Annual report pursuant to Section 13 and 15(d)

Common Stock, Stock-Based Awards and Warrants

v3.19.1
Common Stock, Stock-Based Awards and Warrants
 12 Months Ended
Dec. 31, 2018
Equity [Abstract]  
Common Stock, Stock-Based Awards and Warrants
Common Stock, Stock-Based Awards and Warrants

Common Stock

Issuance of Common Stock

The Company issued approximately 5.5 million shares of its common stock in connection with the EMC Acquisition on July 27, 2016. On the first anniversary of the EMC Acquisition, on July 27, 2017, the Company issued to the former member unit holders approximately 5.0 million additional shares of the Company’s common stock. Pursuant to the EMC purchase agreement, 50% of the newly issued shares were valued at $8.40 per share, and the other 50% were valued at the volume-weighted average price of a share of Company common stock measured two days prior to the first anniversary date.

Furthermore, in August 2016, the Company issued approximately 1.8 million shares of its common stock as partial consideration for the Sound Recording Settlements. The Company is obligated to issue an additional 500,000 shares of its common stock to UMG in connection with the litigation when and if the share price of the Company’s common stock exceeds $10.00 per share and an additional 400,000 shares of its common stock when and if the closing price exceeds $12.00 per share (together, the “Supplemental Shares”) at any time in the future if the share price reaches these price thresholds. In lieu of issuing the Supplemental Shares of the Company’s common stock upon exceeding the respective share price thresholds, the Company may pay the equivalent in cash at its sole discretion. If the Company were to experience a liquidation event, as defined in the settlement documentation, and if the equivalent liquidation price per share at that time exceeds one or both of the share price thresholds, the Company is obligated to pay the equivalent liquidation price per share in cash in lieu of issuing the Supplemental Shares. See Note 10. Commitments and Contingencies for a further description of the Sound Recording Settlements.
2013 Equity Plan
Under the Company’s 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of the Company’s Board of Directors, was able to grant up to 11,000,000 shares (through stock options, restricted stock, restricted stock units (“RSUs”)) (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants. The Company ceased using the 2013 Equity Plan for new equity issuances in December 2017, upon receiving stockholder approval of the Company’s new 2017 Omnibus Long-Term Incentive Plan, although the Company continues to have outstanding previously granted equity awards issued under the 2013 Equity Plan. These previously granted awards represent the right to receive 7,070,298 shares of the Company’s common stock (as of January 18, 2018) if and when they later vest and/or are exercised. See “2017 Equity Plan” immediately below.
2017 Equity Plan
On December 21, 2017, the Company’s stockholders approved a new 2017 Omnibus Long-Term Incentive Plan (the “2017 Omnibus Plan”). The Company had 2,097,846 shares remaining shares available for issuance under the 2013 Equity Plan (as of that date) and those shares rolled into the 2017 Omnibus Plan became available for grant thereunder. The 2017 Omnibus Plan separately made available 6,500,000 shares of the Company’s common stock for new issuance thereunder, in addition to those rolled over from the 2013 Equity Plan. The Administrator of the 2017 Omnibus Plan, which is the Compensation Committee of the Company’s Board of Directors, may grant share awards (through stock options, restricted stock, RSUs (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants.
On June 25, 2018, the Company’s stockholders approved an amendment and restatement of the 2017 Equity Plan that increased by 2,000,000 the number of shares of the Company’s common stock authorized for issuance thereunder.
Stock Repurchase Program

In March 2016, the Company’s Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $50.0 million of its common stock. Under the stock repurchase program, the Company may repurchase shares from time to time using a variety of methods, which may include open-market purchases and privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. The Company measures all potential buybacks against other potential uses of capital that may arise from time to time. The repurchase program does not obligate the Company to repurchase any specific number of shares, and may be suspended or discontinued at any time. The Company expects to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. The Company did not repurchase any shares of its common stock during the years ended December 31, 2018 and 2017. As of December 31, 2018, the remaining authorization under the stock repurchase plan was $44.8 million.
Stock-Based Awards

EMC Employment Inducement Awards

On July 27, 2016, the Company granted its then President and Chief Strategy Officer, Abel Avellan, the following stock-based awards: (i) non-qualified stock options to purchase 450,000 shares of the Company’s common stock (the “Option Award”), (ii) an award of 275,000 restricted stock units (the “Stock Award”), and (iii) 175,000 shares of fully-vested restricted stock. Such compensation expense is recorded in general and administrative in the Consolidated Statement of Operations for the year ended December 31, 2017. Mr. Avellan terminated employment with the Company in April 2017. Under the terms of his consulting agreement, Mr. Avellan received continued vesting on his outstanding equity awards through the date of cessation of those consulting services. Mr. Avellan ceased providing consulting services to the Company in November 2017.

The exercise price per share of the Option Award was equal to the closing price of the Company’s stock on the EMC Acquisition Date. Each of the Option Award and the Stock Award are subject to the terms and conditions applicable to such awards granted under the Company’s 2016 Inducement and Retention Stock Plan for EMC Employees (effective as of the date thereof as it may be amended from time to time, the “Inducement Equity Plan”). Subject to continued vesting due to his consulting relationship with the Company, one-third of the Option Awards vested on July 27, 2017, with the remainder vesting monthly on a pro rata basis thereafter over the next two years until fully vested. Subject to continued vesting due to his consulting relationship with the Company through each vesting date, the restricted stock units will vest in three equal annual installments, with the first installment vested on July 27, 2017 and the remaining installments vesting annually thereafter. Both the Option Award and the Stock Award are subject to automatic vesting provisions in the event of a change in control as provided for under the terms of the employment agreement.

In addition, in connection with the EMC Acquisition, the Company granted certain other EMC employees, in the aggregate, nonqualified stock options to purchase 72,600 shares of the Company’s common stock and 73,750 restricted stock units as employment inducement awards. The exercise price per share of the nonqualified stock options was equal to the closing price of the Company’s stock on the EMC Acquisition Date. The options are subject to continuous employment and vested with respect to one-fourth of the underlying shares on July 27, 2017, with the remainder vesting monthly on a pro rata basis thereafter over the next three years until fully vested. Subject to continuous employment through each vesting date, the restricted stock units will vest in four equal installments, with the first installment vested on July 27, 2017 and the remaining installments vesting annually thereafter.

Stock Options

The exercise price of stock option awards granted is generally equal to the per share closing price of the common stock on the date the options were granted. Employee stock option grants generally have five- and seven- year terms (depending on when they were issued) and employee stock options generally vest over a four-year period, with 1/4th on the anniversary of the vesting commencement date and 1/36th monthly thereafter, over the remaining three-year period.

Stock options granted to members of the Company’s Board of Directors have five- and seven- year terms (depending on when they were issued) and vest 25% per quarter during the calendar year. In 2018, the Board’s Compensation Committee determined that it would only issue stock options (vesting in full on the earlier of the next annual meeting of stockholders and the 12-month anniversary of the grant date) as part of its director compensation program. Certain members of the Board who commenced service during 2018 received fully vested stock options following commencement of service in order to compensate them for a partial year of service for which they were not previously compensated. The stock options granted to members of the Board during 2018 have a seven-year term. Certain stock option awards, including the stock options granted to members of the Board in 2018, have accelerated vesting provisions in the event of a change in control or termination without cause within a certain period following a change in control.

The fair values of stock options issued were determined on the grant date using the Black-Scholes option pricing model and the following level 3 assumptions for the years ended December 31, 2018, 2017 and 2016, respectively:
 
2018
 
2017
 
2016
Common stock price on grant date
$
2.69

 
$
2.74

 
$
8.34

Expected life (in years)
4.75

 
4.75

 
3.91

Risk-free interest rate
2.76
%
 
2.26
%
 
1.15
%
Expected stock volatility
64
%
 
52
%
 
44
%
Expected dividend yield
0
%
 
0
%
 
0
%
Fair value of stock options granted
$
1.47

 
$
0.93

 
$
2.93



There was no significant intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016.

Stock option activity for the year ended December 31, 2018 is as follows:
 
Shares
(in thousands)
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
(in thousands)
Balance unexercised at January 1, 2018
7,167

 
$
8.69

 
2.31
 
$
—

Granted
1,205

 
$
2.69

 

 


Exercised
—

 
$
—

 

 

Forfeited
(3,100
)
 
$
9.68

 

 

Balance unexercised at December 31, 2018
5,272

 
$
6.73

 
3.34
 
$
—

Exercisable at December 31, 2018
3,040

 
$
8.71

 
2.26
 
$
—

Vested and expected to vest after December 31, 2018
5,272

 
$
6.73

 
3.34
 
$
—



The following is a summary of the Company’s stock options outstanding at December 31, 2018:
Range of Exercise Price
Number Outstanding
(in thousands)
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
 
Number Exercisable
(in thousands)
 
Weighted Average Exercise Price
$13.54 - $13.54
100

 
1.42
 
$
13.54

 
88

 
$
13.54

$12.90 - $13.26
528

 
0.98
 
$
13.06

 
519

 
$
13.06

$10.57 - $12.51
744

 
0.83
 
$
11.28

 
702

 
$
11.22

$6.34 - $9.25
634

 
2.68
 
$
8.98

 
461

 
$
8.99

$6.22 - $6.22
1,000

 
2.67
 
$
6.22

 
747

 
$
6.22

$6.18 - $6.18
104

 
2.49
 
$
6.18

 
65

 
$
6.18

$3.21 - $3.21
926

 
5.27
 
$
3.21

 
434

 
$
3.21

$2.92 - $2.92
190

 
5.41
 
$
2.92

 
5

 
$
2.92

$2.65 - $2.65
960

 
5.47
 
$
2.65

 
9

 
$
2.65

$2.35 - $2.50
86

 
6.13
 
$
2.47

 
10

 
$
2.50

 
5,272

 
3.34
 
$
6.73

 
3,040

 
$
8.71



Restricted Stock Units (“RSU”)

Under the 2013 Equity Plan and 2017 Omnibus Plan, the Company’s time vesting RSU awards to employees generally vest annually on each anniversary of the grant date and generally over a four-year term. The time-vesting RSUs granted to non-employee directors in 2016 and 2015 cliff-vest on the 12-month anniversary from the grant date. The grant date fair value of the time-vesting RSUs generally equals the closing price of the Company’s common stock on the grant date.

Under the 2017 Omnibus Plan, beginning on June 25, 2018, the Compensation Committee of the Company’s Board of Directors (the “Committee”) granted new RSU awards (“KBL RSUs”) to the Company’s key business leaders with time-based vesting conditions that differ from the time-based vesting conditions in previous RSU awards. These KBL RSU awards (along with the KBL PSU and $4 and $8 Goal Stock Options discussed below) were sized as multi-year grants and are intended to replace the Company’s traditional annual refresher equity program. Except in the case of the Company’s Executive Chairman, these KBL RSUs generally vest as follows: (i) 50% of the RSUs will vest on March 27, 2020, (ii) 25% of the RSUs will vest on March 27, 2021 and (iii) 25% of the RSUs will vest on March 27, 2022, subject to the recipient’s continuous service through each applicable vesting date.
The KBL RSUs granted to the Company’s Executive Chairman generally vest with respect to 25% of the RSUs on each of March 27, 2019, March 27, 2020, March 27, 2021 and March 27, 2022, subject to his continuous service as either an employee of the Company or a member of the Company’s Board through each applicable vesting date.
During the years ended December 31, 2018 and 2017, the Committee granted 0 RSUs and 268,000 RSUs, respectively, to the members of the Company’s Board of Directors that fully vest on the 12-month anniversary of the grant date.
During the years ended December 31, 2018 and 2017, the Committee also granted 3,391,665 RSUs and 3,643,000 RSUs, respectively, to certain employees. The 2018 grants vest as detailed above for the 2017 Omnibus Plan and the 2017 grants vest 1/4th on the grant anniversary date over a four-year term.
RSU activity during the year ended December 31, 2018 was as follows:
 
Shares (in thousands)
 
Weighted Average Grant Date Fair Value
 
Aggregate Intrinsic Value (in thousands)
Balance nonvested at January 1, 2018
4,697

 
$
3.53

 
$
10,757

Granted
3,392

 
2.65
 
 
Vested
(1,325
)
 
3.61
 
 
Forfeited
(852
)
 
3.42
 
 
Balance nonvested at December 31, 2018
5,913

 
3.03
 
13,185

Vested and expected to vest at December 31, 2018
5,891

 
$
3.02

 
$
13,138



The total fair value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was $2.2 million, $1.2 million and $2.1 million, respectively.

Performance-Based Restricted Stock Units (“PSU”)

Under the 2013 Equity Plan, in October 2016, the Committee issued performance-based PSU awards, which give the recipient the right to receive Company common stock based on the Company’s total stockholder return relative to the Russell 2000 index during the three-year period beginning from date of grant and ending on the third anniversary of the grant date.

Under the 2017 Omnibus Plan, beginning on June 25, 2018, the Committee granted new PSU awards (“KBL PSUs”) to key business leaders with time- and performance-based vesting conditions that differ from those conditions applicable to previous PSU awards. Except in the case of our Executive Chairman, these KBL PSUs generally vest as follows: (i) 50% of the PSUs will vest on March 27, 2020, (ii) 25% of the PSUs will vest on March 27, 2021 and (iii) 25% of the PSUs will vest on March 27, 2022, subject to the recipient’s continuous service through each vesting date, and provided that the Company’s volume-weighted average price per share of common stock (“VWAP”) equals or exceeds $4.00 for 45 consecutive trading days at any time on or prior to June 25, 2023.

The KBL PSUs granted to our Executive Chairman generally vest with respect to 25% of the PSUs on each of March 27, 2019, March 27, 2020, March 27, 2021 and March 27, 2022, subject to his continuous service as either an employee of the Company or a member of the Company’s Board through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $4.00 for 45 consecutive trading days at any time on or prior to June 25, 2023.

The compensation expense recognized for the awards is based on the grant date fair value of a unit that is determined using Monte-Carlo simulation multiplied by the number of units granted. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of units greater or less than the number of units granted. In general, participants vest in their PSU awards at the end of the performance period with continuous employment or service during the period.

During the year ended December 31, 2018, the Company granted 1,695,835 PSUs with a weighted-average grant date fair value of $2.01 per unit and using a risk-free rate of 2.75%. As of December 31, 2018, there were 2,139,745 nonvested PSUs outstanding. During the year ended December 31, 2017, the Company granted 526,100 PSUs with a weighted-average grant date fair value of $2.81 per unit and using a risk-free rate of 1.89%. As of December 31, 2017, there were 683,320 nonvested PSUs outstanding.

Phantom Stock Options

Our stock-based awards also include cash-settled stock options referred to as “phantom options”. Our phantom options are accounted for as liability awards and are re-measured at fair value using the Monte-Carlo simulation each reporting period with compensation expense being recognized over the requisite service period. The Company has, however, reserved the right to later settle all or a portion of the phantom options in shares of its common stock as opposed to cash.
During 2018, the Company granted two types of phantom options, which the Company refers to as the “$4 Goal Stock Options” and the “$8 Goal Stock Options.”
•
$4 Goal Stock Options. The $4 Goal Stock Options have a five-year term, are subject to both time-based and performance-based vesting conditions and, except in the case of the Company’s Executive Chairman, generally vest and become exercisable as follows: (i) 50% of the Stock Options will vest on March 27, 2020, (ii) 25% of the Stock Options will vest on March 27, 2021 and (iii) 25% of the Stock Options will vest on March 27, 2022, subject to the recipient’s continuous service through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $4.00 for 45 consecutive trading days at any time on or prior June 25, 2023. The $4 Goal Stock Options granted to the Company’s Executive Chairman generally vest and become exercisable as follows: (i) 50% of the Stock Options were vested at grant on June 25, 2018, (ii) 25% of the Stock Options will vest on March 27, 2019 and (iii) 25% of the Stock Options will vest on March 27, 2020, subject to the continuous service of the Executive Chairman as either an employee of the Company or a member of the Company’s Board through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $4.00 for 45 consecutive trading days at any time on or prior to June 25, 2023.
•
$8 Goal Stock Options. The $8 Goal Stock Options have a seven-year term, are subject to both time-based and performance-based vesting conditions and, except in the case of the Company’s Executive Chairman, generally vest and become exercisable as follows: (i) 50% of the Stock Options will vest on March 27, 2020 and (ii) 50% of the Stock Options will vest on March 27, 2021, subject to the recipient’s continuous service through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $8.00 for 45 consecutive trading days at any time on or prior to June 25, 2025. The $8 Goal Stock Options granted to the Company’s Executive Chairman generally vest and become exercisable as follows: (i) 50% of the Stock Options were vested at grant on June 25, 2018, (ii) 25% of the Stock Options will vest on March 27, 2019 and (iii) 25% of the Stock Options will vest on March 27, 2020, subject to the continuous service of the Executive Chairman as either an employee of the Company or a member of the Company’s Board through each applicable vesting date, and provided that the Company’s VWAP equals or exceeds $8.00 for 45 consecutive trading days at any time on or prior to June 25, 2025.
•
Exercise Price. The exercise price for all of the Stock Options equals the Company’s Nasdaq closing price on the grant date.
During the year ended December 31, 2018, the Company granted 6,765,761 phantom options with a weighted-average grant date fair value of $1.07 per unit, of which 461,794 were canceled prior to December 31, 2018, due to employee departures. As of December 31, 2018, there were 5,974,114 nonvested phantom options outstanding.
As of December 31, 2018, the aggregate estimated fair value of our cash-settled phantom stock options was $6.7 million for which the vested portion recognized as a liability in our consolidated balance sheet was $1.6 million.
Stock-Based Compensation Expense

Stock-based compensation expense related to all employee and, where applicable, non-employee stock-based awards was as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Consolidated Statement of Operations Classification:
 
 
 
 
 
Cost of sales
$
547

 
$
300

 
$
313

Sales and marketing
498

 
423

 
629

Product development
753

 
634

 
994

General and administrative
11,019

 
6,228

 
8,811

Total
$
12,817

 
$
7,585

 
$
10,747


As of December 31, 2018, the Company had approximately $26.5 million of unrecognized employee related stock-based compensation, which it expects to recognize over a weighted-average period of approximately 2.22 years.
 
Warrants

Legacy Row 44 Warrants

In conjunction with the business combination with Row 44 and Advanced Inflight Alliance AG in January 31, 2013, the Company converted 21,062,500 Row 44 warrants to warrants to purchase up to 721,897 shares of the Company’s common stock (“Legacy Row 44 Warrants”). During the year ended December 31, 2017, all remaining Legacy Row 44 Warrants expired.

Public SPAC Warrants

The following is a summary of Public SPAC Warrants for the year ended December 31, 2018:
 
Number of Warrants (in thousands)
 
Weighted Average Exercise price
 
Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2018
6,173

 
$
11.50

 
0.09
Expired
(6,173
)
 
—

 
 
Outstanding and exercisable at December 31, 2018
—

 
$
—

 



The Public SPAC Warrants expired on January 31, 2018. Prior to their expiration, the Company accounted for its 6,173,228 Public SPAC Warrants as derivative liabilities in the Consolidated Balance Sheets. During the years ended December 31, 2018, 2017 and 2016, the Company recorded less than $0.1 million, and approximately $0.4 million and $23.6 million in Change in fair value of derivatives in the Consolidated Statements of Operations as a result of the remeasurement of these warrants at the respective balance sheet dates.
Warrants Repurchase Program

During the year ended December 31, 2014, the Board of Directors authorized the Company to repurchase Public SPAC Warrants for an aggregate purchase price, payable in cash and/or shares of common stock, of up to $25.0 million (inclusive of prior warrant purchases). In August 2015, the Board of Directors increased this amount by an additional $20.0 million. As of December 31, 2018, $16.7 million remained available for warrant repurchases under this authorization. The amount the Company spends (and the number of Public SPAC Warrants repurchased) varies based on a variety of factors including the warrant price. The Company did not repurchase any warrants during the years ended December 31, 2018 or 2017.
Searchlight Warrants

On March 27, 2018 (the “Searchlight Closing Date”), the Company issued to Searchlight warrants to acquire an aggregate of 18,065,775 shares of common stock at an exercise price of $0.01 per share (the “Searchlight Penny Warrants”), and warrants to acquire an aggregate of 13,000,000 shares of common stock at an exercise price of $1.57 per share (the “Searchlight Market Warrants” and, together with the Searchlight Penny Warrants, the “Searchlight Warrants”), for an aggregate price of $150.0 million.

The Searchlight Warrants vest and are exercisable at any time and from time to time after the Vesting Date (as defined below) until on or prior to the close of business on the tenth anniversary of the Searchlight Closing Date. The Searchlight Warrants vest and become exercisable on January 1, 2021 (the “Vesting Date”), if the average of the 45-day volume-weighted average price (“VWAP”) of the Company’s common stock (as reported by Nasdaq) is at or above (i) $4.00, in the case of the Searchlight Penny Warrants, and (ii) $2.40, in the case of the Searchlight Market Warrants, in each case for 45 consecutive trading days at any time following the Searchlight Closing Date. The VWAP condition in respect of the Searchlight Market Warrants was satisfied in July 2018.

The holders of the Searchlight Warrants cannot exercise the Searchlight Warrants if and to the extent, as a result of such exercise, either (i) such holder’s (together with its affiliates) aggregate voting power on any matter that could be voted on by holders of the common stock would exceed 19.9% of the maximum voting power outstanding or (ii) such holder (together with its affiliates) would beneficially own more than 19.9% of our then outstanding common stock, subject to customary exceptions in connection with public sales or the consummation of a specified liquidity event described in the Searchlight Warrants.

The Searchlight Warrants also include customary anti-dilution adjustments.

Until the earlier of (i) the date on which Searchlight no longer beneficially owns at least 25% of the number of the Searchlight Market Warrants issued on the Searchlight Closing Date (and/or the respective shares of common stock issued in connection with the exercise of the Searchlight Market Warrants) and (ii) January 1, 2021, without the prior consent of Searchlight, the Company will not directly or indirectly redeem, purchase or otherwise acquire any equity securities of the Company for a consideration per share (plus, in the case of any options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) greater than the market price (as defined in the Searchlight Warrants) per share of common stock immediately prior to the earlier of (x) the announcement of such acquisition or (y) such acquisition.

Searchlight is not permitted to transfer the Searchlight Warrants prior to January 1, 2021, except to its controlled affiliates or in connection with certain tender offers, exchange offers, mergers or similar transactions. The Searchlight Warrants and the underlying shares of common stock are freely transferable by Searchlight on and after January 1, 2021.

Searchlight has customary shelf, demand and piggyback registration rights with respect to the common stock (including shares of common stock underlying the Searchlight Warrants) that it holds, including demand registrations and underwritten “shelf takedowns,” subject to specified restrictions, thresholds and the Company’s eligibility to use a registration statement on Form S-3.

Until the earlier of (i) the fifth anniversary of the Searchlight Closing Date and (ii) the date Searchlight no longer holds at least 50% of the Searchlight Penny Warrants (or the respective shares of common stock underlying such Searchlight Penny Warrants), Searchlight has participation rights with respect to issuances of common equity securities by the Company, subject to exceptions. These rights entitle Searchlight to opt to participate in future issuances by the Company of common equity or common equity-linked securities, subject to customary exceptions.