Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
2. Recent Accounting Pronouncements
In May 2014,The discount rate used to calculate the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09,Revenue From Contracts With Customers (“ASU2014-09”). This pronouncement outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of ASU2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB issued several amendmentsadjustment to the standard, including clarification on accounting for licensesopening balance was our incremental borrowing rate as of intellectual property and identifying performance obligations. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within the annual reporting periods; we will adopt this guidanceadoption date, January 1, 2019. The cumulative effect of the adoption of ASC 842 to our unaudited condensed consolidated balance sheet as of January 1, 2018. We are continuing2019 was as follows (in thousands):
| | | | | | | | | | | | |
| | | Balance at
December 31,
2018 | | | Impact of
ASC 842 | | | Balances
with
Adoption of
ASC 842 | |
Assets | | | | | | | | | | | | |
Operating leaseright-of-use assets | | $ | — | | | $ | 72,188 | | | $ | 72,188 | |
Liabilities | | | | | | | | | | | | |
Accrued liabilities | | | 213,111 | | | | 9,019 | | | | 222,130 | |
Non-current operating lease liabilities | | | — | | | | 102,440 | | | | 102,440 | |
Othernon-current liabilities | | | 80,191 | | | | (36,178 | ) | | | 44,013 | |
Equity | | | | | | | | | | | | |
Accumulated deficit | | | (1,228,674 | ) | | | (3,093 | ) | | | (1,231,767 | ) |
See Note 11, “Leases,” for additional information.
On January 1, 2019, we adopted ASU2018-02,Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU2018-02”), which permits entities to evaluate our revenue contracts under the new guidance. Based on our preliminary understandingreclassify tax effects stranded in accumulated other comprehensive income as a result of the impact the adoptiontax reform to retained earnings. Adoption of this standard willdid not have on our financial statements, we reassessed and now plan to adopt the standard using the modified retrospective method. Under the modified retrospective method, revenue and expenses that would have been recognized in the future will be recorded to equity as a cumulative adjustment at the date of adoption. While we are continuing to evaluate thematerial impact of the adoption of this guidance on our consolidated financial statements,statements.
On January 1, 2019, we currently believe thatadopted ASU2018-07,Improvements to Nonemployee Share-Based Payment Accounting (“ASU2018-07”), which expands the measurement and timingscope of recognitionASC 718,Compensation – Stock Compensation, to include share-based payment transactions for acquiring goods or services from nonemployees. Adoption of revenue and related costs from certain ofthis standard did not have a material impact on our customer contracts will be impacted in the following ways, primarily from our Airline Directed contracts inconsolidated financial statements.
Arrangements with commercial airlines
ForCA-NA andCA-ROW, (cash flowspursuant to contractual agreements with our airline partners, we place our equipment on commercial aircraft operated by the airlines in order to deliver our service to passengers on the aircraft. We currently have two types of commercial airline arrangements: turnkey and cash and cash equivalents will not be impacted):
airline-directed. Under the
current revenue recognition standard, the sale ofCA-NA andCA-ROW airborne connectivity equipment does not meet allairline-directed model, we have transferred control of the
requirements for being recognizedequipment to the airline and therefore the airline is our customer in these transactions. Under the turnkey model, we have not transferred control of our equipment to our airline partner and, as a
separate unitresult, the airline passenger is deemed to be our customer. Transactions with our airline partners under the turnkey model are accounted for as an operating lease of
accounting, resultingspace on an aircraft. See Note 11, “Leases,” for additional information on the turnkey model.Remaining performance obligations
As of June 30, 2019, the aggregate amount of the transaction price in our contracts allocated to the deferralremaining unsatisfied performance obligations is approximately $784 million, most of which relates to our commercial aviation contracts. Approximately $101 million represents future equipment revenue (and the related equipment cost) over the life of the contract. Under ASU2014-09, we have concluded that the sale of airborne connectivity equipment for Airline Directed arrangements will represent a separate performance obligation as it is both capable of being distinct and distinctexpected to be recognized within the context of the arrangement. As such, the recognition of all airborne equipment revenuenext one to three years. The remaining $683 million primarily represents connectivity and related costs will be accelerated and recognized upon installation.
Our contracts with customers generateentertainment service revenue that varies based on usage of our service. Under the current revenue recognition standard, these revenues which are recognized as services are provided. Under ASUprovided, which is expected to occur through the remaining term of the contract (approximately2014-09,5-10 years). We have excluded from this amount: all variable consideration derived from our preliminary conclusionconnectivity or entertainment services that is allocated entirely to our performance of obligations related to such services; consideration from contracts that have an original duration of one year or less; revenue from passenger service on airlines operating under the turnkey model; and revenue from contracts that have been executed but under which have not yet met the accounting definition of a contract since the airline has not yet determined which products in our portfolio it wishes to select, and, as a result we are unable to determine which products and services will be required to use a variable consideration model which requires us to estimate (and constrain) variable service revenue, and allocate total contract consideration among all performance obligations. Additionally, estimates used in the recognition of revenue under the new standard will be updated as new facts and circumstances warrant, which may cause differences in the trend of revenue recognition as compared to that reported under the current standard.
We have assessed the treatment of costs to obtain or fulfill a contract with a customer, including costs to obtain Supplemental Type Certificates (“STCs”) issued by the FAA that are required to install our equipment on aircraft. Such costs are expensed as incurred under the current standard. Under ASU2014-09, we have concluded that under our Airline Directed model these costs require capitalization and subsequent amortization over the anticipated service period. Conversely, STC costs incurred in connection with our airline partners operating under our Turnkey model are not subjecttransferred to the same guidance and will continue to be expensed as incurred under ASU2014-09.customer.
Penalties are recorded under the current standard when incurred. Under ASU2014-09, anticipated penalties will be accounted for as a reduction of revenue when or at the time the related performance obligation is satisfied.
The impact upon adoption of ASU2014-09 is subject to change based on new contracts or contractual amendments executed prior to the date of adoption, including contractual amendments that change and arrangement from a Turnkey model to an Airline Directed model. Such changes could have a significant effect on the transition adjustment recorded upon adoption of the new standard.
In March 2016, the FASB issued ASU2016-02,Leases (“ASU2016-02”), which introduces a lessee model that records most leases on the balance sheet. ASU2016-02 also aligns certain underlying principles of the new lessor model with those in Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers(“ASC 606”), the FASB’s new revenue recognition standard. Furthermore, ASU2016-02 eliminates the required use of bright-line tests used in current GAAP for determining lease classification. It also requires lessors to provide
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Disaggregation of revenue
The following table presents our revenue disaggregated by category(in thousands):
additional transparency into their exposure to the changes in value of their residual assets and how they manage that exposure. ASU2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. We will adopt this as guidance as of January 1, 2019 and we are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements. | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended
June 30, 2019 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | | | | | | | | | | | | | | | |
Connectivity | | $ | 90,233 | | | $ | 21,656 | | | $ | 54,176 | | | $ | 166,065 | |
Entertainment, CAS and other | | | 6,169 | | | | 917 | | | | 580 | | | | 7,666 | |
| | | | | | | | | | | | | | | | |
Total service revenue | | $ | 96,402 | | | $ | 22,573 | | | $ | 54,756 | | | $ | 173,731 | |
| | | | | | | | | | | | | | | | |
Equipment revenue | | | | | | | | | | | | | | | | |
ATG | | $ | 5,636 | | | $ | — | | | $ | 12,344 | | | $ | 17,980 | |
Satellite | | | 3,329 | | | | 14,144 | | | | 3,809 | | | | 21,282 | |
Other | | | 360 | | | | — | | | | 332 | | | | 692 | |
| | | | | | | | | | | | | | | | |
Total equipment revenue | | $ | 9,325 | | | $ | 14,144 | | | $ | 16,485 | | | $ | 39,954 | |
| | | | | | | | | | | | | | | | |
Customer type | | | | | | | | | | | | | | | | |
Airline passenger and aircraft owner/operator | | $ | 55,900 | | | $ | 6,767 | | | $ | 54,756 | | | $ | 117,423 | |
Airline, OEM and aftermarket dealer | | | 36,883 | | | | 27,680 | | | | 16,485 | | | | 81,048 | |
Third party | | | 12,944 | | | | 2,270 | | | | — | | | | 15,214 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 105,727 | | | $ | 36,717 | | | $ | 71,241 | | | $ | 213,685 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Three Months Ended
June 30, 2018 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | | | | | | | | | | | | | | | |
Connectivity | | $ | 88,833 | | | $ | 14,548 | | | $ | 47,831 | | | $ | 151,212 | |
Entertainment, CAS and other | | | 6,913 | | | | 637 | | | | 294 | | | | 7,844 | |
| | | | | | | | | | | | | | | | |
Total service revenue | | $ | 95,746 | | | $ | 15,185 | | | $ | 48,125 | | | $ | 159,056 | |
| | | | | | | | | | | | | | | | |
Equipment revenue | | | | | | | | | | | | | | | | |
ATG | | $ | 2,254 | | | $ | — | | | $ | 20,497 | | | $ | 22,751 | |
Satellite | | | 21,650 | | | | 18,460 | | | | 4,461 | | | | 44,571 | |
Other | | | — | | | | — | | | | 1,080 | | | | 1,080 | |
| | | | | | | | | | | | | | | | |
Total equipment revenue | | $ | 23,904 | | | $ | 18,460 | | | $ | 26,038 | | | $ | 68,402 | |
| | | | | | | | | | | | | | | | |
Customer type | | | | | | | | | | | | | | | | |
Airline passenger and aircraft owner/operator | | $ | 54,718 | | | $ | 5,097 | | | $ | 48,125 | | | $ | 107,940 | |
Airline, OEM and aftermarket dealer | | | 49,141 | | | | 26,311 | | | | 26,038 | | | | 101,490 | |
Third party | | | 15,791 | | | | 2,237 | | | | — | | | | 18,028 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 119,650 | | | $ | 33,645 | | | $ | 74,163 | | | $ | 227,458 | |
| | | | | | | | | | | | | | | | |
In March 2016, the FASB issued ASU2016-04,Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU2016-04”), which amends the guidance on extinguishing financial liabilities for certain prepaid stored-value products by requiring that entities that sell prepaid stored-value products recognize breakage proportionally as the prepaid stored-value product is being redeemed rather than immediately upon sale of the product. If an entity is unable to estimate breakage, the amount would be recognized when the likelihood becomes remote that the holder will exercise the remaining rights. Entities are required to reassess their estimates of breakage each reporting period. Any change in this estimate would be accounted for as a change in an accounting estimate. An entity that recognizes breakage is required to disclose the methodology used to recognize breakage and significant judgments made in applying the breakage methodology. ASU2016-04 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. We can apply ASU2016-04 by using either a modified retrospective transition approach or a full retrospective transition approach. We will adopt this as guidance as of January 1, 2018 and we are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In August 2016, the FASB issued ASU2016-15,Classification of Certain Cash Receipts and Cash Payments (“ASU2016-15”), which amends ASC 230,Statement of Cash Flows, the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including debt prepayment or debt extinguishment costs. ASU2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. We will adopt this guidance as of January 1, 2018 and we expect to apply this standard using the full retrospective method. We do not believe adoption of this guidance will have a material effect on our cash flows as we have historically reported debt prepayment and debt extinguishment costs in a manner consistent with ASU2016-15.
In October 2016, the FASB issued ASU2016-16,Intra-Entity Transfers of Assets Other Than Inventory (“ASU2016-16”), which removes the prohibition in ASC 740,Income Taxes, against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. This is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. ASU2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We will adopt this guidance as of January 1, 2018 and we are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In November 2016, the FASB issued ASU2016-18,Restricted Cash – A Consensus of the FASB Emerging Issues Task Force, (“ASU2016-18”), which amends ASC 230,Statement of Cash Flows, to clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We will adopt this guidance as of January 1, 2018 and do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU2017-04,Simplifying the Test for Goodwill Impairment (“ASU2017-04”), which simplifies the accounting for goodwill impairments by eliminatingStep-2 from the goodwill impairment test. ASU2017-04 is effective for annual reporting periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will adopt this guidance as part of our annual goodwill impairment test in October 2017 and do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU2017-09,Scope of Modification Accounting(“ASU2017-09”), which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718,Compensation – Stock Compensation.Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU2017-09 is effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted. We will adopt this guidance as of January 1, 2018 and do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
| | | | | | | | | | | | | | | | |
| | | For the Six Months Ended
June 30, 2019 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | | | | | | | | | | | | | | | |
Connectivity | | $ | 170,051 | | | $ | 40,510 | | | $ | 106,861 | | | $ | 317,422 | |
Entertainment, CAS and other | | | 18,378 | | | | 1,835 | | | | 1,108 | | | | 21,321 | |
| | | | | | | | | | | | | | | | |
Total service revenue | | $ | 188,429 | | | $ | 42,345 | | | $ | 107,969 | | | $ | 338,743 | |
| | | | | | | | | | | | | | | | |
Equipment revenue | | | | | | | | | | | | | | | | |
ATG | | $ | 8,508 | | | $ | — | | | $ | 23,679 | | | $ | 32,187 | |
Satellite | | | 3,959 | | | | 27,303 | | | | 9,044 | | | | 40,306 | |
Other | | | 900 | | | | — | | | | 1,098 | | | | 1,998 | |
| | | | | | | | | | | | | | | | |
Total equipment revenue | | $ | 13,367 | | | $ | 27,303 | | | $ | 33,821 | | | $ | 74,491 | |
| | | | | | | | | | | | | | | | |
Customer type | | | | | | | | | | | | | | | | |
Airline passenger and aircraft owner/operator | | $ | 110,249 | | | $ | 12,618 | | | $ | 107,969 | | | $ | 230,836 | |
Airline, OEM and aftermarket dealer | | | 67,796 | | | | 53,171 | | | | 33,821 | | | | 154,788 | |
Third party | | | 23,751 | | | | 3,859 | | | | — | | | | 27,610 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 201,796 | | | $ | 69,648 | | | $ | 141,790 | | | $ | 413,234 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Six Months Ended
June 30, 2018 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | | | | | | | | | | | | | | | |
Connectivity | | $ | 170,873 | | | $ | 28,197 | | | $ | 95,223 | | | $ | 294,293 | |
Entertainment, CAS and other | | | 13,656 | | | | 1,233 | | | | 552 | | | | 15,441 | |
| | | | | | | | | | | | | | | | |
Total service revenue | | $ | 184,529 | | | $ | 29,430 | | | $ | 95,775 | | | $ | 309,734 | |
| | | | | | | | | | | | | | | | |
Equipment revenue | | | | | | | | | | | | | | | | |
ATG(1) | | $ | 47,016 | | | $ | — | | | $ | 35,918 | | | $ | 82,934 | |
Satellite(1) | | | 31,926 | | | | 23,384 | | | | 8,719 | | | | 64,029 | |
Other | | | — | | | | — | | | | 2,586 | | | | 2,586 | |
| | | | | | | | | | | | | | | | |
Total equipment revenue | | $ | 78,942 | | | $ | 23,384 | | | $ | 47,223 | | | $ | 149,549 | |
| | | | | | | | | | | | | | | | |
Customer type | | | | | | | | | | | | | | | | |
Airline passenger and aircraft owner/operator | | $ | 107,642 | | | $ | 9,826 | | | $ | 95,775 | | | $ | 213,243 | |
Airline, OEM and aftermarket dealer(2) | | | 126,567 | | | | 39,005 | | | | 47,223 | | | | 212,795 | |
Third party | | | 29,262 | | | | 3,983 | | | | — | | | | 33,245 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 263,471 | | | $ | 52,814 | | | $ | 142,998 | | | $ | 459,283 | |
| | | | | | | | | | | | | | | | |
| 1) | ATG and satellite equipment revenue for theCA-NA segment includes the $45.4 million related to the accounting impact of the transition of one of our airline partners to the airline-directed model. Approximately $43.4 million was included in ATG equipment revenue and approximately $2.0 million was included in satellite equipment revenue. |
| 2) | Airline, OEM and aftermarket dealer revenue includes all equipment revenue for our three segments, including the $45.4 million accounting impact of the transition of one of our airline partners to the airline-directed model. |
Contract balances
Our current andnon-current deferred revenue balances totaled $56.2 million and $60.1 million as of June 30, 2019 and December 31, 2018, respectively. Deferred revenue includes, among other things, equipment, multi-pack and subscription connectivity products, sponsorship activities and airline-directed connectivity and entertainment.
Our current andnon-current contract asset balances totaled $81.0 million and $59.9 million as of June 30, 2019 and December 31, 2018, respectively. Contract assets represent the aggregate amount of revenue recognized in excess of billings for our airline-directed contracts.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
3. Capitalized STC balances for our airline-directed contracts were $19.3 million and $16.5 million as of June 30, 2019 and December 31, 2018, respectively. The capitalized STC costs are amortized over the life of the associated airline-directed contracts as part of our engineering, design and development costs in our unaudited condensed consolidated statements of operations. Total amortization expense was $0.3 million and $0.6 million, respectively, for the three and six month periods ended June 30, 2019, and $0.2 million and $0.4 million for the respective prior-year periods.
Basic and diluted net loss per share have been calculated using the weighted average number of common shares outstanding for the period.
The shares of common stock effectively repurchased in connection with the Forward Transactions (as defined and described in Note 8,9, “Long-Term Debt and Other Liabilities”) are considered participating securities requiring thetwo-class method to calculate basic and diluted earnings per share. Net earnings in future periods will be allocated between common shares and participating securities. In periods of a net loss, the shares associated with the Forward Transactions will not receive an allocation of losses, as the counterparties to the Forward Transactions are not required to fund losses. Accordingly, the calculation of weighted average shares outstanding as of SeptemberJune 30, 20172019 and 20162018 excludes approximately 7.2 million shares that will be repurchased as a result of the Forward Transactions.
As a result of the net loss for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 2016,2018, all of the outstanding shares of common stock underlying stock options, deferred stock units and restricted stock units were excluded from the computation of diluted shares outstanding because they were anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 2016;2018; however, because of the undistributed losses, the shares of common stock associated with the Forward Transactions are excluded from the computation of basic earnings per share in 20172019 and 20162018 as undistributed losses are not allocated to these shares (in thousands, except per share amounts):
| | | | For the Three Months | | | For the Nine Months | | | For the Three Months | | | For the Six Months | |
| | | Ended September 30, | | | Ended September 30, | | | Ended June 30, | | | Ended June 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Net loss | | $ | (45,281 | ) | | $ | (33,273 | ) | | $ | (130,857 | ) | | $ | (97,573 | ) | | $ | (83,963 | ) | | $ | (37,207 | ) | | $ | (100,762 | ) | | $ | (64,626 | ) |
Less: Participation rights of the Forward Transactions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Undistributed losses | | $ | (45,281 | ) | | $ | (33,273 | ) | | $ | (130,857 | ) | | $ | (97,573 | ) | | $ | (83,963 | ) | | $ | (37,207 | ) | | $ | (100,762 | ) | | $ | (64,626 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding-basic and diluted | | | 79,543 | | | | 79,003 | | | | 79,340 | | | | 78,864 | | | | 80,702 | | | | 79,783 | | | | 80,575 | | | | 79,718 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss attributable to common stock per share-basic and diluted | | $ | (0.57 | ) | | $ | (0.42 | ) | | $ | (1.65 | ) | | $ | (1.24 | ) | | $ | (1.04 | ) | | $ | (0.47 | ) | | $ | (1.25 | ) | | $ | (0.81 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
4.
Inventories consist primarily of telecommunications systems and parts and are recorded at the lower of cost (average cost) or market. We evaluate the need for write-downs associated with obsolete, slow-moving and nonsalable inventory by reviewing net realizable inventory values on a periodic basis.
Inventories as of SeptemberJune 30, 20172019 and December 31, 2016, all of which were included within the BA segment,2018 were as follows (in thousands):
| | | | September 30, | | | December 31, | | | | | |
| | | 2017 | | | 2016 | | | June 30,
2019 | | | December 31,
2018 | |
Work-in-process component parts | | $ | 37,462 | | | $ | 39,150 | | | $ | 31,343 | | | $ | 30,340 | |
Finished goods | | | 11,159 | | | | 11,116 | | |
Finished goods(1) | | | | 120,190 | | | | 162,705 | |
| | | | | | | | | | | | |
Total inventory | | $ | 48,621 | | | $ | 50,266 | | | $ | 151,533 | | | $ | 193,045 | |
| | | | | | | | | | | | |
| (1) | The change between June 30, 2019 and December 31, 2018 primarily relates to the accounting impact of one of our airline partner agreements transitioning to the turnkey model (see Note 1, “Basis of Presentation,” for additional information). |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
| 6. | Composition of Certain Balance Sheet Accounts |
5. Composition of Certain Balance Sheet Accounts
PropertyPrepaid expenses and equipmentother current assets as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows (in thousands):
| | | | | | | | |
| | | September 30, | | | December 31, | |
| | | 2017 | | | 2016 | |
Office equipment, furniture, fixtures and other | | $ | 45,230 | | | $ | 49,529 | |
Leasehold improvements | | | 42,413 | | | | 42,143 | |
Airborne equipment | | | 702,414 | | | | 557,196 | |
Network equipment | | | 186,650 | | | | 168,121 | |
| | | | | | | | |
| | | 976,707 | | | | 816,989 | |
Accumulated depreciation | | | (362,396 | ) | | | (297,179 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 614,311 | | | $ | 519,810 | |
| | | | | | | | |
| | | | | | | | |
| | | June 30,
2019 | | | December 31,
2018 | |
Contract assets | | $ | 13,056 | | | $ | 10,423 | |
Prepaid satellite services | | | 5,344 | | | | 7,755 | |
Restricted cash | | | 1,035 | | | | 1,535 | |
Other | | | 11,023 | | | | 14,982 | |
| | | | | | | | |
Total prepaid expenses and other current assets | | $ | 30,458 | | | $ | 34,695 | |
| | | | | | | | |
Othernon-current assetsProperty and equipment as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows (in thousands):
| | | | | | | | |
| | | September 30, | | | December 31, | |
| | | 2017 | | | 2016 | |
Deferred cost of equipment revenue | | $ | 40,493 | | | $ | 14,159 | |
Deposits on satellite and airborne equipment | | | 8,371 | | | | 10,800 | |
Other | | | 9,644 | | | | 3,129 | |
| | | | | | | | |
Total othernon-current assets | | $ | 58,508 | | | $ | 28,088 | |
| | | | | | | | |
| | | | | | | | |
| | | June 30,
2019 | | | December 31,
2018 | |
Office equipment, furniture, fixtures and other | | $ | 54,626 | | | $ | 52,320 | |
Leasehold improvements | | | 44,842 | | | | 44,838 | |
Airborne equipment(1) | | | 720,925 | | | | 642,151 | |
Network equipment | | | 209,189 | | | | 205,463 | |
| | | | | | | | |
| | | 1,029,582 | | | | 944,772 | |
Accumulated depreciation | | | (479,674 | ) | | | (432,905 | ) |
| | | | | | | | |
Total property and equipment, net | | $ | 549,908 | | | $ | 511,867 | |
| | | | | | | | |
Accrued liabilities
| (1) | The change between June 30, 2019 and December 31, 2018 primarily relates to the accounting impact of one of our airline partner agreements transitioning to the turnkey model (see Note 1, “Basis of Presentation,” for additional information). |
Othernon-current assets as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows (in thousands):
| | | | | | | | |
| | | September 30, | | | December 31, | |
| | | 2017 | | | 2016 | |
Employee compensation and benefits | | $ | 23,831 | | | $ | 21,008 | |
Airborne equipment and installation costs | | | 35,459 | | | | 22,442 | |
Airborne partner related accrued liabilities | | | 16,226 | | | | 14,307 | |
Accrued interest | | | 22,694 | | | | 40,436 | |
Other | | | 50,054 | | | | 33,862 | |
| | | | | | | | |
Total accrued liabilities | | $ | 148,264 | | | $ | 132,055 | |
| | | | | | | | |
| | | | | | | | |
| | | June 30,
2019 | | | December 31,
2018 | |
Contract assets | | $ | 67,937 | | | $ | 49,517 | |
Deferred STC costs | | | 19,316 | | | | 16,453 | |
Restricted cash | | | 7,972 | | | | 5,426 | |
Other | | | 9,319 | | | | 12,816 | |
| | | | | | | | |
Total othernon-current assets | | $ | 104,544 | | | $ | 84,212 | |
| | | | | | | | |
Othernon-currentAccrued liabilities as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows (in thousands):
| | | | | | | | |
| | | September 30, | | | December 31, | |
| | | 2017 | | | 2016 | |
Deferred revenue | | $ | 67,048 | | | $ | 38,976 | |
Deferred rent | | | 37,101 | | | | 36,538 | |
Asset retirement obligations | | | 9,935 | | | | 8,527 | |
Other | | | 9,114 | | | | 6,627 | |
| | | | | | | | |
Total othernon-current liabilities | | $ | 123,198 | | | $ | 90,668 | |
| | | | | | | | |
| | | | | | | | |
| | | June 30,
2019 | | | December 31,
2018 | |
Airline related accrued liabilities | | $ | 66,998 | | | $ | 53,527 | |
Accrued interest | | | 18,319 | | | | 46,694 | |
Employee compensation and benefits | | | 16,987 | | | | 19,463 | |
Airborne equipment and installation costs | | | 13,266 | | | | 25,119 | |
Accrued satellite network costs | | | 13,472 | | | | 19,557 | |
Warranty reserve | | | 13,357 | | | | 12,291 | |
Operating leases(1) | | | 11,565 | | | | — | |
Other | | | 31,229 | | | | 36,460 | |
| | | | | | | | |
Total accrued liabilities | | $ | 185,193 | | | $ | 213,111 | |
| | | | | | | | |
6.
| (1) | The change between June 30, 2019 and December 31, 2018 is due to the adoption of ASC 842. See Note 2, “Recent Accounting Pronouncements,” for additional information. |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Othernon-current liabilities as of June 30, 2019 and December 31, 2018 were as follows (in thousands):
| | | | | | | | |
| | | June 30,
2019 | | | December 31,
2018 | |
Deferred revenue | | $ | 25,648 | | | $ | 21,482 | |
Deferred rent(1) | | | — | | | | 35,897 | |
Asset retirement obligations | | | 10,170 | | | | 9,696 | |
Deferred tax liabilities | | | 2,251 | | | | 2,162 | |
Other | | | 10,417 | | | | 10,954 | |
| | | | | | | | |
Total othernon-current liabilities | | $ | 48,486 | | | $ | 80,191 | |
| | | | | | | | |
| (1) | The change between June 30, 2019 and December 31, 2018 is due to the adoption of ASC 842. See Note 2, “Recent Accounting Pronouncements,” for additional information. |
Our intangible assets are comprised of both indefinite-lived and finite-lived intangible assets. Intangible assets with indefinite lives and goodwill are not amortized, butamortized; rather, they are reviewed for impairment at least annually or whenever events or circumstances indicate the carrying value of the asset may not be recoverable. We perform our annual impairment tests of our indefinite-lived intangible assets and goodwill during the fourth quarter of each fiscal year. We also reevaluate the useful life of the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The results of our annual indefinite-lived intangible assets and goodwill impairment assessments in the fourth quarter of 20162018 indicated no impairment.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
As of Septemberboth June 30, 20172019 and December 31, 2016,2018, our goodwill balance, all of which related to our BA segment, was $0.6 million.
Our intangible assets, other than goodwill, as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows (in thousands, except for weighted average remaining useful life):
| | | | Weighted | | | | | | | | | | | | | | | | | | |
| | | Average | | | As of September 30, 2017 | | | As of December 31, 2016 | | | | | | | | | | | | | | | |
| | | Remaining | | | Gross | | | | | Net | | | Gross | | | | | Net | | | Weighted | | | | | | | | | | | | | | | | | |
| | | Useful Life | | | Carrying | | | Accumulated | | Carrying | | | Carrying | | | Accumulated | | Carrying | | | Average | | | As of June 30, 2019 | | | As of December 31, 2018 | |
| | | (in years) | | | Amount | | | Amortization | | Amount | | | Amount | | | Amortization | | Amount | | | Remaining
Useful Life
(in years) | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | Net
Carrying
Amount | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | Net
Carrying
Amount | |
Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software | | | 2.2 | | | $ | 140,818 | | | $ | (85,490 | ) | | $ | 55,328 | | | $ | 118,836 | | | $ | (70,127 | ) | | $ | 48,709 | | | | 2.7 | | | $ | 172,712 | | | $ | (126,801 | ) | | $ | 45,911 | | | $ | 164,580 | | | $ | (116,873 | ) | | $ | 47,707 | |
Service customer relationship | | | 2.5 | | | | 8,081 | | | | (5,534 | ) | | 2,547 | | | | 8,081 | | | | (4,773 | ) | | 3,308 | | | | 0.8 | | | | 8,081 | | | | (7,312 | ) | | 769 | | | | 8,081 | | | | (6,804 | ) | | 1,277 | |
Other intangible assets | | | 1.3 | | | | 1,500 | | | | (997 | ) | | 503 | | | | 1,500 | | | | (682 | ) | | 818 | | | | 7.8 | | | | 3,000 | | | | (1,422 | ) | | 1,578 | | | | 3,000 | | | | (1,396 | ) | | 1,604 | |
OEM and dealer relationships | | | | | 6,724 | | | | (6,724 | ) | | | — | | | | 6,724 | | | | (6,667 | ) | | 57 | | | | | | 6,724 | | | | (6,724 | ) | | | — | | | | 6,724 | | | | (6,724 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total amortized intangible assets | | | | | 157,123 | | | | (98,745 | ) | | 58,378 | | | | 135,141 | | | | (82,249 | ) | | 52,892 | | | | | | 190,517 | | | | (142,259 | ) | | 48,258 | | | | 182,385 | | | | (131,797 | ) | | 50,588 | |
Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FCC Licenses | | | | | 32,283 | | | | — | | | 32,283 | | | | 32,283 | | | | — | | | 32,283 | | | | | | 32,283 | | | | — | | | 32,283 | | | | 32,283 | | | | — | | | 32,283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets | | | | $ | 189,406 | | | $ | (98,745 | ) | | $ | 90,661 | | | $ | 167,424 | | | $ | (82,249 | ) | | $ | 85,175 | | | | | $ | 222,800 | | | $ | (142,259 | ) | | $ | 80,541 | | | $ | 214,668 | | | $ | (131,797 | ) | | $ | 82,871 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense was $4.9$5.1 million and $16.5$10.5 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019 and $6.0$7.2 million and $15.8$14.8 million, respectively, for the prior yearprior-year periods.
Amortization expense for each of the next five years and thereafter is estimated to be as follows (in thousands):
| | | | Amortization | | | |
| Years ending December 31, | | Expense | | | Amortization
Expense | |
2017 (period from October 1 to December 31) | | $ | 7,137 | | |
2018 | | $ | 24,284 | | |
2019 | | $ | 14,427 | | |
2019 (period from July 1 to December 31) | | | $ | 10,671 | |
2020 | | $ | 8,382 | | | $ | 17,229 | |
2021 | | $ | 2,425 | | | $ | 12,281 | |
2022 | | | $ | 6,100 | |
2023 | | | $ | 1,201 | |
Thereafter | | $ | 1,723 | | | $ | 776 | |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Actual future amortization expense could differ from the estimated amount as a result of future investments and other factors.
7.
We provide warranties on parts and labor related to our products. Our warranty terms range from two to fiveten years. Warranty reserves are established for costs that are estimated to be incurred after the sale, delivery and installation of the products under warranty. The warranty reserves are determined based on known product failures, historical experience and other available evidence, and are included in accrued liabilities in our unaudited condensed consolidated balance sheets. Our warranty reserve balance was $2.7$13.4 million and $2.6$12.3 million, respectively, as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
8.
| 9. | Long-Term Debt and Other Liabilities |
Long-term debt as of SeptemberJune 30, 20172019 and December 31, 20162018 was as follows (in thousands):
| | | | | | | | |
| | | September 30, | | | December 31, | |
| | | 2017 | | | 2016 | |
Senior Secured Notes | | $ | 706,277 | | | $ | 525,000 | |
Convertible Notes | | | 306,462 | | | | 292,024 | |
| | | | | | | | |
Total debt | | | 1,012,739 | | | | 817,024 | |
Less deferred financing costs | | | (17,193 | ) | | | (16,309 | ) |
| | | | | | | | |
Total long-term debt | | $ | 995,546 | | | $ | 800,715 | |
| | | | | | | | |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
| | | | | | | | |
| | | June 30,
2019 | | | December 31,
2018 | |
2024 Senior Secured Notes | | $ | 920,800 | | | $ | — | |
2022 Senior Secured Notes | | | — | | | | 702,670 | |
2022 Convertible Notes | | | 195,867 | | | | 190,083 | |
2020 Convertible Notes | | | 3,046 | | | | 149,195 | |
| | | | | | | | |
Total debt | | | 1,119,713 | | | | 1,041,948 | |
Less deferred financing costs | | | (27,392 | ) | | | (17,055 | ) |
| | | | | | | | |
Total long-term debt | | $ | 1,092,321 | | | $ | 1,024,893 | |
| | | | | | | | |
2024 Senior Secured Notes– —On June 14, 2016April 25, 2019 (the “Issue Date”), Gogo Intermediate Holdings LLC (“GIH”) (a wholly owned subsidiary of Gogo Inc.) and Gogo Finance Co. Inc. (a wholly owned subsidiary of GIH) (the“Co-Issuer” and, together with GIH, the “Issuers”), issued $525$905 million aggregate principal amount of 12.500%9.875% senior secured notes due 20222024 (the “Original Senior Secured“Initial Notes”) under an Indenture,indenture (the “Base Indenture”), dated as of June 14, 2016 (the “Original Indenture”),April 25, 2019, among the Issuers, us, as guarantor, certain subsidiaries of GIH, as guarantors (the “Subsidiary“2024 Subsidiary Guarantors” and, together with us, the “Guarantors”“2024 Guarantors”), and U.S. Bank National Association, as trustee (in such capacity, the(the “Trustee”) and as collateral agent (in such capacity, the(the “Collateral Agent”). On JanuaryMay 3, 2017,2019, the Issuers, issued $65 million aggregate principal amount of additional senior secured notes due 2022 (the “January 2017 Additional Notes”). The January 2017 Additional Notes were issued at a price equal to 108% of their face value resulting in gross proceeds of $70.2 million. On September 20, 2017, the Issuers, the2024 Guarantors and the Trustee entered into the first supplemental indenture (the “Supplemental“First Supplemental Indenture” and, together with the OriginalBase Indenture, the “Indenture”“2024 Indenture”) to modify certain covenants, as discussed below.increase the amount of indebtedness that may be incurred under Credit Facilities (as defined in the 2024 Indenture) by GIH or its subsidiaries that are 2024 Guarantors by $20 million in aggregate principal amount. On September 25, 2017,May 7, 2019, the Issuers issued $100an additional $20 million aggregate principal amount of additional9.875% senior secured notes due 20222024 (the “September 2017 Additional“Additional Notes”). We refer to the Initial Notes and the Additional Notes collectively as the “2024 Senior Secured Notes”. The September 2017Initial Notes were issued at a price equal to 99.512% of their face value, and the Additional Notes were issued at a price equal to 113%100.5% of their face value, resulting in aggregate gross proceeds of $113.0$920.7 million. Additionally, we received approximately $2.9$0.1 million for interest that accrued from July 1, 2017April 25, 2019 through September 24, 2017, whichMay 7, 2019 with respect to the Additional Notes that will be paid out when we make our next interest payment in January 2018. We refer to the OriginalNovember 2019. The 2024 Senior Secured Notes are guaranteed on a senior secured basis by Gogo Inc. and all of GIH’s existing and future restricted subsidiaries (other than the January 2017 AdditionalCo-Issuer), subject to certain exceptions. The 2024 Senior Secured Notes and the September 2017 Additionalrelated guarantees are secured by first-priority liens (or to the extent of any future asset-based lending (“ABL”) Obligations, second-priority liens on the ABL Priority Collateral) on substantially all of the Issuers’ and the 2024 Guarantors’ assets, including pledged equity interests of the Issuers and all of GIH’s existing and future restricted subsidiaries guaranteeing the 2024 Senior Secured Notes, collectively as the “Senior Secured Notes.”except for certain excluded assets and subject to permitted liens.
As noted above, on September 20, 2017, the Issuers, the Guarantors and the Trustee entered into the Supplemental Indenture to (i) increase the amount of additional secured indebtedness under Credit Facilities (as defined in the Indenture) that may be incurred by the Issuer and its Restricted Subsidiaries (as defined in the Indenture) under the Indenture by $100 million (from $75 million to $175 million in aggregate principal amount), (ii) permit the Issuer and its Restricted Subsidiaries to incur additional secured indebtedness in connection with vendor financing arrangements not to exceed $50 million in aggregate principal amount at any time outstanding and (iii) permit the Issuer and its Restricted Subsidiaries to make additional dividends or distributions to Gogo in an aggregate amount of up to $15 million during any twelve-month period to pay interest on any indebtedness or preferred stock with a maturity later than July 1, 2022. The Supplemental Indenture became effective immediately upon execution, following our receipt of consents from holders of a majority ofJune 30, 2019, the outstanding principal amount of the Existing Notes (excluding Existing Notes held by the Issuers or any affiliates of the Issuers) to the Supplemental Indenture and amendments to the collateral agency agreement governing the Senior Secured Notes (the “Consent”). In connection with the Consent, GIH paid $1.4 million in fees (“Consent Fees”) to holders of Existing Notes who validly offered (and did not revoke) their consents prior to the expiration of the Consent.
As of September 30, 2017 and December 31, 2016, the outstanding principal amount of the2024 Senior Secured Notes was $690.0$925 million, and $525.0the unaccreted debt discount was $4.2 million respectively. The unamortized debt premium and Consent fees were $16.3 million as of September 30, 2017 and the net carrying amount was $706.3 million as$920.8 million.
We used a portion of September 30, 2017. Thethe net carrying amount was $525.0 million asproceeds from the issuance of December 31, 2016.
Interest on the 2024 Senior Secured Notes accruesto fund the redemption of all the outstanding 2022 Senior Secured Notes (as defined below) and to repurchase $159 million aggregate principal amount of the 2020 Convertible Notes (as defined below). We intend to use the remaining net proceeds for general corporate purposes.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
The 2024 Senior Secured Notes will mature on May 1, 2024. The 2024 Senior Secured Notes bear interest at thea rate of 12.500%9.875% per annum and isyear, payable semi-annuallysemiannually in arrears on JulyMay 1 and JanuaryNovember 1 commencingof each year, beginning on JanuaryNovember 1, 2017 (other than the January 2017 Additional Notes, for which interest payments commenced on July 1, 2017, and the September 2017 Additional Notes, for which interest payments will commence on January 1, 2018). The Senior Secured Notes mature on July 1, 2022. The January 2017 Additional Notes and September 2017 Additional Notes have the same terms as the Original Senior Secured Notes, except with respect to the issue date and issue price, and are treated as a single series for all purposes under the Indenture and the security documents that govern the Senior Secured Notes.2019.
We paid approximately $11.4$22.6 million $2.0 million and $2.5 million, respectively, of aggregate origination fees and financing costs related to the issuance of the Original2024 Senior Secured Notes, the January 2017 Additional Notes and the September 2017 Additional Notes, which have been accounted for as deferred financing costs. Additionally, as noted above, we paid approximately $1.4 million of Consent fees, which offset the net carrying value of the Senior Secured Notes. The deferred financing costs on our unaudited condensed consolidated balance sheet are being amortized over the contractual term of the 2024 Senior Secured Notes using the effective interest method. Total amortization expense was $0.5$0.6 million and $1.6 million, respectively, for both the three and ninesix month periods ended SeptemberJune 30, 2017, and $0.4 million and $0.5 million, respectively, for the prior year periods.2019. As of SeptemberJune 30, 2017 and December 31, 2016,2019, the balance of unamortized deferred financing costs related to the 2024 Senior Secured Notes was $13.2$22.0 million and $11.2 million, respectively, and is included as a reduction to long-term debt in our unaudited condensed consolidated balance sheet. See Note 9,10, “Interest Costs”Costs,” for additional information.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
The 2024 Senior Secured Notes are the senior secured indebtedness of the Issuers and are:
effectively senior to all of the Issuers’ existing and future senior unsecured indebtedness and the Issuers’ indebtedness secured on a junior priority basis by the same collateral securing the 2024 Senior Secured Notes, if any, in each case to the extent of the value of the collateral securing the 2024 Senior Secured Notes;
effectively senior in right of payment to all of the Issuers’ future indebtedness that is subordinated in right of payment to the Senior Secured Notes;
effectively equal in right of payment with the Issuers’ existing and future (i) unsecured indebtedness that is not subordinated in right of payment to the 2024 Senior Secured Notes and (ii) indebtedness secured on a junior priority basis by the same collateral securing the 2024 Senior Secured Notes, if any, in each case to the extent of any insufficiency in the collateral securing the 2024 Senior Secured Notes;
structurally senior to all of our existing and future indebtedness, including our 2022 Convertible Notes (asand 2020 Convertible Notes (each as defined below); and
senior in right of payment to any and all of the Issuers’ future indebtedness that is subordinated in right of payment to the 2024 Senior Secured Notes; and
structurally subordinated to all of the indebtedness and other liabilities of anynon-Guarantorsnon-2024 Guarantors (other than the Issuers).
The Senior Secured Notes are guaranteed, on a senior secured basis, by us and all of GIH’s existing and future domestic restricted subsidiaries (other than theCo-Issuer), subject to certain exceptions. The Issuers’ obligations under the Senior Secured Notes are not guaranteed by Gogo International Holdings LLC, a subsidiary of ours that holds no material assets other than equity interests in our foreign subsidiaries. Each guarantee is a senior secured obligation of such 2024 Guarantor and is:
effectively senior in right of payment to all of such Guarantor’s existing and future senior unsecured indebtedness and such Guarantor’s indebtedness secured on a junior priority basis by the same collateral if any, securing the guarantee, if any, of such 2024 Guarantor, in each case to the extent of the value of the collateral securing suchthe guarantee;
effectively senior in right of payment to all of such Guarantor’s future indebtedness that is subordinated in right of payment to such Guarantor’s guarantee;
effectively equal in right of payment with all of such Guarantor’s existing and future (i) unsecuredunsubordinated indebtedness that is not subordinated in right of payment to such Guarantor’s guarantee, and (ii) indebtedness secured on a junior priority basis by the same collateral if any, securing the guarantee, of such Guarantor,if any, in each case to the extent of any insufficiency in the collateral securing such guarantee; and
effectively subordinated to all future ABL Obligations (as defined in the 2024 Indenture) of each 2024 Guarantor, if any, to the extent of the value of the collateral securing the ABL Priority Collateral (as defined in the 2024 Indenture) owned by such 2024 Guarantor;
effectively senior in right of payment to all existing and future subordinated indebtedness, if any, of such 2024 Guarantor; and
structurally subordinated to all indebtedness and other liabilities of anynon-Guarantornon-2024 Guarantor subsidiary of such 2024 Guarantor (excluding, in the case of our guarantee, the Issuers).
The Senior Secured Notes and the related guarantees are secured by first-priority liens, subject to permitted liens, on substantially all of the Issuers’ and the Guarantors’ assets, except for certain excluded assets, including pledged equity interests of the Issuers and all of our existing and future domestic restricted subsidiaries guaranteeing the Senior Secured Notes.
The security interests in certain collateral may be released without the consent of holders of the 2024 Senior Secured Notes if such collateral is disposed of in a transaction that complies with the 2024 Indenture and related security agreements, and if any grantor of such security interests is released from its obligations with respect to the 2024 Senior Secured Notes in accordance with the applicable provisions of the 2024 Indenture and related security agreements. In addition, underUnder certain circumstances, weGIH and the 2024 Guarantors have the right to transfer certain intellectual property assets that on the Issue Date constitute collateral securing the 2024 Senior Secured Notes or the guarantees to a restricted subsidiary organized under the laws of Switzerland, resulting in the release of such collateral without consentcollateral. In addition, the Indenture permits indebtedness incurred under the ABL Obligations to be secured on a first-priority basis by certain of the holders ofsame collateral that secures the 2024 Senior Secured Notes.
On or after July 1, 2019, the
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
The Issuers may at their option, at any time or from time to time, redeem any of the 2024 Senior Secured Notes, in whole or in part. Thepart, at any time prior to May 1, 2021, at a redemption price equal to 100% of the principal amount of the 2024 Senior Secured Notes redeemed plus the make-whole premium set forth in the 2024 Indenture as of, and accrued and unpaid interest, if any, to (but not including) the applicable redemption date.
On or after May 1, 2021, the 2024 Senior Secured Notes will be redeemable at the following redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to (but not including) the redemption date (subject to the right of holders of record on the relevant regular record date on or prior to the redemption date to receive interest due on an interest payment date), if redeemed during the twelve-month period commencing on JulyMay 1 of the following years:
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
| | | | |
| | | Redemption | |
| Year | | Price | |
2019 | | | 106.250 | % |
2020 | | | 103.125 | % |
2021 and thereafter | | | 100.000 | % |
| | | | |
| Year | | Redemption
Price | |
2021 | | | 104.938 | % |
2022 | | | 102.469 | % |
2023 and thereafter | | | 100.000 | % |
In addition, at any time prior to JulyMay 1, 2019,2021, the Issuers may redeem up to 35%40% of the aggregate principal amount of the 2024 Senior Secured Notes with the proceeds of certain equity offerings at a redemption price of 112.500%109.875% of the principal amount redeemed, plus accrued and unpaid interest, if any, to (but not including) the date of redemption;provided, however, that 2024 Senior Secured Notes representing at least 65%50% of the principal amount of the 2024 Senior Secured Notes remain outstanding immediately after each such redemption.
The Issuers may redeemIn addition, if GIH receives cash proceeds in connection with the Senior Secured Notes,entry into or continuation of a strategic relationship, or equity from us in whole or in part,connection with the sale of stock to a complimentary business (in each case, a “strategic investment”) at any time prior to JulyMay 1, 2019,2020, the Issuers may redeem up to $150 million of the aggregate principal amount of the 2024 Senior Secured Notes at a redemption price equal to 100%103% of the principal amount of the 2024 Senior Secured Notes to be redeemed, plus the make-whole premium set forth in the Indenture as of, and accrued and unpaid interest, if any, to (but not including) the applicable redemption date.date with the proceeds from such strategic investment.
The 2024 Indenture contains covenants that, among other things, limit the ability of the Issuers and the 2024 Subsidiary Guarantors and, in certain circumstances, our ability, to: incur additional indebtedness; pay dividends, redeem stock or make other distributions; make investments; create restrictions on the ability of ourGIH’s restricted subsidiaries to pay dividends to the Issuers or make other intercompany transfers; create liens; transfer or sell assets; merge or consolidate; and enter into certain transactions with the Issuers’ affiliates, including us.affiliates. Most of these covenants will cease to apply if, and for as long as, the 2024 Senior Secured Notes have investment grade ratings from both Moody’s Investment Services, Inc. and Standard & Poor’s.
If we or the Issuers undergo specific types of change of control accompanied by a downgrade in the rating of the 2024 Senior Secured Notes prior to JulyMay 1, 2022,2024, GIH is required to make an offer to repurchase for cash all of the 2024 Senior Secured Notes at a repurchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the payment date.
The Indenture provides for events of default, which, if any of them occur, would permit or require the principal, premium, if any, and interest on all of the then outstanding 2024 Senior Secured Notes issued under the 2024 Indenture to be due and payable immediately. As of SeptemberJune 30, 2017,2019, no event of default had occurred.
Convertible2022 Senior Secured Notes– —On March 3, 2015, weJune 14, 2016, the Issuers issued $340.0$525 million aggregate principal amount of 3.75%12.500% senior secured notes due 2022 (the “Original 2022 Senior Secured Notes”) under an Indenture, dated as of June 14, 2016 (the “Original Indenture”), among the Issuers, us, as guarantor, certain subsidiaries of GIH, as guarantors (the “2022 Subsidiary Guarantors” and, together with us, the “2022 Guarantors”), and U.S. Bank National Association, as Trustee and as Collateral Agent. On January 3, 2017, the Issuers issued $65 million aggregate principal amount of additional 12.500% senior secured notes due 2022 (the “January 2017 Additional Notes”). The January 2017 Additional Notes were issued at a price equal to 108% of their face value resulting in gross proceeds of $70.2 million. On September 20, 2017, the Issuers, the 2022 Guarantors and the Trustee entered into the first supplemental indenture (the “Supplemental Indenture” and, together with the Original Indenture, the “Indenture”) to modify certain covenants, as discussed below. On September 25, 2017, the Issuers issued $100 million aggregate principal amount of additional 12.500% senior secured notes due 2022 (the “September 2017 Additional Notes”). The September 2017 Additional Notes were issued at a price equal to 113% of their face value resulting in gross proceeds
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
of $113.0 million. Additionally, we received approximately $2.9 million for interest that accrued from July 1, 2017 through September 24, 2017, which was paid in our January 2018 interest payment. We refer to the Original 2022 Senior Secured Notes, the January 2017 Additional Notes and the September 2017 Additional Notes collectively as the “2022 Senior Secured Notes.”
On April 15, 2019, the Issuers elected to call for redemption in full all $690 million aggregate principal amount outstanding of the 2022 Senior Secured Notes in accordance with the terms of the Indenture. The redemption was conditioned, among other things, upon the incurrence of indebtedness in connection with the issuance of the 2024 Senior Secured Notes or from one or more other sources, in an amount satisfactory to the Issuers which condition was satisfied by the issuance of the 2024 Senior Secured Notes. On April 25, 2019, the Issuers irrevocably deposited, or caused to be irrevocably deposited, with the Trustee funds solely for the benefit of the holders of the 2022 Senior Secured Notes, cash in an amount sufficient to pay principal, premium, if any, and accrued interest on the 2022 Senior Secured Notes to, but not including, the date of redemption and all other sums payable under the Indenture. The Trustee executed and delivered an acknowledgement of satisfaction, discharge and release, dated as of April 25, 2019, among other documents, with respect to the satisfaction and discharge of the 2022 Senior Secured Notes. On May 15, 2019, the 2022 Senior Secured Notes were fully redeemed in accordance with the terms of the Indenture, and the amount deposited with the Trustee on April 25, 2019 was paid to the holders of the 2022 Senior Secured Notes. The make-whole premium paid in connection with the redemption was $51.4 million and we wrote off the remaining unamortized deferred financing costs of $9.1 million and the remaining debt premium of $11.7 million relating to the 2022 Senior Secured Notes in connection with the redemption thereof, which together are included in the loss on extinguishment of debt in our unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2019.
We paid approximately $15.9 million of aggregate origination fees and financing costs related to the issuance of the 2022 Senior Secured Notes which were accounted for as deferred financing costs. Additionally, we paid approximately $1.4 million of consent fees in connection with the Supplemental Indenture, which partially offset the net carrying value of the 2022 Senior Secured Notes. Total amortization expense was $0.2 million and $1.0 million, respectively, for the three and six month periods ended June 30, 2019, and $0.7 million and $1.3 million, respectively, for the prior-year periods. As noted above, the remaining unamortized deferred financing costs were written off as of May 15, 2019.
Convertible Notes
2022 Convertible Notes
On November 21, 2018, we issued $215.0 million aggregate principal amount of 6.00% Convertible Senior Notes due 20202022 (the “Convertible“2022 Convertible Notes”) in a private offeringofferings to qualified institutional buyers, including pursuant to Rule 144A under the Securities Act.Act, and in concurrent private placements. We granted an option to the initial purchasers to purchase up to an additional $60.0$32.3 million aggregate principal amount of 2022 Convertible Notes to cover over-allotments, of which $21.9$22.8 million was subsequently exercised during March 2015,December 2018, resulting in a total issuance of $361.9$237.8 million aggregate principal amount of 2022 Convertible Notes. The 2022 Convertible Notes mature on March 1, 2020,May 15, 2022, unless earlier repurchased or converted into shares of our common stock under certain circumstances described below. Upon maturity, we have the option to settle our obligation through cash, shares of common stock, or a combination of cash and shares of common stock. We pay interest on the 2022 Convertible Notes semi-annually in arrears on March 1May 15 and September 1November 15 of each year. Interest payments began on September 1, 2015.May 15, 2019.
The $361.9$237.8 million of proceeds received from the issuance of the 2022 Convertible Notes was initially allocated between long-term debt (the liability component) at $261.9$188.7 million and additionalpaid-in-capitalpaid-in capital (the equity component) at $100.0$49.1 million, within the consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the 2022 Convertible Notes. If we or the note holders elect not to settle the debt through conversion, we must settle the 2022 Convertible Notes at face value. Therefore, the liability component will be accreted up to the face value of the 2022 Convertible Notes, which will result in additionalnon-cash interest expense being recognized in the unaudited condensed consolidated statements of operations through the 2022 Convertible Notes maturity date (see Note 9,10, “Interest Costs”Costs,” for additional information). The effective interest rate on the 2022 Convertible Notes, including accretion of the notes to par and debt issuance cost amortization, was approximately 11.5%13.6%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
As of September 30, 2017 and December 31, 2016, the outstanding principal on the Convertible Notes was $361.9 million, the unamortized debt discount was $55.4 million and $69.9 million, respectively, and the net carrying amount of the liability component was $306.5 million and $292.0 million, respectively.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
As of June 30, 2019 and December 31, 2018, the outstanding principal on the 2022 Convertible Notes was $237.8 million and $237.8 million, respectively, the unaccreted debt discount was $41.9 million and $47.7 million, respectively, and the net carrying amount of the liability component was $195.9 million and $190.1 million, respectively.
We incurred approximately $10.4$8.1 million of issuance costs related to the issuance of the 2022 Convertible Notes, of which $7.5$6.4 million and $2.9$1.7 million were recorded to deferred financing costs and additionalpaid-in capital, respectively, in proportion to the allocation of the proceeds of the 2022 Convertible Notes. The $7.5$6.4 million recorded as deferred financing costs on our unaudited condensed consolidated balance sheet is being amortized over the term of the 2022 Convertible Notes using the effective interest method. Total amortization expense of the deferred financing costs was $0.4 million and $1.1$0.8 million, respectively, for the three and nine monthssix month periods ended SeptemberJune 30, 2017, and $0.4 million and $1.0 million, respective, for the prior year periods.2019. Amortization expense is included in interest expense in the unaudited condensed consolidated statements of operations. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the balance of unamortized deferred financing costs related to the 2022 Convertible Notes was $4.0$5.4 million and $5.1$6.2 million, respectively, and is included as a reduction to long-term debt in our unaudited condensed consolidated balance sheets. See Note 9,10, “Interest Costs”Costs,” for additional information.
The 2022 Convertible Notes had an initial conversion rate of 41.9274166.6667 common shares per $1,000 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $23.85$6.00 per share of our common stock. Upon conversion, we currently expect to deliver cash up to the principal amount of the 2022 Convertible Notes then outstanding. With respect to any conversion value in excess of the principal amount, we currently expect to deliver shares of our common stock. We may elect to deliver cash in lieu of all or a portion of such shares. The shares of common stock subject to conversion are excluded from diluted earnings per share calculations under theif-converted method as their impact is anti-dilutive.
Holders may convert the 2022 Convertible Notes, at their option, in multiples of $1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances:
during any fiscal quarter beginning after the fiscal quarter ended December 31, 2018, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2022 Convertible Notes on each applicable trading day;
during the five-business day period following any five consecutive trading day period in which the trading price for the 2022 Convertible Notes is less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2022 Convertible Notes on each such trading day; or
upon the occurrence of specified corporate events.
None of the above events allowing for conversion prior to January 15, 2022 occurred during the three and six month periods ended June 30, 2019 or the year ended December 31, 2018. Regardless of whether any of the foregoing circumstances occurs, a holder may convert its 2022 Convertible Notes, in multiples of $1,000 principal amount, at any time on or after January 15, 2022 until the second scheduled trading day immediately preceding May 15, 2022.
In addition, if we undergo a fundamental change (as defined in the indenture governing the 2022 Convertible Notes), holders may, subject to certain conditions, require us to repurchase their 2022 Convertible Notes for cash at a price equal to 100% of the principal amount of the 2022 Convertible Notes to be purchased, plus any accrued and unpaid interest. In addition, following a make-whole fundamental change, we will increase the conversion rate in certain circumstances for a holder who elects to convert its 2022 Convertible Notes in connection with such make-whole fundamental change.
2020 Convertible Notes
On March 3, 2015, we issued $340.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2020 (the “2020 Convertible Notes”) in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act. We granted an option to the initial purchasers to purchase up to an additional $60.0 million aggregate principal amount of 2020 Convertible Notes to cover over-allotments, of which $21.9 million was subsequently exercised during March 2015, resulting in a total issuance of $361.9 million aggregate principal amount of 2020 Convertible Notes. The 2020 Convertible Notes mature on March 1, 2020, unless earlier repurchased or converted into shares of our common stock under certain circumstances described below. Upon maturity, we have the option to settle our obligation through cash, shares of common stock, or a combination of cash and shares of common
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
stock. We pay interest on the 2020 Convertible Notes semi-annually in arrears on March 1 and September 1 of each year. Interest payments began on September 1, 2015. In November 2018, in connection with the issuance of the 2022 Convertible Notes, we repurchased $199.9 million outstanding principal amount of the 2020 Convertible Notes at par value. As a result of the repurchase, the carrying value of the 2020 Convertible Notes was adjusted by $17.9 million to face value and included in the loss on extinguishment of debt in our consolidated statement of operations for the year ended December 31, 2018.
On April 18, 2019, we commenced a cash tender offer (the “Tender Offer”) to purchase any and all of the outstanding 2020 Convertible Notes for an amount equal to $1,000 per $1,000 principal amount of 2020 Convertible Notes purchased, plus accrued and unpaid interest from the last interest payment date on the 2020 Convertible Notes to, but not including, the date of payment for the 2020 Convertible Notes accepted in the Tender Offer. The Tender Offer expired on May 15, 2019, resulting in the purchase of $159.0 million of outstanding 2020 Convertible Notes. As a result of the Tender Offer, the carrying value of the 2020 Convertible Notes was adjusted by $8.5 million to face value and unamortized deferred financing costs of $0.6 million were expensed. These two items are included in the loss on extinguishment of debt in our unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2019.
The $361.9 million of proceeds received from the issuance of the 2020 Convertible Notes was initially allocated between long-term debt (the liability component) at $261.9 million and additionalpaid-in capital (the equity component) at $100.0 million, within the consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the 2020 Convertible Notes. If we or the holders of 2020 Convertible Notes elect not to settle the debt through conversion, we must settle the 2020 Convertible Notes at face value. Therefore, the liability component was accreted up to the face value of the 2020 Convertible Notes, which resulted in additionalnon-cash interest expense being recognized in the unaudited condensed consolidated statements of operations (see Note 10, “Interest Costs,” for additional information). The effective interest rate on the 2020 Convertible Notes, including accretion of the notes to par and debt issuance cost amortization, was approximately 11.5%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
As of June 30, 2019 and December 31, 2018, the outstanding principal on the 2020 Convertible Notes was $3.0 million and $162.0 million, respectively, the unamortized debt discount was zero and $12.8 million, respectively, and the net carrying amount of the liability component was $3.0 million and $149.2 million, respectively.
We incurred approximately $10.4 million of issuance costs related to the issuance of the 2020 Convertible Notes, of which $7.5 million and $2.9 million were recorded to deferred financing costs and additionalpaid-in capital, respectively, in proportion to the allocation of the proceeds of the 2020 Convertible Notes. The $7.5 million recorded as deferred financing costs on our consolidated balance sheet is being amortized over the term of the 2020 Convertible Notes using the effective interest method. Total amortization expense of the deferred financing costs was $0.1 million and $0.3 million, respectively, for the three and six month periods ended June 30, 2019 and $0.4 million and $0.8 million, respectively, for the prior-year periods. Amortization expense is included in interest expense in the unaudited condensed consolidated statements of operations. As of June 30, 2019 and December 31, 2018, the balance of unamortized deferred financing costs related to the 2020 Convertible Notes was zero and $0.9 million, respectively, and is included as a reduction to long-term debt in our unaudited condensed consolidated balance sheets. See Note 10, “Interest Costs,” for additional information.
The 2020 Convertible Notes had an initial conversion rate of 41.9274 common shares per $1,000 principal amount of 2020 Convertible Notes, which is equivalent to an initial conversion price of approximately $23.85 per share of our common stock. Upon conversion, we currently expect to deliver cash up to the principal amount of the 2020 Convertible Notes then outstanding. With respect to any conversion value in excess of the principal amount, we currently expect to deliver shares of our common stock. We may elect to deliver cash in lieu of all or a portion of such shares. The shares of common stock subject to conversion are excluded from diluted earnings per share calculations under theif-converted method as their impact is anti-dilutive.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Holders may convert the 2020 Convertible Notes, at their option, in multiples of $1,000 principal amount at any time prior to December 1, 2019, but only in the following circumstances:
during any fiscal quarter beginning after the fiscal quarter ended June 30, 2015, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2020 Convertible Notes on each applicable trading day;
during the five business day period following any five consecutive trading day period in which the trading price for the 2020 Convertible Notes is less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2020 Convertible Notes on each such trading day; or
upon the occurrence of specified corporate events.
None of the above events allowing for conversion prior to December 1, 2019 occurred during the three and ninesix month periods ended SeptemberJune 30, 2017.2019 or the year ended December 31, 2018. Regardless of whether any of the foregoing circumstances occurs, a holder may convert its 2020 Convertible Notes, in multiples of $1,000 principal amount, at any time on or after December 1, 2019 until maturity.
In addition, if we undergo a fundamental change (as defined in the indenture governing the 2020 Convertible Notes), holders may, subject to certain conditions, require us to repurchase their 2020 Convertible Notes for cash at a price equal to 100% of the principal amount of the 2020 Convertible Notes to be purchased, plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its 2020 Convertible Notes in connection with such a corporate event in certain circumstances.
Forward Transactions
In connection with the issuance of the 2020 Convertible Notes, we paid approximately $140 million to enter into prepaid forward stock repurchase transactions (the “Forward Transactions”) with certain financial institutions (the “Forward Counterparties”), pursuant to which we purchased approximately 7.2 million shares of common stock for settlement on or around the March 1, 2020 maturity date for the 2020 Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. In the future, we may request that any Forward Counterparty modify the settlement terms of its Forward Transaction to provide that, in lieu of the delivery of the applicable number of shares of our common stock to us to settle a portion of its Forward Transaction in accordance with its terms, such Forward Counterparty would pay to us the net proceeds from the sale by such Forward Counterparty (or its affiliate) of a corresponding number of shares of our common stock in a registered offering (which may include block sales, sales on the NASDAQ Global Select Market, sales in theover-the-counter market, sales pursuant to negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices). Any such sales could potentially decrease (or reduce the size of any increase in) the market price of our common stock. The Forward Counterparties are not required to effect any such settlement in cash in lieu of delivery of shares of our common stock and, if we request for any Forward Counterparty to effect any such settlement, it will be entered into in the discretion of the applicable Forward Counterparty on such terms as we may agree with such Forward Counterparty at the time. As a result of the Forward Transactions, total shareholders’ equity within our unaudited condensed consolidated balance sheet was reduced by approximately $140 million. Approximately 7.2 million shares of common stock that will be effectively repurchased through the Forward Transactions are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Amended and Restated Senior Term Facility–On July 30, 2014, GIH, Gogo Business Aviation LLC, f/k/a Aircell Business Aviation Services LLC (“GBA”), and Gogo LLC, as borrowers (collectively, the “Borrowers”), entered into an Amendment and Restatement Agreement (the “Amendment”) to the Credit Agreement dated as of June 21, 2012 and amended on April 4, 2013 (the “Amended Senior Term Facility”) among the Borrowers, the lenders named therein, and Morgan Stanley Senior Funding, Inc., as Administrative Agent and Collateral Agent. We refer to the Amendment and the Amended Senior Term Facility collectively as the “Amended and Restated Senior Term Facility.”
On June 14, 2016, the outstanding principal balance of $287.7 million, together with accrued and unpaid interest, was paid in full, and the Amended and Restated Senior Term Facility was terminated in accordance with its terms on such date (subject to the survival of provisions expressly stated therein to survive the termination thereof). Additionally, we paid the voluntary prepayment premium of 3.0%, or $8.6 million, and wrote off all of the remaining unamortized deferred financing costs of $6.8 million. Both of these items are included in loss on extinguishment of debt in our unaudited condensed consolidated financial statements. See Note 6, “Long-Term Debt and Other Liabilities,” in our 201610-K for additional information on the Amended and Restated Senior Term Facility.
We paid $22.2 million of loan origination fees and financing costs related to the Amended and Restated Senior Term Facility, all but $4.1 million of which were accounted for as deferred financing costs. Total amortization expense of the deferred financing costs was $1.4 million for the nine month period ended September 30, 2016. Amortization expense is included in interest expense in the unaudited condensed consolidated statements of operations. As noted above, deferred financing costs related to the Amended and Restated Senior Term Facility were written off as of June 14, 2016.
Restricted Cash - —Our restricted cash balances were $7.4$9.0 million and $7.9$7.0 million, respectively, as of SeptemberJune 30, 20172019 and December 31, 20162018 and primarily consist of letters of credit.credit and cash restricted to repurchase or repay the remaining balance of the 2020 Convertible Notes. Certain of the letters of credit require us to maintain restricted cash accounts in a similar amount, and are issued for the benefit of the landlords at our current office locations in Chicago, IL, Bensenville, IL and Broomfield, CO.
9.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
We capitalize a portion of our interest on funds borrowed during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and amortized over the useful lives of the assets.
The following is a summary of our interest costs for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018(in thousands):
| | | | For the Three Months | | | For the Nine Months | | | | | | | | | |
| | | Ended September 30, | | | Ended September 30, | | | For the Three Months
Ended June 30, | | | For the Six Months
Ended June 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Interest costs charged to expense | | $ | 21,936 | | | $ | 19,598 | | | $ | 65,164 | | | $ | 42,780 | | | $ | 31,226 | | | $ | 24,928 | | | $ | 57,757 | | | $ | 49,908 | |
Amortization of deferred financing costs | | | 919 | | | | 818 | | | | 2,718 | | | | 2,981 | | | | 1,324 | | | | 1,048 | | | | 2,573 | | | | 2,083 | |
Accretion of debt discount on Convertible Notes | | | 4,945 | | | | 4,432 | | | | 14,438 | | | | 12,940 | | |
Amortization of debt premium on Senior Secured Notes | | | (215 | ) | | | — | | | | (566 | ) | | | — | | |
Accretion of debt discount | | | | 3,858 | | | | 5,368 | | | | 9,392 | | | | 10,592 | |
Amortization of debt premium | | | | (258 | ) | | | (703 | ) | | | (1,018 | ) | | | (1,388 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 27,585 | | | | 24,848 | | | | 81,754 | | | | 58,701 | | | | 36,150 | | | | 30,641 | | | | 68,704 | | | | 61,195 | |
Interest costs capitalized to property and equipment | | | 9 | | | | 34 | | | | 15 | | | | 187 | | | | 7 | | | | 3 | | | | 11 | | | | 15 | |
Interest costs capitalized to software | | | 193 | | | | 279 | | | | 804 | | | | 961 | | | | 115 | | | | 75 | | | | 240 | | | | 107 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest costs | | $ | 27,787 | | | $ | 25,161 | | | $ | 82,573 | | | $ | 59,849 | | | $ | 36,272 | | | $ | 30,719 | | | $ | 68,955 | | | $ | 61,317 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
10.
Operating and Financing Leases—We identify whether a contract contains a lease at contract inception. For leases subsequent to adoption of ASC 842, lease liabilities are calculated using a discount rate based on our incremental borrowing rate at lease commencement. We have operating lease agreements for certain facilities and equipment as well as tower space and base stations. Certain tower space leases have renewal option terms that have been deemed to be reasonably certain to be exercised. These renewal options extend a lease up to 20 years. We recognize operating lease expense on a straight-line basis over the lease term. As of June 30, 2019, there are no significant leases which have not commenced.
Arrangements with Commercial Airlines— Pursuant to contractual agreements withThe following is a summary of our airline partners, we place our equipment on commercial aircraft operated bylease expense included in the airlines for the purposeunaudited condensed consolidated statements of delivering the Gogo service to passengers on the aircraft. There are currently two types of commercial airline arrangements: Turnkey and Airline Directed.operations(in thousands):
| | | | | | | | |
| | | For the Three Months
Ended June 30, 2019 | | | For the Six Months
Ended June 30, 2019 | |
Operating lease cost | | $ | 5,194 | | | $ | 10,112 | |
Financing lease cost | | | | | | | | |
Amortization of leased assets | | | 171 | | | | 376 | |
Interest on lease liabilities | | | 16 | | | | 27 | |
| | | | | | | | |
Total lease cost | | $ | 5,381 | | | $ | 10,515 | |
| | | | | | | | |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Other information regarding our leases is as follows(in thousands, except lease terms and discount rates):
| | | | | | | | |
| | | For the Three Months
Ended June 30, 2019 | | | For the Six Months
Ended June 30, 2019 | |
Supplemental cash flow information | | | | | | | | |
Cash paid for amounts included in measurement of lease liabilities: | | | | | | | | |
Operating cash flows used in operating leases | | $ | 5,791 | | | $ | 11,908 | |
Operating cash flows used in financing leases | | | 16 | | | | 27 | |
Financing cash flows used in financing leases | | | 258 | | | | 383 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases | | | 768 | | | | 1,047 | |
Weighted average remaining lease term | | | | | | | | |
Operating leases | | | | | | | 8 years | |
Financing leases | | | | | | | 1 year | |
Weighted average discount rate | | | | | | | | |
Operating leases | | | | | | | 10.3 | % |
Financing leases | | | | | | | 8.5 | % |
Annual future minimum lease payments as of June 30, 2019(in thousands):
| | | | | | | | |
| Years ending December 31, | | Operating
Leases | | | Financing
Leases | |
2019 (period from July 1 to December 31) | | $ | 11,301 | | | $ | 300 | |
2020 | | | 21,414 | | | | 192 | |
2021 | | | 21,034 | | | | — | |
2022 | | | 19,596 | | | | — | |
2023 | | | 15,765 | | | | — | |
Thereafter | | | 76,952 | | | | — | |
| | | | | | | | |
Total future minimum lease payments | | | 166,062 | | | | 492 | |
Less: Amount representing interest | | | (56,878 | ) | | | (22 | ) |
| | | | | | | | |
Present value of net minimum lease payments | | $ | 109,184 | | | $ | 470 | |
| | | | | | | | |
Reported as of June 30, 2019 | | | | | | | | |
Accrued liabilities | | $ | 11,565 | | | $ | 467 | |
Non-current operating lease liabilities | | | 97,619 | | | | — | |
Othernon-current liabilities | | | — | | | | 3 | |
| | | | | | | | |
Total lease liabilities | | $ | 109,184 | | | $ | 470 | |
| | | | | | | | |
As of December 31, 2018, annual future minimum obligations for operating leases for each of the next five years and thereafter, were as follows (in thousands):
| | | | |
| Years ending December 31, | | Operating
Leases | |
2019 | | $ | 21,902 | |
2020 | | $ | 19,867 | |
2021 | | $ | 19,742 | |
2022 | | $ | 18,420 | |
2023 | | $ | 14,826 | |
Thereafter | | $ | 78,100 | |
Arrangements with Commercial Airlines—Under the Turnkeyturnkey model, we account for equipment transactions as operating leases of space for our equipment on the aircraft. We may be responsible for the costs of installing and/or deinstalling the equipment. The majority ofUnder the turnkey model, the equipment transactions involve the transfer of legal title but do not meet sales recognition for accounting purposes because the risks and rewards of ownership are not fully transferred due to our continuing involvement with the equipment, the length of the term of our agreements with the airlines, and restrictions in the agreements regarding the airlines’ use of the equipment. Under the Turnkeyturnkey model, we refer to our relationship with the airline as a “partner”.“partner.”
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Under the Turnkeyturnkey model, the assets are recorded as airborne equipment on our unaudited condensed consolidated balance sheets, as noted in Note 5,6, “Composition of Certain Balance Sheet Accounts.” Any upfront equipment payments are accounted for as lease incentives and recorded as deferred airborne lease incentives on our unaudited condensed consolidated balance sheets and are recognized as a reduction of the cost of service revenue on a straight-line basis over the term of the agreement with the airline. We recognized $10.1$6.1 million and $28.1$15.0 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019 and $7.8$7.5 million and $20.7$15.1 million, respectively, for the prior yearprior-year periods as a reduction to our cost of service revenue in our unaudited condensed consolidated statements of operations. As of SeptemberJune 30, 2017,2019, deferred airborne lease incentives of $39.1$24.7 million and $121.6$137.2 million, respectively, are included in current andnon-current liabilities in our unaudited condensed consolidated balance sheet. As of December 31, 2016,2018, deferred airborne lease incentives of $36.3$24.1 million and $135.9$129.1 million, respectively, are included in current andnon-current liabilities in our unaudited condensed consolidated balance sheet. The decrease in our deferred airborne lease incentives is due primarily to the transition in the accounting treatment for one of our airline agreements from a Turnkey model in the prior year period to an Airline Directed model in the first quarter of 2017 due to specific provisions elected by the airline.
Under the Turnkeyturnkey model, the revenue share paid to our airline partners represents operating lease payments. They are deemed to be contingent rental payments, as the payments due to each airline are based on a percentage of ourCA-NA andCA-ROW service revenue generated from that airline’s passengers, which is unknown until realized. Therefore, we cannot estimate the lease payments due to an airline at the commencement of our contract with such airline. This rental expense is included in cost of service revenue and is partially offset by the amortization of the deferred airborne lease incentives discussed above. Such rental expenses totaled a net charge of $7.7$6.8 million and $26.9$10.6 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019 and $10.1$6.7 million and $32.3$13.1 million, respectively, for the prior yearprior-year periods.
A contract with one of our airline partners requires us to provide the airline partner with a cash rebate of $1.8 million in June 2018.
| 12. | Under the Airline Directed model, which we have historically used on a limited basis, equipment transactions qualify for sale treatment due to the specific provisions of the agreement. When all the recognition conditions are met for the equipment, the sale is recognized as equipment revenue. When equipment and services are not separable, equipment revenue is deferred and recognized over the service period. Under the Airline Directed model, we refer to our relationship with the airline as a “customer”. For more information see Note 2, “Summary of Significant Accounting Policies” in our 201610-K.
Leases and Cell Site Contracts— We have lease agreements relating to certain facilities and equipment, which are considered operating leases. Rent expense for such operating leases was $3.0 million and $9.0 million, respectively, for the three and nine month periods ended September 30, 2017, and $3.0 million and $8.9 million, respectively, for the prior year periods. Additionally, we have operating leases with wireless service providers for tower space and base station capacity on a volume usage basis (“cell site leases”), some of which provide for minimum annual payments. Our cell site leases generally provide for an initial noncancelable term with various renewal options. Total cell site rental expense was $2.3 and $7.0 million, respectively, for the three and nine month periods ended September 30, 2017, and $2.3 million and $7.0 million, respectively, for the prior year periods.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Annual future minimum obligations for operating leases for each of the next five years and thereafter, other than the arrangements we have with our commercial airline partners, as of September 30, 2017, are as follows (in thousands):
| | | | | | | | Operating | | | Years ending December 31, | | Leases | | 2017 (period from October 1 to December 31) | | $ | 5,005 | | 2018 | | $ | 18,832 | | 2019 | | $ | 17,765 | | 2020 | | $ | 15,718 | | 2021 | | $ | 15,478 | | Thereafter | | $ | 95,693 | |
Equipment Leases – We lease certain computer and network equipment under capital leases, for which interest has been imputed with annual interest rates in an approximate range of 8% to 14%. As of September 30, 2017 and December 31, 2016 the computer equipment leases were classified as part of office equipment, furniture, and fixtures and other in our unaudited condensed consolidated balance sheet at a gross cost of $5.1 million and $3.9 million, respectively. As of September 30, 2017 and December 31, 2016, the network equipment leases were classified as part of network equipment in our unaudited condensed consolidated balance sheet at a gross cost of $7.5 million and $7.5 million, respectively. Annual future minimum obligations under capital leases for each of the next five years and thereafter, as of September 30, 2017, are as follows (in thousands):
| | | | | | | | Capital | | | Years ending December 31, | | Leases | | 2017 (period from October 1 to December 31) | | $ | 947 | | 2018 | | | 2,030 | | 2019 | | | 1,016 | | 2020 | | | 34 | | Thereafter | | | — | | | | | | | Total minimum lease payments | | | 4,027 | | Less: Amount representing interest | | | (401 | ) | | | | | | Present value of net minimum lease payments | | $ | 3,626 | | | | | | |
The $3.6 million present value of net minimum lease payments as of September 30, 2017 has a current portion of $2.1 million included in the current portion of long-term debt and capital leases and anon-current portion of $1.5 million included in othernon-current liabilities.
11. Commitments and Contingencies
|
Contractual Commitments - —We have agreements with vendors to provide us with transponder and teleport satellite services. These agreements vary in length and amount and as of SeptemberJune 30, 20172019 commit us to purchase transponder and teleport satellite services totaling approximately $21.4$59.2 million in 2017 (October2019 (July 1 through December 31), $75.6 million in 2018, $81.9 million in 2019, $86.2$108.8 million in 2020, $75.9$92.3 million in 2021, $76.2 million in 2022, $63.1 million in 2023 and $303.0$166.4 million thereafter.
We have agreements with various vendors under which we have remaining commitments to purchase satellite-based systems, certifications and development services. Such commitments will become payable as we receive the equipment or certifications, or as development services are provided.
Damages and Penalties—We have entered into a number of agreements with our airline partners that require us to provide a credit or pay penalties or liquidated damages to our airline partners if we are delayed in delivering our equipment, unable to install our equipment on aircraft by specified timelines or fail to comply with service level commitments. The maximum amount of future credits or payments we could be required to make under these agreements is uncertain because the amount of future credits or payments is based on certain variable inputs.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Indemnifications and Guarantees - —In accordance with Delaware law, we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under this indemnification is uncertain and may be unlimited, depending upon circumstances. However, our Directors’ and Officers’ insurance does provide coverage for certain of these losses.
In the ordinary course of business we may occasionally enter into agreements pursuant to which we may be obligated to pay for the failure of the performance of others, such as the use of corporate credit cards issued to employees. Based on historical experience, we believe that the risk of sustaining any material loss related to such guarantees is remote.
We have entered into a number of agreements, including our agreements with commercial airlines, pursuant to which we indemnify the other party for losses and expenses suffered or incurred in connection with any patent, copyright, or trademark infringement or misappropriation claim asserted by a third party with respect to our equipment or services. The maximum potential amount of future payments we could be required to make under these indemnification agreements is uncertain and is typically not limited by the terms of the agreements.
12.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Linksmart Litigation—On April 20, 2018, Linksmart Wireless Technology, LLC filed suit against us and eight of our airline partners in the U.S. District Court for the Central District of California alleging that our redirection server and login portal infringe a patent owned by the plaintiff. The suits seek an unspecified amount of damages. We are required under our contracts with these airlines to indemnify them for defense costs and any liabilities resulting from the suit. The Court has stayed the suits against our airline customers pending resolution of the suit against Gogo. Linksmart has also filed suit against other defendants asserting the same patent. Following the filing by one of those defendants of a petition to commence aninter partes review against the asserted patent in the U.S. Patent and Trademark Office, the Court stayed the litigation against such other defendant and Gogo, but such stay was lifted in July 2019 when the U.S. Patent and Trademark Office determined that the petitioner had not met the standard of proof required to commence theinter partes review. We believe that the plaintiff’s claims are without merit and intend to defend them vigorously. The outcome of this litigation is inherently uncertain. No amounts have been accrued for any potential losses under this matter, as we cannot reasonably predict the outcome of the litigation or any potential losses.
Securities Litigation—On June 27, 2018, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Northern District of Illinois, Eastern Division styled Pierrelouis v. Gogo Inc., naming the Company, its former Chief Executive Officer and Chief Financial Officer and its current Chief Financial Officer and President, Commercial Aviation as defendants purportedly on behalf of all purchasers of our securities from February 27, 2017 through May 4, 2018. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule10b-5 promulgated thereunder, alleging misrepresentations or omissions by us purporting to relate to our 2Ku antenna’s reliability and installation and remediation costs. The plaintiffs seek to recover from us and the individual defendants an unspecified amount of damages. In December 2018 the plaintiffs filed an amended complaint and in February 2019, we filed a motion to dismiss such amended complaint. In April 2019 the plaintiffs filed a response to our motion, and we filed our reply in May 2019. The parties are currently awaiting the Court’s ruling on the motion. We believe that the claims are without merit and intend to continue to defend them vigorously. In accordance with Delaware law, we will indemnify the individual named defendants for their defense costs and any damages they incur in connection with the suit. We have filed a claim with the issuer of our Directors’ and Officers’ insurance policy with respect to this suit. No amounts have been accrued for any potential losses under this matter, as we cannot reasonably predict the outcome of the litigation or any potential losses.
Derivative Litigation—On September 25, 2018 and September 26, 2018, two purported stockholders of the Company filed substantively identical derivative lawsuits in the United States District Court for the Northern District of Illinois, Eastern Division, styled Nanduri v. Gogo Inc. and Hutsenpiller v. Gogo Inc., respectively. Both lawsuits were purportedly brought derivatively on behalf of us and name us as a nominal defendant and name as defendants each member of the Company’s Board of Directors, its former Chief Executive Officer and Chief Financial Officer and its current Chief Executive Officer, Chief Financial Officer and President, Commercial Aviation. The complaints assert claims under Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and allege misrepresentations or omissions by us purporting to relate to our 2Ku antenna’s reliability and installation and remediation costs, as well as allegedly excessive bonuses, stock options, and other compensation paid to current Officers and Directors and excessive severance paid to former Officers. The two lawsuits were consolidated and are stayed pending the Court’s ruling on the motion to dismiss in the class action suit. We believe that the claims are without merit and intend to defend them vigorously. The plaintiffs seek to recover, on our behalf, an unspecified amount of damages from the individual defendants. We have filed a claim with the issuer of our Directors’ and Officers’ insurance policy with respect to these suits. No amounts have been accrued for any potential costs under this matter, as we cannot reasonably predict the outcome of the litigation or any potential costs.
| 13. | Fair Value of Financial Assets and Liabilities |
A three-tier fair value hierarchy has been established which prioritizes the inputs used in measuring fair value. These tiers include:
| | • | | Level 1 - —defined as observable inputs such as quoted prices in active markets; |
| | • | | Level 2 - —defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
| | • | | Level 3 - —defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Long-Term Debt:
Our financial assets and liabilities that are disclosed but not measured at fair value include the 2024 Senior Secured Notes, 2022 Convertible Notes, 2020 Convertible Notes and, while outstanding, the Convertible2022 Senior Secured Notes, which are reflected on the unaudited condensed consolidated balance sheet at cost. The fair value measurements are classified as Level 2 within the fair value hierarchy since they are based on quoted market prices of our instruments in markets that are not active. We estimated the fair value of the 2024 Senior Secured Notes, 2022 Convertible Notes, 2020 Convertible Notes, and, Convertiblewhile outstanding, the 2022 Senior Secured Notes by calculating the upfront cash payment a market participant would require to assume these obligations. The upfront cash payment used in the calculations of fair value on our SeptemberJune 30, 20172019 unaudited condensed consolidated balance sheet, excluding any issuance costs, is the amount that a market participant would be willing to lend at SeptemberJune 30, 20172019 to an entity with a credit rating similar to ours and achieve sufficient cash inflows to cover the scheduled cash outflows under the 2024 Senior Secured Notes, 2022 Convertible Notes and the2020 Convertible Notes. The calculated fair value of our 2022 Convertible Notes and 2020 Convertible Notes is highly correlated to our stock price and as a result, significant changes to our stock price could have a significant impact on thetheir calculated fair value of our Convertible Notes.values.
The fair value and carrying value of long-term debt as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows(in thousands):
| | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | | December 31, 2016 | |
| | | Fair
Value (1) | | | Carrying
Value | | | Fair
Value (1) | | | Carrying
Value | |
Senior Secured Notes | | $ | 788,000 | | | $ | 706,277 | (2) | | $ | 572,000 | | | $ | 525,000 | |
Convertible Notes | | | 333,000 | | | | 306,462 | (3) | | | 275,000 | | | | 292,024 | (3) |
| | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | | December 31, 2018 | |
| | | Fair Value (1) | | | Carrying
Value | | | Fair Value (1) | | | Carrying
Value | |
2024 Senior Secured Notes | | $ | 955,000 | | | $ | 920,800 | (2) | | $ | — | | | $ | — | |
2022 Senior Secured Notes | | | — | | | | — | | | | 737,000 | | | | 702,670 | (3) |
2022 Convertible Notes | | | 221,000 | | | | 195,867 | (4) | | | 216,000 | | | | 190,083 | (4) |
2020 Convertible Notes | | | 3,000 | | | | 3,046 | | | | 150,000 | | | | 149,195 | (5) |
| (1) | Fair value amounts are rounded to the nearest million. |
| (2) | Carrying value of the 2024 Senior Secured Notes includes unamortizedreflects the unaccreted debt premium and Consent Feesdiscount of $16.3$4.2 million as of SeptemberJune 30, 2017.2019. See Note 8,9, “Long-Term Debt and Other Liabilities,” for further information. |
| (3) | Carrying value of the Convertible2022 Senior Secured Notes excludesreflects the unamortized debt discountpremium and Consent Fees of $55.4$12.7 million and $69.9 million, respectively, as of September 30, 2017 and December 31, 2016.2018. See Note 8,9, “Long-Term Debt and Other Liabilities,” for further information. |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
| (4) | Carrying value of the 2022 Convertible Notes reflects the unaccreted debt discount of $41.9 million and $47.7 million, respectively, as of June 30, 2019 and December 31, 2018. See Note 9, “Long-Term Debt and Other Liabilities,” for further information. |
| (5) | Carrying value of the 2020 Convertible Notes reflects the unaccreted debt discount of $12.8 million as of December 31, 2018. See Note 9, “Long-Term Debt and Other Liabilities,” for further information. |
We haveheld-to-maturity financial instruments where carrying value approximates fair value. There were no fair value adjustments to these financial instruments during 2017the three and 2016.six month periods ended June 30, 2019 and 2018.
13.
The effective income tax rates for the three and ninesix month periods ended SeptemberJune 30, 2017 was (0.8%)2019 were (0.4)% and (0.7%)(0.5)%, respectively, as compared with (0.2)% and (1.4%) and (1.0%)5.4%, respectively, for the prior yearprior-year periods. Income tax expense recorded in each period was similar, with differences inpre-tax income causing the change in the effective tax rate. The difference between our effective tax rates and the U.S. federal statutory rate of 35% forFor the three and ninesix month periods ended SeptemberJune 30, 2017 and 20162019, our income tax expense was not significant primarily due to the recording of a valuation allowance against our net deferred tax assets. An income tax benefit was recorded for the six month period ended June 30, 2018 resulting from a reduction in our valuation allowance of approximately $4.0 million due to the application of provisions of H.R. 1, commonly known as the Tax Cuts and Jobs Act (“U.S. Tax Reform”), to our evaluation of our deferred tax assets.
We are subject to income taxation in the United States, various states within the United States, Canada, Switzerland, Japan, Mexico, Brazil, Singapore, the United Kingdom, Hong Kong, Australia, China, India, France, Germany and Germany.the Netherlands. With few exceptions, as of SeptemberJune 30, 2017,2019, we are no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2013.2015.
We record penalties and interest relating to uncertain tax positions in the income tax provision line item in the unaudited condensed consolidated statement of operations. No penalties or interest related to uncertain tax positions were recorded for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 2016.2018. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, we did not have a liability recorded for interest or potential penalties.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
We do not expect a change in the unrecognized tax benefits within the next 12 months.
14.
| 15. | Business Segments and Major Customers |
We operate our business through three operating segments: Commercial Aviation North America, or“CA-NA”,CA-NA,” Commercial Aviation Rest of World, or“CA-ROW,” and Business Aviation, or “BA”.“BA.” See Note 1, “Basis of Presentation,” for further information regarding our segments.
The accounting policies of the operating segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” in our 2016201810-K. Intercompany transactions between segments are excluded as they are not included in management’s performance review of the segments. We currently do not generate a material amountFor the three and six month periods ended June 30, 2019 and 2018, our foreign revenue accounted for less than 15% of foreignour consolidated revenue. We do not segregate assets between segments for internal reporting. Therefore, asset-related information has not been presented. We do not discloseAdditionally, assets outside of the United States as thesetotaled less than 15% of our unaudited condensed consolidated assets are not material as of SeptemberJune 30, 20172019 and December 31, 2016.2018, respectively. For our airborne assets, we consider only those assets installed in aircraft associated with international commercial airline partners to be owned outside of the United States.
Management evaluates performance and allocates resources to each segment based on segment profit (loss), which is calculated internally as net income (loss) attributable to common stock before interest expense, interest income, income taxes, depreciation and amortization, certainnon-cash chargesitems (including amortization of deferred airborne lease incentives, stock-based compensation expense, loss on extinguishment of debt, amortization of STC costs and adjustmentthe accounting impact of the transition to deferred financing costs)the airline-directed model) and other income (expense). Segment profit (loss) is a measure of performance reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and evaluating segment performance. In addition, segment profit (loss) is included herein in conformity with ASC280-10,Segment Reporting. Management believes that segment profit (loss) provides useful information for analyzing and evaluating the underlying operating results of each segment. However, segment profit (loss) should not be considered in isolation or as a substitute for net income (loss) attributable to common stock or other measures of financial performance prepared in accordance with GAAP. Additionally, our computation of segment profit (loss) may not be comparable to other similarly titled measures computed by other companies.
Information regarding our reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended | |
| | | June 30, 2019 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 96,402 | | | $ | 22,573 | | | $ | 54,756 | | | $ | 173,731 | |
Equipment revenue | | | 9,325 | | | | 14,144 | | | | 16,485 | | | | 39,954 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 105,727 | | | $ | 36,717 | | | $ | 71,241 | | | $ | 213,685 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 24,171 | | | $ | (17,265 | ) | | $ | 31,290 | | | $ | 38,196 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Three Months Ended | |
| | | June 30, 2018 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 95,746 | | | $ | 15,185 | | | $ | 48,125 | | | $ | 159,056 | |
Equipment revenue | | | 23,904 | | | | 18,460 | | | | 26,038 | | | | 68,402 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 119,650 | | | $ | 33,645 | | | $ | 74,163 | | | $ | 227,458 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 7,041 | | | $ | (24,474 | ) | | $ | 36,679 | | | $ | 19,246 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Six Months Ended | |
| | | June 30, 2019 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 188,429 | | | $ | 42,345 | | | $ | 107,969 | | | $ | 338,743 | |
Equipment revenue | | | 13,367 | | | | 27,303 | | | | 33,821 | | | | 74,491 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 201,796 | | | $ | 69,648 | | | $ | 141,790 | | | $ | 413,234 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 47,713 | | | $ | (36,414 | ) | | $ | 64,788 | | | $ | 76,087 | |
| | | | | | | | | | | | | | | | |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
Information regarding our reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| |
| | | For the Six Months Ended | |
| | | June 30, 2018 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 184,529 | | | $ | 29,430 | | | $ | 95,775 | | | $ | 309,734 | |
Equipment revenue(1) | | | 78,942 | | | | 23,384 | | | | 47,223 | | | | 149,549 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 263,471 | | | $ | 52,814 | | | $ | 142,998 | | | $ | 459,283 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 8,697 | | | $ | (47,079 | ) | | $ | 69,002 | | | $ | 30,620 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended | |
| | | September 30, 2017 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 94,436 | | | $ | 15,687 | | | $ | 43,224 | | | $ | 153,347 | |
Equipment revenue | | | 1,291 | | | | 953 | | | | 17,283 | | | | 19,527 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 95,727 | | | $ | 16,640 | | | $ | 60,507 | | | $ | 172,874 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 15,966 | | | $ | (24,110 | ) | | $ | 21,329 | | | $ | 13,185 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Three Months Ended | |
| | | September 30, 2016 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 88,534 | | | $ | 7,235 | | | $ | 33,330 | | | $ | 129,099 | |
Equipment revenue | | | 2,191 | | | | 360 | | | | 15,617 | | | | 18,168 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 90,725 | | | $ | 7,595 | | | $ | 48,947 | | | $ | 147,267 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 14,509 | | | $ | (19,924 | ) | | $ | 20,655 | | | $ | 15,240 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Nine Months Ended | |
| | | September 30, 2017 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 290,260 | | | $ | 38,243 | | | $ | 125,415 | | | $ | 453,918 | |
Equipment revenue | | | 5,234 | | | | 2,756 | | | | 49,172 | | | | 57,162 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 295,494 | | | $ | 40,999 | | | $ | 174,587 | | | $ | 511,080 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 43,316 | | | $ | (82,068 | ) | | $ | 72,646 | | | $ | 33,894 | |
| | | | | | | | | | | | | | | | |
| |
| | | For the Nine Months Ended | |
| | | September 30, 2016 | |
| | | CA-NA | | | CA-ROW | | | BA | | | Total | |
Service revenue | | $ | 261,751 | | | $ | 17,213 | | | $ | 96,442 | | | $ | 375,406 | |
Equipment revenue | | | 8,708 | | | | 731 | | | | 51,707 | | | | 61,146 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 270,459 | | | $ | 17,944 | | | $ | 148,149 | | | $ | 436,552 | |
| | | | | | | | | | | | | | | | |
Segment profit (loss) | | $ | 46,966 | | | $ | (62,945 | ) | | $ | 59,895 | | | $ | 43,916 | |
| | | | | | | | | | | | | | | | |
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
| (1) | CA-NA equipment revenue for the six month period ended June 30, 2018 includes the accounting impact of the transition of one of our airline partners to the airline-directed model. See Note 1, “Basis of Presentation,” for additional information. |
A reconciliation of segment profit (loss) to the relevant consolidated amounts is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months | | | For the Nine Months | | | For the Three Months | | | For the Six Months | |
| | | Ended September 30, | | | Ended September 30, | | | Ended June 30, | | | Ended June 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
CA-NA segment profit | | $ | 15,966 | | | $ | 14,509 | | | $ | 43,316 | | | $ | 46,966 | | | $ | 24,171 | | | $ | 7,041 | | | $ | 47,713 | | | $ | 8,697 | |
CA-ROW segment loss | | | (24,110 | ) | | | (19,924 | ) | | | (82,068 | ) | | | (62,945 | ) | | | (17,265 | ) | | | (24,474 | ) | | | (36,414 | ) | | | (47,079 | ) |
BA segment profit | | | 21,329 | | | | 20,655 | | | | 72,646 | | | | 59,895 | | | | 31,290 | | | | 36,679 | | | | 64,788 | | | | 69,002 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total segment profit | | | 13,185 | | | | 15,240 | | | | 33,894 | | | | 43,916 | | | | 38,196 | | | | 19,246 | | | | 76,087 | | | | 30,620 | |
Interest income | | | 683 | | | | 852 | | | | 1,999 | | | | 1,064 | | | | 1,230 | | | | 1,328 | | | | 2,379 | | | | 2,404 | |
Interest expense | | | (27,585 | ) | | | (24,848 | ) | | | (81,754 | ) | | | (58,701 | ) | | | (36,150 | ) | | | (30,641 | ) | | | (68,704 | ) | | | (61,195 | ) |
Depreciation and amortization | | | (35,824 | ) | | | (26,779 | ) | | | (96,821 | ) | | | (76,042 | ) | | | (29,967 | ) | | | (31,938 | ) | | | (60,716 | ) | | | (67,857 | ) |
Transition to airline-directed model | | | | — | | | | 2,249 | | | | — | | | | 21,551 | |
Amortization of deferred airborne lease incentives(1) | | | 10,121 | | | | 7,765 | | | | 28,099 | | | | 20,650 | | | | 6,077 | | | | 7,462 | | | | 15,030 | | | | 15,092 | |
Amortization of STC costs | | | | (322 | ) | | | (255 | ) | | | (642 | ) | | | (427 | ) |
Stock-based compensation expense | | | (5,283 | ) | | | (5,000 | ) | | | (15,007 | ) | | | (12,986 | ) | | | (4,318 | ) | | | (4,213 | ) | | | (8,645 | ) | | | (8,599 | ) |
Adjustment to deferred financing costs | | | — | | | | — | | | | — | | | | 792 | | |
Loss of extinguishment of debt | | | — | | | | — | | | | — | | | | (15,406 | ) | |
Loss on extinguishment of debt | | | | (57,962 | ) | | | — | | | | (57,962 | ) | | | — | |
Other income (expense) | | | (228 | ) | | | (34 | ) | | | (322 | ) | | | 137 | | | | (443 | ) | | | (374 | ) | | | 2,922 | | | | 131 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | $ | (44,931 | ) | | $ | (32,804 | ) | | $ | (129,912 | ) | | $ | (96,576 | ) | | $ | (83,659 | ) | | $ | (37,136 | ) | | $ | (100,251 | ) | | $ | (68,280 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Amortization of deferred airborne lease incentive relates to ourCA-NA andCA-ROW segments. See Note 10,11, “Leases,” for further information. |
Major Customers and Airline Partnerships— During the three and nine month periods ended September 30, 2017 and 2016, no customer accounted for more than 10% of our consolidated revenue. One airline partner, under the Turnkey model, accounted for approximately 19% and 18% of consolidated accounts receivable as of September 30, 2017 and December 31, 2016, respectively. Two customers, under the Airline Directed model, collectively accounted for approximately 22% of consolidated accounts receivable as of September 30, 2017 while no customer accounted for more than 10% of consolidated accounts receivable as of December 31, 2016.
Revenue earned throughfrom Delta Air Lines and American Airlinesits passengers accounted for approximately 47%28% of consolidated revenue for both the three and ninesix month periods ended SeptemberJune 30, 2017,2019 and 50%approximately 23% and 22%, respectively, for the prior-year periods. Delta Air Lines accounted for approximately 11% of consolidated accounts receivable as of both June 30, 2019 and December 31, 2018.
During the prior yearthree and six month periods ended June 30, 2019, American Airlines accounted for approximately 12% and 11% of consolidated revenue, respectively, and approximately 22% and 29%, respectively, for the prior-year periods. Revenue earned from American Airlines for the six month period ended June 30, 2018 included $45.4 million of equipment revenue recognized due to the airline’s transition to the airline-directed model in January 2018. See Note 1, “Basis of Presentation,” for additional information. American Airlines accounted for approximately 13% and 11%, respectively, of consolidated accounts receivable as of June 30, 2019 and December 31, 2018.
15. One other airline accounted for approximately 10% of consolidated accounts receivable as of June 30, 2019.
| 16. | Employee Retirement and Postretirement Benefits |
Stock-Based Compensation—As of SeptemberJune 30, 2017,2019, we hadmaintained three stock-based employee compensation plans (“Stock Plans”). See Note 11,12, “Stock-Based Compensation,” in our 2016201810-K for further information regarding these plans. Most of our equity grants are awarded on an annual basis. The annual grants occurred in the first quarter of 2017 whereas they had occurred in the second quarter in prior years.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
For the ninesix month period ended SeptemberJune 30, 2017,2019, options to purchase 1,992,5951,437,988 shares of common stock (of which 527,850148,500 are options that contain a market condition and 50,000 contain a performance condition, in addition to the time-based vesting requirements) were granted, no options to purchase 48,662 shares of common stock were exercised, options to purchase 315,140456,431 (of which 33,620278,146 options contain a market condition) shares of common stock were forfeited, and options to purchase 265,02420,675 shares of common stock expired.
For the ninesix month period ended SeptemberJune 30, 2017, 875,1662019, 2,038,988 Restricted Stock Units (“RSUs”) (of which 228,84086,000 are RSUs that contain a market condition and 50,000 contain a performance condition, in addition to the time-based vesting requirements) were granted, 368,506447,646 RSUs vested and 196,167379,521 RSUs (of which 27,940109,760 contained a market condition) were forfeited.
For the ninesix month period ended SeptemberJune 30, 2017, 92,910 shares of2019, 64,995 restricted stock were granted and 98,988 shares vested. These shares are deemed issued as of the date of grant, but not outstanding until they vest.
For the ninesix month period ended SeptemberJune 30, 2017, 60,972 DSUs2019, 113,744 Deferred Stock Units were granted and none were released.vested.
For the ninesix month period ended SeptemberJune 30, 2017, 117,4712019, 157,158 shares of common stock were issued under the employee stock purchase plan.
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)
The following is a summary of our stock-based compensation expense by operating expense line in the unaudited condensed consolidated statements of operations(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months | | | For the Nine Months | | | For the Three Months | | | For the Six Months | |
| | | Ended September 30, | | | Ended September 30, | | | Ended June 30, | | | Ended June 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Cost of service revenue | | $ | 542 | | | $ | 446 | | | $ | 1,332 | | | $ | 1,142 | | | $ | 374 | | | $ | 447 | | | $ | 802 | | | $ | 881 | |
Cost of equipment revenue | | | 49 | | | | 34 | | | | 136 | | | | 78 | | | | 80 | | | | 59 | | | | 151 | | | | 113 | |
Engineering, design and development | | | 897 | | | | 970 | | | | 2,801 | | | | 2,432 | | | | 780 | | | | 783 | | | | 1,554 | | | | 1,693 | |
Sales and marketing | | | 1,305 | | | | 1,498 | | | | 3,473 | | | | 3,799 | | | | 967 | | | | 1,226 | | | | 1,937 | | | | 2,308 | |
General and administrative | | | 2,490 | | | | 2,052 | | | | 7,265 | | | | 5,535 | | | | 2,117 | | | | 1,698 | | | | 4,201 | | | | 3,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 5,283 | | | $ | 5,000 | | | $ | 15,007 | | | $ | 12,986 | | | $ | 4,318 | | | $ | 4,213 | | | $ | 8,645 | | | $ | 8,599 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
401(k) Plan—Under our 401(k) plan, all employees who are eligible to participate are entitled to maketax-deferred contributions, subject to Internal Revenue Service limitations. We match 100% of the employee’s first 4% of contributions made, subject to annual limitations. Our matching contributions were $1.2$1.4 million and $4.0$2.6 million, respectively, during the three and six month periods ended June 30, 2019, and $1.3 million and $2.6 million, respectively, for the three and nine month periods ended September 30, 2017, and $1.1 million and $3.1 million, respectively, for the prior yearprior-year periods.
16.
| 17. | Research and Development Costs |
Expenditures for research and development are charged to expense as incurred and totaled $18.6$17.6 million and $57.9$31.7 million, respectively, during the three and six month periods ended June 30, 2019, and $18.0 million and $37.1 million, respectively, for the three and nine month periods ended September 30, 2017, and $11.8 million and $34.5 million, respectively, for the prior yearprior-year periods. Research and development costs are reported as a component of engineering, design and development expenses in our unaudited condensed consolidated statements of operations.
17. Canadian ATG Spectrum License
On July 17, 2012, Industry Canada issued to our Canadian subsidiary a subordinate license that allows us to use the Canadian ATG spectrum of which SkySurf Canada Communications Inc. (“SkySurf”) is the primary licensee. On July 24, 2012 we entered into a subordinate license agreement (the “License Agreement”) with SkySurf and on August 14, 2012 the agreement commenced. The License Agreement provides for our exclusive rights to use SkySurf’s ATG spectrum licenses in Canada. For additional information, see Note 16, “Canadian ATG Spectrum License,” in our 201610-K.
Amortization expense for theone-time payment for each of the next five years and thereafter is estimated to be as follows(in thousands):
| | | | |
| | | Canadian
ATG
Spectrum | |
| Years ending December 31, | | Amortization | |
2017 (period from October 1 to December 31) | | $ | 26 | |
2018 | | $ | 104 | |
2019 | | $ | 104 | |
2020 | | $ | 104 | |
2021 | | $ | 104 | |
Thereafter | | $ | 1,632 | |
Amortization expense totaled less than $0.1 million during the three month periods ended September 30, 2017 and 2016 and $0.1 million during the nine month periods ended September 30, 2017 and 2016.
The monthly payments are expensed as incurred and totaled approximately $0.3 million and $0.9 million, respectively, during the three and nine month periods ended September 30, 2017, and $0.3 million and $0.9 million, respectively, for the prior year periods.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding our business outlook, industry, business strategy, plans, goals and expectations concerning our market position, international expansion, future technologies, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this Quarterly Report on Form10-Q.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:
the loss of, or failure to realize the anticipated benefits from, agreements with our airline partners or customers on a timely basis or any failure to renew any existing agreements upon expiration or termination;
the failure to maintain airline and passenger satisfaction with our equipment or our service;
any inability to timely and efficiently deploy our 2Ku service or develop and deploy the technology to which our next-generation ATG solutionnetwork evolves or other components of our technology roadmap for any reason, including technological issues and related remediation efforts, changes in regulations or regulatory delays or failures affecting us or delays on the part of any of our suppliers, some of whom are single source, or the failure by our airline partners or customers to roll out equipment upgrades or new services or adopt new technologies in order to support increased network capacity demands;
the timing of deinstallation of our equipment from aircraft, including deinstallations resulting from aircraft retirements and other deinstallations permitted by certain airline contract provisions;
the loss of relationships with original equipment manufacturers or dealers;
our ability to make our equipment factory linefit available on a timely basis;
our ability to develop or purchase ATG and satellite network capacity sufficient to accommodate current and expected growth in passenger demand in North America and internationally as we expand;
our reliance on third-party suppliers, some of whom are single source, for satellite capacity and other services and the equipment we use to provide services to commercial airlines and their passengers and business aviation customers;
unfavorable economic conditions in the airline industry and/or the economy as a whole;
governmental action restricting trade with China or other foreign countries;
our ability to expand our international or domestic operations, including our ability to grow our business with current and potential future airline partners;partners and customers and the effect of shifts in business models;
an inability to compete effectively with other current or future providers ofin-flight connectivity services and other products and services that we offer, including on the basis of price, service performance andline-fit linefit availability;
our ability to successfully develop and monetize new products and services such as Gogo Vision and Gogo TV, including those that were recently released, are currently being offered on a limited or trial basis, or are in various stages of development;
our ability to certify and install our equipment and deliver our products and services, including newly developed products and services, on schedules consistent with our contractual commitments to customers;
the failure of our equipment or material defects or errors in our software resulting in recalls or substantial warranty claims;
a revocation of, or reduction in, our right to use licensed spectrum, the availability of otherair-to-ground spectrum to a competitor or the repurposing by a competitor of other spectrum forair-to-ground use;
our use of open source software and licenses;
the effects of service interruptions or delays, technology failures and equipment failures or malfunctions arising from defects or errors in our software or defects in or damage to our equipment;equipment, including quality and performance issues related tode-icing fluid or other moisture entering our antennas;
the limited operating history of ourCA-ROW segment;
contract changes and implementation issues resulting from decisions by airlines to transition from the Turnkeyturnkey model to the Airline Directed model;airline-directed model or vice versa;
increases in our projected capital expenditures due to, among other things, unexpected costs incurred in connection with theroll-out of our technology roadmap or our international expansion;
compliance with U.S. and foreign government regulations and standards, including those related to regulation of the Internet, includinge-commerce or online video distribution changes, and the installation and operation of satellite equipment and our ability to obtain and maintain all necessary regulatory approvals to install and operate our equipment in the United States and foreign jurisdictions;
our, or our technology suppliers’, inability to effectively innovate;
obsolescence of, and our ability to access, parts, products, equipment and support services compatible with our existing products and technologies;
changes as a result of U.S. federal tax reform;
costs associated with defending pendingexisting or future intellectual property infringement, securities and derivative litigation and other litigation or claims;claims and any negative outcome or effect of pending or future litigation;
our ability to protect our intellectual property;
breaches of the security of our information technology network, resulting in unauthorized access to our customers’ credit card information or other personal information;
any negative outcome or effects of future litigation;our substantial indebtedness;
our substantial indebtedness;
limitations and restrictions in the agreements governing our indebtedness and our ability to service our indebtedness;
our ability to obtain additional financing for operations, or financing intended to refinance our existing indebtedness, on acceptable terms or at all;all, including our ability to enter into our pending asset-based revolving line of credit;
fluctuations in our operating results;
our ability to attract and retain customers and to capitalize on revenue from our platform;
the demand for and market acceptance of our products and services;
changes or developments in the regulations that apply to us, our business and our industry, including changes or developments affecting the ability of passengers or airlines to use ourin-flight connectivity services, including the recent U.S. and U.K. bans on the use of certain personal devices such as laptops and tablets on certain aircraft flying certain routes;services;
a future act or threat of terrorism, cyber-security attack or other events that could result in adverse regulatory changes or developments as referenced above, or otherwise adversely affect our business and industry;
our ability to attract and retain qualified employees, including key personnel;
the effectiveness of our marketing and advertising and our ability to maintain and enhance our brands;
our ability to manage our growth in a cost-effective manner and integrate and manage acquisitions;
compliance with anti-corruption laws and regulations in the jurisdictions in which we operate, including the Foreign Corrupt Practices Act and the (U.K.) Bribery Act 2010;
restrictions on the ability of U.S. companies to do business in foreign countries, including, among others, restrictions imposed by the U.S. Office of Foreign Assets Control;
difficulties in collecting accounts receivable;
our ability to successfully implement our new enterprise resource planning system, our new integrated business plan and other improvements to systems, operations, strategy and procedures needed to support our growth; and
other risks and factors listed under “Risk Factors” in our Annual Report on Form10-K for the year ended December 31, 20162018, as filed with the Securities Exchange Commission (“SEC”) on February 27, 201721, 2019 (the “2016“201810-K”) and in Item 1A of ourthis Quarterly Report on Form10-Q10-Q. for the quarter ended March 31, 2017 as filed with the SEC on May 4, 2017.
Any one of these factors or a combination of these factors could materially affect our financial condition or future results of operations and could influence whether any forward-looking statements contained in this report ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and you should not place undue reliance on them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition, while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any materialnon-public information or other confidential information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not our responsibility.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our unaudited condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form10-Q. Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “Gogo,” and the “Company,” as used in this report, refer to Gogo Inc. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated or where it is clear that the terms refer only to Gogo Inc. exclusive of its subsidiaries.
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and othernon-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” in the 2016201810-K and in Item 1A in this Quarterly Report on Form10-Q, and in “Special Note Regarding Forward-Looking Statements” in this report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our fiscal year ends December 31 and, unless otherwise noted, references to “years” or “fiscal” are for fiscal years ended December 31. See “— Results of Operations.”
Company Overview
Gogo (“we”, “us”,we,” “us,” “our”) is the global leader in providing broadband connectivity solutions and wirelessin-flight entertainment to the aviation industry. We operate through the following three segments: Commercial Aviation North America, or“CA-NA,” Commercial Aviation Rest of World, or“CA-ROW,” and Business Aviation, or “BA.”
Services provided by ourCA-NA andCA-ROW businesses include Passenger Connectivity, which allows passengers to connect to the Internet from their personalWi-Fi-enabled devices; Passenger Entertainment, which offers passengers the opportunity to enjoy a broad selection ofin-flight entertainment options on their personalWi-Fi enabled devices; and Connected Aircraft Services (“CAS”), which offers airlines connectivity for various operations and currently include, among others, real-time credit card transaction processing, electronic flight bags and real-time weather information. Services are provided byCA-NA on commercial aircraft flying routes that generally begin and end within North America, which for this purpose includes the United States, Canada and Mexico.CA-ROW provides service on commercial aircraft operated by foreign-based commercial airlines and flights outside of North America for North American based commercial airlines. The routes included in ourCA-ROW segment are those that begin and/or end outside of North America (as defined above) on which our international service is provided. BA providesin-flight Internet connectivity and other voice and data communications products and services and sells equipment forin-flight telecommunications to the business aviation market. BA services include Gogo Biz, ourin-flight broadband service, Passenger Entertainment,Gogo Vision, ourin-flight entertainment service, and satellite-based voice and data services through our strategic alliances with satellite companies.
Factors and Trends Affecting Our Results of Operations
We believe that our operating and business performance is driven by various factors that affect the commercial airline and business aviation industries, including trends affecting the travel industry and trends affecting the customer bases that we target, as well as factors that affect wireless Internet service providers and general macroeconomic factors. Key factors that may affect our future performance include:
costs associated with the implementation of, and our ability to implement on a timely basis our technology roadmap, upgrades and installation of ourATG-4 and 2Ku next generationtechnologies, the technology to which our ATG network evolves and other new technologies (including technological issues and related remediation efforts and failures or delays on the part of antenna and other equipment developers and providers, some of which are single source, or delays in obtaining STCs)STCs including as a result of any government shutdown), theroll-out of our satellite services, the use of unlicensed spectrum, the potential licensing of additional spectrum, and the implementation of improvements to our network and operations as technology changes and we experience increased network capacity constraints;
costs associated with, and our ability to execute, our international expansion, including modifications of our network to accommodate satellite technology, development and implementation of new satellite-based technologies, the availability of satellite capacity, costs of satellite capacity to which we may have to commit well in advance, and our ability to obtain and comply with foreign telecommunications, aviation and other licenses and approvals necessary for our international operations;
costs associated with managing a rapidly growing company;
costs associated with, and our ability to obtain sufficient satellite capacity, including for heavily-trafficked areas, in the United States the and internationally;
costs of satellite capacity in the United States and internationally, to which we may have to commit to well in advance;
the pace and extent of adoption of our service for use on domestic and international commercial aircraft by our current North Americanand new airline partners and new international airline partners;customers;
the number of aircraft in service in our markets, including consolidation of the airline industry or changes in fleet size by one or more of our commercial airline partners or BA fractional ownership customers;
the economic environment and other trends that affect both business and leisure aviation travel;
the extent of passengers’, airline and aviation partners’ and other aircraft owners’ and operators’ adoption of our products and services, which is affected by, among other things, willingness to pay for the services that we provide, the quality and reliability of our products and services, changes in technology and competition from current competitors and new market entrants;
our ability to enter into and maintain long-term connectivity arrangements with airline partners and customers, which depends on numerous factors including the real or perceived availability, quality and price of our services and product offerings as compared to those offered by our competitors;
the impact of a change in business models and contract terms on the profitability of our connectivity agreements with airline partners, including as a result of changes in accounting standards;
our ability to engage suppliers of equipment components and network services on a timely basis and on commercially reasonable terms;
costs relating to the implementation of our ongoing integrated business planning process, including restructuring charges;
continued demand for connectivity and proliferation ofWi-Fi enabled devices, including smartphones, tablets and laptops;
changes in domestic or foreign laws, regulations or policies resulting from the 2016 elections that affect our business or the business of our customers and suppliers;
changes in laws, regulations and interpretations affecting telecommunications services, including those affecting our ability to maintain our licenses for ATG spectrum in the United States, obtain sufficient rights to use additional ATG spectrum and/or other sources of broadband connectivity to deliver our services, and expand our service offerings;offerings and manage our network; and
changes in laws, regulations and interpretations affecting aviation, including, in particular, changes that impact the design of our equipment and our ability to obtain required certifications for our equipment and changes that affect the ability of passengers and airlines to utilize ourin-flight connectivity services, including the recent U.S. and U.K. bans on the use of certain personal devices, such as laptops and tablets, on certain airlines flying certain routes.equipment.
Recent Developments
On September 20, 2017, Gogo Intermediate Holdings LLC (“GIH”) (a wholly owned subsidiary of Gogo Inc.) and Gogo Finance Co. Inc. (a wholly owned subsidiary of GIH) (the“Co-Issuer” and, together with GIH, the “Issuers”), certain subsidiaries of GIH, as guarantors (the “Subsidiary Guarantors” and, together with us, the “Guarantors”), and U.S. Bank National Association, as trustee (in such capacity, the “Trustee”) entered into the first supplemental indenture (the “Supplemental Indenture” and, together with the Original Indenture, the “Indenture”) to modify certain covenants, as discussed below. On September 25, 2017, the Issuers issued $100 million aggregate principal amount of additional senior secured notes due 2022 (the “September 2017 Additional Notes”). The September 2017 Additional Notes were issued at a price equal to 113% of their face value resulting in gross proceeds of $113.0 million. Additionally, we received approximately $2.9 million for interest that accrued from July 1, 2017 through September 24, 2017, which will be paid out when we make our next interest payment in January 2018. We refer to the Original Senior Secured Notes, the January 2017 Additional Notes and the September 2017 Additional Notes collectively as the “Senior Secured Notes.”
As noted above, on September 20, 2017, the Issuers, the Guarantors and the Trustee entered into the Supplemental Indenture to (i) increase the amount of additional secured indebtedness under Credit Facilities (as defined in the Indenture) that may be incurred by the Issuer and its Restricted Subsidiaries (as defined in the Indenture) under the Indenture by $100 million (from $75 million to $175 million in aggregate principal amount), (ii) permit the Issuer and its Restricted Subsidiaries to incur additional secured indebtedness in connection with vendor financing arrangements not to exceed $50 million in aggregate principal amount at any time outstanding and (iii) permit the Issuer and its Restricted Subsidiaries to make additional dividends or distributions to Gogo in an aggregate amount of up to $15 million during any twelve-month period to pay interest on any indebtedness or preferred stock with a maturity later than July 1, 2022. The Supplemental Indenture became effective immediately upon execution, following our receipt of consents from holders of a majority of the outstanding principal amount of the Existing Notes (excluding Existing Notes held by the Issuers or any affiliates of the Issuers) to the Supplemental Indenture and amendments to the collateral agency agreement governing the Senior Secured Notes (the “Consent”). In connection with the Consent, GIH paid $1.4 million in fees (“Consent Fees”) to holders of Existing Notes who validly offered (and did not revoke) their consents prior to the expiration of the Consent.
See Note 8, “Long-Term Debt and Other Liabilities” for additional information on the September 2017 Additional Notes.
Summary Financial Information
Consolidated revenue increased 17.4% and 17.1% to $172.9 million and $511.1 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $147.3 million and $436.6 million, respectively, for the prior year periods. For the three and nine month periods ended September 30, 2017, theCA-NA segment had 2,859 and 2,816, respectively, aircraft equivalents providing the Gogo service as compared with 2,663 and 2,599, respectively, for the prior year periods. As of September 30, 2017, the BA segment had 5,474 aircraft online with satellite systems, including our first 2Ku equipped aircraft in BA, and 4,567 ATG systems online as compared with 5,473 and 3,974, respectively, as of September 30, 2016. For the three and nine month periods ended September 30, 2017, theCA-ROW segment had 295 and 250, respectively, aircraft equivalents as compared with 209 and 193, respectively, for the prior year periods.
Key Business Metrics
Our management regularly reviews financial and operating metrics, including the following key operating metrics for theCA-NA,CA-ROW and BA segments, to evaluate the performance of our business and our success in executing our business plan, make decisions regarding resource allocation and corporate strategies, and evaluate forward-looking projections.
| Commercial Aviation North America | Commercial Aviation North America | | Commercial Aviation North America | |
| | | For the Three Months | | For the Nine Months | | | For the Three Months
Ended June 30, | | | For the Six Months
Ended June 30, | |
| | | Ended September 30, | | Ended September 30, | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | 2017 | | 2016 | | 2017 | | 2016 | | |
Aircraft online (at period end) | | | 2,817 | | | 2,629 | | | 2,817 | | | 2,629 | | | | 2,443 | | | | 2,809 | | | | 2,443 | | | | 2,809 | |
Total aircraft equivalents (average during the period) | | | 2,859 | | | 2,663 | | | 2,816 | | | 2,599 | | |
Satellite | | | 252 | | | 55 | | | 201 | | | 55 | | | | 777 | | | | 578 | | | | 777 | | | | 578 | |
ATG | | | 2,607 | | | 2,608 | | | 2,615 | | | 2,544 | | | | 1,666 | | | | 2,231 | | | | 1,666 | | | | 2,231 | |
Average monthly service revenue per aircraft equivalent (ARPA) (in thousands) | | $ | 11.1 | | | $ | 11.1 | | | $ | 11.6 | | | $ | 11.3 | | |
Satellite (in thousands) | | $ | 18.4 | | | | — | | | $ | 19.1 | | | | — | | |
ATG (in thousands) | | $ | 10.4 | | | | — | | | $ | 11.0 | | | | — | | |
Gross passenger opportunity (GPO) (in thousands) | | | 110,792 | | | 108,351 | | | 314,880 | | | 298,812 | | |
Total average revenue per session (ARPS) | | $ | 10.49 | | | $ | 11.46 | | | $ | 10.83 | | | $ | 12.43 | | |
Connectivity take rate | | | 7.5 | % | | 6.5 | % | | 7.8 | % | | 6.4 | % | |
Total aircraft equivalents (average during the period) | | | | 2,480 | | | | 2,876 | | | | 2,500 | | | | 2,894 | |
Net annualized average monthly service revenue per aircraft equivalent (annualized ARPA) (in thousands) | | | $ | 136 | | | $ | 113 | | | $ | 131 | | | $ | 108 | |
| Commercial Aviation Rest of World | Commercial Aviation Rest of World | | Commercial Aviation Rest of World | |
| | | For the Three Months | | For the Nine Months | | | For the Three Months
Ended June 30, | | | For the Six Months
Ended June 30, | |
| | | Ended September 30, | | Ended September 30, | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | 2017 | | 2016 | | 2017 | | 2016 | | |
Aircraft online (at period end) | | | 352 | | | 256 | | | 352 | | | 256 | | | | 691 | | | | 459 | | | | 691 | | | | 459 | |
Total aircraft equivalents (average during the period) | | | 295 | | | 209 | | | 250 | | | 193 | | | | 619 | | | | 389 | | | | 585 | | | | 364 | |
ARPA (in thousands) | | $ | 18.8 | | | $ | 14.5 | | | $ | 18.3 | | | $ | 12.8 | | |
Net annualized ARPA (in thousands) | | | $ | 135 | | | $ | 147 | | | $ | 135 | | | $ | 153 | |
| | • | | Aircraft online.We define aircraft online as the total number of commercial aircraft on which our equipment is installed and service has been made commercially available as of the last day of each period presented. We assign aircraft toCA-NA orCA-ROW at the time of contract signing as follows: (i) all aircraft operated by North American airlines and under contract for ATG orATG-4 service are assigned toCA-NA, (ii) all aircraft operated by North American airlines and under a contract for satellite service are assigned toCA-NA orCA-ROW based on whether the routes flown by such aircraft under the contract are anticipated to be predominantly within or outside of North America at the time the contract is signed, and (iii) all aircraft operated bynon-North American airlines and under a contract are assigned toCA-ROW. All aircraft online for theCA-ROW segment are equipped with our satellite equipment. The decline inCA-NA’s aircraft online is due to the deinstallation of our equipment from certain American Airlines aircraft during 2018 and the three and six month periods ended June 30, 2019. |
| | • | | Aircraft equivalents. We define aircraft equivalents for a segment as the number of commercial aircraft online (as defined above) multiplied by the percentage of flights flown by such aircraft within the scope of that segment, rounded to the nearest whole aircraft and expressed as an average of the month endmonth-end figures for each month in the period. This methodology takes into account the fact that during a particular period certain aircraft may fly routes outside the scope of the segment to which they are assigned for purposes of the calculation of aircraft online. The decline inCA-NA’s aircraft equivalents is due to the deinstallation of our equipment from certain American Airlines aircraft during 2018 and the three and six month periods ended June 30, 2019. |
| | • | | AverageNet annualized average monthly service revenue per aircraft equivalent (“ARPA”). We define net annualized ARPA as the aggregate service revenue plus monthly service fees, some of which are reported as a reduction to cost of service revenue for that segment for the period, less revenue share expense and other transactional expenses which are included in cost of service revenue for that segment, divided by the number of months in the period, and further divided by the number of aircraft equivalents (as defined above) for that segment during the period. Satellite ARPAperiod, which is calculated based on satellite revenuethen annualized and satellite aircraft equivalents, within that segment. ATG ARPA is calculated based on ATG revenue and ATG aircraft equivalents.rounded to the nearest thousand.
|
| • | | Gross passenger opportunity(“GPO”).We define GPO as the aggregate number of passengers who board commercial aircraft on which Gogo service has been available at any time during the period presented.When actual passenger counts are available directly from our airline partners, we aggregate such counts across flights on Gogo-equipped aircraft. When not available directly from our airline partners, we estimate GPO. Estimated GPO is calculated by first estimating the number of flights occurring on each Gogo-equipped aircraft, then multiplying by the number of seats on that aircraft, and finally multiplying by a seat factor that is determined from historical information provided to us in arrears by our airline partners. The estimated number of flights is derived from real-time flight information provided to ourfront-end systems by Air Radio Inc. (ARINC), direct airline feeds and supplementary third-party data sources. These aircraft-level estimates are then aggregated with any available airline-provided passenger counts to obtain total GPO. |
| | | | | | | | | | | | | | | | |
Business Aviation | |
| | | For the Three Months
Ended June 30, | | | For the Six Months
Ended June 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Aircraft online (at period end) | | | | | | | | | | | | | | | | |
Satellite | | | 5,099 | | | | 5,204 | | | | 5,099 | | | | 5,204 | |
ATG | | | 5,462 | | | | 4,920 | | | | 5,462 | | | | 4,920 | |
Average monthly service revenue per aircraft online | | | | | | | | | | | | | | | | |
Satellite | | $ | 249 | | | $ | 228 | | | $ | 243 | | | $ | 239 | |
ATG | | | 3,091 | | | | 3,027 | | | | 3,081 | | | | 3,032 | |
Units Sold | | | | | | | | | | | | | | | | |
Satellite | | | 78 | | | | 113 | | | | 208 | | | | 217 | |
ATG | | | 186 | | | | 281 | | | | 373 | | | | 531 | |
Average equipment revenue per unit sold (in thousands) | | | | | | | | | | | | | | | | |
Satellite | | $ | 49 | | | $ | 39 | | | $ | 43 | | | $ | 40 | |
ATG | | | 66 | | | | 67 | | | | 63 | | | | 65 | |
| | • | | Total average revenue per session(“ARPS”). We define ARPS as revenue from Passenger Connectivity, excludingnon-session related revenue, divided by the total number of sessions during the period. A session, or a “use” of Passenger Connectivity, is defined as the use by a unique passenger of Passenger Connectivity on a flight segment. Multiple logins or purchases under the same user name during one flight segment count as only one session. |
| • | | Connectivity take rate. We define connectivity take rate as the number of sessions during the period expressed as a percentage of GPO. Included in our connectivity take-rate calculation are sessions for which we did not receive revenue, including those provided pursuant to free promotional campaigns and, to a lesser extent, as a result of complimentary passes distributed by our customer service representatives for unforeseen technical issues. For the periods listed above, the number of sessions for which we did not receive revenue was not material. |
| | | | | | | | | | | | | | | | |
Business Aviation | |
| | | For the Three Months | | | For the Nine Months | |
| | | Ended September 30, | | | Ended September 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Aircraft online (at period end) | | | | | | | | | | | | | | | | |
Satellite | | | 5,474 | | | | 5,473 | | | | 5,474 | | | | 5,473 | |
ATG | | | 4,567 | | | | 3,974 | | | | 4,567 | | | | 3,974 | |
Average monthly service revenue per aircraft online | | | | | | | | | | | | | | | | |
Satellite | | $ | 235 | | | $ | 211 | | | $ | 232 | | | $ | 217 | |
ATG | | | 2,874 | | | | 2,535 | | | | 2,848 | | | | 2,521 | |
Units Sold | | | | | | | | | | | | | | | | |
Satellite | | | 116 | | | | 126 | | | | 303 | | | | 367 | |
ATG | | | 210 | | | | 165 | | | | 596 | | | | 558 | |
Average equipment revenue per unit sold (in thousands) | | | | | | | | | | | | | | | | |
Satellite | | $ | 38 | | | $ | 45 | | | $ | 42 | | | $ | 44 | |
ATG | | | 58 | | | | 54 | | | | 55 | | | | 57 | |
| • | | Satellite aircraft online. We define satellite aircraft online as the total number of business aircraft for which we provide satellite services as of the last day of each period presented. |
| | • | | ATG aircraft online.We define ATG aircraft online as the total number of business aircraft for which we provide ATG services as of the last day of each period presented. |
| | • | | Average monthly service revenue per satellite aircraft online. We define average monthly service revenue per satellite aircraft online as the aggregate satellite service revenue for the period divided by the number of months in the period, divided by the number of satellite aircraft online during the period (expressed as an average of the month endmonth-end figures for each month in such period). |
| | • | | Average monthly service revenue per ATG aircraft online.We define average monthly service revenue per ATG aircraft online as the aggregate ATG service revenue for the period divided by the number of months in the period, divided by the number of ATG aircraft online during the period (expressed as an average of the month endmonth-end figures for each month in such period). |
| | • | | Units sold. We define units sold as the number of satellite or ATG units for which we recognized revenue during the period. In the three and nine months ended September 30, 2017, we recognized revenue on four and seven Gogo Biz 4G units, respectively, that were previously deferred. |
| | • | | Average equipment revenue per satellite unit sold. We define average equipment revenue per satellite unit sold as the aggregate equipment revenue earned from all satellite units sold during the period, divided by the number of satellite units sold. |
| | • | | Average equipment revenue per ATG unit sold.We define average equipment revenue per ATG unit sold as the aggregate equipment revenue from all ATG units sold during the period, divided by the number of ATG units sold. |
Key Components of Consolidated Statements of Operations
There have been no material changes to our key components of unaudited condensed consolidated statements of operations and segment profit (loss) as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) in our 2016201810-K.
Off-Balance Sheet Arrangements
We do not have any obligations that meet the definition of anoff-balance sheet arrangement, other than operating leases, which have or are reasonably likely to have a material effect on our results of operations. See Note 10, “Leases” to our unaudited condensed consolidated financial statements for further information.arrangement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our unaudited condensed consolidated financial statements and related disclosures require us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related exposures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. In some instances, we could reasonably use different accounting estimates, and in some instances results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We believe that the assumptions and estimates associated with revenue recognition, long-lived assets, indefinite-lived assets and stock-based compensation have the greatest potential impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in MD&A in our 2016201810-K.
Recent Accounting Pronouncements
See Note 2, “Recent Accounting Pronouncements”Pronouncements,” to our unaudited condensed consolidated financial statements for additional information.
Results of Operations
The following table sets forth, for the periods presented, certain data from our unaudited condensed consolidated statements of operations. The information contained in the table below should be read in conjunction with our unaudited condensed consolidated financial statements and related notes.
Unaudited Condensed Consolidated Statement of Operations Data
(in thousands)
| | | | For the Three Months | | For the Nine Months | | | | | | | | | |
| | | Ended September 30, | | Ended September 30, | | | For the Three Months
Ended June 30, | | For the Six Months
Ended June 30, | |
| | | 2017 | | 2016 | | 2017 | | 2016 | | | 2019 | | 2018 | | 2019 | | 2018 | |
Revenue: | | | | | | | | | | | | | | | | |
Service revenue | | $ | 153,347 | | | $ | 129,099 | | | $ | 453,918 | | | $ | 375,406 | | | $ | 173,731 | | | $ | 159,056 | | | $ | 338,743 | | | $ | 309,734 | |
Equipment revenue | | | 19,527 | | | 18,168 | | | 57,162 | | | 61,146 | | | | 39,954 | | | 68,402 | | | 74,491 | | | 149,549 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | | 172,874 | | | 147,267 | | | 511,080 | | | 436,552 | | | | 213,685 | | | 227,458 | | | 413,234 | | | 459,283 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of service revenue (exclusive of items shown below) | | | 67,854 | | | 56,365 | | | 201,794 | | | 164,615 | | | | 71,494 | | | 73,650 | | | 139,615 | | | 148,597 | |
Cost of equipment revenue (exclusive of items shown below) | | | 15,326 | | | 10,527 | | | 41,623 | | | 36,752 | | | | 35,571 | | | 64,350 | | | 65,302 | | | 116,643 | |
Engineering, design and development | | | 31,313 | | | 25,835 | | | 103,262 | | | 72,201 | | | | 26,912 | | | 28,409 | | | 51,640 | | | 58,186 | |
Sales and marketing | | | 16,294 | | | 14,874 | | | 47,253 | | | 46,366 | | | | 12,994 | | | 15,427 | | | 25,312 | | | 31,328 | |
General and administrative | | | 24,064 | | | 21,661 | | | 70,162 | | | 65,038 | | | | 27,081 | | | 21,133 | | | 49,535 | | | 46,292 | |
Depreciation and amortization | | | 35,824 | | | 26,779 | | | 96,821 | | | 76,042 | | | | 29,967 | | | 31,938 | | | 60,716 | | | 67,857 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 190,675 | | | 156,041 | | | 560,915 | | | 461,014 | | | | 204,019 | | | 234,907 | | | 392,120 | | | 468,903 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating loss | | | (17,801 | ) | | (8,774 | ) | | (49,835 | ) | | (24,462 | ) | |
Operating income (loss) | | | | 9,666 | | | (7,449 | ) | | 21,114 | | | (9,620 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other (income) expense: | | | | | | | | | | | | | | | | |
Interest income | | | (683 | ) | | (852 | ) | | (1,999 | ) | | (1,064 | ) | | | (1,230 | ) | | (1,328 | ) | | (2,379 | ) | | (2,404 | ) |
Interest expense | | | 27,585 | | | 24,848 | | | 81,754 | | | 58,701 | | | | 36,150 | | | 30,641 | | | 68,704 | | | 61,195 | |
Loss on extinguishment of debt | | | — | | | | — | | | | — | | | 15,406 | | | | 57,962 | | | | — | | | 57,962 | | | | — | |
Adjustment of deferred financing costs | | | — | | | | — | | | | — | | | (792 | ) | |
Other (income) expense | | | 228 | | | 34 | | | 322 | | | (137 | ) | | | 443 | | | 374 | | | (2,922 | ) | | (131 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other expense | | | 27,130 | | | 24,030 | | | 80,077 | | | 72,114 | | | | 93,325 | | | 29,687 | | | 121,365 | | | 58,660 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (44,931 | ) | | (32,804 | ) | | (129,912 | ) | | (96,576 | ) | | | (83,659 | ) | | (37,136 | ) | | (100,251 | ) | | (68,280 | ) |
Income tax provision | | | 350 | | | 469 | | | 945 | | | 997 | | |
Income tax provision (benefit) | | | | 304 | | | 71 | | | 511 | | | (3,654 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (45,281 | ) | | $ | (33,273 | ) | | $ | (130,857 | ) | | $ | (97,573 | ) | | $ | (83,963 | ) | | $ | (37,207 | ) | | $ | (100,762 | ) | | $ | (64,626 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Three and NineSix Months Ended SeptemberJune 30, 20172019 and 20162018
Revenue:
Revenue by segment and percent change for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 were as follows(in thousands, except for percent change):
| | | | For the Three Months | | | % Change | | | For the Three Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
Service Revenue: | | | | | | | | | | | | |
CA-NA | | $ | 94,436 | | | $ | 88,534 | | | | 6.7 | % | | $ | 96,402 | | | $ | 95,746 | | | | 0.7 | % |
BA | | | 43,224 | | | | 33,330 | | | | 29.7 | % | | | 54,756 | | | | 48,125 | | | | 13.8 | % |
CA-ROW | | | 15,687 | | | | 7,235 | | | | 116.8 | % | | | 22,573 | | | | 15,185 | | | | 48.7 | % |
| | | | | | | | | | | | | | | | | | |
Total Service Revenue | | $ | 153,347 | | | $ | 129,099 | | | | 18.8 | % | | $ | 173,731 | | | $ | 159,056 | | | | 9.2 | % |
| | | | | | | | | | | | | | | | | | |
Equipment Revenue: | | | | | | | | | | | | |
CA-NA | | $ | 1,291 | | | $ | 2,191 | | | | (41.1 | %) | | $ | 9,325 | | | $ | 23,904 | | | | (61.0 | )% |
BA | | | 17,283 | | | | 15,617 | | | | 10.7 | % | | | 16,485 | | | | 26,038 | | | | (36.7 | )% |
CA-ROW | | | 953 | | | | 360 | | | | 164.7 | % | | | 14,144 | | | | 18,460 | | | | (23.4 | )% |
| | | | | | | | | | | | | | | | | | |
Total Equipment Revenue | | $ | 19,527 | | | $ | 18,168 | | | | 7.5 | % | | $ | 39,954 | | | $ | 68,402 | | | | (41.6 | )% |
| | | | | | | | | | | | | | | | | | |
Total Revenue: | | | | | | | | | | | | |
CA-NA | | $ | 95,727 | | | $ | 90,725 | | | | 5.5 | % | | $ | 105,727 | | | $ | 119,650 | | | | (11.6 | )% |
BA | | | 60,507 | | | | 48,947 | | | | 23.6 | % | | | 71,241 | | | | 74,163 | | | | (3.9 | )% |
CA-ROW | | | 16,640 | | | | 7,595 | | | | 119.1 | % | | | 36,717 | | | | 33,645 | | | | 9.1 | % |
| | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 172,874 | | | $ | 147,267 | | | | 17.4 | % | | $ | 213,685 | | | $ | 227,458 | | | | (6.1 | )% |
| | | | | | | | | | | | | | | | | | |
| | | | For the Nine Months | | | % Change | | | For the Six Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
Service Revenue: | | | | | | | | | | | | |
CA-NA | | $ | 290,260 | | | $ | 261,751 | | | | 10.9 | % | | $ | 188,429 | | | $ | 184,529 | | | | 2.1 | % |
BA | | | 125,415 | | | | 96,442 | | | | 30.0 | % | | | 107,969 | | | | 95,775 | | | | 12.7 | % |
CA-ROW | | | 38,243 | | | | 17,213 | | | | 122.2 | % | | | 42,345 | | | | 29,430 | | | | 43.9 | % |
| | | | | | | | | | | | | | | | | | |
Total Service Revenue | | $ | 453,918 | | | $ | 375,406 | | | | 20.9 | % | | $ | 338,743 | | | $ | 309,734 | | | | 9.4 | % |
| | | | | | | | | | | | | | | | | | |
Equipment Revenue: | | | | | | | | | | | | |
CA-NA | | $ | 5,234 | | | $ | 8,708 | | | | (39.9 | %) | | $ | 13,367 | | | $ | 78,942 | | | | (83.1 | )% |
BA | | | 49,172 | | | | 51,707 | | | | (4.9 | %) | | | 33,821 | | | | 47,223 | | | | (28.4 | )% |
CA-ROW | | | 2,756 | | | | 731 | | | | 277.0 | % | | | 27,303 | | | | 23,384 | | | | 16.8 | % |
| | | | | | | | | | | | | | | | | | |
Total Equipment Revenue | | $ | 57,162 | | | $ | 61,146 | | | | (6.5 | %) | | $ | 74,491 | | | $ | 149,549 | | | | (50.2 | )% |
| | | | | | | | | | | | | | | | | | |
Total Revenue: | | | | | | | | | | | | |
CA-NA | | $ | 295,494 | | | $ | 270,459 | | | | 9.3 | % | | $ | 201,796 | | | $ | 263,471 | | | | (23.4 | )% |
BA | | | 174,587 | | | | 148,149 | | | | 17.8 | % | | | 141,790 | | | | 142,998 | | | | (0.8 | )% |
CA-ROW | | | 40,999 | | | | 17,944 | | | | 128.5 | % | | | 69,648 | | | | 52,814 | | | | 31.9 | % |
| | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 511,080 | | | $ | 436,552 | | | | 17.1 | % | | $ | 413,234 | | | $ | 459,283 | | | | (10.0 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Aviation North America:
CA-NA revenue increaseddecreased to $95.7$105.7 million and $295.5$201.8 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $90.7$119.7 million and $270.5$263.5 million, respectively, for the prior yearprior-year periods, primarily due to a decrease in equipment revenue offset in part by an increase in service revenue.
Equipment revenue driven by increased Passenger Connectivity revenue. The increase inCA-NA Passenger Connectivity revenue for the three and nine month periods ended September 30, 2017 was primarily duedecreased to an increase in connectivity take rate and an increase in the number of aircraft equivalents, offset in part by a decrease in ARPS. GPO increased to 110.8$9.3 million and 314.9$13.4 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with 108.4$23.9 million and 298.8$78.9 million, respectively, for the prior year periods, driven by an increase in aircraft equivalents. The connectivity take rate increased to 7.5%
and 7.8%, respectively, forprior-year periods. Equipment revenue decreased during the three and ninesix month periods ended SeptemberJune 30, 2017,2019 due to fewer 2Ku installations and a shift in mix from airline-directed to turnkey installations during 2019 as compared with 6.5% and 6.4%, respectively, for2018.
Additionally, equipment revenue decreased during the prior year periods, reflecting increased passenger adoption including the impact of third party-paid and airline-paid promotions. Passenger Connectivity sessions totaled 8.3 million and 24.6 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with 7.0 million and 19.2 million, respectively, for the prior year periods. ARPS decreased to $10.49 and $10.83, respectively, for the three and nine month periods ended September 30, 2017, as compared with $11.46 and $12.43, respectively, for the prior year periods, due to shifts in product mix, third party-paid and airline-paid promotions. Total ARPA was $11.1 thousand for both the threesix month period ended SeptemberJune 30, 2017 and 2016, and2019 due to the transition to the airline-directed model by one airline in January 2018, which increased to $11.6 thousandrevenue by approximately $45.4 million for the ninesix month period ended SeptemberJune 30, 2017, as compared with $11.3 thousand2018; see Note 1, “Basis of Presentation” for the prior year period. Total ARPA is comprised of Satellite ARPA of $18.4 thousand and $19.1 thousand, respectively, and ATG ARPA of $10.4 thousand and $11.0 thousand, respectively, for the three and nine month periods ended September 30, 2017.additional information.
A summary of the components ofCA-NA’s service revenue for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 is as follows(in thousands, except for percent change):
| | | | | | | | | | | | |
| | | For the Three Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | |
| | | 2017 | | | 2016 | | | 2016 | |
Passenger Connectivity revenue(1) | | $ | 88,348 | | | $ | 84,323 | | | | 4.8 | % |
Passenger Entertainment and CAS revenue | | | 6,088 | | | | 4,211 | | | | 44.6 | % |
| | | | | | | | | | | | |
Total service revenue | | $ | 94,436 | | | $ | 88,534 | | | | 6.7 | % |
| | | | | | | | | | | | |
| | |
| | | For the Nine Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | |
| | | 2017 | | | 2016 | | | 2016 | |
Passenger Connectivity revenue(1) | | $ | 272,351 | | | $ | 250,060 | | | | 8.9 | % |
Passenger Entertainment and CAS revenue | | | 17,909 | | | | 11,691 | | | | 53.2 | % |
| | | | | | | | | | | | |
Total service revenue | | $ | 290,260 | | | $ | 261,751 | | | | 10.9 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | For the Three Months | | | % Change | |
| | | Ended June 30, | | | 2019 over | |
| | | 2019 | | | 2018 | | | 2018 | |
Connectivity revenue(1) | | $ | 90,233 | | | $ | 88,833 | | | | 1.6 | % |
Entertainment and CAS revenue | | | 6,169 | | | | 6,913 | | | | (10.8 | )% |
| | | | | | | | | | | | |
Total service revenue | | $ | 96,402 | | | $ | 95,746 | | | | 0.7 | % |
| | | | | | | | | | | | |
| | |
| | | For the Six Months | | | % Change | |
| | | Ended June 30, | | | 2019 over | |
| | | 2019 | | | 2018 | | | 2018 | |
Connectivity revenue(1) | | $ | 170,051 | | | $ | 170,873 | | | | (0.5 | )% |
Entertainment and CAS revenue | | | 18,378 | | | | 13,656 | | | | 34.6 | % |
| | | | | | | | | | | | |
Total service revenue | | $ | 188,429 | | | $ | 184,529 | | | | 2.1 | % |
| | | | | | | | | | | | |
| (1) | Includesnon-session related revenue of $1.0$5.3 million and $5.6$6.7 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, and $4.0$2.7 million and $11.9$4.0 million, respectively, for the prior yearprior-year periods. |
CA-NA Passenger Connectivityservice revenue increased to $88.3$96.4 million and $272.4$188.4 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $84.3$95.7 million and $250.1$184.5 million, respectively, for the prior yearprior-year periods. The increase during the three month period ended SeptemberJune 30, 2017 as compared with the prior year period2019 was due to increasesan increase in third party-paidconnectivity revenue offset by a decrease in entertainment and airline-paidCAS revenue, while the increase during the ninesix month period ended SeptemberJune 30, 2017 as compared with the prior year period2019 was due to increases in passenger-paid, third party-paid and airline-paid revenue. Third party-paid revenue increased primarily due to increases in sponsorship, roaming, enterprise and wholesale revenue. Our airline-paid revenue increased due to new agreements with certain airline partners under which the airlines pay us for specified data usage, including data used by passengers and by airline crew members using connectivity services while in flight. Passenger-paid revenue increased during the nine month period ended September 30, 2017 as compared with the prior year period due to increases in both individual sessions and subscriptions, despite being negatively impacted by the hurricanes during the period.
The increase in Passenger Entertainment and CAS revenue to $6.1 million and $17.9 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $4.2 million and $11.7 million, respectively, for the prior year periods, was due to increased usage of CAS operational applications and Passenger Entertainment services underbusiness-to-business arrangements with our airline partners.
The increase inCA-NA service revenue was partially offset by a decrease in equipment revenue to $1.3 million and $5.2 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $2.2 million and $8.7 million, respectively, in the prior year periods, due primarily to more equipment transactions qualifying for sales treatment (instead of lease treatment) in the prior year period as compared with the current year.
Business Aviation:
BA revenue increased to $60.5 million and $174.6 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $48.9 million and $148.1 million, respectively, for the prior year periods, due to an increase in serviceentertainment and CAS revenue. BA revenue was also positively impacted by an increase in equipment revenue during the three month period ended September 30, 2017 as compared with the prior year period, while equipment
CA-NA entertainment and CAS revenue decreased during the nine month period ended September 30, 2017 as compared with the prior year period.
BA service revenue increased to $43.2 million and $125.4 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $33.3 million and $96.4 million, respectively, for the prior year periods, primarily due to more customers subscribing to our Gogo Biz (ATG) service and an increase in average monthly service revenue per aircraft online. The number of ATG aircraft online increased 14.9% to 4,567 as of September 30, 2017 as compared with 3,974 as of September 30, 2016.
BA equipment revenue increased to $17.3$6.2 million for the three month period ended SeptemberJune 30, 2017,2019 as compared with $15.6$6.9 million for the prior yearthree month period ended June 30, 2018, but increased to $18.4 million for the six month period ended June 30, 2019 as compared with $13.7 million for the six month period ended June 30, 2018. The decrease during the three month period ended June 30, 2019 was due primarily to the deinstallation of Gogo equipment from certain American Airlines aircraft during 2018 and the six month period ended June 30, 2019. The increase during the six month period ended June 30, 2019 was due primarily to the recognition of product development-related revenue for one of our airline partners in the first quarter of 2019 offset in part by the deinstallation of Gogo equipment from certain American Airlines aircraft during 2018 and the six month period ended June 30, 2019.
Connectivity revenue increased to $90.2 million for the three month period ended June 30, 2019 from $88.8 million for the prior-year period but decreased to $170.1 million for the six month period ended June 30, 2019 from $170.9 million for the prior-year period. The increase during the three month period ended June 30, 2019 was due primarily to theone-time impact from a contract renewal with one of our airline customers, and an increase in ATGpassenger-paid, airline-paid and third party-paid revenue, offset in part by the deinstallation of Gogo equipment from certain American Airlines aircraft during 2018 and 2019. The decrease during the six month period ended June 30, 2019 was due primarily to the deinstallation of Gogo equipment from certain American Airlines aircraft during 2018 and 2019, offset in part by an increase in passenger-paid revenue, airline-paid revenue, third party-paid revenue and theone-time impact from a contract renewal with one of our airline customers.
Net annualized ARPA increased to $136 thousand and $131 thousand, respectively, for the three and six month periods ended June 30, 2019, as compared with $113 thousand and $108 thousand, respectively, for the prior-year periods. Net annualized ARPA increased for the three and six month periods ended June 30, 2019 due to theone-time impact from a contract renewal with one of our airline customers; the increase in product development-related revenue mentioned above also contributed to the increase in net annualized ARPA for the six month period. The connectivity take rate, which is the number of sessions expressed as a percentage of passengers, increased to 12.7% and 13.3%, respectively, for the three and six month periods ended June 30, 2019, as compared with 11.2% and 10.9%, respectively, for the prior-year periods, reflecting increased passenger adoption including the impact of third party-paid and airline-paid offerings, primarily under the airline-directed model.
We expect service revenue forCA-NA to decrease in the near-term primarily due to the deinstallation of Gogo equipment from certain American Airlines aircraft in 2018 and 2019.
As the recognition ofCA-NA equipment revenue partially offsetis a function of equipment installation schedules, equipment revenue will be driven by a decrease in satellite equipment revenue. Equipmentour ability to execute our existing airline partner contracts and enter into new contracts.
Business Aviation:
BA revenue decreased to $49.2$71.2 million and $141.8 million, respectively, for the ninethree and six month periodperiods ended SeptemberJune 30, 2017,2019, as compared with $51.7$74.2 million inand $143.0 million, respectively, for the prior year periodprior-year periods due to decreasesa decrease in satellite equipment revenue offset in part by an increase in service revenue.
BA equipment revenue decreased to $16.5 million and $33.8 million, respectively, for the three and six month periods ended June 30, 2019, as compared with $26.0 million and $47.2 million, respectively, for the prior-year periods due primarily to a decrease in ATG equipment revenue.
Under a sales programBA service revenue increased to $54.8 million and $108.0 million, respectively, for Gogo Biz 4G equipment that started in 2016, we have deferred approximately $5.2 million of equipment revenue as of September 30, 2017 in connection with a free upgrade program under which we shipped ATG and UCS equipment to customers who have a right to exchange that equipment for Gogo Biz 4G equipment. In the three and nine monthssix month periods ended SeptemberJune 30, 2017, we shipped four2019, as compared with $48.1 million and seven$95.8 million, respectively, for the prior-year periods primarily due to additional customers subscribing to our Gogo Biz 4G units, respectively, under this program and recognized $0.3 million and $0.5 million, respectively,(ATG) service. The number of previously deferred equipment revenue. We will recognize the remaining deferred revenue upon the earlierATG aircraft online increased 11% to 5,462 as of the shipmentJune 30, 2019, as compared with 4,920 as of the Gogo Biz 4G equipment or the expiration of the free upgrade period, which is June 30, 2018.
Commercial Aviation Rest of World:
CA-ROW revenue increased to $16.6$36.7 million and $41.0$69.6 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $7.6$33.6 million and $17.9$52.8 million, respectively, for the prior year periods,prior-year periods. The increase for the three month period ended June 30, 2019 was due to an increase in service revenue andoffset in part by a decrease in equipment revenue, while the increase during the six month period ended June 30, 2019 was due to a lesser extent an increase in both service and equipment revenue.
CA-ROW service revenue increased to $15.7$22.6 million and $38.2$42.3 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $7.2$15.2 million and $17.2$29.4 million, respectively, for the prior yearprior-year periods, due to an increase in ARPA and to a lesser extent an increase in aircraft equivalents. Net annualized ARPA for theCA-ROW segment increaseddecreased to $18.8$135 thousand and $18.3 thousand for both the three and ninesix month periods ended SeptemberJune 30, 2017, respectively,2019, as compared with $14.5$147 thousand and $12.8$153 thousand, respectively, for the prior yearprior-year periods due to increased airline-paid passenger usage and the transitionan increase in the accounting treatment for one of ouraircraft online from new airline agreements from an operating lease or Turnkey model in the prior yearpartners.
CA-ROW equipment revenue decreased to a sale or Airline Directed model in the first quarter of the current year due to specific provisions elected by the airline. Take rate was 13.5% and 14.3%, respectively,$14.1 million for the three and ninemonth period ended June 30, 2019 as compared with $18.5 million for the three month period ended June 30, 2018 due to fewer installations under the airline-directed model.CA-ROW equipment revenue increased to $27.3 million as compared with $23.4 million for the six month periods ended SeptemberJune 30, 2017.
CA-ROW generated equipment revenue of $1.0 million2019 and $2.8 million,2018, respectively, fordue to more installations under the three and nine month periods ended September 30, 2017,airline-directed model in 2019 as compared with $0.4 million2018.
As the recognition ofCA-ROW equipment revenue is a function of equipment installation schedules, equipment revenue will be driven by our ability to execute our existing airline partner contracts and $0.7 million, respectively, for the prior year periods, due to the transition in the accounting treatment for one of our airline agreements from an operating lease or Turnkey model in the prior year to a sale or Airline Directed model in the first quarter of the current year due to specific provisions elected by the airline.enter into new contracts.
Cost of Service Revenue:
Cost of service revenue by segment and percent change and cost of service revenue as a percent of service revenue for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 were as follows(in thousands, except for percent change):
| | | | For the Three Months | | | % Change | | | For the Three Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
CA-NA | | $ | 37,738 | | | $ | 36,696 | | | | 2.8 | % | | $ | 38,645 | | | $ | 45,594 | | | | (15.2 | )% |
BA | | | 10,090 | | | | 8,374 | | | | 20.5 | % | | | 13,101 | | | | 10,086 | | | | 29.9 | % |
CA-ROW | | | 20,026 | | | | 11,295 | | | | 77.3 | % | | | 19,748 | | | | 17,970 | | | | 9.9 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 67,854 | | | $ | 56,365 | | | | 20.4 | % | | $ | 71,494 | | | $ | 73,650 | | | | (2.9 | )% |
| | | | | | | | | | | | | | | | | | |
| | | | For the Nine Months | | | % Change | | | For the Six Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
CA-NA | | $ | 112,439 | | | $ | 107,067 | | | | 5.0 | % | | $ | 75,070 | | | $ | 92,147 | | | | (18.5 | )% |
BA | | | 29,476 | | | | 25,691 | | | | 14.7 | % | | | 26,153 | | | | 21,200 | | | | 23.4 | % |
CA-ROW | | | 59,879 | | | | 31,857 | | | | 88.0 | % | | | 38,392 | | | | 35,250 | | | | 8.9 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 201,794 | | | $ | 164,615 | | | | 22.6 | % | | $ | 139,615 | | | $ | 148,597 | | | | (6.0 | )% |
| | | | | | | | | | | | | | | | | | |
CA-NA cost of service revenue decreased to $38.6 million and $75.1 million, respectively, for the three and six month periods ended June 30, 2019, as compared with $45.6 million and $92.1 million, respectively, for the prior-year periods due to decreases in revenue share, operational costs, ATG network costs andde-icing-related costs, offset in part by increased satellite service fees.
BA cost of service revenue increased to $13.1 million and $26.2 million, respectively, for the three and six month periods ended June 30, 2019, as compared with $10.1 million and $21.1 million, respectively, for the prior-year periods. The increase was primarily due to ATG network costs.
CA-ROW cost of service revenue increased to $20.0$19.7 million and $59.9$38.4 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $11.3$18.0 million and $31.9$35.3 million, respectively, for the prior year periods,prior-year period primarily due to increases in network operations expenses (including satellite service fees), aircraft operations expenses, revenue share expense and billing and transaction related expenses as the business continued to grow. Cost of service revenue was further impacted by decreases in the amortization of our deferred airborne lease incentives, the recognition of monthly service fees and maintenance fees paid to us by certain of our airline partners, all of which reduce our cost of services.
CA-NA cost of service revenue increased to $37.7 million and $112.4 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $36.7 million and $107.1 million, respectively, for the prior year periods, due to increases in network operations expenses (including satellite service fees) and aircraft operations expenses. These increases were partially offset by increases in the amortization of our deferred airborne lease incentives, the recognition of monthly service fees and maintenance fees paid to us by certain of our airline partners, all of which reduce our cost of services. See Note 10, “Leases” to our unaudited condensed consolidated financial statements for additional information regarding our deferred airborne lease incentives.
BA cost of service revenue increased to $10.1 million and $29.5 million, respectively, for the three and nine month periods ended September 30, 2017, as compared with $8.4 million and $25.7 million, respectively, for the prior year periods. The increases were primarily due to increased ATG units online and an increase in the average network utilization per ATG unit online which resulted in higher ATG network service costs and, to a lesser extent, an increase in satellite serviceand network fees.
We expect cost of service revenue forCA-NA to increaseplateau over time mainly due to increased satellite service fees for additional coverage. Additionally, we expectaircraft operating on our satellite network, offset by a decreasereduction in the amortization of deferred airborne lease incentives as we anticipate our airline agreements will transition from an operating lease or Turnkey model to a sale or Airline Directed model.operational costs.
As we expand ourCA-ROW business, internationally, we also expect to incur additional cost of service revenue inCA-ROW, reflecting increased satellite usage maintenance costs and network related expenses. However, we expect to see increased utilization of our network as we install additional aircraft.
Cost of Equipment Revenue:
Cost of equipment revenue by segment and percent change for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 were as follows(in thousands, except for percent change):
| | | | For the Three Months | | | % Change | | | For the Three Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
CA-NA | | $ | 1,065 | | | $ | 1,526 | | | | (30.2 | %) | | $ | 5,865 | | | $ | 29,312 | | | | (80.0 | )% |
BA | | | 13,414 | | | | 8,820 | | | | 52.1 | % | | | 11,809 | | | | 15,268 | | | | (22.7 | )% |
CA-ROW | | | 847 | | | | 181 | | | | 368.0 | % | | | 17,897 | | | | 19,770 | | | | (9.5 | )% |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 15,326 | | | $ | 10,527 | | | | 45.6 | % | | $ | 35,571 | | | $ | 64,350 | | | | (44.7 | )% |
| | | | | | | | | | | | | | | | | | |
| | | | For the Nine Months | | | % Change | | | For the Six Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
CA-NA | | $ | 5,646 | | | $ | 8,335 | | | | (32.3 | %) | | $ | 7,456 | | | $ | 64,798 | | | | (88.5 | )% |
BA | | | 33,651 | | | | 27,986 | | | | 20.2 | % | | | 23,207 | | | | 27,724 | | | | (16.3 | )% |
CA-ROW | | | 2,326 | | | | 431 | | | | 439.7 | % | | | 34,639 | | | | 24,121 | | | | 43.6 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 41,623 | | | $ | 36,752 | | | | 13.3 | % | | $ | 65,302 | | | $ | 116,643 | | | | (44.0 | )% |
| | | | | | | | | | | | | | | | | | |
Cost of equipment revenue increaseddecreased to $15.3$35.6 million and $41.6$65.3 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $10.5$64.4 million and $36.8$116.6 million, respectively, for the prior yearprior-year periods.
The increase occurred primarily withindecrease inCA-NA for the BA segmentthree and six month periods ended June 30, 2019, as compared with the prior-year periods was due to a lesser extent theCA-ROW segment, offset in part by a decrease in costs associated with remediation of quality issues related to our 2Ku technology and fewer installations under theCA-NA segment. airline-directed model during 2019 as compared with 2018. Additionally, the decrease for the six month period ended June 30, 2019 as compared with the prior-year period was due to the transition to the airline-directed model by one airline in January 2018, which included cost of equipment revenue of approximately $26.1 million, while we had no such activity in 2019; see Note 1, “Basis of Presentation” for additional information.
The increasedecrease in BA was due to a decrease in equipment revenue and changes in product mix.
The decrease inCA-ROW during the three month period was due to the decrease in activity under airline-directed model, while the increase during the six month period was due to an increase in inventory reserves on certain products,activity under thewrite-off of capitalized software, changes in product mix and increases in warranty expense. The increase inCA-ROW was due to additional equipment transactions that qualify for sale treatment. The decrease inCA-NA was due to fewer equipment transactions that qualify for sale treatment. airline-directed model.
We expect that our cost of equipment revenue in future periods will vary with changes in equipment revenue.
Engineering, Design and Development Expenses:
Engineering, design and development expenses increased 21.2%decreased 5.3% and 43.0%11.3% to $31.3$26.9 million and $103.3$51.6 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $25.8$28.4 million and $72.2$58.2 million, respectively, for the prior yearprior-year periods due primarily to increasesdecreased program and personnel-related expenses in all three segments due to higher personnel expenseCA-ROW and outside services in connection with the development of new products and technologies and obtaining STCs. Additionally, the increase in theCA-NA, segment for the three and nine month periods was due to the recognition of approximately $3 million and $16 million, respectively, of expenses related to theoffset in part by increased product development of our next generation ATG solution, primarily due to the achievement of major development milestonescosts at different points during the year.BA.
We expect consolidated engineering, design and development expenses to decrease as a percentage of consolidated service revenue over time.
Sales and Marketing Expenses:
Sales and marketing expenses increased 9.5%decreased 15.8% and 1.9%19.2% to $16.3$13.0 million and $47.3$25.3 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $14.9$15.4 million and $46.4$31.3 million, respectively, for the prior yearprior-year periods due to increasesdecreases in the BA andCA-ROW segments, offset in part by a decrease inCA-NA. The increase in BA andCA-ROW was due primarily to an increase in personnel expense to support the growth of the businesses. Salesall three segments. Consolidated sales and marketing expenses as a percentage of total consolidated service revenue decreased to 9.4% and 9.2%, respectively,was 7.5% for both the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with 10.1%9.7% and 10.6%, respectively,10.1% for the prior yearprior-year periods.
We expect our sales and marketing expenses to increase in future periods as we expand our international marketing initiatives, commence service on aircraft operated by new and existing airline partners in bothCA-NA andCA-ROW, increase advertising and promotional initiatives for new product offerings (particularly in BA) and expand programs to retain and support our existing users. In addition, the commission component of sales and marketing expenses at BA will fluctuate with equipment revenue. We expect consolidated sales and marketing expenses to decrease as a percentage of consolidated service revenue over time.
General and Administrative Expenses:
General and administrative expenses increased 11.1%28.1% and 7.9%7.0% to $24.1$27.1 million and $70.2$49.5 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $21.7$21.1 million and $65.0$46.3 million, respectively, for the prior yearprior-year periods primarily due to increases in all three segments,CA-NA and BA. The increase inCA-NA was primarily due to establishment of a bad debt reserve for anon-airline customer during the second quarter of 2019 while the increase in BA was primarily due to increases in personnel expense. Generalpersonnel-related expenses and various administrative costs. Consolidated general and administrative expenses as a percentage of total consolidated service revenue decreased to 13.9%was 15.6% and 13.7%, respectively,14.6% for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with 14.7%13.3% and 14.9%, respectively, for the prior yearprior-year periods.
We expect general and administrative expenses to decrease as a percentage of consolidated service revenue as we realize economies of scale.over time.
Segment Profit (Loss):
CA-NA’s segment profit increased 10.0%243.3% and 448.6% to $16.0$24.2 million and $47.7 million, respectively, for the three and six month periodperiods ended SeptemberJune 30, 2017,2019, as compared with $14.5$7.0 million and $8.7 million, respectively, for the prior year period, while segment profit decreased 7.8% to $43.3 million for the nine month period ended September 30, 2017, as compared with $47.0 million for the prior year period. The increase inCA-NA’s segment profit for the three month period ended September 30, 2017 wasprior-year periods due to an increase in service revenue and decreases in cost of equipment revenue and sales and marketing expense, offset in part by increases in cost of service revenue, engineering, design and development and general and administrative expenses and a decrease in equipment revenue, as discussed above. The decrease inCA-NA’s segment profit for the nine month period ended September 30, 2017 was due to increases in cost of service revenue, engineering, design and development and general and administrative expenses and a decrease in equipment revenue, offset in part by an increase in service revenue and decreases in cost of equipment revenue and sales and marketing expense,changes as discussed above.
BA’s segment profit increased 3.3%decreased 14.7% and 21.3%6.1% to $21.3$31.3 million and $72.6$64.8 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $20.7$36.7 million and $59.9$69.0 million, respectively, for the prior year periods. The increase in BA’s segment profit for the three and nine monthprior-year periods ended September 30, 2017 wasprimarily due to an increase in service revenue, partially offset by an increase in operating expenses,the changes as discussed above.
CA-ROW’s segment loss increased 21.0%decreased 29.5% and 30.4%22.7% to $24.1$17.3 million and $82.1$36.4 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $19.9$24.5 million and $62.9$47.1 million, respectively, for the prior year periods. The increase inCA-ROW’s segment loss for the three and nine monthprior-year periods ended September 30, 2017 was due to an increase in operating expenses, offset in part by an increase in service and equipment revenue,the changes as discussed above.
Depreciation and Amortization:
Depreciation and amortization expense increased 33.8%decreased 6.2% and 27.3%10.5% to $35.8$30.0 million and $96.8$60.7 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared with $26.8$31.9 million and $76.0$67.9 million, respectively, for the prior yearprior-year periods due to the increase in the numberdecreased amortization of aircraft outfitted with our airborne equipment by ourCA-ROW andCA-NA segmentscapitalized software and accelerated depreciation expense for certain upgradeupgrades and decommission programs. See Note 1, “Basisprograms that were completed in the first half of Presentation” to our unaudited condensed consolidated financial statements for additional information on the accelerated depreciation expense.2018.
We expect that our depreciation and amortization expense to increasewill vary in the future periods as we install our equipment on additional aircraft, install more expensive satellite-based equipment on aircraft and further expand our ground and satellite networks.depending upon the number of installations under the turnkey model.
Other (Income) Expense:
Other (income) expense and percent change for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 were as follows(in thousands, except for percent change):
| | | | For the Three Months | | | % Change | | | For the Three Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
Interest income | | $ | (683 | ) | | $ | (852 | ) | | | (19.8 | %) | | $ | (1,230 | ) | | $ | (1,328 | ) | | | (7.4 | )% |
Interest expense | | | 27,585 | | | | 24,848 | | | | 11.0 | % | | | 36,150 | | | | 30,641 | | | | 18 | % |
Loss on extinguishment of debt | | | | 57,962 | | | | — | | | | n/a | |
Other expense | | | 228 | | | | 34 | | | | 570.6 | % | | | 443 | | | | 374 | | | | 18.4 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 27,130 | | | $ | 24,030 | | | | 12.9 | % | | $ | 93,325 | | | $ | 29,687 | | | | 214.4 | % |
| | | | | | | | | | | | | | | | | | |
| | | | For the Nine Months | | | % Change | | | For the Six Months | | | % Change | |
| | | Ended September 30, | | | 2017 over | | | Ended June 30, | | | 2019 over | |
| | | 2017 | | | 2016 | | | 2016 | | | 2019 | | | 2018 | | | 2018 | |
Interest income | | $ | (1,999 | ) | | $ | (1,064 | ) | | | 87.9 | % | | $ | (2,379 | ) | | $ | (2,404 | ) | | | (1.0 | )% |
Interest expense | | | 81,754 | | | | 58,701 | | | | 39.3 | % | | | 68,704 | | | | 61,195 | | | | 12.3 | % |
Loss on extinguishment of debt | | | — | | | | 15,406 | | | | n/a | | | | 57,962 | | | | — | | | | n/a | |
Adjustment to deferred financing costs | | | — | | | | (792 | ) | | | n/a | | |
Other (income) expense | | | 322 | | | | (137 | ) | | | n/a | | |
Other income | | | | (2,922 | ) | | | (131 | ) | | | 2,130.5 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 80,077 | | | $ | 72,114 | | | | 11.0 | % | | $ | 121,365 | | | $ | 58,660 | | | | 106.9 | % |
| | | | | | | | | | | | | | | | | | |
Total other expense was $27.1increased to $93.3 million and $80.1$121.4 million, respectively, for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, as compared to $24.0with $29.7 million and $72.1$58.7 million, respectively, for the prior year periods. Interestprior-year periods due to the loss on extinguishment of debt and increased interest expense increased during the three and nine month periods ended September 30, 2017 as compared with the prior year periods due to higher average debt levels outstanding and higher average interest rates incurred during the current year as compared with the prior year. The increase in interest expenseprior-year period; for the three and nine month periods ended September 30, 2017, as compared to the prior year periods, was due to the issuance of the Original Senior Secured Notes in June 2016, the January 2017 Additional Notes in January 2017 and the September 2017 Additional Notes in September 2017. The increase in interest expense associated with the Senior Secured Notes was partially offset by lower interest expense associated with the Amended and Restated Senior Term Facility, which was repaid in full in June 2016. See Note 8, “Long-Term Debt and Other Liabilities,” in our unaudited condensed consolidated financial statements for additional information. See Note 9, “Interest Costs,” in our unaudited condensed consolidated financial statements for additional information related to our interest expense. The ninesix month period ended SeptemberJune 30, 2016 included2019 these factors were offset in part by $3.2 million of net proceeds from a loss on extinguishmentlitigation settlement in the first quarter of debt related to the repayment of the Amended and Restated Senior Term Facility and adjustment of deferred financing costs, while the current year did not include such activities.2019.
We expect our interest expense to increase in 2019 as compared to 2018 due to higher average debt outstanding and higher average interest rates because of the issuanceissuances of the 2024 Senior Secured Notes. InterestNotes in April and May 2019 and the 2022 Convertible Notes in November 2018 and the associated accretion expense will also increase due to a full year ofand amortization of deferred financing fees associated with the Senior Secured Notes offset in part by the amortization of the debt premium associated with the Senior Secured Notes.costs for such issuances. These increases will be partially offset by the extinguishmentreduction in interest expense related to the 2022 Senior Secured Notes, which were redeemed in full in May 2019, and the partial repurchase of the Amended and Restated Senior Term Facility.2020 Convertible Notes. See Note 8,9, “Long-Term Debt and Other Liabilities,” in our unaudited condensed consolidated financial statements for additional information.
Income Taxes:
The effective income tax raterates for the three and ninesix month periods ended SeptemberJune 30, 20172019 were (0.4)% and 2016 was (0.8%) and (0.7%)(0.5)%, respectively, as compared with (1.4%)(0.2)% and (1.0%)5.4%, respectively, for the prior yearprior-year periods. Income tax expense recorded in each period was similar, with differences inpre-tax income causing the change in the effective tax rate. The difference between our effective tax rates and the U.S. federal statutory rate of 35% forFor the three and ninesix month periods ended SeptemberJune 30, 2017 and 20162019, our income tax expense was not significant primarily due to the recording of a valuation allowance against our net deferred tax assets. An income tax benefit was recorded for the six month period ended June 30, 2018 resulting from a reduction in our valuation allowance of approximately $4.0 million due to the application of provisions of H.R. 1, commonly known as the Tax Cuts and Jobs Act (“U.S. Tax Reform”), to our evaluation of our deferred tax assets.
We expect our income tax provision to increase in future periods to the extent we become profitable.
Non-GAAP Measures
In our discussion below, we discuss certainnon-GAAP financial measurements, including Adjusted EBITDA, Free Cash Flow and Unlevered Free Cash CAPEXFlow as defined below. Management uses Adjusted EBITDA, Free Cash Flow and Unlevered Free Cash CAPEXFlow for business planning purposes, including managing our business against internally projected results of operations and measuring our performance and liquidity. These supplemental performance measures also provide another basis for comparing period to periodperiod-to-period results by excluding potential differences caused bynon-operational and unusual ornon-recurring items. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA, Free Cash Flow and Unlevered Free Cash CAPEXFlow are not recognized measurements under
accounting principles generally accepted in the United States, or GAAP, andGAAP; when analyzing our performance with Adjusted EBITDA or liquidity with Free Cash CAPEX,Flow or Unlevered Free Cash Flow, as applicable, investors should (i) evaluate each adjustment in our reconciliation to net loss attributable to common stock,the corresponding GAAP measure, and the explanatory footnotes regarding those adjustments, (ii) use Adjusted EBITDA in addition to, and not as an alternative to, net loss attributable to common stock as a measure of operating results, and (iii) use Free Cash CAPEXFlow or Unlevered Free Cash Flow in addition to, and not as an alternative to, consolidated capital expendituresnet cash provided by (used in) operating activities when evaluating our liquidity.
Definition and Reconciliation ofNon-GAAP Measures
EBITDA represents net income (loss)loss attributable to common stock before income taxes,interest expense, interest income, interest expense,income taxes, depreciation expense and amortization of other intangible assets.
Adjusted EBITDA represents EBITDA adjusted for (i) stock-based compensation expense, (ii) amortization of deferred airborne lease incentives, (iii) amortization of STC costs, (iv) the accounting impact of the transition to the airline-directed model, (v) proceeds from litigation settlement and (vi) loss on extinguishment of debt and (iv) adjustment of deferred financing costs.debt. Our management believes that the use of Adjusted EBITDA eliminates items that, management believes, have less bearing on our operating performance, thereby highlighting trends in our core business which may not otherwise be apparent. It also provides an assessment of controllable expenses, which are indicators management uses to determine whether current spending decisions need to be adjusted in order to meet financial goals and achieve optimal financial performance.
We believe the exclusion of stock-based compensation expense from Adjusted EBITDA is appropriate given the significant variation in expense that can result from using the Black-Scholes model to determine the fair value of such compensation. The fair value of our stock options is determined using the Black-Scholes model and varies based on fluctuations in the assumptions used in this model, including inputs that are not necessarily directly related to the performance of our business, such as the expected volatility, the risk-free interest rate and the expected life of the options. Therefore, we believe the exclusion of this cost provides a clearer view of the operating performance of our business. Further, stock option grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time. While we believe that investors should have information about any dilutive effect of outstanding options and the cost of that compensation, we also believe that stockholders should have the ability to consider our performance using anon-GAAP financial measure that excludes these costs and that management uses to evaluate our business.
We believe the exclusion of the amortization of deferred airborne lease incentives and amortization of STC costs from Adjusted EBITDA is useful as it allows an investor to view operating performance across time periods in a manner consistent with how management measures segment profit and loss (see Note 14,15, “Business Segments and Major Customers,” for a description of segment profit (loss) in our unaudited condensed consolidated financial statements). Management evaluates segment profit and loss in this manner, excluding the amortization of deferred airborne lease incentives and amortization of STC costs, because such presentation reflects operating decisions and activities from the current period, without regard to the prior period decision or the form of connectivity agreements. See “—Key Components of Consolidated Statements of Operations—Cost of Service Revenue—Commercial Aviation North America and Rest of World” in our 201610-K for a discussion of the accounting treatment of deferred airborne lease incentives.
We believe it is useful tofor an understanding of our operating performance to exclude the accounting impact of the transition by one of our airline partners to the airline-directed model and the loss on extinguishment of debt and adjustment of deferred financing costs from Adjusted EBITDA because of thenon-recurring nature of these charges.activities.
We believe the exclusion of litigation proceeds from Adjusted EBITDA is appropriate as this isnon-recurring in nature and represents an infrequent financial benefit to our operating performance.
We also present Adjusted EBITDA as a supplemental performance measure because we believe that this measure provides investors, securities analysts and other users of our financial statements with important supplemental information with which to evaluate our performance and to enable them to assess our performance on the same basis as management.
Free Cash CAPEXFlow represents capital expenditures net cash provided by (used in) operating activities, less purchases of airborneproperty and equipment proceeds received fromand the airlines.acquisition of intangible assets. We believe Free Cash CAPEXFlow provides a more representative indicationmeaningful information regarding the Company’s liquidity.
Unlevered Free Cash Flow represents Free Cash Flow adjusted for cash interest payments and interest income. We believe that Unlevered Free Cash Flow provides an additional view of the Company’s liquidity, excluding the impact of our liquidity requirements with respect to capital expenditures, as under certain agreements with our airline partners we are reimbursed for all or a substantial portion of the cost of our airborne equipment, thereby reducing our cash capital requirements.structure.
Gogo Inc. and Subsidiaries
Reconciliation of GAAP toNon-GAAP Measures
(in thousands, except per share amounts)
(unaudited)
| | | | For the Three Months | | | For the Nine Months | | | For the Three Months | | | For the Six Months | |
| | | Ended September 30, | | | Ended September 30, | | | Ended June 30, | | | Ended June 30, | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Adjusted EBITDA: | | | | | | | | | | | | | | | | |
Net loss attributable to common stock (GAAP) | | $ | (45,281 | ) | | $ | (33,273 | ) | | $ | (130,857 | ) | | $ | (97,573 | ) | | $ | (83,963 | ) | | $ | (37,207 | ) | | $ | (100,762 | ) | | $ | (64,626 | ) |
Interest expense | | | 27,585 | | | | 24,848 | | | | 81,754 | | | | 58,701 | | | | 36,150 | | | | 30,641 | | | | 68,704 | | | | 61,195 | |
Interest income | | | (683 | ) | | | (852 | ) | | | (1,999 | ) | | | (1,064 | ) | | | (1,230 | ) | | | (1,328 | ) | | | (2,379 | ) | | | (2,404 | ) |
Income tax provision | | | 350 | | | | 469 | | | | 945 | | | | 997 | | |
Income tax provision (benefit) | | | | 304 | | | | 71 | | | | 511 | | | | (3,654 | ) |
Depreciation and amortization | | | 35,824 | | | | 26,779 | | | | 96,821 | | | | 76,042 | | | | 29,967 | | | | 31,938 | | | | 60,716 | | | | 67,857 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EBITDA | | | 17,795 | | | | 17,971 | | | | 46,664 | | | | 37,103 | | | | (18,772 | ) | | | 24,115 | | | | 26,790 | | | | 58,368 | |
Stock-based compensation expense | | | 5,283 | | | | 5,000 | | | | 15,007 | | | | 12,986 | | | | 4,318 | | | | 4,213 | | | | 8,645 | | | | 8,599 | |
Amortization of deferred airborne lease incentives | | | (10,121 | ) | | | (7,765 | ) | | | (28,099 | ) | | | (20,650 | ) | | | (6,077 | ) | | | (7,462 | ) | | | (15,030 | ) | | | (15,092 | ) |
Amortization of STC costs | | | | 322 | | | | 255 | | | | 642 | | | | 427 | |
Transition to airline-directed model | | | | — | | | | (2,249 | ) | | | — | | | | (21,551 | ) |
Loss on extinguishment of debt | | | — | | | | — | | | | — | | | | 15,406 | | | | 57,962 | | | | — | | | | 57,962 | | | | — | |
Adjustment of deferred financing costs | | | — | | | | — | | | | — | | | | (792 | ) | |
Proceeds from litigation settlement | | | | — | | | | — | | | | (3,215 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 12,957 | | | $ | 15,206 | | | $ | 33,572 | | | $ | 44,053 | | | $ | 37,753 | | | $ | 18,872 | | | $ | 75,794 | | | $ | 30,751 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash CAPEX: | | | | | | | | | |
Consolidated capital expenditures (GAAP)(1) | | $ | (68,495 | ) | | $ | (43,653 | ) | | $ | (214,238 | ) | | $ | (128,694 | ) | |
Change in deferred airborne lease incentives(2) | | | 5,351 | | | | 330 | | | | 8,856 | | | | 8,674 | | |
Amortization of deferred airborne lease incentives(2) | | | 10,077 | | | | 7,697 | | | | 27,994 | | | | 20,458 | | |
Unlevered Free Cash Flow: | | | | | | | | | |
Net cash provided by (used in) operating activities (GAAP)(1) | | | $ | 11,691 | | | $ | 17,176 | | | $ | 5,535 | | | $ | (29,029 | ) |
Consolidated capital expenditures(1) | | | | (14,534 | ) | | | (52,508 | ) | | | (42,245 | ) | | | (115,166 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash CAPEX | | $ | (53,067 | ) | | $ | (35,626 | ) | | $ | (177,388 | ) | | $ | (99,562 | ) | |
Free cash flow | | | | (2,843 | ) | | | (35,332 | ) | | | (36,710 | ) | | | (144,195 | ) |
Cash paid for interest(1) | | | | 40,257 | | | | — | | | | 86,420 | | | | 49,911 | |
Interest income(2) | | | | (1,230 | ) | | | (1,328 | ) | | | (2,379 | ) | | | (2,404 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Unlevered free cash flow | | | $ | 36,184 | | | $ | (36,660 | ) | | $ | 47,331 | | | $ | (96,688 | ) |
| | | | | | | | | | | | | |
| (1) | See unaudited condensed consolidated statements of cash flows. |
| (2) | Excludes deferred airborne lease incentives and related amortization associated with STCs for the three and nine month periods ended September 30, 2017 and 2016 as STC costs are expensed as incurred as partSee unaudited condensed consolidated statements of Engineering, Design and Development.operations. |
Material limitations ofNon-GAAP measures
Although EBITDA, Adjusted EBITDA and Free Cash CAPEXFlow are measurements frequently used by investors and securities analysts in their evaluations of companies, EBITDA, Adjusted EBITDA, Free Cash Flow and Unlevered Free Cash CAPEXFlow each have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for, or more meaningful than, amounts determined in accordance with GAAP.
Some of these limitations include:
EBITDA and Adjusted EBITDA do not reflect interest income or expense;
EBITDA and Adjusted EBITDA do not reflect cash requirements for our income taxes;
EBITDA and Adjusted EBITDA do not reflect depreciation and amortization, which are significant and unavoidable operating costs given the level of capital expenditures needed to maintain our business;
Adjusted EBITDA does not reflectnon-cash components of employee compensation;
Free Cash CAPEX doesFlow and Unlevered Free Cash Flow do not reflectrepresent the full extent of capital investments we have madetotal increase or decrease in our operations;cash balance for the period; and
since other companies in our or related industries may calculate these measures differently from the way we do, their usefulness as comparative measures may be limited.
Liquidity and Capital Resources
The following table presents a summary of our cash flow activity for the periods set forth below(in thousands):
| | | | For the Nine Months | | | | | |
| | | Ended September 30, | | | For the Six Months
Ended June 30, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
Net cash provided by (used in) operating activities | | $ | (4,209 | ) | | $ | 45,148 | | | $ | 5,535 | | | $ | (29,029 | ) |
Net cash used in investing activities | | | (66,743 | ) | | | (247,708 | ) | | | (2,562 | ) | | | (25,565 | ) |
Net cash provided by financing activities | | | 175,472 | | | | 202,426 | | |
Net cash used in financing activities | | | | (2,837 | ) | | | (1,444 | ) |
Effect of foreign exchange rate changes on cash | | | 556 | | | | (378 | ) | | | (378 | ) | | | (373 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 105,076 | | | | (512 | ) | |
Cash and cash equivalents at the beginning of period | | | 117,302 | | | | 147,342 | | |
Net decrease in cash, cash equivalents and restricted cash | | | | (242 | ) | | | (56,411 | ) |
Cash, cash equivalents and restricted cash at the beginning of period | | | | 191,116 | | | | 203,729 | |
| | | | | | | | | | | | |
Cash and cash equivalents at the end of period | | $ | 222,378 | | | $ | 146,830 | | |
Cash, cash equivalents and restricted cash at the end of period | | | $ | 190,874 | | | $ | 147,318 | |
| | | | | | | | | | | | |
| _________________ | | | | | |
| | | | | |
Supplemental information: | | | | | | | | |
Cash, cash equivalents and restricted cash at the end of period | | | $ | 190,874 | | | $ | 147,318 | |
Less: current restricted cash | | | | 1,035 | | | | 1,738 | |
Less:non-current restricted cash | | | | 7,972 | | | | 5,160 | |
| | | | | | | |
Cash and cash equivalents at the end of the period | | | $ | 181,867 | | | $ | 140,420 | |
| | | | | | | |
Short-term investments | | $ | 188,496 | | | $ | 338,725 | | | $ | — | | | $ | 123,191 | |
We have historically financed our growth and cash needs primarily through the issuance of common stock,non-convertible debt, senior convertible preferred stock, convertible debt, term facilities and cash from operating activities. We continually evaluate our ongoing capital needs in light of increasing demand for our services, capacity requirements, evolving technologies in our industry and related strategic, operational and technological opportunities. We actively consider opportunities to raise additional capital in the public and private markets utilizing one or more of the types of capital raising transactions through which we have historically financed our growth and cash needs, as well as other means of capital raising not previously used by us.
Liquidity:
Although we can provide no assurances, we currently believe that cash, cash equivalents and short-term investments on hand as of September 30, 2017 will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months, including costs associated with installing our airborne equipment on certain aircraft operated by our airline partners, continuing our international expansion and developing our next generation ATG solution. Excluding the impact of our initial public offering, in June 2013,our prior credit facility, the Amended and Restated2022 Convertible Notes, the 2020 Convertible Notes, the 2024 Senior Term Facility, the ConvertibleSecured Notes and the 2022 Senior Secured Notes, to date we have not generated positive cash flows on a consolidated basis, and our ability to do so will depend in large partbasis. However, based on our ability to increase revenue in each of our three business segments. In addition, our ability to generate positive cash flows from operating activities and the timing of certain capital and other necessary expenditures are subject to numerous variables, such as costs related to international expansion and execution of our current technology roadmap, including 2Ku, next generation ATG and other potential future technologies. We currentlyplans, we believe that cash on hand, comprised ofour cash, cash equivalents and short-term investments, and cash flows provided by operating activities and, if necessary, additional equity financings or the incurrence of additional debt, will be sufficient to meet our liquidity needs in the longer-term,near- and long-term operating obligations, including our continued international expansioncapital expenditure requirements. As detailed in Note 9, “Long-Term Debt and executionOther Liabilities,” in April 2019 and May 2019, we entered into financing transactions that extended the maturity of our current technology roadmap. senior secured indebtedness to 2024 and generated funds sufficient to repay, repurchase or retire our 2020 Convertible Notes (of which we repurchased $159 million aggregate principal amount in May 2019). Our intent is to continue to access the capital markets to refinance our future debt obligations on anas-needed basis.
The 2024 Indenture governing our Senior Secured Notes contains covenants that limit the ability of GIH and its subsidiaries to incur additional indebtedness. Additionally, the Indenture governing the Senior Secured Notes limits the amount of cash GIH and its subsidiaries may distribute to us, including cash distributed to us to pay interest on the Convertible Notes, to pay any interest on indebtedness incurred, or pay dividends on preferred stock issued by us to refinance, replace, renew or refund the Convertible Notes. Further, market conditions and/or our financial performance may limit our access to additional sources of equity or debt financing.financing, or our ability to pursue potential strategic alternatives. As a result, we may be unable to finance growth of our business to the extent that our cash, on hand (includingcash equivalents and short-term investments)investments and cash generated through operating activities prove insufficient andor we are unable to raise additional financing through the issuance of ouradditional equity, or through permitted incurrences of debt by us or by GIH and its subsidiaries.subsidiaries, or the pursuit of potential strategic alternatives.
For additional information on ourthe 2024 Senior Secured Notes, 2022 Senior Secured Notes, the 2022 Convertible Notes Amended and Restated Credit Agreement and Restricted Cash, pleasethe 2020 Convertible Notes, see Note 8,9, “Long-Term Debt and Other Liabilities”Liabilities,” to our unaudited condensed consolidated financial statements.
Cash flows provided by (used in) Operating Activities:
The following table presents a summary of our cash flows from operating activities for the periods set forth below(in thousands):
| | | | For the Nine Months | | | | | |
| | | Ended September 30, | | | For the Six Months
Ended June 30, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
Net loss | | $ | (130,857 | ) | | $ | (97,573 | ) | | $ | (100,762 | ) | | $ | (64,626 | ) |
Non-cash charges and credits | | | 136,695 | | | | 121,812 | | | | 142,784 | | | | 68,810 | |
Changes in operating assets and liabilities | | | (10,047 | ) | | | 20,909 | | | | (36,487 | ) | | | (33,213 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (4,209 | ) | | $ | 45,148 | | | $ | 5,535 | | | $ | (29,029 | ) |
| | | | | | | | | | | | |
For the ninesix month period ended SeptemberJune 30, 2017,2019, cash provided by operating activities was $5.5 million as compared with net cash used in operating activities was $4.2of $29.0 million as compared with $45.1 million of cash provided by operating activities in the prior yearprior-year period. The principal contributors to the change in operating cash flows were:
A $18.4$37.8 million changeschange in net loss adjusted fornon-cash charges and credits, andoffset in part by
A $31.0$3.3 million change in cash flows related to operating assets and liabilities resulting from:
A decrease in cash flows due to the following:
Changes inCA-NA’s, BA’s andCA-ROW’s accounts receivable accrued interest due primarily to the timingissuance of collections;the 2024 Senior Secured Notes in the second quarter of 2019 and the issuance of the 2022 Convertible Notes in the fourth quarter of 2018, while accrued interest remained flat during 2018;
Changes inCA-NA’s and BA’s deferred revenue as deferred revenue balances increased more during 2016 than in 2017;
Changes inCA-ROW’s deferred airborne lease incentives due to more installations at higher amounts during 2016 as compared with 2017;
Changes inCA-NA’saccounts payable and accrued liabilities due primarily to the timing of payments; and
Changes in accrued interestCA-NA’s andCA-ROW’s contract assets due to more activity under our airline-directed model during the payment of interest oncurrent year as compared with the Senior Secured Notes during 2017 while no such payment was made during 2016, as the Senior Secured Notes were issued in June 2016.prior year;
Changes inCA-NA’s andCA-ROW’s deferred revenue as deferred revenue balances decreased during 2019 and increased during 2018;
Changes in BA’s inventory due to a decrease in equipment revenue; and
Changes inCA-NA’s warranty reserves, due to costs associated with remediation of quality issues associated with our 2Ku technology during 2018, which remediation did not occur in the current year.
Offset in part by an increase in cash flows due to the following:
Changes in all three segments’ prepaid expensesCA-NA’s and other current assets. The changeCA-ROW’s accounts receivable due primarily to the timing of collections;
Changes inCA-NACA-NA’s wasandCA-ROW��s inventories as we allocated a smaller portion of our uninstalled airborne equipment to inventory due to the recognitiontransition of development services during 2017 that were paidone our airline partners from the airline-directed model to the turnkey model in 2016. The change in BA was due to deposits made on certain inventory items during the first quarter of 2016, while no such payments were made during 2017. The change inCA-ROW was due to the timing of payments on satellite services;2019;
Changes in BA’s inventory due to inventory builds throughout 2016 while inventory decreased slightly during 2017;
Changes inCA-NA’s deferred airborne lease incentives due to more installations at higher amounts during 2017 as compared with 2016;accounts payable and
Changes inCA-ROW’s and BA’s accrued liabilities due primarily to the timing of payments.payments; and
We anticipate cash flows from changes
Changes in operating assets and liabilitiesall three segments’ prepaid expenses due to be impacted by deferred airborne lease incentives, which we estimate will range from $60 million to $70 million for the year ending December 31, 2017 and $40 million to $50 million for the year ended December 31, 2018. See “—Capital Expenditures” below for further information.timing of payments.
Cash flows used in Investing Activities:
Cash used in investing activities is primarily for capital expenditures related to airborne equipment, cell site construction, software development, and data center upgrades. See “—Capital Expenditures” below. Additionally, cash used in investing activities includes net changes in our short-term investments of a cash inflow of $150.0$39.3 million and a cash outflow $119.2$89.6 million, respectively, for the ninesix month periodperiods ended SeptemberJune 30, 20172019 and 2016.2018.
Cash flows provided byused in Financing Activities:
Cash provided by financing activities for the nine month period ended September 30, 2017 was $175.5 million primarily due to the issuance of the January 2017 Additional Notes and the September 2017 Additional Notes with gross proceeds of $181.8 million, offset in part by the payment of debt issuance costs for the January 2017 Additional Notes and September 2017 Additional Notes of $3.6 million and capital lease payments of $2.3 million.
Cash used in financing activities for the ninesix month period ended SeptemberJune 30, 20162019 was $202.4$2.8 million primarily due to the issuancefull redemption of $525.0 million ofoutstanding 2022 Senior Secured Notes partially offset by the payment in full of the Amended and Restated Credit Agreement totaling $310.1 million (including the early prepayment penaltymake-whole premium payable under the indenture governing the 2022 Senior Secured Notes), totaling $741.4 million, the repurchase of approximately $8.6 million),$159.0 million of outstanding 2020 Convertible Notes and the payment of debt$22.6 million of deferred financing costs associated with the issuance costs forof the 2024 Senior Secured Notes, offset in part by $920.7 million of $10.6proceeds from the issuance of the 2024 Senior Secured Notes.
Cash used in financing activities for the six month period ended June 30, 2018 was $1.4 million and capitalprimarily due to financing lease payments of $1.9 million.payments.
Capital Expenditures
Our operations continue to require significant capital expenditures, primarily for technology development, equipment and capacity expansion. Capital expenditures for theCA-NA andCA-ROW segments include the purchase of airborne equipment for the turnkey model, which correlates directly to the roll out and/or upgrade of service to our airline partners’ fleets. Capital spending is also associated with the expansion of our ATG and satellite network and data centers and includes site acquisition, design, permitting, network equipment and construction costs.centers. We capitalize software development costs related to network technology solutions, the Gogo platform and new product/service offerings. We also capitalized costs related to the build out of our new office locations.
Capital expenditures for the ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 were $214.2$42.2 million and $128.7$115.2 million, respectively. The increasedecrease in capital expenditures was primarily due to an increasea decrease in airborne equipment purchases (as airborne equipment represents approximately 70% of our capital expense for the current year), primarily for the rollout of 2Ku, and toas well as a lesser extent an increasedecrease in capitalized software.
We anticipateexpect that capital expenditures for the year ending December 31, 2017 will range from $290 million to $330 million as we increase purchases of airborne equipment (including 2Ku) that when sold to the airlines will qualify as an operating lease of space, and begin the buildout of our next generation ATG network. We expect our capital expenditures netwill vary in the future depending upon the number of deferred airborne lease incentives, which we estimate will range from $60 millioninstallations under the turnkey model.
Other
Contractual Commitments: The following table summarizes our contractual obligations (including those that require us to $70 million, to range from $230 million to $260 million for the year ending December 31, 2017. We anticipate that capital expenditures for the year endingmake future cash payments) as of December 31, 2018, will range from $110 millionexcept for 2024 Senior Secured Notes, Interest on 2024 Senior Secured Notes, 2020 Convertible Notes and Interest on 2020 Convertible Notes which are as of June 30, 2019. Additionally, we removed the 2022 Senior Secured Notes and Interest on 2022 Senior Secured Notes due to $170 million. We expectthe full redemption in May 2019. The future contractual requirements include payments required for our capital expenditures, net of deferred airborne lease incentives, which we estimate will range from $40 million to $50 million, to range from $70 million to $120 million for the year ending December 31, 2018. The decrease in capital expenditures and related deferred airborne lease incentives in 2018 as compared with 2016 and 2017 primarily reflects our purchases of equipment in 2018 that, when sold to airlines, will qualify as sales rather than as operating leases of space on aircraft.and contractual purchase agreements(in thousands).
Contractual Commitments:
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | | Less than
1 year | | | 1-3
years | | | 3-5
years | | | More than
5 years | |
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | |
Capital lease obligations | | $ | 925 | | | $ | 707 | | | $ | 218 | | | $ | — | | | $ | — | |
Operating lease obligations | | | 172,857 | | | | 21,902 | | | | 39,609 | | | | 33,246 | | | | 78,100 | |
Purchase obligations(1) | | | 298,221 | | | | 298,221 | | | | — | | | | — | | | | — | |
2022 Convertible Notes(2) | | | 237,750 | | | | — | | | | — | | | | 237,750 | | | | — | |
Interest on 2022 Convertible Notes | | | 48,144 | | | | 14,265 | | | | 28,530 | | | | 5,349 | | | | — | |
2020 Convertible Notes(2) | | | 3,046 | | | | 3,046 | | | | — | | | | — | | | | — | |
Interest on 2020 Convertible Notes | | | 76 | | | | 76 | | | | — | | | | — | | | | — | |
2024 Senior Secured Notes(2) | | | 925,000 | | | | — | | | | — | | | | 925,000 | | | | — | |
Interest on 2024 Senior Secured Notes | | | 449,108 | | | | 91,344 | | | | 182,688 | | | | 175,076 | | | | — | |
Satellite transponder and teleport services | | | 548,855 | | | | 98,889 | | | | 166,284 | | | | 124,696 | | | | 158,986 | |
Deferred revenue arrangements(3) | | | 60,053 | | | | 38,571 | | | | 4,677 | | | | 4,229 | | | | 12,576 | |
Deferred airborne lease incentives(4) | | | 153,231 | | | | 24,145 | | | | 42,665 | | | | 41,785 | | | | 44,636 | |
Other long-term obligations(5) | | | 61,572 | | | | 11,521 | | | | 11,213 | | | | 1,478 | | | | 37,360 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,958,838 | | | $ | 602,687 | | | $ | 475,884 | | | $ | 1,548,609 | | | $ | 331,658 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | As of December 31, 2018, our outstanding purchase obligations represented obligations to vendors to meet operational requirements as part of the normal course of business and related primarily to information technology, research and development, sales and marketing and production related activities. |
| (2) | See Note 9, “Long-Term Debt and Other Liabilities,” for more information. |
| (3) | Amounts represent obligations to provide services for which we have already received cash from our customers. |
| (4) | Amounts represent the upfront payments made by our airline partners for our airborne equipment and payments for STCs. Upfront payments made pursuant to these agreements are accounted for as deferred airborne lease incentives which are amortized on a straight-line basis as a reduction of cost of service revenue over the term of the agreement. |
| (5) | Other long-term obligations consist of estimated payments (undiscounted) for our asset retirement obligations, network transmission services, obligations to certain airline partners, and Canadian ATG Spectrum License related payments related to the monthly C$0.1 million payment over the estimated25-year term of the agreement, using the December 31, 2018 exchange rate. Other long-term obligations do not include $2.1 million related to our deferred tax liabilities due to the uncertainty of their timing. |
We have agreements with vendors to provide us with transponder and teleport satellite services. These agreementsservices that vary in length and amountamount. See Note 12, “Commitments and as of September 30, 2017 commit usContingencies,” to purchase transponder and teleport satellite services totaling approximately $21.4 million in 2017 (October 1 through December 31), $75.6 million in 2018, $81.9 million in 2019, $86.2 million in 2020, $75.9 million in 2021 and $303.0 million thereafter.our unaudited condensed consolidated financial statements for additional information.
We have agreements with various vendors under which we have remaining commitments to purchase satellite-based systems, certifications and development services. Such commitments will become payable as we receive the equipment or certifications, or as development services are provided.
Leases and Cell Site Contracts:We have lease agreements relating to certain facilities and equipment, which are considered operating leases. Additionally, we have operating leases with wireless service providers for tower space and base station capacity on a volume usage basis (“cell site leases”), some of which provide for minimum annual payments. See Note 10,11, “Leases,” to our unaudited condensed consolidated financial statements for additional information.
For the airline agreements where the equipment transactions are accounted for as operating leases of space, theThe revenue share paid to our airline partners represents operating lease payments. Theypayments and are deemed to be contingent rental payments, as the payments due to each airline are based on a percentage of ourCA-NA andCA-ROW service revenue generated from that airline’s passengers, which is unknown until realized. As such, we cannot estimate the lease payments due to an airline at the commencement of our contract with such airline. This rentalRental expense isrelated to the arrangements with commercial airlines included in cost of service revenue and is primarily comprised of these revenue share payments offset by the amortization of the deferred airborne lease incentive discussed above. See Note 10,11, “Leases,” to our unaudited condensed consolidated financial statements for additional information.information.
A contract with one of our airline partners requires us to provide the airline partner with a cash rebate of $1.8 million in June 2018.
Indemnifications and Guarantees: In accordance with Delaware law, we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under this indemnification is uncertain and may be unlimited, depending upon circumstances. However, our Directors’ and Officers’ insurance does provide coverage for certain of these losses.
In the ordinary course of business we may occasionally enter into agreements pursuant to which we may be obligated to pay for the failure of performance of others, such as the use of corporate credit cards issued to employees. Based on historical experience, we believe that the risk of sustaining any material loss related to such guarantees is remote.
We have entered into a number of agreements, including our agreements with commercial airlines, pursuant to which we indemnify the other party for losses and expenses suffered or incurred in connection with any patent, copyright, or trademark infringement or misappropriation claim asserted by a third party with respect to our equipment or services. The maximum potential amount of future payments we could be required to make under these indemnification agreements is uncertain and is typically not limited by the terms of the agreements.
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our exposure to market risk is currently confined to our cash and cash equivalents, short-term investments and our debt. We have not used derivative financial instruments for speculation or trading purposes. The primary objectives of our investment activities are to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including U.S. Treasuries, U.S. Government Agency Securities, and Money Market Funds. Our cash and cash equivalents as of SeptemberJune 30, 20172019 and December 31, 20162018 primarily included amounts in bank checkingdeposit accounts and Money Market Funds. We believe that a change in average interest rates would not materially affect our interest income and results of operations.operations by a material amount.
The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on the overall economic activity, nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
Interest:Our earnings are affected by changes in interest rates due to the impact those changes have on interest income generated from our cash, cash equivalents and short-term investments. Our cash and cash equivalents as of SeptemberJune 30, 20172019 and December 31, 20162018 included amounts in bank checkingdeposit accounts and money market funds,funds; and as of December 31, 2018 our short-term investments consistconsisted of U.S. Treasury bills. We believe we have minimal interest rate risk; a 10% change in the average interest rate on our portfolio would have reduced interest income for the three and ninesix month periods ended SeptemberJune 30, 20172019 and 20162018 by an immaterial amount.
Inflation:We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.
Seasonality:Our results of operations for any interim period are not necessarily indicative of those for any other interim period for the entire year because the demand for air travel, including business travel, is subject to significant seasonal fluctuations. We generally expect overall passenger opportunity to be greater in the second and third quarters compared to the rest of the year due to an increase in leisure travel offset in part by a decrease in business travel during the summer months and holidays. We expect seasonality of the air transportation business to continue, which may affect our results of operations in any one period.
| ITEM 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended) as of SeptemberJune 30, 2017.2019. Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2019.
(b) Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting in connection with the evaluation required by Rules13a-15(f) and15d-15(f) under the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Linksmart Litigation—On April 20, 2018, Linksmart Wireless Technology, LLC filed suit against us and eight of our airline partners in the U.S. District Court for the Central District of California alleging that our redirection server and login portal infringe a patent owned by the plaintiff. The suits seek an unspecified amount of damages. We are required under our contracts with these airlines to indemnify them for defense costs and any liabilities resulting from the suit. The Court has stayed the suits against our airline customers pending resolution of the suit against Gogo. Linksmart has also filed suit against other defendants asserting the same patent. Following the filing by one of those defendants of a petition to commence aninterpartes review against the asserted patent in the U.S. Patent and Trademark Office, the Court stayed the litigation against such other defendant and Gogo, but such stay was lifted in July 2019 when the U.S. Patent and Trademark Office determined that the petitioner had not met the standard of proof required to commence theinterpartes review. We believe that the plaintiff’s claims are without merit and intend to defend them vigorously. The outcome of this litigation is inherently uncertain. No amounts have been accrued for any potential losses under this matter, as we cannot reasonably predict the outcome of the litigation or any potential losses.
Securities Litigation—On June 27, 2018, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Northern District of Illinois, Eastern Division styled Pierrelouis v. Gogo Inc., naming the Company, its former Chief Executive Officer and Chief Financial Officer and its current Chief Financial Officer and President, Commercial Aviation as defendants purportedly on behalf of all purchasers of our securities from February 27, 2017 through May 4, 2018. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule10b-5 promulgated thereunder, alleging misrepresentations or omissions by us purporting to relate to our 2Ku antenna’s reliability and installation and remediation costs. The plaintiffs seek to recover from us and the individual defendants an unspecified amount of damages. In December 2018 the plaintiffs filed an amended complaint and in February 2019, we filed a motion to dismiss such amended complaint. In April 2019 the plaintiffs filed a response to our motion, and we filed our reply in May 2019. The parties are currently awaiting the Court’s ruling on the motion. We believe that the claims are without merit and intend to continue to defend them vigorously. In accordance with Delaware law, we will indemnify the individual named defendants for their defense costs and any damages they incur in connection with the suit. We have filed a claim with the issuer of our Directors’ and Officers’ insurance policy with respect to this suit. No amounts have been accrued for any potential losses under this matter, as we cannot reasonably predict the outcome of the litigation or any potential losses.
Derivative Litigation—On September 25, 2018 and September 26, 2018, two purported stockholders of the Company filed substantively identical derivative lawsuits in the United States District Court for the Northern District of Illinois, Eastern Division, styled Nanduri v. Gogo Inc. and Hutsenpiller v. Gogo Inc., respectively. Both lawsuits were purportedly brought derivatively on behalf of us and name us as a nominal defendant and name as defendants each member of the Company’s Board of Directors, its former Chief Executive Officer and Chief Financial Officer and its current Chief Executive Officer, Chief Financial Officer and President, Commercial Aviation. The complaints assert claims under Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and allege misrepresentations or omissions by us purporting to relate to our 2Ku antenna’s reliability and installation and remediation costs, as well as allegedly excessive bonuses, stock options, and other compensation paid to current Officers and Directors and excessive severance paid to former Officers. The two lawsuits were consolidated and are stayed pending the Court’s ruling on the motion to dismiss in the class action suit. We believe that the claims are without merit and intend to defend them vigorously. The plaintiffs seek to recover, on our behalf, an unspecified amount of damages from the individual defendants. We have filed a claim with the issuer of our Directors’ and Officers’ insurance policy with respect to these suits. No amounts have been accrued for any potential costs under this matter, as we cannot reasonably predict the outcome of the litigation or any potential costs.
From time to time we may become involved in other legal proceedings arising in the ordinary course of our business. We cannot predict with certainty the potential for or outcome of any future litigation. Regardless of the outcome of any particular litigation and the merits of any particular claim, litigation can have a material adverse impact on our company due to, among other reasons, any injunctive relief granted, which could inhibit our ability to operate our business, amounts paid as damages or in settlement of any such matter, diversion of management resources and defense costs.
The following risk factor updates the corresponding risk factor in our 201810-K.Except as set forth in our Quarterly Report on Form10-Q for the quarter ended March 31, 2017 as filed with the SEC on May 4, 2017,below, there have been no material changes to the risk factors previously disclosed in our 2016201810-K.
We may not be able to grow our business with current airline partners or successfully negotiate agreements with airlines to which we do not currently provide the Gogo service; the outcome of negotiations with airline partners regarding a business model under which the airlines provide free service to passengers and the effect of this shift and other possible shifts in business models on our revenue and results of operations cannot be predicted.
We are currently in negotiations or discussions with certain of our airline partners to provide our equipment and the Gogo service on additional aircraft in their fleets. We have no assurance that these efforts will be successful. We are also in discussions with other airlines to provide our equipment and the Gogo service to some or all of their aircraft. Negotiations with current and prospective airline partners require substantial time, effort and resources. The time required to reach a final agreement with an airline is unpredictable and may lead to variances in our operating results from quarter to quarter. We may ultimately fail in our negotiations and any such failure could harm our results of operations due to, among other things, a diversion of our focus and resources, actual costs incurred in the negotiation process and opportunity costs.
In addition, the terms of any future agreements could be materially different and less favorable to us than the terms included in our existing agreements with our airline partners, which could trigger most favored nations provisions of contracts with certain existing airline partners, which could result in our inability to achieve the originally anticipated benefits of such contracts.
Under our turnkey model, we provide the connectivity service, determine passenger pricing and share revenue with the airline. Several of our airline partners have adopted or have the option to adopt the airline-directed model, under which the airlines purchase bandwidth from us and distribute it to their passengers on a paid or complimentary basis. Under the airline-directed model, the airline retains pricing discretion over the cost of our service to passengers and the extent to which we receive revenue under this model is directly related to passenger usage. As a result, a failure by airlines to price our service appropriately has and could continue to adversely affect our results. We are currently in negotiations with certain airline partners regarding amendments to our existing contracts that would enable such partners to offer free Gogo service to their passengers under our airline directed business model and other airline partners may elect to move to afree-to-passengers business model. We expect commercial models and contract terms to continue to evolve, and we anticipate that third-party payors (including airlines) will generate an increasing portion of our revenue and that the portion of our revenue paid by passengers using our service will decline. Certain airline partners have recently shifted or informed us that they intend to shift from the airline directed model to the turnkey model, and we are unable to predict to what extent future shifts in commercial models will occur or the effect that such shifts in models will have on our results of operations. In addition, our growth will depend in part on our ability to reach agreements with OEMs to have our equipment factory-installed on certain aircraft, which will require us to comply with OEM specifications, which may be costly and time-consuming. To the extent that any negotiations with current or potential airline partners are unsuccessful, or any existing or future agreements, including those reflecting evolving business models and/or a shift to free passenger service under the airline directed model, prove generally less favorable to us than expected or as compared to previous agreements, our business, financial condition and results of operations may be materially adversely affected.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
a) Sales of Unregistered Securities
| a) | Sales of Unregistered Securities |
None.
b) Use of Proceeds from Public Offering of Common Stock
None.
| b) | Use of Proceeds from Public Offering of Common Stock |
None.
| ITEM 3. | Defaults Upon Senior Securities |
None.
| ITEM 4. | Mine Safety Disclosures |
None.
None.
| | |
Exhibit Number | | Description of Exhibits |
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| 4.10 | | Second Supplemental Indenture, dated as of April4.10 25, 2019, between Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., Gogo Inc., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Form8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 4.11 | | Indenture, dated as of April 25, 2019, between Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., Gogo Inc., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.3 to Form8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 4.12 | | Form of 9.875% Senior Secured Note due 2024 (incorporated by reference to Exhibit 4.4 to Form8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 4.13 | | Form of Crossing Lien Intercreditor Agreement (incorporated by reference to Exhibit 4.2 to Form8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 4.14 | | First Supplemental Indenture, dated as of September 20, 2017,May 3, 2019, by and among Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., each of the guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Form8-K filed on September 20, 2017May 3, 2019 (File No.No. 001-35975)). |
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10.1.51 †10.1.62† | | Amendment #1 to the UnifiedIn-Flight Connectivity Hardware, Services and MaintenanceLetter Agreement, dated as of July 28, 2017,April 22, 2019, by and between Gogo LLC and American Airlines, Inc. |
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10.1.5210.1.63† | | Amendment No. 2 to the Service Order, between Gogo LLC and New Skies Satellites B.V., effective as of May 1, 2019. |
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| 10.8.12 | | Collateral Agreement, dated as of April 25, 2019, among Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., Gogo Inc. and the Subsidiary Guarantors party thereto, in favor of U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 10.8.13 | | Collateral Agency Agreement, dated as of April 25, 2019, among Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., Gogo Inc., the Subsidiary Guarantors party thereto, and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 10.2 to Form 8-K filed on April 25, 2019 (File No.001-35975)). |
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| 10.8.14 | | Patent Security Agreement, dated as of April 25, 2019, by Gogo LLC, in favor of U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 10.3 to Form8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 10.8.15 | | Trademark Security Agreement, dated as of April 25, 2019, among Gogo LLC and Gogo Business Aviation LLC, in favor of U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 10.4 to Form 8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 10.8.16 | | Copyright Security Agreement, dated as of April 25, 2019, by Gogo LLC, in favor of U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 10.5 to Form 8-K filed on April 25, 2019 (File No. 001-35975)). |
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| 10.8.17 | | Reaffirmation Agreement, dated as of September 25, 2017,May 7, 2019, among Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., Gogo Inc. and the Subsidiary Guarantors party thereto (incorporated by reference to Exhibit 10.110.8.17 to Form8-K 10-Q filed on September 25, 2017May 9, 2019 (FileNo. 001-35975)). |
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10.1.5310.8.18 | | Additional Secured Debt Designation, dated as of September 25, 2017, by andMay 7, 2019, between Gogo Intermediate Holdings LLC and Gogo Finance Co. Inc. as acknowledged by U.S. Bank National Association (incorporated by reference to Exhibit 10.210.8.18 to Form8-K 10-Q filed on September 25, 2017May 9, 2019 (FileNo. 001-35975)). |
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10.1.54 †10.8.19 | | Amendment No. 3 to the Master Supply and ServicesPurchase Agreement, dated as of July 1, 2017,April 17, 2019, by and between ZTE USA, Inc. and Gogo LLC |
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10.8.9 | | Collateral Agreement Amended, dated as of September 20, 2017, made by Gogo Inc.,among Gogo Intermediate Holdings LLC, Gogo Finance Co. Inc., Morgan Stanley & Co. LLC and certain of their Subsidiaries in favor of U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 4.2 to Form8-K filed on September 20, 2017 (FileNo. 001-35975))J.P. Morgan Securities LLC |
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| 31.1 | | Certification of Chief Executive Officer pursuant to Exchange Act Rules13a-14(a) and15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| † | Certain provisions of this exhibit have been omitted and separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.Item 601 (b)(10)(iv) of RegulationS-K. |
| * | This certification accompanies the Form10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form10-Q), irrespective of any general incorporation language contained in such filing. |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | |
| | | | | | Gogo Inc. |
| | | |
Date: November 2, 2017August 8, 2019 | | | | | | |
| | | | | | /s/ Oakleigh Thorne |
| | | | | | Oakleigh Thorne |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
| | | |
| | | | | | /s/ Michael Small |
| | | | | | Michael Small |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
| | | Barry Rowan |
| | | | | | /s/ Barry Rowan
|
| | | | | | Barry RowanExecutive Vice President and Chief Financial Officer |
| | | | | | Executive Vice President and Chief Financial Officer |
| | | | | | (Principal Financial Officer) |
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