Notes to Unaudited Condensed Consolidated Financial Statements
The Business -
Gogo Inc. (we,
us, our) is a holding company, which through its operating subsidiaries is a provider of
in-flight
connectivity and wireless
in-cabin
digital
entertainment solutions. 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 our
CA-NA
and
CA-ROW
businesses include
Passenger Connectivity, which allows passengers to connect to the Internet from their personal
Wi-Fi-enabled
devices; Passenger Entertainment, which offers passengers
the opportunity to enjoy a broad selection of
in-flight
entertainment options on their personal
Wi-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 by
CA-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 our
CA-ROW
segment are those that begin and/or end outside of North America (as defined above) on which our international service is provided. BA provides
in-flight
Internet
connectivity and other voice and data communications products and services and sells equipment for
in-flight
telecommunications to the business aviation market. BA services include Gogo Biz, our
in-flight
broadband service, Passenger Entertainment, our
in-flight
entertainment service, and satellite-based voice and data services through our strategic alliances with
satellite companies.
Basis of Presentation
- The accompanying unaudited condensed consolidated financial statements and
notes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in conformity with Article 10 of Regulation
S-X
promulgated under the
Securities Act of 1933, as amended (the Securities Act). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with our annual audited
consolidated financial statements and the notes thereto included in our Annual Report on Form
10-K
for the year ended December 31, 2016 as filed with the Securities and Exchange Commission
(SEC) on February 27, 2017 (the 2016
10-K).
These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which
include normal recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
The results of operations and cash flows for the six month period ended June 30, 2017 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2017.
We have one class of common stock outstanding as of June 30, 2017
and December 31, 2016.
Use of Estimates
- The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses
during the reporting period. On an ongoing basis, management evaluates the significant estimates and bases such estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. However, actual
results could differ materially from those estimates.
2.
|
Recent Accounting Pronouncements
|
In May 2014, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU)
2014-09,
Revenue From Contracts With Customers
(ASU
2014-09).
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 ASU
2014-09
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 amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. This guidance is effective
for annual reporting periods beginning after December 15, 2017, including interim periods within the annual reporting periods. We will adopt this guidance as of January 1, 2018 and we expect to apply this standard using the full
retrospective method. During 2016, we established a project team responsible for assessment and implementation of this guidance. While we are continuing to evaluate the impact of the adoption of this guidance on our consolidated financial
statements, we currently believe
6
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
that the measurement and timing of recognition of revenue from certain of our
CA-NA,
CA-ROW
and BA customers will
be impacted in the following ways (however cash and cash equivalents will not be impacted):
|
|
|
Under the current standard, the sale of
CA-NA
and
CA-ROW
airborne connectivity equipment does not meet all of the requirements for being
recognized as a separate unit of accounting, resulting in the deferral of the related revenue (and cost) over the life of the contract. Under the new standard, we believe airborne connectivity equipment represents a standalone performance obligation
as it is both distinct and distinct within the context of the arrangement. As such, the recognition of all airborne equipment revenue will be accelerated and recognized upon installation.
|
|
|
|
Certain of our
CA-NA,
CA-ROW
and BA contracts provide service revenue that varies based on usage by passengers and our airline customers.
The adoption of this guidance will require consideration of whether service revenue under such contracts is considered an optional purchase of goods or services or variable consideration.
|
|
|
|
We are continuing to assess the treatment of costs to obtain or fulfill a contract with a customer, including costs to obtain Supplemental Type Certificates issued by the FAA that are required to install our equipment
on aircraft (STCs), which may require capitalization and amortization over the anticipated service period.
|
|
|
|
Recognition of
up-front
activation fees may be accelerated as the incurrence of such fees does not contain a future material right or otherwise significantly influence whether a
customer would renew its service contract.
|
|
|
|
Penalties will be accounted for as a reduction of revenue that will be recognized at the time the related performance obligation is satisfied.
|
In March 2016, the FASB issued ASU
2016-02,
Leases
(ASU
2016-02),
which introduces a lessee model that records most leases on the balance sheet. ASU
2016-02
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 FASBs new revenue recognition standard. Furthermore, ASU
2016-02
eliminates the required use of bright-line tests used in current GAAP for determining lease classification. It also requires lessors to provide additional transparency into their exposure to the
changes in value of their residual assets and how they manage that exposure. ASU
2016-02
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.
In March 2016, the FASB issued ASU
2016-04,
Recognition of Breakage for Certain Prepaid
Stored-Value Products
(ASU
2016-04),
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. ASU
2016-04
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 ASU
2016-04
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 ASU
2016-15,
Classification of Certain Cash Receipts and Cash
Payments
(ASU
2016-15),
which amends ASC 230,
Statement of Cash Flows
, the FASBs 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. ASU
2016-15
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 ASU
2016-15.
7
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
In October 2016, the FASB issued ASU
2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
(ASU
2016-16),
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. ASU
2016-16
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 ASU
2016-18,
Restricted Cash A Consensus of the FASB
Emerging Issues Task Force
, (ASU
2016-18),
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. ASU
2016-18
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 ASU
2017-04,
Simplifying the Test for Goodwill Impairment
(ASU
2017-04),
which simplifies the accounting for goodwill impairments by eliminating
Step-2
from the goodwill impairment test. ASU
2017-04
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 ASU
2017-09,
Scope of Modification Accounting
(ASU
2017-09),
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. ASU
2017-09
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.
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, Long-Term Debt and Other
Liabilities) are considered participating securities requiring the
two-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 June 30, 2017 and 2016 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 six month periods ended June 30, 2017 and 2016, 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.
8
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table sets forth the computation of basic and diluted earnings per share for
the three and six month periods ended June 30, 2017 and 2016; 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
2017 and 2016 as undistributed losses are not allocated to these shares (
in thousands, except per share amounts
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(44,209
|
)
|
|
$
|
(40,194
|
)
|
|
$
|
(85,576
|
)
|
|
$
|
(64,300
|
)
|
Less: Participation rights of the Forward Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed losses
|
|
$
|
(44,209
|
)
|
|
$
|
(40,194
|
)
|
|
$
|
(85,576
|
)
|
|
$
|
(64,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding-basic and diluted
|
|
|
79,334
|
|
|
|
78,849
|
|
|
|
79,237
|
|
|
|
78,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock per share-basic and diluted
|
|
$
|
(0.56
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2017 and December 31, 2016, all of which were included within the BA segment, were as follows (
in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Work-in-process
component parts
|
|
$
|
43,446
|
|
|
$
|
39,150
|
|
Finished goods
|
|
|
8,595
|
|
|
|
11,116
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
52,041
|
|
|
$
|
50,266
|
|
|
|
|
|
|
|
|
|
|
5.
|
Composition of Certain Balance Sheet Accounts
|
Property and equipment as of
June 30, 2017 and December 31, 2016 were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office equipment, furniture, fixtures and other
|
|
$
|
53,009
|
|
|
$
|
49,529
|
|
Leasehold improvements
|
|
|
42,402
|
|
|
|
42,143
|
|
Airborne equipment
|
|
|
639,958
|
|
|
|
557,196
|
|
Network equipment
|
|
|
184,440
|
|
|
|
168,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
919,809
|
|
|
|
816,989
|
|
Accumulated depreciation
|
|
|
(336,564
|
)
|
|
|
(297,179
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
583,245
|
|
|
$
|
519,810
|
|
|
|
|
|
|
|
|
|
|
Other
non-current
assets as of June 30, 2017 and
December 31, 2016 were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred cost of equipment revenue
|
|
$
|
39,496
|
|
|
$
|
14,159
|
|
Deposits on satellite and airborne equipment
|
|
|
13,914
|
|
|
|
10,800
|
|
Other
|
|
|
3,147
|
|
|
|
3,129
|
|
|
|
|
|
|
|
|
|
|
Total other
non-current
assets
|
|
$
|
56,557
|
|
|
$
|
28,088
|
|
|
|
|
|
|
|
|
|
|
9
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Accrued liabilities as of June 30, 2017 and December 31, 2016 were as follows
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Employee compensation and benefits
|
|
$
|
17,299
|
|
|
$
|
21,008
|
|
Airborne equipment and installation costs
|
|
|
36,012
|
|
|
|
22,442
|
|
Airborne partner related accrued liabilities
|
|
|
18,188
|
|
|
|
14,307
|
|
Accrued interest
|
|
|
41,399
|
|
|
|
40,436
|
|
Other
|
|
|
35,671
|
|
|
|
33,862
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
148,569
|
|
|
$
|
132,055
|
|
|
|
|
|
|
|
|
|
|
Other
non-current
liabilities as of June 30, 2017 and
December 31, 2016 were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred revenue
|
|
$
|
62,965
|
|
|
$
|
38,976
|
|
Deferred rent
|
|
|
36,831
|
|
|
|
36,538
|
|
Asset retirement obligations
|
|
|
9,684
|
|
|
|
8,527
|
|
Other
|
|
|
9,353
|
|
|
|
6,627
|
|
|
|
|
|
|
|
|
|
|
Total other
non-current
liabilities
|
|
$
|
118,833
|
|
|
$
|
90,668
|
|
|
|
|
|
|
|
|
|
|
Our intangible assets are comprised of both indefinite-lived and
finite-lived intangible assets. Intangible assets with indefinite lives and goodwill are not amortized, but 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 2016 indicated no
impairment.
As of June 30, 2017 and December 31, 2016, our goodwill balance, all of which related to our BA segment, was
$0.6 million.
Our intangible assets, other than goodwill, as of June 30, 2017 and December 31, 2016 were as follows (
in
thousands, except for weighted average remaining useful life
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
As of June 30, 2017
|
|
|
As of December 31, 2016
|
|
|
|
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
|
|
|
2.3
|
|
|
$
|
135,596
|
|
|
$
|
(80,992
|
)
|
|
$
|
54,604
|
|
|
$
|
118,836
|
|
|
$
|
(70,127
|
)
|
|
$
|
48,709
|
|
Service customer relationship
|
|
|
2.8
|
|
|
|
8,081
|
|
|
|
(5,280
|
)
|
|
|
2,801
|
|
|
|
8,081
|
|
|
|
(4,773
|
)
|
|
|
3,308
|
|
Other intangible assets
|
|
|
1.5
|
|
|
|
1,500
|
|
|
|
(892
|
)
|
|
|
608
|
|
|
|
1,500
|
|
|
|
(682
|
)
|
|
|
818
|
|
OEM and dealer relationships
|
|
|
|
|
|
|
6,724
|
|
|
|
(6,724
|
)
|
|
|
|
|
|
|
6,724
|
|
|
|
(6,667
|
)
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets
|
|
|
|
|
|
|
151,901
|
|
|
|
(93,888
|
)
|
|
|
58,013
|
|
|
|
135,141
|
|
|
|
(82,249
|
)
|
|
|
52,892
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FCC Licenses
|
|
|
|
|
|
|
32,283
|
|
|
|
|
|
|
|
32,283
|
|
|
|
32,283
|
|
|
|
|
|
|
|
32,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
184,184
|
|
|
$
|
(93,888
|
)
|
|
$
|
90,296
|
|
|
$
|
167,424
|
|
|
$
|
(82,249
|
)
|
|
$
|
85,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $5.8 million and $11.6 million, respectively, for the three and six month
periods ended June 30, 2017, and $5.1 million and $9.7 million, respectively, for the prior year periods.
10
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Amortization expense for each of the next five years and thereafter is estimated to be as
follows (
in thousands
):
|
|
|
|
|
Years ending December 31,
|
|
Amortization
Expense
|
|
2017 (period from July 1 to December 31)
|
|
$
|
13,151
|
|
2018
|
|
$
|
21,843
|
|
2019
|
|
$
|
12,837
|
|
2020
|
|
$
|
6,252
|
|
2021
|
|
$
|
2,277
|
|
Thereafter
|
|
$
|
1,653
|
|
Actual future amortization expense could differ from the estimated amount as a result of future investments
and other factors.
We provide warranties on parts and labor related to our products. Our
warranty terms range from two to five 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 $2.6 million as of both June 30, 2017
and December 31, 2016.
8.
|
Long-Term Debt and Other Liabilities
|
Long-term debt as of June 30, 2017 and
December 31, 2016 was as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Senior Secured Notes
|
|
$
|
594,849
|
|
|
$
|
525,000
|
|
Convertible Notes
|
|
|
301,517
|
|
|
|
292,024
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
896,366
|
|
|
|
817,024
|
|
Less deferred financing costs
|
|
|
(15,995
|
)
|
|
|
(16,309
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
880,371
|
|
|
$
|
800,715
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes
On June 14, 2016 (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 million aggregate principal amount of 12.500% senior secured notes due 2022 (the Original Senior Secured Notes) under an Indenture, dated as of June 14, 2016 (the Indenture), among the Issuers, us, as
guarantor, 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) and as
collateral agent (in such capacity, the Collateral Agent). On January 3, 2017, the Issuers issued $65 million aggregate principal amount of additional senior secured notes due 2022 (the Additional Notes). The
Additional Notes were issued at a price equal to 108% of their face value resulting in gross proceeds of $70.2 million. We refer to the Original Senior Secured Notes and the Additional Notes collectively as the Senior Secured Notes.
As of June 30, 2017 and December 31, 2016 the outstanding principal balance of the Senior Secured Notes was $590.0 million
and $525.0 million, respectively. The unamortized debt premium was $4.8 million as of June 30, 2017 and the net carrying amount was $594.8 million as of June 30, 2017. The net carrying amount was $525.0 million as of
December 31, 2016.
Interest on the Senior Secured Notes accrues at the rate of 12.500% per annum and is payable semi-annually
in arrears on July 1 and January 1, commencing on January 1, 2017 (other than the Additional Notes, for which interest payments commenced on July 1, 2017). The Senior Secured Notes mature on July 1, 2022. The 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 Additional
Notes and the Original Senior Secured Notes.
We paid approximately $11.4 million and $2.0 million, respectively, of Senior
Secured Notes origination fees and financing costs related to the issuance of the Original Senior Secured Notes and the Additional Notes, which have been accounted for as deferred financing costs. The deferred financing costs on our unaudited
condensed
11
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
consolidated balance sheet are being amortized over the contractual term of the Senior Secured Notes using the effective interest method. Total amortization expense was $0.6 million and
$1.1 million, respectively, for the three and six month periods ended June 30, 2017, and $0.1 million and $0.1 million, respectively, for the prior year periods. As of June 30, 2017 and December 31, 2016, the balance of
unamortized deferred financing costs related to the Senior Secured Notes was $11.3 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,
Interest Costs for additional information.
The 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 Senior Secured
Notes, if any, in each case to the extent of the value of the collateral securing the 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 Senior Secured Notes and (ii) indebtedness
secured on a junior priority basis by the same collateral securing the Senior Secured Notes, if any, in each case to the extent of any insufficiency in the collateral securing the Senior Secured Notes;
|
|
|
|
structurally senior to all of our existing and future indebtedness, including our Convertible Notes (as defined below); and
|
|
|
|
structurally subordinated to all of the indebtedness and other liabilities of any
non-Guarantors
(other than the Issuers).
|
The Senior Secured Notes are guaranteed, on a senior secured basis, by us and all of GIHs existing and future domestic restricted
subsidiaries (other than the
Co-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 Guarantor and is:
|
|
|
effectively senior to all of such Guarantors existing and future senior unsecured indebtedness and such Guarantors indebtedness secured on a junior priority basis by the same collateral, if any, securing the
guarantee of such Guarantor, in each case to the extent of the value of the collateral securing such guarantee;
|
|
|
|
effectively senior in right of payment to all of such Guarantors future indebtedness that is subordinated in right of payment to such Guarantors guarantee;
|
|
|
|
effectively equal in right of payment with all of such Guarantors existing and future (i) unsecured indebtedness that is not subordinated in right of payment to such Guarantors guarantee, and
(ii) indebtedness secured on a junior priority basis by the same collateral, if any, securing the guarantee of such Guarantor, in each case to the extent of any insufficiency in the collateral securing such guarantee; and
|
|
|
|
structurally subordinated to all indebtedness and other liabilities of any
non-Guarantor
subsidiary of such 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 Senior Secured Notes if
such collateral is disposed of in a transaction that complies with the Indenture and related security agreements. In addition, under certain circumstances, we and the Guarantors have the right to transfer certain intellectual property assets that on
the Issue Date constitute collateral securing the Senior Secured Notes or the guarantees to a restricted subsidiary organized under the laws of Switzerland, resulting in the release of such collateral without consent of the holders of the Senior
Secured Notes.
12
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
On or after July 1, 2019, the Issuers may, at their option, at any time or from time to
time, redeem any of the Senior Secured Notes in whole or in part. The 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 July 1 of the following years:
|
|
|
|
|
Year
|
|
Redemption
Price
|
|
2019
|
|
|
106.250
|
%
|
2020
|
|
|
103.125
|
%
|
2021 and thereafter
|
|
|
100.000
|
%
|
In addition, at any time prior to July 1, 2019, the Issuers may redeem up to 35% of the aggregate
principal amount of the Senior Secured Notes with the proceeds of certain equity offerings at a redemption price of 112.500% of the principal amount redeemed, plus accrued and unpaid interest, if any, to (but not including) the date of
redemption;
provided, however
,
that Senior Secured Notes representing at least 65% of the principal amount of the Senior Secured Notes remain outstanding immediately after each such redemption.
The Issuers may redeem the Senior Secured Notes, in whole or in part, at any time prior to July 1, 2019, at a redemption price equal to
100% of the principal amount of the Senior Secured Notes 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.
The Indenture contains covenants that, among other things, limit the ability of the Issuers and the 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 our 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. Most of these covenants will cease to apply if, and for as long as, the Senior
Secured Notes have investment grade ratings from both Moodys Investment Services, Inc. and Standard & Poors.
If
we or the Issuers undergo specific types of change of control prior to July 1, 2022, GIH is required to make an offer to repurchase for cash all of the 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 Senior Secured Notes issued under the Indenture to be due and payable immediately. As of June 30, 2017, no event of
default had occurred.
Convertible Notes
On March 3, 2015, we issued $340.0 million aggregate principal amount of
3.75% Convertible Senior Notes due 2020 (the 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 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 Convertible Notes. The 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 stock. We pay interest on the Convertible Notes semi-annually in arrears on March 1 and September 1 of each year. Interest payments
began on September 1, 2015.
The $361.9 million of proceeds received from the issuance of the Convertible Notes was initially
allocated between long-term debt (the liability component) at $261.9 million and additional
paid-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 Convertible Notes. If we or the note holders elect not to settle the debt through conversion, we must settle the Convertible Notes at face
value. Therefore, the liability component will
13
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
be accreted up to the face value of the Convertible Notes, which will result in additional
non-cash
interest expense being recognized in the unaudited
condensed consolidated statements of operations through the Convertible Notes maturity date (see Note 9, Interest Costs for additional information). The effective interest rate on the 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, 2017 and December 31, 2016, the outstanding principal on the Convertible Notes was $361.9 million, the
unamortized debt discount was $60.4 million and $69.9 million, respectively, and the net carrying amount of the liability component was $301.5 million and $292.0 million, respectively.
We incurred approximately $10.4 million of issuance costs related to the issuance of the Convertible Notes of which $7.5 million and
$2.9 million were recorded to deferred financing costs and additional
paid-in
capital, respectively, in proportion to the allocation of the proceeds of the Convertible Notes. The $7.5 million
recorded as deferred financing costs on our unaudited condensed consolidated balance sheet is being amortized over the term of the Convertible Notes using the effective interest method. Total amortization expense of the deferred financing costs was
$0.3 million and $0.7 million, respectively, for the three and six months periods ended June 30, 2017, and $0.3 million and $0.7 million, respective, for the prior year periods. Amortization expense is included in interest
expense in the unaudited condensed consolidated statements of operations. As of June 30, 2017 and December 31, 2016, the balance of unamortized deferred financing costs related to the Convertible Notes was $4.7 million and
$5.1 million, respectively, and is included as a reduction to long-term debt in our unaudited condensed consolidated balance sheets. See Note 9, Interest Costs for additional information.
The Convertible Notes had an initial conversion rate of 41.9274 common shares per $1,000 principal amount of 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 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 the
if-converted
method as their impact is anti-dilutive.
Holders may convert the 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 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 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 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 six month periods ended June 30, 2017. Regardless of whether any of the foregoing circumstances occurs, a holder may convert its 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 Convertible Notes), holders may, subject to certain conditions, require us to repurchase their Convertible Notes for cash at a price equal to 100% of the principal amount of the 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 Convertible Notes in connection with such a
corporate event in certain circumstances.
In connection with the issuance of the 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 Convertible Notes, subject to the ability of each
14
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. 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.
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 2016
10-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 $0.6 million and $1.4 million, respectively, for the three and six month periods ended June 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 million and $7.9 million, respectively, as of June 30,
2017 and December 31, 2016 and primarily consist of letters of credit. 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.
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 six month periods ended June 30, 2017 and 2016
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest costs charged to expense
|
|
$
|
21,689
|
|
|
$
|
12,250
|
|
|
$
|
43,228
|
|
|
$
|
23,182
|
|
Amortization of deferred financing costs
|
|
|
903
|
|
|
|
995
|
|
|
|
1,799
|
|
|
|
2,163
|
|
Accretion of debt discount on Convertible Notes
|
|
|
4,812
|
|
|
|
4,312
|
|
|
|
9,493
|
|
|
|
8,508
|
|
Amortization of debt premium on Senior Secured Notes
|
|
|
(178
|
)
|
|
|
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
27,226
|
|
|
|
17,557
|
|
|
|
54,169
|
|
|
|
33,853
|
|
Interest costs capitalized to property and equipment
|
|
|
2
|
|
|
|
82
|
|
|
|
6
|
|
|
|
153
|
|
Interest costs capitalized to software
|
|
|
253
|
|
|
|
400
|
|
|
|
611
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest costs
|
|
$
|
27,481
|
|
|
$
|
18,039
|
|
|
$
|
54,786
|
|
|
$
|
34,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Arrangements with Commercial Airlines
Pursuant to contractual
agreements with our airline partners, we place our equipment on commercial aircraft operated by the airlines for the purpose of delivering the Gogo service to passengers on the aircraft. There are currently two types of commercial airline
arrangements: Turnkey and Airline Directed.
Under the Turnkey 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 of 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 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. For more information see Note 2, Summary of Significant Accounting Policies in our
10-K.
Under the Turnkey model, the assets are recorded as airborne equipment on our unaudited condensed consolidated balance sheets, as noted in
Note 5, 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 $8.6 million and $18.0 million, respectively, for the three and six month periods ended
June 30, 2017, and $7.2 million and $12.9 million, respectively, for the prior year periods as a reduction to our cost of service revenue in our unaudited condensed consolidated statements of operations. As of June 30, 2017,
deferred airborne lease incentives of $35.3 million and $117.5 million, respectively, are included in current and
non-current
liabilities in our unaudited condensed consolidated balance sheet. As of
December 31, 2016, deferred airborne lease incentives of $36.3 million and $135.9 million, respectively, are included in current and
non-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 Turnkey 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 our
CA-NA
and
CA-ROW
service revenue generated from that airlines 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 $10.2 million and
$19.1 million, respectively, for the three and six month periods ended June 30, 2017, and $10.8 million and $22.2 million, respectively, for the prior year periods.
A contract with one of our airline partners requires us to provide the airline partner with cash rebates of $1.8 million in June 2017 and
June 2018. We paid the 2017 rebate on June 13, 2017.
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 $6.0 million, respectively, for the three and six month periods ended June 30, 2017, and
$2.9 million and $6.0 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 $2.4 and $4.7 million, respectively, for
the three and six month periods ended June 30, 2017, and $2.4 million and $4.7 million, respectively, for the prior year periods.
16
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 June 30, 2017, are as follows (
in thousands
):
|
|
|
|
|
Years ending December 31,
|
|
Operating
Leases
|
|
2017 (period from July 1 to December 31)
|
|
$
|
9,790
|
|
2018
|
|
$
|
17,836
|
|
2019
|
|
$
|
16,747
|
|
2020
|
|
$
|
14,662
|
|
2021
|
|
$
|
14,423
|
|
Thereafter
|
|
$
|
95,061
|
|
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 June 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 June 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 June 30, 2017, are as follows (
in thousands
):
|
|
|
|
|
Years ending December 31,
|
|
Capital
Leases
|
|
2017 (period from July 1 to December 31)
|
|
$
|
1,851
|
|
2018
|
|
|
2,030
|
|
2019
|
|
|
1,016
|
|
2020
|
|
|
39
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
4,936
|
|
Less: Amount representing interest
|
|
|
(509
|
)
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
4,427
|
|
|
|
|
|
|
The $4.4 million present value of net minimum lease payments as of June 30, 2017 has a current
portion of $2.6 million included in the current portion of long-term debt and capital leases and a
non-current
portion of $1.8 million included in other
non-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 June 30, 2017 commit us to purchase transponder and teleport satellite services totaling approximately
$41.7 million in 2017 (July 1 through December 31), $72.9 million in 2018, $79.1 million in 2019, $85.4 million in 2020, $75.9 million in 2021 and $303.0 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 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.
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.
17
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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.
12.
|
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.
|
Long-Term Debt:
Our
financial assets and liabilities that are disclosed but not measured at fair value include the Senior Secured Notes and the Convertible 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 Senior Secured Notes and Convertible 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 June 30, 2017 unaudited condensed consolidated balance sheet,
excluding any issuance costs, is the amount that a market participant would be willing to lend at June 30, 2017 to an entity with a credit rating similar to ours and achieve sufficient cash inflows to cover the scheduled cash outflows under the
Senior Secured Notes and the Convertible Notes. The calculated fair value of our 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 the calculated fair
value of our Convertible Notes.
The fair value and carrying value of long-term debt as of June 30, 2017 and December 31, 2016
were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair Value
(1)
|
|
|
Carrying
Value
|
|
|
Fair Value
(1)
|
|
|
Carrying
Value
|
|
Senior Secured Notes
|
|
$
|
673,000
|
|
|
$
|
594,849
|
(2)
|
|
$
|
572,000
|
|
|
$
|
525,000
|
|
Convertible Notes
|
|
|
330,000
|
|
|
|
301,517
|
(3)
|
|
|
275,000
|
|
|
|
292,024
|
(3)
|
(1)
|
Fair value amounts are rounded to the nearest million.
|
(2)
|
Carrying value of the Senior Secured Notes includes unamortized debt premium of $4.8 million as of June 30, 2017. See Note 8, Long-Term Debt and Other Liabilities, for further information.
|
(3)
|
Carrying value of the Convertible Notes excludes unamortized debt discount of $60.4 million and $69.9 million, respectively, as of June 30, 2017 and December 31, 2016. See Note 8, Long-Term
Debt and Other Liabilities, for further information.
|
We have
held-to-maturity
financial instruments where carrying value approximates fair value. There were no fair value adjustments to these financial instruments during 2017 and 2016.
The effective income tax rates for the three and six month periods ended
June 30, 2017 was (0.8%) and (0.7%), respectively, and (0.6%) and (0.8%), respectively, for the prior year periods. Income tax expense recorded in each
18
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
period was similar, with differences in
pre-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% for the three and six month periods ended June 30, 2017 and 2016 was primarily due to the recording of a valuation allowance against our net 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 and Australia. With few exceptions, as of June 30, 2017, we are no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2013.
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 six month periods ended June 30, 2017 and 2016. As of June 30, 2017 and December 31, 2016, we did not
have a liability recorded for interest or potential penalties.
We do not expect a change in the unrecognized tax benefits within the next
12 months.
14.
|
Business Segments and Major Customers
|
We operate our business through three operating
segments: Commercial Aviation North America, or
CA-NA,
Commercial Aviation Rest of World, or
CA-ROW
and Business Aviation, or 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 2016
10-K.
Intercompany transactions between segments are excluded as they are not included in
managements performance review of the segments. We currently do not generate a material amount of foreign revenue. We do not segregate assets between segments for internal reporting. Therefore, asset-related information has not been presented.
We do not disclose assets outside of the United States as these assets are not material as of June 30, 2017 and December 31, 2016. 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, certain
non-cash
charges (including amortization of deferred airborne lease incentives, stock-based compensation expense and adjustment to deferred financing costs) 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 ASC
280-10,
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, 2017
|
|
|
|
CA-NA
|
|
|
CA-ROW
|
|
|
BA
|
|
|
Total
|
|
Service revenue
|
|
$
|
98,679
|
|
|
$
|
13,188
|
|
|
$
|
42,209
|
|
|
$
|
154,076
|
|
Equipment revenue
|
|
|
2,272
|
|
|
|
885
|
|
|
|
15,567
|
|
|
|
18,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
100,951
|
|
|
$
|
14,073
|
|
|
$
|
57,776
|
|
|
$
|
172,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
16,191
|
|
|
$
|
(31,403
|
)
|
|
$
|
25,202
|
|
|
$
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
June 30, 2016
|
|
|
|
CA-NA
|
|
|
CA-ROW
|
|
|
BA
|
|
|
Total
|
|
Service revenue
|
|
$
|
89,808
|
|
|
$
|
5,376
|
|
|
$
|
32,403
|
|
|
$
|
127,587
|
|
Equipment revenue
|
|
|
2,879
|
|
|
|
368
|
|
|
|
16,705
|
|
|
|
19,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
92,687
|
|
|
$
|
5,744
|
|
|
$
|
49,108
|
|
|
$
|
147,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
18,641
|
|
|
$
|
(23,300
|
)
|
|
$
|
19,016
|
|
|
$
|
14,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
|
CA-NA
|
|
|
CA-ROW
|
|
|
BA
|
|
|
Total
|
|
Service revenue
|
|
$
|
195,824
|
|
|
$
|
22,556
|
|
|
$
|
82,191
|
|
|
$
|
300,571
|
|
Equipment revenue
|
|
|
3,943
|
|
|
|
1,803
|
|
|
|
31,889
|
|
|
|
37,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
199,767
|
|
|
$
|
24,359
|
|
|
$
|
114,080
|
|
|
$
|
338,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
27,350
|
|
|
$
|
(57,958
|
)
|
|
$
|
51,317
|
|
|
$
|
20,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2016
|
|
|
|
CA-NA
|
|
|
CA-ROW
|
|
|
BA
|
|
|
Total
|
|
Service revenue
|
|
$
|
173,217
|
|
|
$
|
9,978
|
|
|
$
|
63,112
|
|
|
$
|
246,307
|
|
Equipment revenue
|
|
|
6,517
|
|
|
|
371
|
|
|
|
36,090
|
|
|
|
42,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
179,734
|
|
|
$
|
10,349
|
|
|
$
|
99,202
|
|
|
$
|
289,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
32,457
|
|
|
$
|
(43,021
|
)
|
|
$
|
39,240
|
|
|
$
|
28,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of segment profit (loss) to the relevant consolidated amounts is as follows (
in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
CA-NA
segment profit
|
|
$
|
16,191
|
|
|
$
|
18,641
|
|
|
$
|
27,350
|
|
|
$
|
32,457
|
|
CA-ROW
segment loss
|
|
|
(31,403
|
)
|
|
|
(23,300
|
)
|
|
|
(57,958
|
)
|
|
|
(43,021
|
)
|
BA segment profit
|
|
|
25,202
|
|
|
|
19,016
|
|
|
|
51,317
|
|
|
|
39,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit
|
|
|
9,990
|
|
|
|
14,357
|
|
|
|
20,709
|
|
|
|
28,676
|
|
Interest income
|
|
|
771
|
|
|
|
166
|
|
|
|
1,316
|
|
|
|
212
|
|
Interest expense
|
|
|
(27,226
|
)
|
|
|
(17,557
|
)
|
|
|
(54,169
|
)
|
|
|
(33,853
|
)
|
Depreciation and amortization
|
|
|
(30,562
|
)
|
|
|
(24,906
|
)
|
|
|
(60,997
|
)
|
|
|
(49,263
|
)
|
Amortization of deferred airborne lease incentives
(1)
|
|
|
8,630
|
|
|
|
7,241
|
|
|
|
17,978
|
|
|
|
12,885
|
|
Stock-based compensation expense
|
|
|
(5,394
|
)
|
|
|
(3,788
|
)
|
|
|
(9,724
|
)
|
|
|
(7,986
|
)
|
Adjustment to deferred financing costs
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
792
|
|
Loss of extinguishment of debt
|
|
|
|
|
|
|
(15,406
|
)
|
|
|
|
|
|
|
(15,406
|
)
|
Other income (expense)
|
|
|
(56
|
)
|
|
|
(3
|
)
|
|
|
(94
|
)
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(43,847
|
)
|
|
$
|
(39,973
|
)
|
|
$
|
(84,981
|
)
|
|
$
|
(63,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amortization of deferred airborne lease incentive relates to our
CA-NA
and
CA-ROW
segments. See Note 10, Leases, for further
information.
|
Major Customers and Airline Partnerships
During the three and six month periods ended
June 30, 2017 and 2016, no customer accounted for more than 10% of our consolidated revenue. One airline partner accounted for approximately 13% and approximately 18% of consolidated accounts receivable as of June 30, 2017 and
December 31, 2016, respectively. One customer accounted for approximately 10% of consolidated accounts receivable as of June 30, 2017 while no customer accounted for more than 10% of consolidated accounts receivable as of December 31,
2016.
20
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Revenue earned through Delta Air Lines and American Airlines accounted for approximately 48%
of consolidated revenue for both the three and six month periods ended June 30, 2017, and 50% for both the prior year periods.
15.
|
Employee Retirement and Postretirement Benefits
|
Stock-Based Compensation
As of June 30, 2017, we had three stock-based employee compensation plans (Stock Plans). See Note 11, Stock-Based Compensation, in our 2016
10-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.
For the six month period ended June 30, 2017, options to purchase 1,953,474 shares of common stock (of which 527,850 are options that
contain a market condition, in addition to the time-based vesting requirements) were granted, options to purchase 44,087 shares of common stock were exercised, options to purchase 269,571 (of which 26,000 options contain a market condition) shares
of common stock were forfeited, and options to purchase 246,044 shares of common stock expired.
For the six month period ended
June 30, 2017, 860,099 Restricted Stock Units (RSUs) (of which 228,840 are RSUs that contain a market condition, in addition to the time-based vesting requirements) were granted, 345,314 RSUs vested and 149,317 RSUs (of which 20,070
contained a market condition) were forfeited.
For the six month period ended June 30, 2017, 92,910 shares of restricted stock were
granted and 96,593 shares vested. These shares are deemed issued as of the date of grant, but not outstanding until they vest.
For the
six month period ended June 30, 2017, 41,290 DSUs were granted and none were released.
For the six month period ended June 30,
2017, 80,867 shares of common stock were issued under the employee stock purchase plan.
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 Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of service revenue
|
|
$
|
332
|
|
|
$
|
361
|
|
|
$
|
790
|
|
|
$
|
696
|
|
Cost of equipment revenue
|
|
|
50
|
|
|
|
18
|
|
|
|
87
|
|
|
|
44
|
|
Engineering, design and development
|
|
|
1,054
|
|
|
|
734
|
|
|
|
1,904
|
|
|
|
1,462
|
|
Sales and marketing
|
|
|
1,419
|
|
|
|
1,171
|
|
|
|
2,168
|
|
|
|
2,301
|
|
General and administrative
|
|
|
2,539
|
|
|
|
1,504
|
|
|
|
4,775
|
|
|
|
3,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,394
|
|
|
$
|
3,788
|
|
|
$
|
9,724
|
|
|
$
|
7,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k)
Plan
Under our 401(k) plan, all employees who are eligible to
participate are entitled to make
tax-deferred
contributions, subject to Internal Revenue Service limitations. We match 100% of the employees first 4% of contributions made, subject to annual limitations.
Our matching contributions were $1.2 million and $2.8 million, respectively, for the three and six month periods ended June 30, 2017, and $1.0 million and $2.1 million, respectively, for the prior year periods.
16.
|
Research and Development Costs
|
Expenditures for research and development are charged to
expense as incurred and totaled $17.2 million and $39.3 million, respectively, for the three and six month periods ended June 30, 2017, and $10.8 million and $22.7 million, respectively, for the prior 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 SkySurfs ATG spectrum licenses in Canada. For additional
information, see Note 16, Canadian ATG Spectrum License, in our 2016
10-K.
21
Gogo Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Amortization expense for the
one-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 July 1 to December 31)
|
|
$
|
49
|
|
2018
|
|
$
|
97
|
|
2019
|
|
$
|
97
|
|
2020
|
|
$
|
97
|
|
2021
|
|
$
|
97
|
|
Thereafter
|
|
$
|
1,522
|
|
Amortization expense totaled less than $0.1 million during the three and six month periods ended
June 30, 2017 and 2016.
The monthly payments are expensed as incurred and totaled approximately $0.3 million and
$0.5 million, respectively, during the three and six month periods ended June 30, 2017, and $0.3 million and $0.6 million, respectively, for the prior year periods.
22
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 Form
10-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 benefits from, agreements with our airline partners or any failure to renew any existing agreements upon expiration or termination;
|
|
|
|
the failure to maintain airline satisfaction with our equipment or our service;
|
|
|
|
any inability to timely and efficiently deploy our 2Ku service or develop and deploy our next-generation ATG solution or other components of our technology roadmap for any reason, including regulatory delays or
failures, or delays on the part of any of our suppliers, some of whom are single source, or the failure by our airline partners to roll out equipment upgrades, 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 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;
|
|
|
|
our ability to expand our international or domestic operations, including our ability to grow our business with current and potential future airline partners;
|
|
|
|
an inability to compete effectively with other current or future providers of
in-flight
connectivity services and other products and services that we offer, including on the basis
of price, service performance and
line-fit
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;
|
23
|
|
|
a revocation of, or reduction in, our right to use licensed spectrum, the availability of other
air-to-ground
spectrum to a competitor or
the repurposing by a competitor of other spectrum for
air-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;
|
|
|
|
the limited operating history of our
CA-ROW
segment;
|
|
|
|
contract changes and implementation issues resulting from decisions by airlines to transition from the retail model to the airline directed model;
|
|
|
|
increases in our projected capital expenditures due to, among other things, unexpected costs incurred in connection with the
roll-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, including
e-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;
|
|
|
|
costs associated with defending pending or future intellectual property infringement and other litigation or claims;
|
|
|
|
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;
|
|
|
|
limitations and restrictions in the agreements governing our indebtedness and our ability to service our indebtedness;
|
|
|
|
our ability to obtain additional financing on acceptable terms or at all;
|
|
|
|
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 our
in-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;
|
|
|
|
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;
|
24
|
|
|
difficulties in collecting accounts receivable;
|
|
|
|
our ability to successfully implement our new enterprise resource planning system and other improvements to systems and procedures needed to support our growth; and
|
|
|
|
other risks and factors listed under Risk Factors in our Annual Report on Form
10-K
for the year ended December 31, 2016 as filed with the Securities Exchange
Commission (SEC) on February 27, 2017 (the 2016
10-K)
and in Item 1A of our Quarterly Report on Form
10-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 material
non-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.
25