to 2013 as we continue to grow our sales and marketing organizations and invest in marketing activities to support the growth of our businesses; however, with the additions of PMG and IFES financial results in the full year of 2014, we expect our sales and marketing costs through 2014 will decrease as a percentage of revenue when compared to 2013.

Product Development

Product development expenses consist primarily of expenses incurred in our software engineering, product development and web portal design activities and related personnel costs. Fluctuations in our product development expenses are generally the result of hiring personnel to support and develop our platform, including the costs to further develop our Connectivity segment platform, timing and scope of our STC efforts, new connectivity product offerings, expenses associated with line-fit offerability and network operations. We currently anticipate that our product development expenses will increase in the near term, and more significantly in 2015, as we continue to hire more product development personnel and further develop our products and offerings to support the growth of our business. However, and for the remainder of 2014, we expect our product development expense to decrease as a percentage of revenue when compared to 2013.

General and Administrative

General and administrative expenses consist primarily of personnel costs from our executive, legal, finance, human resources and information technology organizations and facilities related expenditures, as well as third party professional fees, insurance and bad debt expenses. Professional fees are largely comprised of outside legal, accounting, audit and information technology consulting. For the nine months ended September 30, 2014 and 2013, our allowance for doubtful accounts and bad debt expense were not significant and we expect that this trend will continue in the near term. During the first quarter of 2013, we incurred approximately $12.0 million in one-time professional fees associated with the Business Combination. For the second half of 2013 through September 30, 2014, we experienced increased personnel costs and professional fees related to merger and acquisition activities, including the acquisitions of PMG and IFES in July and October 2013, respectively, and in our efforts to support public company compliance and create synergies between our businesses. As we continue to expand our business and integrate AIA over the remainder of 2014, we anticipate general and administrative expenses will continue to fluctuate in the near term when compared to historical periods.

Restructuring

During the third quarter ended September 30, 2014, the Company implemented a plan to improve operational efficiencies, which included the closure of its German-based operations and facilities, centralization of its international financial operations, and realignment of its international and U.S. tax structure (the “Plan”). During the three months ended September 30, 2014 and in conjunction with the Plan, the Company committed to a reduction in force. As of September 23, 2014, the Company communicated the reduction to affected employees. The Company anticipates that it will substantially complete the implementation of its Plan by the first half of 2015.

The Company currently estimates that $4.7 million to $5.2 million of restructuring charges will be incurred in connection with the Plan, including:

(1)
The Company estimates that it will incur total expenses relating to employee termination benefits, which primarily include severance and transitional-related expenses, of approximately $2.7 million, all of which represents cash expenditures. Of this amount, the Company expects to record $0.4 to $0.7 million in the first quarter of 2015.

(2)
In connection with the closure of its German operations pursuant to the Plan, the Company expects disposals of approximately 11,000 square feet of leased facilities in Duisburg and Munich, Germany, representing approximately 6% of its global facilities square footage. The Company expects to incur approximately $0.5 million in the aggregate facilities disposal charges pursuant to the Plan, beginning in the three months ended September 30, 2014 and throughout the first quarter of 2015.

(3)
Beginning in the third quarter of 2014 through the first half of 2015, the Company anticipates incurring periodic restructuring expenditures in an aggregate amount of $1.5 to $2.0 million, comprised of legal and professional fees associated with the execution of the Plan.


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During the three and nine months ended September 30, 2014, we incurred approximately $2.6 million of restructuring costs. We expect that substantially all remaining restructuring actions, discussed above, will be completed and the related estimated costs incurred through the first half of 2015.

Amortization of Intangibles

The Company determines the appropriate useful life of intangible assets by performing an analysis of expected cash flows based on its historical experience of intangible assets of similar quality and value. We expect amortization expense to fluctuate in the near term upon a variety of factors, such as the amounts and mix of our identifiable intangible assets acquired in business combinations.

Stock-based Compensation

Included in our operating expenses are expenses associated with stock-based compensation, which are allocated and included in costs of sales, sales and marketing, product development and general and administrative expenses as necessary. Stock-based compensation expense is largely comprised of costs associated with stock options granted to employees and certain non-employees. We record the fair value of these equity-based awards and expense at their cost ratably over related vesting periods. In addition, stock-based compensation expense includes the cost of options to purchase common stock issued to certain non-employees.
    
Other Income (Expense)

Other income (expense) principally consists of changes in the fair value of our derivative financial instruments, interest on outstanding debt associated with our foreign notes payable and interest earned on cash balances and short-term investments, income or loss from our equity-method investments and certain unrealized transaction gains and losses on foreign currency denominated assets and liabilities. We typically invest our available cash balances in money market funds and short-term United States Treasury obligations. We expect our transaction gains and losses will vary depending upon movements in underlying currency exchange rates, and could become more significant in 2014 with the 2013 acquisitions of AIA and IFES.

Provision for Income Taxes

Since our inception, we have been subject to income taxes principally in the United States, and more recently with the acquisition of AIA in January 2013, PMG in July 2013, and IFES in October 2013, in other countries where we have a legal presence, including Germany, the United Kingdom, the Netherlands, Canada, China, India, Hong Kong and the United Arab Emirates. We anticipate that as we continue to expand our operations outside the United States, we will become subject to taxation based on the foreign statutory rates and our effective tax rate could fluctuate accordingly.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

We currently believe that based on the available information, it is more likely than not that some of our deferred tax assets will not be realized, and accordingly we have recorded a valuation allowance against certain of our federal, state and foreign deferred tax assets. As of September 30, 2014 and December 31, 2013, we had approximately $119.5 million and $102.2 million of federal and $55.4 million and $58.9 million, respectively, of state operating loss carry-forwards available to offset future taxable income which expire in varying amounts beginning in 2026 for federal and 2014 for state purposes if unused. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Currently, we expect the utilization of our net operating loss and tax credit carry-forwards in the near term to be affected by certain limitations placed on these carry-forwards as a result of our previous ownership changes with PAR Capital

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

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We believe that the assumptions and estimates associated with our revenue recognition, accounts receivable and allowance for doubtful accounts, capitalization and useful lives associated with our intangible assets, including our internal software and website development and content costs, income taxes, derivative financial instruments, stock-based compensation and the recoverability of our goodwill and long-lived assets, have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Revenue Recognition

We recognize revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. We consider persuasive evidence of a sales arrangement to be the receipt of a signed contract. Collectability is assessed based on a number of factors, including transaction history and the credit worthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue.

We have determined, among other criteria that we are the primary obligor in the fulfillment of our Connectivity and Content services. As a result, we report revenue on a gross basis in our consolidated statements of operations for both segments.

Connectivity Equipment Revenue

Connectivity equipment revenue is generated as title and risk of our equipment sales pass to our customers, which is generally upon shipment or arrival at destination depending on the contractual arrangement with the customer. In determining whether an arrangement exists, we ensure that a binding arrangement is in place, such as a standard purchase order or a fully executed customer-specific agreement. In cases where a customer has the contractual ability to accept or return equipment within a specific time frame, we will provide for return reserves when and if necessary, based upon historical experience.

Connectivity Service Revenue

Our Connectivity service revenue includes in-flight Wi-Fi Internet services, live television, on-demand content, shopping and travel-related information. Service revenue is recognized after it has been rendered and the customer can use the service, which is in the form of (i) enplanement for boarded passengers, (ii) usage by passengers, depending upon the specific contract, and (iii) other revenue such as advertising sponsorship.

Content Licensing Revenue

Content licensing revenue is principally generated through the sale or license of media content, video and music programming, applications, and video games to airlines, and to a lesser extent, through various services such as encoding and editing of media content. Revenue from the sale or license of content is recognized when the content has been delivered and the contractual performance obligations have been fulfilled, generally at the time a customer's license period begins.

Content Services Revenue

Content services revenue, such as technical services or the provision of materials, is billed and recognized as services are performed.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable primarily consist of amounts due from airlines or third parties who we provide services to, including our Connectivity and Content related services, advertising services through our platform and sales of our equipment. Accounts receivable from these providers are recorded when we earn the underlying revenue, and are generally due within 30 to 45 days from the month-end in which the invoice is generated.

We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables from our customers based on our best estimate of the amount of probable losses from existing accounts receivable. We determine the allowance based on analysis of historical bad debts, advertiser concentrations, advertiser credit-worthiness and current economic trends. In addition, past due balances over 90 days and specific other balances are reviewed individually for collectability on at least a quarterly basis.


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Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Beginning in 2013, and in conjunction with the acquisitions of AIA in January 2013, PMG in July 2013, and IFES in October 2013, we perform our annual impairment test of goodwill on October 1st of our fiscal year or when events or circumstances change that would indicate that goodwill might be impaired, including, but not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant under-performance relative to expected historical or projected future results of operations.

Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. In accordance with amended FASB guidance for goodwill impairment testing, we perform a qualitative assessment for our reporting units which management estimates each have fair values that significantly exceed their respective carrying values. For each reporting unit, we weighed the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. The reporting unit specific factors that we considered included financial performance and changes to the reporting units' carrying amounts. For each reporting unit, we considered assumptions about sales, operating margins, and growth rates which are based on our forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. We also assess the impact of macroeconomic factors on the discount rates and growth rates used for the most recent impairment tests, and determine if they would significantly affect the fair value of our reporting units. As of October 1, 2013, which was the last date the Company performed its annual impairment test for goodwill, the Company concluded that for each of its reporting units, it is more likely than not that the fair value of each reporting unit exceeds its carrying amount and that it was therefore unnecessary to perform any additional impairment tests as of such date.

Useful Lives Associated with our Intangible Assets, including Internal Software and Website Development Costs

We have capitalized certain identifiable intangible assets acquired in connection with business combinations and we use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions and estimates including projected revenues, operating costs, growth rates, useful lives and discount rates. Beginning in the first half of 2013, we also began capitalizing our internally developed software and platform development costs during their development phase.

We amortize our intangible assets acquired through business combinations on a straight-line basis over the period in which the underlying economic benefits are expected to be realized. Internally developed software and website development costs are depreciated on a straight-line basis over their estimated useful life, which is generally no greater than three years.


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Recoverability of Long-lived Assets

We evaluate the recoverability of our intangible assets, and other long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These trigger events or changes in circumstances include, but are not limited to a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse changes in legal factors, including changes that could result from our inability to renew or replace material agreements with certain of our partners such as Southwest on favorable terms, significant adverse changes in the business climate including changes which may result from adverse shifts in technology in our industry and the impact of competition, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of our long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In making this determination, we consider the specific operating characteristics of the relevant long-lived assets, including (i) the nature of the direct and any indirect revenues generated by the assets; (ii) the interdependency of the revenues generated by the assets; and (iii) the nature and extent of any shared costs necessary to operate the assets in their intended use. An impairment test would be performed when the estimated undiscounted future cash flows expected to result from the use of the asset group is less than its carrying amount. Impairment is measured by assessing the usefulness of an asset by comparing its carrying value to its fair value. If an asset is considered impaired, the impairment loss is measured as the amount by which the carrying value of the asset group exceeds its estimated fair value. Fair value is determined based upon estimated discounted future cash flows. The key estimates applied when preparing cash flow projections relate to revenue, operating margins, economic lives of assets, overheads, taxation and discount rates. To date, we have not recognized any such impairment loss associated with our long-lived assets.

Income Taxes

We account for our income taxes using the liability and asset method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or in our tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of our deferred tax assets and valuation allowances are provided when necessary to reduce deferred tax assets to the amounts expected to be realized.

We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, and relevant tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our income tax (benefit) provision in our statements of operations.

We calculate our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.


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Derivative Financial Instruments

Derivative financial instruments include certain warrants to purchase shares of our stock that are accounted for on a fair value basis. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis. The period to period change in fair value of derivatives is recorded through earnings. Cash flows from embedded derivatives subject to bifurcation are reported consistently with the host contracts within the statements of cash flows. Cash flows from other derivatives are reported in cash flows from investing activities within the statements of cash flows.

The Company sometimes uses derivative financial instruments such as interest rate swaps to hedge interest rate risks. These derivatives are recognized at fair value on the transaction date and subsequently remeasured at fair value. Derivatives are measured as financial assets when their fair value is positive and as financial liabilities when their fair value is negative. Gains or losses on changes in the fair value of derivatives are recognized immediately in the statement of operations as a component of other income (expense).

Stock-based Compensation

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions, the fair value is estimated using the Black-Scholes option pricing model. The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat share-based payment awards, other than performance awards, with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are classified in the statement of operations based on the department to which the related employee reports. Our stock-based awards are comprised principally of stock options.

We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Our management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of our underlying stock, the expected volatility and the expected term of the award. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.

Because the accounting acquirer’s common stock was not publicly traded prior to February 1, 2013, we estimated the expected volatility of our awards from the historical volatility of selected public companies within the technology and media industries with comparable characteristics to us, including similarity in size, lines of business, market capitalization, revenue and financial leverage. From our inception through September 30, 2014, the weighted average expected life of options was calculated using the simplified method as prescribed under guidance by the SEC. This decision was based on the lack of relevant historical data due to our limited experience and the lack of an active market for our common stock. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The expected dividend rate is zero based on the fact that we currently have no history or expectation of paying cash dividends on our common stock. The forfeiture rate is established based on the historical average period of time that options were outstanding and adjusted for expected changes in future exercise patterns.


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Results of Operations

The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
102,623

 
$
74,518

 
$
286,736

 
$
179,862

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
73,618

 
54,002

 
213,341

 
139,571

Sales and marketing expenses
3,980

 
3,758

 
10,119

 
8,444

Product development
7,212

 
2,282

 
15,561

 
5,946

General and administrative
17,172

 
17,056

 
51,440

 
53,860

Amortization of intangible assets
6,049

 
4,221

 
18,613

 
8,470

Restructuring charges
2,606

 
—

 
2,606

 
—

Total operating expenses
110,637

 
81,319

 
311,680

 
216,291

Loss from operations
(8,014
)
 
(6,801
)
 
(24,944
)
 
(36,429
)
Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
175

 
(267
)
 
44

 
(726
)
Change in fair value of derivatives
(5,253
)
 
2,233

 
555

 
(7,107
)
Other income (expense), net
(984
)
 
601

 
(1,786
)
 
571

Income (loss) before income taxes
(14,076
)
 
(4,234
)
 
(26,131
)
 
(43,691
)
Income tax provision (benefit)
1,454

 
1,161

 
3,552

 
1,754

Net income (loss)
(15,530
)
 
(5,395
)
 
(29,683
)
 
(45,445
)
Net income (loss) attributable to non-controlling interests
—

 
158

 
194

 
89

Net income (loss) attributable to Global Eagle Entertainment Inc. common stockholders
(15,530
)
 
(5,553
)
 
(29,877
)
 
(45,534
)
 
 
 
 
 
 
 
 
Net income (loss) per common share - basic
$
(0.21
)
 
$
(0.10
)
 
$
(0.41
)
 
$
(0.89
)
Net income (loss) per common share - diluted
$
(0.21
)
 
$
(0.10
)
 
$
(0.41
)
 
$
(0.89
)
 
 
 
 
 
 
 
 
Weighted average common shares - basic
72,877

 
55,166

 
72,284

 
51,106

Weighted average common shares - diluted
72,877

 
55,166

 
72,284

 
51,106


The following table provides the depreciation expense included in the above line items (in thousands):

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Cost of sales
567

 
546

 
2,197

 
1,256

Sales and marketing
163

 
—

 
377

 
—

Product development
295

 
18

 
580

 
51

General and administrative
809

 
542

 
2,016

 
1,050

Total depreciation expense
$
1,834

 
$
1,106

 
$
5,170

 
$
2,357


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The following table provides the stock-based compensation expense included in the above line items (in thousands):

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Stock-based compensation expense:
2014
 
2013
 
2014
 
2013
Cost of sales
$
6

 
$
—

 
$
6

 
$
—

Sales and marketing expenses
14

 
—

 
14

 
—

Product development
53

 
—

 
53

 
—

General and administrative
1,823

 
526

 
6,412

 
1,902

Total stock-based compensation expense
$
1,896

 
$
526

 
$
6,485

 
$
1,902


The following table provides our results of operations, as a percentage of revenue, for the periods presented:

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Operating expenses:
 
 
 
 
 
 
 
Cost of sales
72
 %
 
72
 %
 
74
 %
 
78
 %
Sales and marketing expenses
4
 %
 
5
 %
 
4
 %
 
5
 %
Product development
7
 %
 
3
 %
 
5
 %
 
3
 %
General and administrative
17
 %
 
23
 %
 
18
 %
 
30
 %
Amortization of intangible assets
6
 %
 
6
 %
 
6
 %
 
5
 %
Restructuring charges
3
 %
 
—
 %
 
1
 %
 
—
 %
Total operating expenses
108
 %
 
109
 %
 
109
 %
 
120
 %
Loss from operations
(8
)%
 
(9
)%
 
(9
)%
 
(20
)%
Other income (expense), net
(6
)%
 
3
 %
 
—
 %
 
(4
)%
Income (loss) before income taxes
(14
)%
 
(6
)%
 
(9
)%
 
(24
)%
Income tax expense
1
 %
 
2
 %
 
1
 %
 
1
 %
Net income (loss)
(15
)%
 
(7
)%
 
(10
)%
 
(25
)%
Net income attributable to non-controlling interests
—
 %
 
—
 %
 
—
 %
 
—
 %
Net income (loss) attributable to common stockholders
(15
)%
 
(7
)%
 
(10
)%
 
(25
)%



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Three Months Ended September 30, 2014 Compared To Three Months Ended September 30, 2013

Operating Segments

Segment revenue, expenses and contribution profit for the three months ended September 30, 2014 and 2013 derived from the Company's Content and Connectivity segments were as follows (in thousands):

 
Three Months Ended September 30,
 
2014
 
2013
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Licensing
$
60,907

 
—

 
$
60,907

 
$
44,645

 
$
—

 
$
44,645

Service
10,603

 
19,933

 
30,536

 
8,796

 
16,218

 
25,014

Equipment
—

 
11,180

 
11,180

 
—

 
4,859

 
4,859

Total revenue
71,510

 
31,113

 
102,623

 
53,441

 
21,077

 
74,518

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
50,596

 
23,022

 
73,618

 
38,809

 
15,193

 
54,002

Contribution profit
20,914

 
8,091

 
29,005

 
14,632

 
5,884

 
20,516

Other operating expenses
 
 
 
 
37,019

 
 
 
 
 
27,317

Loss from operations
 
 
 
 
$
(8,014
)
 
 
 
 
 
$
(6,801
)

Revenue

Connectivity operating segment revenue was as follows (in thousands):

 
Three Months Ended September 30,
 
% Change
 
2014
 
2013
 
2013 to 2014
Service revenue
$
19,933

 
$
16,218

 
22.9
%
Equipment revenue
11,180

 
4,859

 
130.1
%
Total revenue Connectivity segment
$
31,113

 
$
21,077

 
47.6
%

Connectivity Service Revenue
Connectivity service revenue increased $3.7 million, or 23%, to $19.9 million for the three months ended September 30, 2014, as compared to $16.2 million for the three months ended September 30, 2013. The increase was principally due to the growth in users of our Wi-Fi Internet services on Southwest Airlines, which was driven by a higher number of Southwest planes offering our Connectivity services in 2014 as compared to 2013.

Connectivity Equipment Revenue
Connectivity equipment revenue increased by $6.3 million, or 130%, to $11.2 million for the three months ended September 30, 2014, as compared to $4.9 million for the three months ended September 30, 2013. The increase was primarily due to the timing of equipment installations on newly commissioned planes for the Southwest Airlines fleet and NOK Air.

Content operating segment revenue was as follows (in thousands):

 
Three Months Ended September 30,
 
% Change
 
2014
 
2013
 
2013 to 2014
Licensing revenue
$
60,907

 
$
44,645

 
36.4
%
Service revenue
10,603

 
8,796

 
20.5
%
Total revenue Content segment
$
71,510

 
$
53,441

 
33.8
%

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Content Licensing Revenue
Content licensing revenue increased $16.3 million, or 36%, to $60.9 million for the three months ended September 30, 2014 as compared to $44.6 million for the three months ended September 30, 2013. The increase was primarily due to the acquisition of IFES, which we acquired on October 18, 2013 and was not part of our operations as of September 30, 2013. IFES generated $8.5 million of licensing revenue in the three months ended September 30, 2014. The remaining increase of $7.8 million was largely due to the addition of new Content customers throughout the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.

Content Service Revenue
Content service revenue increased $1.8 million, or 21%, to $10.6 million for the three months ended September 30, 2014, as compared to $8.8 million for the three months ended September 30, 2013. The increase was primarily due to the acquisition of IFES, which we acquired on October 18, 2013 and was not part of our operations as of September 30, 2014. IFES generated $2.0 million of content service revenue in the three months ended September 30, 2014.

Cost of Sales

Connectivity operating segment cost of sales was as follows (in thousands):

 
Three Months Ended September 30,
 
% Change
 
2014
 
2013
 
2013 to 2014
Service cost of sales
$
13,428

 
$
11,388

 
17.9
%
Equipment cost of sales
9,594

 
3,805

 
152.1
%
Total Connectivity cost of sales
$
23,022

 
$
15,193

 
51.5
%

Connectivity cost of sales increased $7.8 million, or 52%, to $23.0 million for the three months ended September 30, 2014 compared to $15.2 million for the three months ended September 30, 2013 due to a $5.8 million increase in Connectivity equipment cost of sales and a $2.0 million increase in Connectivity service cost of sales. The increase in equipment cost of sales was principally due to an increase in equipment revenue over the same period as a result of the timing of equipment shipments on newly commissioned planes on the Southwest Airlines and NOK Air fleets, which was did not exist in 2013. The increase in service cost of sales was principally due to higher satellite bandwidth costs to support the growth in our Connectivity service revenue during the same period.

As a percentage of Connectivity equipment revenue, Connectivity equipment cost of sales was 85.8% during the three months ended September 30, 2014 compared to 78.3% during the three months ended September 30, 2013, a decrease of 7.5%. The period to period improvement in equipment contribution margin was largely due to higher equipment revenue from newer customers, such as NOK Air, which have higher margins than other airlines, during the three months ended September 30, 2014 versus the three months ended September 30, 2013.

As a percentage of Connectivity service revenue, Connectivity service cost of sales was 67.4% during the three months ended September 30, 2014, as compared to 70.2% for the three months ended September 30, 2013, an improvement of 280 basis points. The period to period improvement in contribution margin was largely due to higher service revenue from increased take rates and passenger usage on Southwest Airlines during the three months ended September 30, 2014 versus the three months ended September 30, 2013.

Content operating segment cost of sales was as follows (in thousands):

 
Three Months Ended September 30,
 
% Change
 
2014
 
2013
 
2013 to 2014
Content cost of sales
$
50,596

 
38,809

 
30.4
%

Content cost of sales increased $11.8 million, or 30%, to $50.6 million for the three months ended September 30, 2014, as compared to $38.8 million for the three months ended September 30, 2013. Consistent with the change in Content

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Table of Contents

revenue over the same period, the increase was primarily due to the acquisition of IFES, which we acquired on October 18, 2013 and was not part of our operations as of September 30, 2013. IFES incurred $6.9 million of content licensing cost of sales in the three months ended September 30, 2014. Offsetting this was a decrease of approximately $2.3 million in amortization expense associated with acquired content rights from the acquisition of AIA during the three months ended September 30, 2014 when compared to three months ended September 30, 2013. The remaining increase of $7.2 million was largely due to higher cost of sales as a result of the increase in service revenues from newer Content customers during the three months ended September 30, 2014 as compared to three months ended September 30, 2013.

As a percentage of Content revenue, Content licensing cost of sales was 70.8% during the three months ended September 30, 2014 as compared to 72.6% in the three months ended September 30, 2013, an improvement of 180 basis points. The slight improvement was largely due to a higher mix of content revenue under fixed costs arrangements with the studios during the three months ended September 30, 2014.

Other Operating Expenses

Other operating expenses were as follows (in thousands):

 
Three Months Ended September 30,
 
% Change
 
2014
 
2013
 
2012 to 2013
Sales and marketing expenses
$
3,980

 
$
3,758

 
5.9
%
Product development
7,212

 
2,282

 
216.0
%
General and administrative
17,172

 
17,056

 
0.7
%
Amortization of intangible assets
6,049

 
4,221

 
43.3
%
Restructuring charges
2,606

 
—

 
100.0
%

Sales and Marketing Expenses

Sales and marketing expenses increased $0.2 million, or 5.9%, to $4.0 million for the three months ended September 30, 2014 as compared to $3.8 million for the three months ended September 30, 2013. The increase was largely due to the acquisitions of IFES, which we acquired on October 18, 2013 and was not part of our operations as of September 30, 2013. IFES incurred $0.1 million of sales and marketing expenses during the three months ended September 30, 2014.

Product Development

Product development expenses increased $4.9 million, or 216.0%, to $7.2 million for the three months ended September 30, 2014 compared to $2.3 million for the three months ended September 30, 2013. The period to period change was largely due to an increase of $3.0 million related to product development consulting fees and personnel costs, $0.7 million relating to test equipment, and $0.6 million in travel related costs. These increases were primarily to support the continued development of our W-Fi Internet portal and network operations and expansion in product development efforts to support the launch of our Air China trial in the three months ended September 30, 2014; coupled with increased research and development on new technologies and services in the Connectivity business in the three months ended September 30, 2014.

General and Administrative

General and administrative costs increased $0.1 million, or 0.7%, to $17.2 million during the three months ended September 30, 2014 compared to $17.1 million for the three months ended September 30, 2013. The increase was largely due to $0.6 million associated with one-time earn-out expenses from the AIA acquisition, $1.7 million in non-recurring legal settlement expense, $1.3 million in stock based compensation expense and $0.6 million of IFES general and administrative expenses which we acquired on October 18, 2013 and was not part of our operations as of September 30, 2013. In addition and in during the three months ended September 30, 2013, there was a non-recurring reversal of $1.1 million of accrued expenses associated with certain accrued tax obligations that resulted from the January 2013 Business Combination. Offsetting these were decreases of approximately $3.0 million associated with one-time expenses related to departures of two executives during the three months ended September 30, 2013 and $0.7 million largely related synergies as a result of the adoption of the 2014 Plan. The remaining decrease of $1.6 million was generally associated with lower professional fees and personnel costs in the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.

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Amortization of Intangible Assets
Amortization expense increased to $6.0 million during the three months ended September 30, 2014 as compared to $4.2 million for the three months ended September 30, 2013. The increase is due to the amortization of acquired intangible assets acquired via the 2013 acquisitions of AIA, PMG and IFES. There was only the AIA and PMG acquisitions made as of September 30, 2013, and as a result the amounts as of September 30, 2013 are not comparable to September 30, 2014.

Restructuring Charges

Restructuring charges increased to $2.6 million during the three months ended September 30, 2014. The increase is due to expenses recorded pursuant to the formal restructuring plan announced during the three months ended September 30, 2014.

Total Other Income (Expense)

Total other income (expense) was $(6.1) million during the three months ended September 30, 2014 compared to $2.6 million for the three months ended September 30, 2013. The increase in net other expense was principally due to an increase in the fair value of the Company's public warrants of $7.5 million and $0.2 million of expense associated with the write-down of the Company's equity method investment during the three months ended September 30, 2014.

Income Tax Expense
Income tax expense was $1.5 million for the three months ended September 30, 2014 compared to $1.2 million for the three months ended September 30, 2013. The income tax expense increase was largely due to foreign withholding taxes and income earned in the U.S., Germany, Canada and other foreign jurisdictions. Due to uncertainties in realizing future taxable income in certain U.S. and foreign jurisdictions, the Company had a valuation allowance of $59.1 million and $50.4 million at September 30, 2014 and 2013, respectively.

Nine Months Ended September 30, 2014 Compared To Nine Months Ended September 30, 2013

Segment revenue, expenses and contribution profit for the nine months ended September 30, 2014 and 2013 derived from the Company's Content and Connectivity segments were as follows (in thousands):
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
Content
 
Connectivity
 
Consolidated
 
Content
 
Connectivity
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Licensing
 
$
172,375

 
$
—

 
$
172,375

 
$
106,353

 
$
—

 
$
106,353

Service
 
33,917

 
53,735

 
87,652

 
18,346

 
34,893

 
53,239

Equipment
 
349

 
26,360

 
26,709

 
—

 
20,270

 
20,270

Total revenue
 
206,641

 
80,095

 
286,736

 
124,699

 
55,163

 
179,862

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
149,475

 
63,866

 
213,341

 
92,158

 
47,413

 
139,571

Contribution profit
 
57,166

 
16,229

 
73,395

 
32,541

 
7,750

 
40,291

Other operating expenses
 
 
 
 
 
98,339

 
 
 
 
 
76,720

Loss from operations
 
 
 
 
 
$
(24,944
)
 
 
 
 
 
$
(36,429
)

Revenue

Connectivity revenue was as follows (in thousands):

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Table of Contents

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
% Change
Service revenue
 
$
53,735

 
$
34,893

 
54.0
%
Equipment revenue
 
26,360

 
20,270

 
30.0
%
Total Connectivity revenue
 
$
80,095

 
$
55,163

 
45.2
%

Connectivity Service Revenue
Connectivity service revenue increased $18.8 million or 54% to $53.7 million for the nine months ended September 30, 2014, as compared to $34.9 million for the nine months ended September 30, 2013. The increase was principally due to the growth in users of our Wi-Fi Internet services on Southwest Airlines, which was driven by a higher number of Southwest planes offering our Connectivity services in 2014 as compared to 2013, coupled with the commencement of the TV Flies Free service on Southwest Airlines in July 2013.

Connectivity Equipment Revenue
Connectivity equipment revenue increased by $6.1 million or 30% to $26.4 million for the nine months ended September 30, 2014, as compared to $20.3 million for the nine months ended September 30, 2013. The increase was primarily due to the timing of equipment shipments on the Southwest Airlines fleet and new customers such as NOK Air.

Content revenue was as follows (in thousands):
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
% Change
Licensing revenue
 
$
172,375

 
$
106,353

 
62.1
%
Service revenue
 
33,917

 
18,346

 
84.9
%
Equipment revenue
 
$
349

 
$
—

 
100.0
%
Total Content revenue
 
$
206,641

 
$
124,699

 
65.7
%

Content Licensing Revenue
Content licensing revenue increased $66.0 million or 62%, to $172.4 million for the nine months ended September 30, 2014, as compared to $106.4 million for the nine months ended September 30, 2013. The increase was primarily due to the acquisitions of PMG and IFES, which we acquired on July 10, 2013 and October 18, 2013, respectively, and were not part of our operations during the full nine months ended September 30, 2013. When combined, PMG and IFES generated approximately $45.2 million of licensing revenue in the nine months ended September 30, 2014 during periods each were not a part of the Company’s operations during the comparable nine months ended September 30, 2013. The remaining increase of $20.8 million was largely due to AIA, which we acquired on January 31, 2013 and was only a part of our operations for a partial period during the nine months ended September 30, 2013, coupled with the addition of new Content customers in the nine months ended September 30, 2014.

Content Service Revenue
Content service revenue increased $15.6 million or 85%, to $33.9 million for the nine months ended September 30, 2014, compared to $18.3 million for the nine months ended September 30, 2013. The increase was primarily due to the acquisitions of PMG and IFES, which we acquired on July 10, 2013 and October 18, 2013, respectively, and were not part of our operations during the entire nine months ended September 30, 2014.


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Table of Contents

Cost of Sales

Connectivity cost of sales was as follows (in thousands):

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
% Change
Service cost of sales
 
$
40,933

 
$
31,160

 
31.4
%
Equipment cost of sales
 
22,933

 
16,254

 
41.1
%
Total Connectivity cost of sales
 
$
63,866

 
$
47,414

 
34.7
%

Connectivity cost of sales increased $16.5 million or 35% to $63.9 million for the nine months ended September 30, 2014 compared to $47.4 million for the nine months ended September 30, 2013. The $16.5 million increase was due to a $9.8 million increase in Connectivity service cost of sales, and a $6.7 million increase in Connectivity equipment cost of sales. Connectivity equipment cost of sales increased $6.7 million or 41% principally due to a higher number equipment shipments on the Southwest Airlines and newer customer fleets during the nine months ended September 30, 2014. Connectivity service cost of sales increased $9.8 million or 31% principally due to higher satellite bandwidth costs to support the growth in our Connectivity service revenue over the same period

As a percentage of Connectivity equipment revenue, Connectivity equipment cost of sales was 87.0% during the nine months ended September 30, 2014 as compared to 80.2% during the nine months ended September 30, 2013, an increase of 680 basis points. The period over period decrease in contribution margin was primarily due to a higher mix of equipment shipments on the Southwest Airline fleet in the nine months ended 2014, which were sold at less favorable margins as compared to other airlines.

As a percentage of Connectivity service revenue, Connectivity service cost of sales was 76.2% during the nine months ended September 30, 2014 as compared to 89.3% during the nine months ended September 30, 2013, a decrease of 1,310 basis points. The period to period improvement in contribution margin was largely due to higher service revenue from Southwest Airlines during the nine months ended September 30, 2014 versus the nine months ended September 30, 2013. When compared to 2013, the growth in Connectivity service revenue during 2014 exceeded the increase in the related fixed satellite bandwidth costs over the same period, coupled with the commencement of the TV Flies Free service on Southwest Airlines in July 2013. The TV Flies Free service largely utilizes our existing bandwidth and satellite costs, and as a result is highly accretive to our operating results.

Content cost of sales was as follows (in thousands):

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
% Change
Content cost of sales
 
$
149,475

 
$
92,158

 
62.2
%

Content cost of sales increased $57.3 million or 62% to $149.5 million for the nine months ended September 30, 2014, as compared to $92.2 million for the nine months ended September 30, 2013. Consistent with the change in Content revenue over the same period, the increase was primarily due to the acquisitions of PMG and IFES, which we acquired on July 10, 2013 and October 18, 2013, respectively, and were not part of our operations as of June 30, 2013. When combined, PMG and IFES incurred $52.5 million of content cost of sales in the nine months ended September 30, 2014 during periods each were not a part of the Company’s operations during the comparable nine months ended September 30, 2013. The remaining increase of $4.8 million was largely due to AIA, which we acquired on January 31, 2013 and was only a part of our operations for a partial period during the nine months ended September 30, 2013. Offsetting this was a decrease of approximately $5.9 million in amortization expense associated with acquired content rights from the acquisition of AIA during the nine months ended September 30, 2014 when compared to nine months ended September 30, 2013.

As a percentage of Content revenue, Content licensing cost of sales of 72.3% during the nine months ended September 30, 2014 remained relatively flat as compared to 73.9% during the nine months ended September 30, 2013.



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Other Operating Expenses

Other operating expenses were as follows (in thousands):
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
% Change
Sales and marketing expenses
 
$
10,119

 
$
8,444

 
19.8
 %
Product development
 
15,561

 
5,946

 
161.7
 %
General and administrative
 
51,440

 
53,860

 
(4.5
)%
Amortization of intangible assets
 
18,613

 
8,470

 
119.8
 %
Restructuring charges
 
2,606

 
—

 
100.0
 %

Sales and Marketing Expenses

Sales and marketing expenses increased $1.7 million or 20% to $10.1 million for the nine months ended September 30, 2014 compared to $8.4 million in the corresponding period in 2013. The increase was largely due to the acquisitions of PMG and IFES, which we acquired on July 10, 2013 and October 18, 2013, respectively, and were not part of our operations for the full nine month period ended September 30, 2013. When combined, PMG and IFES incurred $2.6 million of sales expenses during the nine months ended September 30, 2014. Offsetting this was a decrease of approximately $0.9 million in consulting and trade show expenses in the nine months ended September 30, 2014 as compared to the corresponding period in 2013.

Product Development

Product development expenses increased $9.6 million or 162% to $15.6 million for the nine months ended September 30, 2014 compared to $5.9 million in the corresponding period in 2013. The period to period change was largely due to an increase of $6.9 million related to product development consulting fees associated with new development efforts in China and increased consulting fees associated with the development of our W-Fi Internet portal in the nine months ended September 30, 2014, coupled with increased research and development on new technologies and services in the Connectivity segment in the nine months ended September 30, 2014. The remaining increase of $3.0 million was largely due to increases of $0.7 million in test equipment and $0.8 million in travel expenses largely due increased development efforts surrounding the Air China trial during the nine months ended September 30, 2104, coupled with $0.2 million in one-time expenses associated with the departure of certain product development employees and approximately $1.2 million largely due to the acquisition of PMG in July 2013, which was only partly included in the operating results during the nine months ended September 30, 2013. Offsetting product development expenses was approximately $1.2 million and $1.0 million of internally developed software projects capitalized during the nine months ended September 30, 2014 and 2013, respectively.

General and Administrative

General and administrative costs decreased by $2.4 million or 4.5% to $51.4 million during the nine months ended September 30, 2014 compared to $53.9 million in the corresponding period in 2013. The decrease was largely due to a one-time backstop fee of $11.9 million paid to PAR Capital in the first quarter of 2013 and $3.0 million in certain one-time expenses associated with the departures of two executives during the three months ended September 30, 2013. Offsetting these were increases of $1.9 million associated with one-time earn-out expenses from prior acquisitions, $1.0 million in severance expense associated with the departure of a former AIA executive in June 2014, $1.7 million in non-recurring legal settlement expense during the three months ended September 30, 2014, approximately $0.2 million in professional fees principally to support various initiatives in the period, $4.9 million from PMG and IFES, which were acquired in 2013, and approximately $5.2 million in stock-based compensation and depreciation expense. The remaining change was largely due to decreased personnel costs as a result of integration efforts during the nine months ended September 30, 2014.

Amortization of Intangible Assets

Amortization expense increased to $18.6 million during the nine months ended September 30, 2014 as compared to $8.5 million for the nine months ended September 30, 2013. The increase is due to the amortization of acquired intangible assets acquired via the 2013 acquisitions of AIA, PMG and IFES. There was only the AIA and PMG acquisitions made as of September 30, 2013, and as a result the amounts as of September 30, 2013 are not comparable to September 30, 2014.


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Restructuring Charges

Restructuring charges increased to $2.6 million during the nine months ended September 30, 2014. The increase is due to expenses recorded pursuant to the formal restructuring plan announced during the three months ended September 30, 2014.

Other income (expense)

Other income (expense), net decreased $6.1 million to $(1.2) million during the nine months ended September 30, 2014 as compared to $(7.3) million in the same period in 2013. The decrease in the net other income was principally due to a decrease in the fair value of the Company's public warrants of $7.3 million and $0.4 million of expense associated with certain Row 44 warrants during the nine months ended September 30, 2013, offset by $1.3 million of expense associated with a one-time write-down of the Company’s equity method investment and $0.3 million of expense associated with issuance of common stock to Row 44 shareholders to settle certain historical matters pertaining to the 2013 Business Combination during the nine months ended September 30, 2014. The remaining decrease was largely due to lower overall interest expense as a result of debt pay-downs throughout the nine months ended September 30, 2014.

Income Tax Expense

Income tax expense was $3.6 million for the nine months ended September 30, 2014 compared to $1.8 million for the nine months ended September 30, 2013. The income tax expense increase was largely due to foreign withholding taxes and income earned in the U.S., Germany, Canada and other foreign jurisdictions. Due to uncertainties in realizing future taxable income in certain U.S. and foreign jurisdictions, the Company had a valuation allowance of $59.1 million and $50.4 million at September 30, 2014 and 2013, respectively.


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Liquidity and Capital Resources
Current Financial Condition
As of September 30, 2014, our principal sources of liquidity were our cash and cash equivalents in the amount of $209.6 million, which primarily are invested in cash and money market funds in banking institutions in the U.S. and in Europe. Excluded from our cash balance at September 30, 2014 is approximately $3.2 million of restricted cash that secures letters of credit between our subsidiaries and certain airlines. The vast majority of our cash was from the Business Combination in January 2013 and follow-on offering in December 2013. As of September 30, 2014, we had total debt outstanding of $3.5 million. Prior to the consummation of the Business Combination on January 31, 2013, Row 44, the accounting acquirer in the Business Combination, principally financed its operations from the issuance of stock, net cash provided by its operating activities and borrowings from shareholders in the form of convertible notes.

Our cash flows from operating activities are significantly affected by our cash-based investments in operations, including working capital, and corporate infrastructure to support our ability to generate revenue and conduct operations through cost of services, product development, sales and marketing and general and administrative activities. Cash used in investing activities has historically been, and is expected to be, impacted significantly by our investments in business combinations, our platform, Company infrastructure and equipment for our business offerings, the net sales and purchases of our marketable securities and changes in our derivative financial instruments. We recently invested an aggregate $46.8 million of our cash from July 2013 to October 2013 to acquire PMG and IFES. In the near term, we also expect to continue using significant cash to make additional strategic acquisitions to further grow our business.

In connection with the Business Combination, we incurred approximately $3.0 million of additional operating expenses related to the addition of personnel, professional fees and systems to build our infrastructure to support our public company compliance and certain corporate alignment initiatives through the end of 2013. In addition, our use of cash flows from operating activities exceeded our proceeds from operating activities throughout the remainder of 2013 and through the second quarter of 2014, primarily due to the ongoing efforts to build our infrastructure and support our public company compliance initiatives, and our ongoing efforts to grow our Connectivity business. In the future, our net use of our working capital could be substantially higher or lower depending on the number and timing of new customers that we add to our Connectivity and Content businesses.

Subsequent to the Business Combination, we acquired a total of 22.6 million additional shares in AIA, which raised our ownership in AIA from approximately 86% as of March 31, 2013 to 94% as of June 30, 2013. Total costs used to complete these share acquisitions was approximately $15.4 million. In addition and in April, we acquired the remaining 6% non-controlling interests in AIA for an aggregate purchase price of $21.7 million, inclusive of $0.6 million of transaction fees. During the three months ended June 30, 2014, we paid approximately $18.2 million in cash to former AIA shareholders, and paid off its remaining obligations of approximately $3.5 million during the three months ending September 30, 2014.

On August 2, 2014, the Company purchased substantially all the assets of Purple Inflight Entertainment Private Ltd. (“Purple”) in exchange for approximately $0.5 million in cash. The Company acquired the assets of Purple to further expand its leadership in delivering Indian-based content. While we believe that a part of the future revenue growth in our content business will come from increased licensing of foreign-based content, there is no guarantee that our customers will purchase more foreign-based content in the future.
    
During the nine months ended September 30, 2014, the Board of Directors (the “Board”) authorized the Company to repurchase up to $25.0 million of GEE's public warrants. As of September 30, 2014, $23.6 million was available for warrants repurchases under this authorization. The amount we spend and the number of warrants repurchased varies based on a variety of factors including the stock price and blackout periods in which we are restricted from repurchasing warrants.

On August 13, 2014, the Company completed a tender offer to all holders of the Company’s outstanding warrants exercisable for shares of the Company’s common stock, that were originally issued by GEAC and which have an exercise price of $11.50 per share (the “Warrants”), to receive 0.3333 Shares in exchange for every Warrant tendered by the holders thereof (approximately one Share for every three Warrants tendered), up to a maximum of 15,000,000 Warrants. On September 11, 2014, the Company issued 4,227,187 shares of common stock in exchange for 12,682,755 Warrants and recognized a gain on the exchange of approximately $0.8 million included in change in fair value of financial instruction instruments in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014.

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In the future, we may utilize commercial financings, bonds, debentures, lines of credit and term loans with a syndicate of commercial banks or other bank syndicates and/or issue equity securities (publicly or privately) for general corporate purposes, including acquisitions and investing in our intangible assets, platform and technologies. We may also use our existing cash and cash equivalents to repurchase some or all of our outstanding public company warrants. We expect that our existing cash and cash equivalents and our cash flows from operating activities will be sufficient to fund our operations for at least the next 24 months. However, we may need to raise additional funds through the issuance of equity, equity-related or debt securities or through additional credit facilities to fund our growing operations, invest in new business opportunities and make potential acquisitions.

Sources and Uses of Cash - Nine Months Ended September 30, 2014 vs. Nine Months Ended September 30, 2013

The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
 
Nine months ended September 30,
 
2014
 
2013
Net cash used in operating activities
$
(12,054
)
 
$
(48,557
)
Net cash (used in) provided by investing activities
$
(6,148
)
 
$
165,587

Net cash used in financing activities
$
(30,853
)
 
$
(21,201
)
     
Cash Flows Provided by/Used in Operating Activities

Nine months ended September 30, 2014

Net cash used in our operating activities of $12.1 million primarily resulted from our net loss during the period of $29.7 million, which included non-cash charges of $25.3 million largely comprised of changes in the fair value of our derivative financial instruments, depreciation and amortization, changes in our deferred income taxes, loss on equity method investment and stock based compensation. The remainder of our uses of cash in operating activities of $7.7 million was from changes in our working capital, including accounts receivable, prepaid expenses, and content and inventory investments. Offsetting these uses of cash in operating activities was a net cash inflow of $23.1 million from increases in accounts payable and accrued expenses reflective of timing of cash receipts from customers and payments to vendors. The increase in accounts receivable was reflective of the growth in our corresponding revenue in the period, coupled with the timing of payments from key customers in the period. The increases in prepaid expenses and inventory and content purchases were from continued investments to support the growth in our Connectivity equipment installations and Content licensing acquisitions.

Nine months ended September 30, 2013

Net cash used in our operating activities of $48.6 million primarily resulted from our net loss during the period of $45.4 million, which included non-cash charges of $31.3 million largely comprised of depreciation and amortization, changes in the fair value of our derivative financial instruments, and changes in our deferred income taxes. The remainder of our uses of cash in operating activities of $34.4 million was from changes in our working capital, including accounts payable and accrued expenses, content and inventory investments, and accounts receivable of approximately $33.9 million. The decrease in accounts payable and accrued expenses is reflective of significant amounts of accrued obligations paid as a result of our Business Combination in January 2013, including $11.9 million paid to PAR Capital as a one-time back stop fee. The increase in inventory and content purchases were continued investments to support the growth in our Connectivity equipment installations and Content licensing acquisitions. The increase in accounts receivable is reflective of the growth in service revenue over the period.

Cash Flows Provided by/Used in Investing Activities

Nine months ended September 30, 2014

Net cash used in investing activities of $6.1 million was due to $6.2 million investments in property and equipment to build-out our internal infrastructure during the nine months ended September 30, 2014 and $0.5 million relating to the assets purchase of Purple, offset by proceeds of approximately $0.6 million received from the sale of certain marketable securities during the nine months ended September 30, 2014.

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Nine months ended September 30, 2013

Net cash provided by investing activities of $165.6 million was largely from the Business Combination in January 2013, which resulted in net cash provided from the Row 44 merger of $159.2 million and AIA stock purchase of $22.1 million. In addition we sold our 8.5% interest in Guestlogix for total proceeds of approximately $6.3 million, and purchased PMG for approximately $10.5 million during the nine months ended September 30, 2013. The remaining change in net cash used investing activities of $11.5 million was largely due to investments in property and equipment of $10.0 million to expand our network operations in Russia and Europe and to support our new live TV product on Southwest Airlines, and a $1.5 million investment in Allegiant Systems.

Cash Flows Provided by/Used in Financing Activities

Nine months ended September 30, 2014

Net cash used in financing activities of $30.9 million was primarily due to cash consideration of $21.7 million to acquire the remaining 6% interest in AIA, $7.4 million in payments of certain debt obligations and $1.4 million in payments to purchase outstanding GEE public warrants during the nine months ended September 30, 2014.

Nine months ended September 30, 2013

Net cash used in financing activities of $21.2 million was primarily driven by the completion of our purchase of the remaining shares of AIA not already owned by us in April 2013, where we purchased $15.4 million of non-controlling interests in AIA to increase our ownership to 94.07%. The remaining change in cash used in financing activities of $5.8 million was largely due to $3.6 million in payments of certain debt obligations and $1.9 million in repurchase of common stock warrants in the period.

Debt Instruments

Long-term debt consists of the following at September 30, 2014 and December 31, 2013 (in thousands):

 
September 30,
2014
 
December 31,
2013
Bank loans
$
3,456

 
$
10,801


The following is a schedule, by year, of future minimum principal payments required under notes payable and bank debt as of September 30, 2014 (in thousands):

Years Ending December 31,
Amount
2014 (remaining six months)
$
2,511

2015
124

2016
112

2017
101

2018
101

Thereafter
507

Total
$
3,456


Bank loan

AIA had an unsecured four-year loan of $15.9 million from UniCredit Bank AG, Munich, Germany. The loan was subject to half-yearly repayments of $2.2 million, no prepayment penalties and variable interest based on the six-month Euribor plus 2.35%. In order to avoid any exposure to the risk from rising interest rates associated with variable interest obligations, a portion of the variable interest payments was converted into fixed interest obligations by means of interest rate swaps over the term of the loan.

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Under the terms of the loan agreement, mandatory special loan repayments were required under certain circumstances. The provision regarding mandatory special loan repayments resulted in a mandatory special loan repayment of $1.4 million on June 30, 2013. As a result, the repayment period and thus the loan would end six months earlier than originally envisioned. These special loan repayments result in a reclassification of the amount of the special loan payments to the current portion of the loan as of December 31, 2013.

As of September 30, 2014, there were no outstanding principal or accrued interest balance on the note.

Subordinated bank loan

AIA held a note payable of $2.6 million for mezzanine financing obtained through a financing program of Capital Efficiency Group AG, Zug, Switzerland. This financing program matured and was repaid in March 2014. The interest rate was 8.8% per year. A payment of 1% had to be made each year and interest of 7.8% on the principal had to be paid every quarter. As of September 30, 2014, there was no outstanding principal or accrued interest balance on the note.

Bank Debt

With the acquisition of PMG in July 2013, the Company assumed approximately $3.3 million of debt in the form a $1.5 million term loan (the “Term Loan”) and a $1.8 million line of credit (the “LOC”) with a bank. The Term Loan and LOC mature in October 2017 and 2014, respectively, and bear interest at a rate equal to the bank’s reference rate, which was approximately 3.25% during the quarter ended September 30, 2014, or the bank’s current prime rate. The LOC matures in December 2014, and bears interest. Interest is paid on a monthly basis. There was no accrued interest on the Term Loan and LOC. As of September 30, 2014, the principal balance outstanding on the Term Loan and the LOC were $1.1 million and $1.3 million, respectively.

With the acquisition of IFES on October 18, 2013, the Company assumed approximately $1.3 million of debt in the form of two facility letters for a commercial mortgage loan with a bank for $0.2 million and $1.1 million. The mortgage letters mature in October 2014 and 2032, respectively, and bear interest at a rate equal to the bank’s base rate, which was approximately 3.25% during the three months ended March 31, 2014 and year ended December 31, 2013. Interest is paid on a monthly basis. Accrued interest on the credit facilities was $0.0 million at September 30, 2014. As of September 30, 2014, there was $1.0 million in borrowings outstanding under facility letters.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices, equity prices and other market driven rates or prices.

Market Risk

Row 44 and PMG

Row 44 and PMG are generally not exposed to any material risk associated with exchange rates or equity prices. Row 44 and PMG do not hold or issue financial instruments for trading purposes. Row 44 has indirect exposure to changes in commodity prices (i.e., the price of jet fuel) because a key aspect of the decision by potential customers of Row 44 to purchase the connectivity products offered by Row 44 is the effect such products may have on an aircraft’s fuel burn.


AIA and IFES

AIA and IFES have exposure primarily to two types of market risk: changes in foreign currency exchange rates and interest rates. AIA and IFES do not hold or issue financial instruments for trading purposes.
 
The following sections provide information on AIA and IFES's exposure to foreign currency exchange rate risks and interest rate risks. AIA and IFES make use of sensitivity analysis that are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.
 

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Foreign Currency Exchange Rates
 
AIA, and to a lesser extent IFES, are highly exposed to fluctuations in foreign currency exchange rates. Within AIA and IFES, currency risks arise from the fact that both sales to customers and most of their film license costs or film rights purchases are largely effected in U.S. dollars while a significant portion of AIA's fixed and overhead costs are incurred in Euros, British pounds and Canadian dollars. AIA may engage in hedging transactions to counteract direct currency risks. However, there can be no assurance that all currency risks have been or will be hedged in full. Severe currency fluctuations could also cause the hedging transactions to fail if agreed thresholds are not met or exceeded. Therefore, substantial negative foreign currency effects may occur due to unforeseen exchange rate fluctuations and/or inaccurate assessments of market developments. IFES has historically not engaged in hedging transactions. At this time, AIA rarely resorts to hedges because of highly volatile foreign exchange rates, and the general trend toward a strengthening of the U.S. dollar relative to the Euro. AIA monitors all foreign exchange rates relevant to it in order to be able to initiate appropriate hedging activities if the current market situation were to change.
 
There are also intercompany receivables and liabilities such as loans that can generate significant foreign currency effects. Changes in the exchange rates of a number of foreign currencies against the Euro, especially the U.S. dollar and the Canadian dollar, could lead to the recognition of unrealized foreign exchange gains and losses in some cases, particularly as a result of intercompany transactions, including short term borrowings. AIA and IFES management have sought to minimize the impact of intercompany borrowings by reducing the magnitude and quantity of intercompany borrowings.
 

Concentrations of Credit Risk

Our cash and cash equivalents are maintained at a 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. AIA monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its financial instruments. AIA is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At September 30, 2014, AIA did not anticipate nonperformance by any of its counterparties. Historically, we have not experienced any losses related to these balances and believe that there is minimal risk of expected future losses. However, there can be no assurance that there will not be losses on these deposits.

As of September 30, 2014 and 2013, the following customer accounted for more than 10% of our consolidated revenue balance:

 
Nine Months Ended September 30,
 
2014
 
2013
Southwest Airlines
22
%
 
14
%

Accounts receivable balances from Southwest Airlines represented approximately 20% at September 30, 2014 and less than 10% of total accounts receivable at December 31, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness

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of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, as a result of the material weaknesses identified in our 2013 Form 10-K, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-Q, the Company’s disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting

We are in the process of implementing changes, as more fully described in our 2013 Form 10-K, to the Company’s internal control over financial reporting to remediate certain material weaknesses as described in our 2013 Form 10-K. Other than such changes, there have been no changes in our internal control over financial reporting, during the three months ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On December 28, 2012, Advanced Media Networks, L.L.C. filed suit in the United States District Court for the Central District of California against Row 44 and one of its customers which Row 44 has agreed to indemnify for allegedly infringing two of its patents and seeking injunctive relief and unspecified monetary damages.  Both of the patents are being reexamined by the U.S. Patent & Trademark Office.  Based on currently available information, Row 44 believes that it has strong defenses and intends to defend vigorously against this lawsuit, but the outcome of this matter is inherently uncertain and could have a materially adverse effect on Row 44's business, financial condition and results of operations.  The potential range of loss related to this matter cannot be determined.

On October 22, 2013, Arista Music, Sony Music Entertainment and certain parties believed to be related to the foregoing filed suit in the United States Direct Court for the Southern District of New York against Inflight Productions Ltd. (“IFP”), one of its customers and a third party unrelated to IFP for copyright infringement and related claims and unspecified money damages. IFP is a direct subsidiary of AIA and an indirect subsidiary of the Company.  The matter settled in September 2014 and the case was dismissed with prejudice. The settlement included a monetary payment to the plaintiffs.  In connection with this settlement, the plaintiffs also released IFP, certain IFP customers and certain other parties from similar copyright infringement and related claims.

On May 6, 2014, UMG Recordings, Inc., Capital Records, Universal Music Corp and entities affiliated with the foregoing (collectively, “UMG”) filed suit in the United States District Court for the Central District of California against the Company and IFP for copyright infringement and related claims and unspecified money damages.  The Company is in the process of evaluating the merits of this matter, and intends to defend against it vigorously; however the outcome is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations. As of September 30, 2014, the potential range of loss related to this matter cannot be determined.
 
On August 14, 2014, SwiftAir, LLC filed suit against Row 44, Inc. and one of its customers for breach of contract, quantum meruit, unjust enrichment and similar claims and unspecified money damages in the Superior Court of California for the Country of Los Angeles.   The Company is in the process of evaluating the merits of this matter, and intends to defend against it vigorously; however the outcome is inherently uncertain and could have a material adverse effect on the Company’s business, financial condition and results of operations. As of September 30, 2014, the potential range of loss related to this matter cannot be determined.
 
While the resolution of the above matters cannot be predicted with certainty, the Company does not believe, based on current knowledge, that the outcome of the currently pending claims or legal proceedings in which the Company is currently involved will have a material adverse effect on the Company's financial statements.

ITEM 1A. RISK FACTORS

Uncertain global economic conditions could materially adversely affect our business and results of operations.
 
     Our operations and performance are sensitive to fluctuations in general economic conditions, both in the U.S. and globally. The United States and the European Union recently expanded their sanctions against Russia which, among other things, increased

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the restrictions on sales of certain products, including aviation products and planes, to Russia and to specified restricted parties in or affiliated with Russia. Such sanctions may alone or in combination affect the business that our two customers in Russia conduct with us and, in such case, may have a material adverse effect on our revenues, , the realizability of our accounts receivables with such parties, and the results of our operations. In addition, geopolitical instability in the Middle East as well as the continued volatility of the currency markets in the emerging economies could negatively impact the broader industrial economy, which could affect our revenues and results of operations.

We are subject to civil litigation involving allegations of copyright infringement, which could result in our having to pay damages or injunctive relief. We may also be subject to additional similar litigation in the future.

As discussed under “Item 1. Legal Proceedings,” we have been and currently are subject to civil litigation by parties claiming that certain of our audio and music programming offerings infringe the copyright and other intellectual property rights of such parties. In addition to these matters, we may in the future be subject to additional similar civil litigation involving copyright and other intellectual property right infringement. We have incurred costs to defend and settle such lawsuits, and may incur additional costs in the future, and such costs may be material. We may also be subject to injunctive relief and our having to pay damages.

Southwest Airlines may not maintain a sponsor for its TV Flies Free offering, which may have a material negative effect on our Connectivity service revenue.
 
Our client Southwest Airlines has elected to make available to its passengers for free a television and on-demand video service provided by us under the name "TV Flies Free." To date, we have operated this television service pursuant to an arrangement with Southwest whereby the service has been offered for free to passengers based on a sponsorship by Dish Network Corporation and in exchange for us receiving an agreed fee. Our agreement with Southwest for this sponsored service expires at the end of 2014. Both we and Southwest are actively pursuing sponsorship arrangements for the period beyond 2014. If we cannot come to an agreement with Southwest on a sponsor-based free television service model, Southwest has the option to offer (a) a free-to-the-passenger television service for the remainder of the term of our Agreement with Southwest  based on a per on-board passenger fee to be paid to us or (b) a paid television model where we receive a portion of the fees, which are subject to certain minimum requirements,  paid by Southwest passenger users. Under the passenger-paid model, our revenue from the provision of television services to Southwest would fluctuate based on the number of passengers who pay for the service
 
Other than as set forth above, there have been no material changes to the risk factors previously disclosed in response to Part I, Item 1A, of our 2013 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.
    
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

See Exhibit Index attached hereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 7th day of November 2014.

GLOBAL EAGLE ENTERTAINMENT INC.
By:
/s/ Michael Zemetra
 
Michael Zemetra
 
Chief Financial Officer and Treasurer
 
(principal financial officer, principal accounting officer and duly authorized officer)



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EXHIBIT INDEX

Exhibit
 
Description
10.1

 
Tender Support Agreement, dated as of August 13, 2014, by and between Global Eagle Entertainment Inc. and Harry E. Sloan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-35176), filed with the SEC on August 19, 2014).
 
 
 
10.2

 
Tender Support Agreement, dated as of August 13, 2014, by and between Global Eagle Entertainment Inc. and Jeff Sagansky (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-35176), filed with the SEC on August 19, 2014).
 
 
 
10.3
 
Executive Employment Agreement, made as of November 3, 2014, by and between Global Eagle Entertainment Inc. and Michael Zemetra (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-35176), filed with the SEC on November 6, 2014).
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 
 
32.1
 
Section 1350 Certification of Chief Executive Officer
 
 
 
32.2
 
Section 1350 Certification of Chief Financial Officer
 
 
 
101.1
 
The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013; (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013; (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013; (iv) Unaudited Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2014; (v) Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 



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