Annual report pursuant to Section 13 and 15(d)

Business Combinations

v3.8.0.1
Business Combinations
 12 Months Ended
Dec. 31, 2016
Business Combinations [Abstract]  
Business Combinations
Business Combinations

2016 Transaction

Emerging Markets Communications

On July 27, 2016, the Company completed the EMC Acquisition. The acquisition date fair value consideration transferred to the member unit holders of EMC for all of their membership interests totaled approximately $166.3 million. This acquisition was intended to provide growth opportunities by expanding into a complementary maritime market in order to realize synergies by leveraging existing infrastructure and suppliers to achieve efficiencies and cost savings resulting from removing overlap in existing network infrastructure, reduced bandwidth costs, lower development expenses and integrating internal operations. The acquisition was also intended to achieve cross-selling opportunities for the Company’s content, digital media and operations solutions products into the maritime market.

The consideration for the EMC Acquisition consisted of the following (in thousands, except share amounts in the footnotes to the table):

 
Amount
Cash consideration paid to seller (1)
$
100,454

Issuance of 5,466,886 shares of Company common stock (2)
40,607

Deferred consideration (3)
25,000

Settlement of pre-existing relationship
228

Total
$
166,289



(1)
In June 2017, the Company settled the working capital adjustments with the seller resulting in the release of $1.3 million from the adjustment escrow to the Company.

(2)
The fair value of the Company’s common stock issued as consideration was measured based on the stock price upon closing of the transaction on July 27, 2016, less a 7.5% discount for restriction on transferability.

(3)
On July 27, 2017, the Company elected to pay such amount in 5,080,049 newly issued shares of its common stock to the former unit holder of EMC.

The following is a summary of the purchase price allocation to the estimated fair values of the identifiable assets acquired and the liabilities assumed at the EMC Acquisition date (dollars in thousands):

 
Weighted Average Useful Life (Years)(4)
 
Preliminary
 
Adjustments
 
Final
Cash and cash equivalents
 
 
$
9,032

 
$
(824
)
 
$
8,208

Restricted cash (1)
 
 
17,802

 
(1,545
)
 
16,257

Other current assets (1)
 
 
58,220

 
2,405

 
60,625

Property, plant and equipment (2)
 
 
94,321

 
(12,101
)
 
82,220

Equity method investments (2)(3)
 
 
102,719

 
49,981

 
152,700

Intangible assets (2):
 
 
 
 
 
 
 
Completed technology
3.4
 
21,800

 
(3,300
)
 
18,500

Customer relationships
8.0
 
19,100

 
28,600

 
47,700

Backlog
3.0
 
—

 
18,300

 
18,300

Favorable vendor agreements
9.0
 
91,800

 
(91,800
)
 
—

Trademarks
5.0
 
2,200

 
(1,200
)
 
1,000

Other non-current assets (1)
 
 
1,074

 
1,247

 
2,321

Accounts payable and accrued liabilities (1)
 
 
(47,067
)
 
(21,797
)
 
(68,864
)
Debt, including current (1)
 
 
(370,845
)
 
(1,145
)
 
(371,990
)
Deferred tax liabilities, net (1)
 
 
(74,082
)
 
2,128

 
(71,954
)
Unfavorable vendor contracts, including current (2)
 
 
—

 
(13,500
)
 
(13,500
)
Deferred revenue, including current (1)(2)
 
 
(8,930
)
 
4,328

 
(4,602
)
Other non-current liabilities (1)(2)
 
 
(22,170
)
 
12,691

 
(9,479
)
Fair value of net assets acquired
 
 
(105,026
)
 
(27,532
)
 
(132,558
)
Consideration transferred
 
 
166,493

 
(204
)
 
166,289

Goodwill
 
 
$
271,519

 
$
27,328

 
$
298,847


(1)
The amounts represent reclassifications to conform with the year-end presentation.

(2)
The amounts represent measurement period adjustments that were recorded as a result of further validating the fair value of acquired assets and assumed liabilities based on obtaining new facts and circumstances that existed as of the acquisition date. 

(3)
Represents 49% investments in WMS and Santander.

(4)
The weighted average useful life in total is 5.9 years.

Goodwill arising from the EMC Acquisition was allocated primarily to Maritime & Land Connectivity reporting unit, which was established as a result of the EMC Acquisition, and the remaining was allocated to the existing Aviation Connectivity and Media & Content reporting units based on the assessment of expected synergies these reporting units would benefit as a result of the EMC Acquisition. See Note 5. Goodwill for the amount allocated to each reporting unit. The allocation of fair value resulted in tax deductible goodwill of $74.9 million.

For the years ended December 31, 2016 and 2015, $15.4 million and $1.8 million, respectively, of transaction costs related to the EMC Acquisition, primarily consisting of legal and advisory fees, are classified in General and administrative in the Consolidated Statements of Operations.

The following unaudited pro forma summary presents consolidated information of EMC for the years ended December 31, 2016 and 2015 assuming the EMC Acquisition had occurred on January 1, 2015 (in thousands). The most significant pro forma adjustments were to reflect the (net of tax) impact of: (i) the amortization expenses related to intangibles; and (ii) the interest expense on the existing debt taking into account the fair value adjustment to the debt as of the EMC Acquisition Date. The unaudited pro forma financial information is for informational purposes only and may not necessarily reflect the actual results of operations had the EMC Acquisition been consummated on January 1, 2015. These pro forma amounts are not designed to represent the future expected financial results of the Company.

 
Year Ended December 31,
 
2016
 
2015
Revenue
$
634,649

 
$
631,552

Net loss
(168,497
)
 
(1,310
)


The revenue and net loss of EMC included in the Company’s Consolidated Statements of Operations were $73.2 million and $94.8 million, respectively, from the acquisition date through December 31, 2016.

2015 Transactions

During the year ended December 31, 2015, the Company completed four acquisitions discussed further below. The fair values of these acquisitions, as set forth in the table below, were considered preliminary and subject to adjustment as of December 31, 2015. During the three months ended March 31, 2016, the Company revised its analysis of the fair value of the RMG asset acquisition. The revised analysis related to a pre-acquisition contingency that was subsequently identified resulting in the Company’s ability to recover amounts held in escrow by the seller of the RMG Assets. The fair value of the assets and liabilities of these acquisitions were finalized during the six months ended June 30, 2016.

The following table summarizes the fair value of the assets acquired and liabilities assumed in the acquisitions (dollars in thousands):

 
Weighted Average Useful Life (Years)(1)
 
(Final)
December 31, 2016
Goodwill
 
 
$
40,281

Customer relationships
7.6
 
14,000

Developed technology
5.7
 
21,900

Trade name
5.0
 
200

Accounts receivable
 
 
6,450

Property and equipment
 
 
1,783

Deferred tax liability
 
 
(11,047
)
Accrued expenses
 
 
(4,379
)
Other liabilities assumed, net of assets acquired
 
 
(857
)
Total consideration transferred
 
 
$
68,331



(1)
The weighted average useful life in total is 6.4 years.

Pro forma results of operations for these four acquisitions have not been presented because the effects of these business combinations, individually and in aggregate, are not material to our Consolidated Statements of Operations.

WOI Stock Purchase

On July 1, 2015, the Company acquired WOI for approximately $38.3 million in cash and $3.1 million in contingent consideration. WOI produces and licenses games and applications for global in-flight entertainment, provides technical services to third parties for global in-flight entertainment user interfaces. The acquisition was intended to augment and diversify the Company’s Media & Content operating segment. The goodwill recorded for the WOI acquisition was $19.6 million. Key factors that contributed to the recognition of WOI goodwill were trained workforce, expansion of international operations, the opportunity to consolidate and complement existing content operations, and the opportunity to generate future synergies within the existing Media & Content business. As a result of the stock purchase of WOI, the goodwill is not deductible for tax purposes.

Significant other assets and net liabilities assumed and included in the table above were approximately $4.1 million in accounts receivable, $9.1 million of deferred tax liabilities and $1.8 million of fixed assets that included two long-term office buildings lease arrangements. The net tax liability is made up of short-term deferred tax assets of $0.2 million and long-term deferred tax liabilities of $9.3 million, largely driven by the tax impact of the fair value of the intangible assets. The Company incurred approximately $0.5 million in transaction costs associated with the WOI purchase. The sellers of WOI have the opportunity to receive an additional $5.0 million in cash if, among other things, WOI achieves certain revenue and earnings targets within the first and second annual anniversaries of the closing date (the “WOI earn-out”). The fair value of the WOI earn-out as of the acquisition date was approximately $3.1 million. During the year ended December 31, 2016, the Company paid additional consideration of $2.5 million upon the achievement of the first anniversary revenue and earnings targets. As of December 31, 2016, the fair value of the WOI earn-out of $0.9 million was included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets.

The amount of revenue for WOI included in the Consolidated Statement of Operations for the year ended December 31, 2015 was $5.9 million.

RMG Asset Acquisition

On July 1, 2015, the Company acquired certain assets and assumed certain liabilities of RMG Networks Holding Corporation (“RMG”) for approximately $1.4 million in cash. These assets were integrated into the Company’s advertising and sponsorship team, which provides digital media advertising and related services through executive clubs, in-flight entertainment systems, in-flight Wi-Fi portals and in private terminals. The acquisition is intended to enhance the Company’s digital media offerings within its Media & Content operating segment. The goodwill recorded for the acquisition of assets from RMG, after the adjustment recorded during the measurement period, was $1.4 million. Key factors that contributed to the recognition of goodwill were the opportunity to expand the Company’s digital media offerings to the travel industry, the opportunity to consolidate and complement existing Media & Content operations, and the opportunity to generate future synergies with our existing business. As a result of the asset purchase, the goodwill is deductible for tax purposes.

Significant other assets and net liabilities assumed and included in the table above were approximately $2.2 million in accounts receivable, $3.1 million of revenue share liabilities and a $1.3 million provision for losses on a specific loss contract expiring in December 2015. The Company incurred approximately $0.2 million in transaction costs associated with the acquisition of assets from RMG. .

The amount of revenue for RMG included in the Consolidated Statement of Operations for the year ended December 31, 2015 was $4.6 million.

navAero, Inc. Stock Purchase

On August 4, 2015, the Company acquired NavAero Holding AB (“navAero”) for approximately $4.8 million in cash and $0.3 million in contingent consideration. navAero is engaged in developing and commercializing technologies to enable and deploy electronic flight bag solutions for the commercial aviation market, which allows airlines to improve their in-flight operations.  The acquisition is intended to enhance the Company’s Connectivity operating segment. The goodwill recorded for the navAero acquisition was $3.2 million. Key factors that contributed to the recognition of navAero goodwill were trained workforce, expansion of international operations, the opportunity to expand into new product and technology offerings within the airline industry, and to a lesser extent the opportunity to generate future synergies with our existing business. As a result of the stock purchase of navAero, the goodwill is not deductible for tax purposes.

Significant other assets and net liabilities assumed included a net tax liability of $0.5 million, which is made up of short-term deferred tax assets of $0.1 million and long-term deferred tax liabilities of $0.6 million. The Company incurred approximately $0.3 million in transaction costs associated with the navAero purchase. The sellers of navAero had the opportunity to receive an additional $1.0 million in cash if navAero achieves certain revenue targets through December 31, 2016 (the “navAero earn-out”). There were no additional payments made to the sellers through December 31, 2016. As of December 31, 2016, the fair value of contingent consideration of $0.2 million was included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets.

The amount of revenue for navAero included in the Consolidated Statement of Operations for the year ended December 31, 2015 was $2.4 million.

masFlight, Inc. Stock Purchase

On August 4, 2015, the Company acquired Marks Systems, Inc. doing business as masFlight for approximately $10.3 million in cash and $9.3 million in contingent consideration. The acquisition was completed as a merger resulting in the acquisition subsidiary, masFlight Inc. (“masFlight”) as the surviving corporation. masFlight pioneered the adoption of cloud-based technologies to collect, compile, link, validate and host a variety of information and offer a single solution enabling airlines to analyze predictive data to run their operations more effectively and efficiently. The acquisition is intended to enhance the Company’s Connectivity operating segment. The goodwill recorded for the masFlight acquisition was $16.1 million. Key factors that contributed to the recognition of masFlight goodwill were trained workforce, expansion into new operations data solutions offerings, the opportunity to consolidate and complement current connectivity operations within the airline industry as well as expand into new industries, and the opportunity to generate future savings through synergies with our existing business. As a result of the acquisition, the goodwill is not deductible for tax purposes.

Significant other assets and net liabilities assumed included a net tax liability of $1.4 million, which is made up of net short-term deferred tax assets of $0.3 million and long-term deferred tax liabilities of $1.7 million. The Company incurred approximately $0.3 million in transaction costs associated with the masFlight purchase. The sellers of masFlight have the opportunity to receive up to an additional $20.0 million in cash if, among other things, masFlight achieves certain operational, revenue and earnings targets at various dates through December 31, 2019. As a portion of the contingent consideration is subject to future employment of certain key employee of masFlight, certain contingent consideration will be recorded as compensation expense after the acquisition date. The fair value of masFlight contingent consideration as of the acquisition date was $9.3 million. During the year ended December 31, 2016, consideration totaling $1.7 million was paid to the sellers upon the achievement of the targets. As of December 31, 2016, the fair value of the contingent consideration of $0.9 million was included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets.

The amount of revenue for masFlight included in the Consolidated Statement of Operations for the year ended December 31, 2015 was less than $1.0 million.

2014 Transactions

Purple Inflight Entertainment Asset Purchase

On August 2, 2014, the Company purchased substantially all of the assets of Purple Inflight Entertainment (“Purple”) to further expand its ability to deliver 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 made an additional payment to the stockholders of Purple of $0.2 million in 2014 that was contingent upon the renewal of the terms of a certain supplier’s contract. The estimated fair value of the contingent consideration obligation amounted to $0.1 million as of the acquisition date and was determined using a probability factor of 70% for the renewal of the supplier’s contract. There are no further contingent consideration obligation in connection with this acquisition.

The Company allocated the consideration to acquire Purple to finite-lived intangible assets (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 amount of revenue for Purple included in the Consolidated Statements of Operations for the years ended December 31, 2015 and 2014 was not material.