Anuvu Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies (Policies)

Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2013

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("US GAAP") to reflect the financial position, results of operations and cash flows of the Company. These financial statements have been prepared on a going concern basis, which assumes the realization of assets and satisfaction of liabilities in the normal course of business.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company's most recent audited consolidated financial statements and related notes for the fiscal year ended December 31, 2012, which are included in the Company's 8K/A filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, on March 18, 2013. In the opinion of management, all adjustments considered necessary have been made for a fair presentation of the results of these interim periods. All adjustments are of a normal, recurring nature, except as otherwise disclosed in this Note under the Correction of an Immaterial Error in the Financial Statements section.

Principles of Consolidation

The unaudited consolidated financial statements included herein are the financial statements of Global Eagle and its owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation, including AIA's investment in Row 44. The Company's fiscal year ends on December 31. The operating results for the interim period presented are not necessarily indicative of the results that may be expected for the Company's fiscal year ending December 31, 2013.

Use of Estimates

The preparation of the Company's unaudited consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Management bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amount of assets and liabilities reported on the Company's balance sheets and the amounts of income and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, revenue recognition, accounts receivable and related reserves, useful lives of property, plant and equipment and intangible assets, fair value of financial instruments, intangible assets and goodwill, valuation of inventory and related reserves, warrants and derivatives, earn-out liabilities, income taxes, contingent liabilities, and determining the fair value of stock-based compensation awards. Accordingly, actual results may differ from these estimates.

Segments of the Company

The Company currently reviews its business from a segmented perspective. The Company believes that total segment operating income is an appropriate measure for evaluating the operating performance of Global Eagle’s business segments because it is the primary measure used by Global Eagle’s chief operating decision makers to evaluate the performance and allocate resources within Global Eagle’s businesses. Total segment operating income provides the chief operating decision makers, investors and equity analysts a measure to analyze operating performance of each of Global Eagle’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). Global Eagle’s consolidated business is divided into three reporting segments as follows:


•	Connectivity

Connectivity represents the current Row 44 business, and is the Company's global satellite-based broadband services provider to the worldwide commercial airline industry. Row 44's network enables airlines to connect to orbiting Ku-band satellites and to communicate with existing satellite ground earth stations. Row 44's in-cabin communications link currently provides airline passengers with Internet access, live television, on-demand media, shopping and flight and destination information.


•	Content Service Providing ("CSP")

CSP represents a portion of the current business of AIA, and is providing technical and substantive services related to in-flight entertainment; however, AIA's range of services does not include development, provision or maintenance of the hardware that airlines use on-board for in-flight entertainment purposes.


•	Content

The Company's in-flight entertainment content business, a current segment of AIA's business, creates, purchases, develops and/or utilizes content such as movies and audio.

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.

Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times, may exceed the Federal Depository Insurance Coverage ("FDIC") of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

The Connectivity segment of the business has a major customer that has historically accounted for a significant portion of revenue and receivables. During the three months ended March 31, 2013 and 2012, the customer represented 65% and 65% of net revenues, respectively. Total connectivity segment accounts receivable from this customer represented 63% and 78% of total accounts receivable at March 31, 2013 and December 31, 2012, respectively.

The CSP segment of the business has two major customers that have historically accounted for a significant portion of revenue and receivables. During the two months ended March 31, 2013, these customers represented 15% and 11% of net revenues, respectively. Total CSP segment accounts receivable from these customers represented 11% and 8% of total accounts receivable at March 31, 2013, respectively.

The Content segment of the business has two major customers that have historically accounted for a significant portion of revenue and receivables. During the two months ended March 31, 2013, these customers represented 15% and 11% of net revenues, respectively. Total Content segment accounts receivable from these customers represented 21% and 5% of total accounts receivable at March 31, 2013, respectively.

The Connectivity segment of the business is also significantly dependent on certain key suppliers. The Connectivity segment purchases its satellite bandwidth from a single supplier, which also provides the segment 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. The Connectivity segment also purchases radomes and rings from a single supplier. Additionally, the segment purchases its satellite antenna system from another single supplier. Any interruption in supply from these significant vendors could have a material impact on the Company’s ability to provide connectivity to its commercial airline customers.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with ASC 718, "Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the estimated grant date fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's statement of operations.

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 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 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. 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 option or warrant.

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. 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).

Accounts Receivable, net

The Company extends credit to its customers. An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company's customers to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the collectability of the Company’s trade accounts receivable balances. If the Company determines that the financial condition of any of its customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off.

Inventory, net

Inventories, which are classified as finished goods, are comprised of individual parts and assemblies and are stated at the lower of cost or market. Cost of inventory is determined using actual cost on a first-in, first-out basis. 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.

Property, Plant & Equipment, net

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 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.

Property, plant and equipment is reviewed for disposal when no economic benefit is expected from the continuing use or sale of the asset. Gains or losses arising from the retirement or disposal of the asset shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognized as a gain or loss in the period in which the asset is disposed of or retired. The residual values, useful lives and depreciation methods applied to assets are reviewed annually and adjusted prospectively as necessary.

Intangible Assets and Goodwill

Intangible assets with finite useful lives are amortized over their useful life and tested for impairment if there are any indicators of impairment. An impairment loss is recognized only if the carrying amount of a long-lived asset with finite useful lives is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Amortization of intangible assets with finite useful lives is recognized in the statements of operations under cost of goods sold.

Goodwill is not amortized, but instead will be tested for impairment annually or more frequently if certain indicators are present. In the event management of the Company determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during the quarter in which the determination is made is recognized.

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 finite useful lives 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. Certain film rights in the Company's portfolio may be used in perpetuity under certain conditions. The content library is tested for impairment at least annually. Considering the marketability of the given film right, an impairment loss is recognized as necessary. If the cash flows from the future revenue forecast of a given film right are lower than its carrying amount as of the reporting date, an impairment loss is recognized.

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.

Revenue Recognition

The Company recognizes revenue when all of the following have occurred:


•	persuasive evidence of an agreement with the customer exists;


•	products are shipped and the customer takes delivery;


•	the selling price is fixed or determinable; and


•	collectability of the selling price is reasonably assured.

Equipment Revenue

Revenue recognition from sales of equipment to airlines, which are hardware equipment sets that the Company purchases from third party vendors and then sells to the commercial airlines, generally occurs at the time of shipment or delivery, depending on shipping terms.

Service Revenue

Service revenue is recognized after it has been rendered and the customer can use the service, which can be in the form of (i) enplanement for boarded passengers or (ii) usage by passengers, depending upon the specific contract.

Licensing Revenue

In the CSP segment, revenue is recognized for service arrangements associated with licenses after the service has been rendered and the customer can use the service in the form of an "in-flight entertainment package." This is the case at the beginning of what is known as the "on-board cycle," i.e., at the inception of the license or from the time when the customer can use the services provided in the aircraft.

In the content segment, revenue from the use and/or sublicensing of the film rights for in-flight entertainment is realized at the time the customer's license period begins. Any additional services rendered, such as technical services or the provision of materials, are billed as ancillary costs, and recognized as services are provided.

Revenue Share

A portion of service revenues earned from airline passengers is shared with some airline customers. The terms of the revenue share agreements vary with each airline, however, are typically based upon the net revenue of services and are expensed to cost of services in the period the service is provided.

Deferred Revenue

Deferred revenue primarily consists of prepayments received from customers for which the Company's revenue recognition criteria have not been met. The deferred revenue will be recognized as revenue once the criteria for revenue recognition have been met.

Multiple-Element Arrangements

Revenue derived from a single sales contract that contains multiple products and services is allocated based on the relative selling price of each delivered item and recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting.

Research and Development

The Company’s research and development expenditures are focused on developing new products and services, and obtaining Supplemental Type Certificates (“STCs”) as required by the Federal Aviation Administration for each model/type of aircraft prior to providing Connectivity services. Research and development costs are expensed as incurred.

Earnings Per Share

Earnings (Loss) Per Share

Basic earnings (loss) per share 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 warrants issued to third parties have been excluded from the diluted loss per share calculation because their effect is anti-dilutive.

Foreign Currency

The financial position and results of operations of the Company's foreign subsidiaries are generally determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Adjustments arising from the use of differing exchange rates from period to period are included in the statements of comprehensive loss.

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 our ability to realize future taxable income in certain jurisdictions, the Company has recorded a valuation allowance of $42.2 million and $0.6 million against our domestic and foreign deferred tax assets as of March 31, 2013, respectively

The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense. No interest expense or penalties have been recognized as of and for the three months ended March 31, 2013 and 2012. The Company is subject to income taxes in the U.S. and numerous state and foreign jurisdictions in which it operates.