Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value of 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:
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.
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 nonrecurring 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 and non-recurring basis as of March 31, 2013, and December 31, 2012, respectively:

(in thousands)
March 31, 2013
Quotes Prices in Active Markets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Other Unobservable Inputs (Level 3)
AFS securities
$
7,140

$
7,140

$
—

$
—

Total financial assets
$
7,140

$
7,140

$
—

$
—

 
 
 
 
 
Earn-out liability
$
1,265

$
—

$
—

$
1,265

Interest rate swaps
149

—

149

—

Global Eagle warrants (1)
26,090

26,090

—

—

Series C preferred warrants
3,091

—

—

3,091

Total financial liabilities
$
30,595

$
26,090

$
149

$
4,356


(1) Includes 18,992,500 public warrants and 333,333 sponsor warrants.
(in thousands)
December 31, 2012
Quotes Prices in Active Markets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Other Unobservable Inputs (Level 3)
Total financial assets
$
—

$
—

$
—

$
—

 
 
 
 
 
Series C warrants
$
5,482

$
—

$
—

$
5,482

Common stock warrants
2,696

—

—

2,696

Total financial liabilities
$
8,178

$
—

$
—

$
8,178



There were no assets or liabilities transferred in or out of level 3 during the periods presented.

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

Common Stock

The common stock is recorded at fair value on a recurring basis. The fair value of the common stock is reported as level 1 because the share price is obtained directly from a public exchange. Therefore, it is an observable quoted price in an active market.

Earn-Out Liabilities

The fair value of the earn-out liabilities were estimated by using the income approach. Based on the respective purchase agreements, management estimated best case, base case, and worst case scenarios and discounted them 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.

Interest Rate Swaps

AIA uses futures to hedge a portion of its risk of increases in variable interest rates related to its bank loan from UniCredit Bank AG. These interest rate swaps are marked to market at the end of each reporting period. Interest rate swaps of $0.1 million were recognized in derivative liabilities as of the reporting date. The Company classifies the fair value of interest rate swaps within the level 2 hierarchy. Gains (losses) from these interest rate swaps for the three months ended March 31, 2013, and 2012, were $4,000 and $0, respectively.

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. Income (expense) from these warrants for the three months ended March 31, 2013, and 2012, were $(4.2) million and $0, respectively.

The fair values of warrants for Row 44's Series C Preferred Stock that were assumed by GEE under the Row 44 Merger Agreement are determined using the Black-Scholes model, which utilizes level 3 unobservable inputs. Significant inputs used in valuing the derivatives included (i) the Company's current stock price, (ii) the Company's expected stock-price volatility, and (iii) the expected term of the instrument. Significant increases (decreases) in any of these inputs could result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the expected term is accompanied by a change in the assumption used for the risk-free rate and the expected stock volatility. The change in value of derivative liabilities is presented as a part of other income (expenses) in the accompanying statements of operations. Income (expense) from the Series C warrants for the three months ended March 31, 2013, and 2012, were $(0.3) million and $0, respectively. Income (expense) from the Common Stock warrants for the three months ended March 31, 2013, and 2012, were $(0.1) million and $(0.3) million, respectively. Please refer to the Note 10. "Convertible, Redeemable Preferred Stock, Stock Options, Common Stock, and Warrants" section of these footnotes found in this Form 10-Q for the level 3 assumptions used in the level 3 Black-Scholes model calculations on the warrants.

The following table shows both the carrying amounts and the fair values of financial assets and liabilities not carried at fair value in the consolidated financial statements at March 31, 2013 and December 31, 2012, respectively:

 
March 31, 2013
December 31, 2012
(in thousands)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Financial Assets:
 
 
 
 
Other Assets
$
—

$
—

$
—

$
—

Financial Liabilities:
 
 
 
 
Notes Payable
$
11,092

$
10,200

$
—

$
—



Notes Payable

The Company classifies the notes payable within the level 2 hierarchy because it uses discount rates on the public market for similar credit-rated companies for its valuation. The fair value presented above is calculated based on the present value of expected principle and interest cash flows.

The following tables present the fair value roll-forward reconciliation of level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis for the three months ended March 31, 2013, and 2012, respectively:

(in thousands)
Series C Warrants
Common Stock Warrants
Earn-Out Liability
Total
Balance, January 1, 2013
$
5,482

$
2,696

$
—

$
8,178

  Reclassification to equity
—

(2,696
)
—

(2,696
)
  Change in value
344

—

—

344

Elimination of Row 44 Series C-1 Preferred Warrants held by AIA
(2,735
)
—

—

(2,735
)
   Level III Liability acquired in AIA Stock Purchase
—

—

1,265

1,265

Balance, March 31, 2013
$
3,091

$
—

$
1,265

$
4,356


(in thousands)
Series C Warrants
Common Stock Warrants
Earn-Out Liability
Total
Balance, January 1, 2012
$
—

$
—

$
—

$
—

Issuance of warrants
—

279

—

279

  Change in value
—

—

—

—

Balance, March 31, 2012
$
—

$
279

$
—

$
279