| Fair Value Measurements |
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:
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Level 1: Observable quoted prices in active markets for identical assets and liabilities.
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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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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.
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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, on a non-recurring basis, the Company may be required to record other assets and liabilities at fair value. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write-downs resulting from impairment of assets.
Due to the short-term nature, carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value.
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, and 2018, respectively (in thousands, except as presented in footnotes to the tables):
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December 31, 2019 |
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Quotes Prices in Active Markets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Other Unobservable Inputs
(Level 3)
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Liabilities: |
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Contingently issuable shares(2)
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$ |
305 |
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$ |
— |
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$ |
— |
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$ |
305 |
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Phantom stock options(3)
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464 |
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— |
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— |
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464 |
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Total |
$ |
769 |
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$ |
— |
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$ |
— |
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$ |
769 |
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December 31, 2018 |
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Quotes Prices in Active Markets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Other Unobservable Inputs
(Level 3)
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Liabilities: |
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Earn-out liability(1)
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$ |
114 |
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$ |
— |
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$ |
— |
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$ |
114 |
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Contingently issuable shares(2)
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1,371 |
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— |
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— |
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1,371 |
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Phantom stock options(3)
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1,564 |
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— |
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— |
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1,564 |
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Total |
$ |
3,049 |
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$ |
— |
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$ |
— |
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$ |
3,049 |
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(1) |
Represents aggregate earn-out liabilities for the Company’s acquisitions of WOI, RMG, navAero and masFlight assumed in business combinations for the year ended December 31, 2015. |
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(2) |
In connection with the Sound Recording Settlements (as described below in Note 11. Commitments and Contingencies), the Company is obligated to issue to UMG (as defined in that Note) 20,000 shares of its common stock when and if the closing price of the Company's common stock exceeds $250.00 per share and an additional 16,000 shares of common stock when and if the closing price of the Company’s common stock exceeds $300.00 per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.
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(3) |
The Company’s cash-settled phantom stock options, granted during 2018, are accounted for as liability awards and are re-measured at fair value each reporting period with compensation expense being recognized over the requisite service period. As of December 31, 2019, the aggregate estimated fair value of the Company’s cash-settled phantom stock options was $0.8 million, for which the vested portion recognized as a liability in its Consolidated Balance Sheets was $0.5 million. The cash-settled phantom stock options are described in more detail in Note 13. Equity Transactions.
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The following tables present the fair value roll-forward reconciliation of Level 3 assets and liabilities measured at fair value for the years ended December 31, 2019 and 2018, respectively (in thousands):
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Phantom stock Options (Level 3) |
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Liability Warrants (Level 3) |
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Contingently Issuable Shares
(Level 3)
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Earn-Out Liabilities (Level 3) |
Balance, December 31, 2017 |
$ |
— |
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$ |
20 |
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$ |
1,448 |
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$ |
114 |
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Fair value of cash-settled phantom stock options |
1,564 |
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— |
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— |
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— |
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Change in value |
— |
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(20 |
) |
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(77 |
) |
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— |
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Balance, December 31, 2018 |
1,564 |
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— |
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1,371 |
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114 |
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Change in value |
(1,100 |
) |
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— |
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(1,066 |
) |
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(114 |
) |
Balance, December 31, 2019 |
$ |
464 |
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$ |
— |
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$ |
305 |
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$ |
— |
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The valuation methodology used to estimate the fair value of the financial instruments in the tables above is summarized as follows:
Earn-Out Liability. The earn-out liabilities are estimated using the income approach. Based on the respective purchase agreements, management estimated the present value of best case, base case, and worst case scenarios. The sum of the discounted weighted average probabilities was used to arrive at the fair value of the earn-out liability. The current and non-current portions of the earn-out liabilities are included in Accounts payable and accrued liabilities and Other non-current liabilities, respectively, on the Consolidated Balance Sheets. The change in value of these earn-out liabilities is included in General and administrative expenses in the Consolidated Statements of Operations.
Contingently Issuable Shares. The liabilities for these contingently issuable shares are included in Accounts payable and accrued liabilities on the December 31, 2019, Consolidated Balance Sheet. The fair values of these contingently issuable shares were determined using a quantitative put option method. The change in the fair value of the contingently issuable shares are included in change in fair value of derivatives in the December 31, 2019, Consolidated Statement of Operations.
The following table presents information about significant unobservable inputs related to Level 3 financial liabilities as of December 31, 2019:
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Phantom Stock Options |
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Contingently Issuable Shares |
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Tranche 1 |
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Tranche 2 |
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Tranche 1 |
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Tranche 2 |
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Assumed liquidation company share price |
N/A |
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N/A |
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$ |
250.00 |
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$ |
300.00 |
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Common stock price at December 31, 2019 |
$ |
12.50 |
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$ |
12.50 |
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$ |
12.50 |
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$ |
12.50 |
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Exercise price |
$ |
100.00 |
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$ |
200.00 |
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N/A |
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N/A |
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Estimated term (in years) |
3.5 - 6.6 |
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3.5 - 5.5 |
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23.32 |
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24.74 |
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Expected stock volatility |
75.6% - 98.7% |
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79.6% - 98.7% |
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86.0 |
% |
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86.0 |
% |
Risk free rate |
1.60% - 1.83% |
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1.60% - 1.70% |
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N/A |
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N/A |
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Dividend yield |
— |
% |
— |
% |
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— |
% |
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— |
% |
Implied discount for lack of marketability (1)
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N/A |
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N/A |
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32.3 |
% |
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32.3 |
% |
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(1) |
A discount for lack of marketability was applied to the resulting values as the shares, when issued, may not initially be registered with the SEC.
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Nonrecurring Fair Value Measurements. The Company measures its equity method investments at fair value on a nonrecurring basis, when they are deemed to be other-than-temporarily impaired, using Level 3 unobservable inputs. Based on our non-controlling 49% interest, and having no direct comparable publicly-listed competitor to WMS, management concluded that utilizing the income approach, specifically the discounted cash flow method, would be the most reasonable method of assessing the fair value of WMS. During the year ended December 31, 2018, the Company recorded an impairment charge of $51.0 million relating to its WMS equity investment after determining that the carrying value of its interest in the WMS joint venture exceeded the estimated fair value of its interest. The net carrying value of our WMS equity investment as of December 31, 2019 amounted to $76.1 million. See Note 8. Equity Method Investments.
The following table shows the carrying amounts of the Company’s long-term debt in the consolidated financial statements (in thousands):
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December 31, 2019 |
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December 31, 2018 |
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Carrying Amount (7)
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Fair Value |
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Carrying Amount |
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Fair Value |
Senior secured term loan facility, due January 2023 (+)(1)
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$ |
485,166 |
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$ |
454,168 |
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$ |
455,292 |
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$ |
473,344 |
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Senior secured revolving credit facility, due January 2022 (+)(2)
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43,315 |
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43,315 |
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54,015 |
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54,015 |
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2.75% convertible senior notes due 2035 (1) (3)
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71,126 |
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37,125 |
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70,419 |
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49,064 |
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Second lien notes, due 2023 (4) (5)
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149,772 |
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99,922 |
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128,178 |
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112,230 |
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Other debt (6)
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23,683 |
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23,685 |
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1,707 |
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1,707 |
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$ |
773,062 |
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$ |
658,215 |
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$ |
709,611 |
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$ |
690,360 |
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(+) This facility is a component of the 2017 Credit Agreement
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(1) |
The estimated fair value is classified as Level 2 financial instrument and was determined based on the quoted prices of the instrument in an over-the-counter market. |
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(2) |
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments. The Company expect to draw on the 2017 Revolving Loans from time to time to fund its working capital needs and for other general corporate purposes. |
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(3) |
The fair value of the 2.75% Convertible Notes is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at $13.0 million, and is included in the Consolidated Balance Sheets within “Additional paid-in capital” (see Note 13. Equity Transactions). The principal amount outstanding of the Convertible Notes was $82.5 million as of December 31, 2019, and the carrying amounts in the above table reflect this outstanding principal amount net of debt issuance costs and discount associated with the equity component.
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(4) |
The principal amount outstanding of the Second Lien Notes, due June 2023 as set forth in the above table was $178.0 million as of December 31, 2019, and includes approximately $28.0 million of payment-in-kind (“PIK”) interest converted to principal since debt issuance. The value allocated to the attached penny warrants and market warrants for financial reporting purposes was $14.9 million and $9.3 million, respectively. These qualify for classification in stockholders’ equity and are included in the Consolidated Balance Sheets within “Additional paid-in capital” (see Note 10. Financing Arrangements).
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(5) |
The fair value of the Second Lien Notes was determined based on a Black-Derman-Toy interest rate Lattice model. The key inputs of the valuation model contain certain Level 3 inputs. |
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(6) |
The estimated fair value is considered to approximate carrying value and is classified as Level 3 financial instruments. As of December 31, 2019, Other debts primarily consisted of: (i) $3.4 million financing for transponder purchases and (ii) $19.0 million of finance lease liability relating to an assessed right-of-use over a satellite bandwidth capacity (refer to Note 4. Leases for details).
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(7) |
The carrying amounts at December 31, 2019 and 2018 are presented net of $60.5 million and $65.2 million of unamortized bond discounts and issuance costs, respectively.
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Draw Down of the Revolving Credit Facility. On February 28, 2020, in an abundance of caution regarding the uncertainty related to the COVID-19 pandemic, as of the time of filing for this 10-K we have fully drawn down the available capacity under the revolving credit facility, with a corresponding increase in our cash on hand.
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