Gogo Inc. - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One):

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2020

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission File Number: 001-35975

 

 

 

Gogo Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		27-1650905
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

111 North Canal St., Suite 1500

Chicago, IL 60606

(Address of principal executive offices)

Telephone Number (312) 517-5000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class		Trading Symbol		Name of Each Exchange on Which Registered
Common stock, par value $0.0001 per share		GOGO		NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Ye  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of May 7, 2020, 83,770,421 shares of $0.0001 par value common stock were outstanding.

 

 

 

Gogo Inc.

INDEX

 

				Page
Part I.		Financial Information
Item 1.		Financial Statements			2
		Unaudited Condensed Consolidated Balance Sheets			2
		Unaudited Condensed Consolidated Statements of Operations			3
		Unaudited Condensed Consolidated Statements of Comprehensive Loss			4
		Unaudited Condensed Consolidated Statements of Cash Flows			5
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)			6
		Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			54
Item 4.		Controls and Procedures			55
Part II.		Other Information
Item 1.		Legal Proceedings			56
Item 1A.		Risk Factors			57
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 3.		Defaults Upon Senior Securities			62
Item 4.		Mine Safety Disclosures			62
Item 5.		Other Information			62
Item 6.		Exhibits			62
Signatures					64

 

1

PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

Gogo Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		March 31,				December 31,
		2020				2019
Assets
Current assets:
Cash and cash equivalents		$	214,229			$	170,016
Accounts receivable, net of allowances of $3,970 and $686, respectively			92,619				101,360
Inventories			123,179				117,144
Prepaid expenses and other current assets, net of allowances of $997 and $0, respectively			36,462				36,305
Total current assets			466,489				424,825
Non-current assets:
Property and equipment, net			505,584				560,318
Goodwill and intangible assets, net			75,083				76,499
Operating lease right-of-use assets			58,085				63,386
Other non-current assets, net of allowances of $6,111 and $0, respectively			86,229				89,672
Total non-current assets			724,981				789,875
Total assets		$	1,191,470			$	1,214,700
Liabilities and Stockholders’ deficit
Current liabilities:
Accounts payable		$	35,995			$	17,160
Accrued liabilities			176,238				174,111
Deferred revenue			28,472				34,789
Deferred airborne lease incentives			30,718				26,582
Total current liabilities			271,423				252,642
Non-current liabilities:
Long-term debt			1,124,713				1,101,248
Deferred airborne lease incentives			145,172				135,399
Non-current operating lease liabilities			82,975				77,808
Other non-current liabilities			53,793				46,493
Total non-current liabilities			1,406,653				1,360,948
Total liabilities			1,678,076				1,613,590
Commitments and contingencies (Note 13)			—				—
Stockholders’ deficit
Common stock, par value $0.0001 per share; 500,000,000 shares authorized at March 31, 2020 and December 31, 2019; 83,825,592 and 88,292,821 shares issued at March 31, 2020 and December 31, 2019, respectively; and 83,773,648 and 88,240,877 shares outstanding at March 31, 2020 and December 31, 2019, respectively			8				9
Additional paid-in-capital			1,081,955				979,499
Accumulated other comprehensive loss			(5,127	)			(2,256	)
Treasury stock, at cost			(98,857	)			—
Accumulated deficit			(1,464,585	)			(1,376,142	)
Total stockholders’ deficit			(486,606	)			(398,890	)
Total liabilities and stockholders’ deficit		$	1,191,470			$	1,214,700

See the Notes to Unaudited Condensed Consolidated Financial Statements

 

2

Gogo Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

 

		For the Three Months
		Ended March 31,
		2020				2019
Revenue:
Service revenue		$	150,782			$	165,012
Equipment revenue			33,693				34,537
Total revenue			184,475				199,549
Operating expenses:
Cost of service revenue (exclusive of items shown below)			70,755				68,121
Cost of equipment revenue (exclusive of items shown below)			26,040				29,731
Engineering, design and development			22,863				24,728
Sales and marketing			9,652				12,318
General and administrative			27,166				22,454
Impairment of long-lived assets			46,389				—
Depreciation and amortization			32,670				30,749
Total operating expenses			235,535				188,101
Operating income (loss)			(51,060	)			11,448
Other (income) expense:
Interest income			(606	)			(1,149	)
Interest expense			31,174				32,554
Other (income) expense			2,993				(3,365	)
Total other expense			33,561				28,040
Loss before income taxes			(84,621	)			(16,592	)
Income tax provision			157				207
Net loss		$	(84,778	)		$	(16,799	)
Net loss attributable to common stock per share—basic and diluted		$	(1.04	)		$	(0.21	)
Weighted average number of shares—basic and diluted			81,205				80,446

See the Notes to Unaudited Condensed Consolidated Financial Statements

 

3

Gogo Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

		For the Three Months
		Ended March 31,
		2020				2019
Net loss		$	(84,778	)		$	(16,799	)
Currency translation adjustments, net of tax			(2,871	)			410
Comprehensive loss		$	(87,649	)		$	(16,389	)

See the Notes to Unaudited Condensed Consolidated Financial Statements

 

4

Gogo Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

		For the Three Months
		Ended March 31,
		2020				2019
Operating activities:
Net loss		$	(84,778	)		$	(16,799	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization			32,670				30,749
Loss on asset disposals, abandonments and write-downs			1,098				1,241
Provision for expected credit losses			6,764				84
Impairment of long-lived assets			46,389				—
Impairment of cost-basis investment			3,000				—
Deferred income taxes			45				44
Stock-based compensation expense			3,995				4,327
Amortization of deferred financing costs			1,419				1,249
Accretion and amortization of debt discount and premium			3,326				4,774
Changes in operating assets and liabilities:
Accounts receivable			5,085				10,551
Inventories			(6,035	)			(1,118	)
Prepaid expenses and other current assets			1,038				3,015
Contract assets			(10,622	)			(6,175	)
Accounts payable			16,399				2,843
Accrued liabilities			(18,291	)			(19,381	)
Deferred airborne lease incentives			2,345				(3,923	)
Deferred revenue			1,378				2,257
Accrued interest			26,413				(19,514	)
Warranty reserves			(526	)			(588	)
Other non-current assets and liabilities			6,915				208
Net cash provided by (used in) operating activities			38,027				(6,156	)
Investing activities:
Purchases of property and equipment			(13,202	)			(23,154	)
Acquisition of intangible assets—capitalized software			(2,108	)			(4,557	)
Redemptions of short-term investments			—				39,323
Other, net			89				95
Net cash provided by (used in) investing activities			(15,221	)			11,707
Financing activities:
Proceeds from credit facility draw			22,000				—
Repurchase of convertible notes			(2,498	)			—
Payment of debt issuance costs			—				(557	)
Payments on financing leases			(247	)			(125	)
Stock-based compensation activity			(397	)			(58	)
Net cash provided by (used in) financing activities			18,858				(740	)
Effect of exchange rate changes on cash			51				(276	)
Increase in cash, cash equivalents and restricted cash			41,715				4,535
Cash, cash equivalents and restricted cash at beginning of period			177,675				191,116
Cash, cash equivalents and restricted cash at end of period		$	219,390			$	195,651
Cash, cash equivalents and restricted cash at end of period		$	219,390			$	195,651
Less: current restricted cash			560				1,535
Less: non-current restricted cash			4,601				5,426
Cash and cash equivalents at end of period		$	214,229			$	188,690
Supplemental Cash Flow Information:
Cash paid for interest		$	66			$	46,163
Cash paid for taxes			1				41
Noncash Investing and Financing Activities:
Purchases of property and equipment in current liabilities		$	6,411			$	19,951
Purchases of property and equipment paid by commercial airlines			5,580				5,016

See the Notes to Unaudited Condensed Consolidated Financial Statements

 

5

Gogo Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except share data)

 

		For the Three Months Ended March 31, 2020
														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive				Accumulated				Treasury Stock
		Shares				Par Value				Capital				Loss				Deficit				Shares				Amount				Total
Balance at January 1, 2020			88,240,877			$	9			$	979,499			$	(2,256	)		$	(1,376,142	)			—			$	—			$	(398,890	)
Net loss			—				—				—				—				(84,778	)			—				—				(84,778	)
Currency translation adjustments, net of tax			—				—				—				(2,871	)			—				—				—				(2,871	)
Stock-based compensation expense			—				—				3,995				—				—				—				—				3,995
Issuance of common stock upon vesting of restricted stock units and restricted stock awards			522,490				—				—				—				—				—				—				—
Tax withholding related to vesting of restricted stock units			—				—				(682	)			—				—				—				—				(682	)
Issuance of common stock in connection with employee stock purchase plan			87,681				—				285				—				—				—				—				285
Settlement of prepaid forward shares			(5,077,400	)			(1	)			98,858												5,077,400				(98,857	)			—
Impact of the adoption of new accounting standards			—				—				—				—				(3,665	)			—				—				(3,665	)
Balance at March 31, 2020			83,773,648			$	8			$	1,081,955			$	(5,127	)		$	(1,464,585	)			5,077,400			$	(98,857	)		$	(486,606	)

 

		For the Three Months Ended March 31, 2019
														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive				Accumulated				Treasury Stock
		Shares				Par Value				Capital				Loss				Deficit				Shares				Amount				Total
Balance at January 1, 2019			87,560,694			$	9			$	963,458			$	(3,554	)		$	(1,228,674	)			—			$	—			$	(268,761	)
Net loss			—				—				—				—				(16,799	)			—				—				(16,799	)
Currency translation adjustments, net of tax			—				—				—				410				—				—				—				410
Stock-based compensation expense			—				—				4,327				—				—				—				—				4,327
Issuance of common stock upon vesting of restricted stock units and restricted stock awards			161,667				—				—				—				—				—				—				—
Tax withholding related to vesting of restricted stock units			—				—				(351	)			—				—				—				—				(351	)
Issuance of common stock in connection with employee stock purchase plan			75,253				—				293				—				—				—				—				293
Impact of the adoption of new accounting standards			—				—				—				—				(3,093	)			—				—				(3,093	)
Balance at March 31, 2019			87,797,614			$	9			$	967,727			$	(3,144	)		$	(1,248,566	)			—			$	—			$	(283,974	)

See the Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The Business - Gogo (“we,” “us,” “our”) is the global leader in providing broadband connectivity solutions and wireless in-flight entertainment to the aviation industry. We operate through the following three reportable 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 other services, 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, 2019 as filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020 (the “2019 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 three month period ended March 31, 2020, including the impact of COVID-19, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020.

We have one class of common stock outstanding as of March 31, 2020 and December 31, 2019.

During March 2020, approximately 5.1 million shares of common stock were delivered to us in connection with the Forward Transactions (as defined and described in Note 10, “Long-Term Debt and Other Liabilities”). We accounted for these shares as Treasury Stock and reclassified $98.9 million from Additional Paid-In Capital to Treasury Stock, at cost, in our unaudited condensed consolidated balance sheet. See Note 10, “Long-Term Debt and Other Liabilities,” for additional information.

Reclassifications – To conform with the current year presentation, $84 thousand of bad debt expense has been reclassified to a separate line from accounts receivable for the three month period ended March 31, 2019.

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 revenues 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. Impact of COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China, and the World Health Organization (the “WHO”) subsequently declared COVID-19 a “Public Health Emergency of International Concern.” The COVID-19 pandemic has caused a significant decline in commercial and business air travel, which has materially and adversely affected our business. Approximately 60% of our revenue comes from our two

 

 

7

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

commercial airline segments, CA-NA and CA-ROW. Passenger traffic declined significantly in April 2020 compared to March 2020, resulting in an expected significant reduction in service revenue in April 2020 as compared to the monthly service revenue in the first quarter of 2020. The approximate remaining 40% of our revenue comes from our business aviation segment, BA, which has also seen a sharp decrease in flight activity. Additionally, since many business aircraft are flying less frequently, there was an increase in requests for one-month account suspensions and a significant decrease in new plan activations in April 2020 compared to March 2020.

In response to the COVID-19 pandemic and resulting developments, we developed, and continue to refine on an ongoing basis, a range of projections based on estimated market conditions, and have implemented measures to protect our employees, ensure the business has adequate liquidity and maintain the value of our business segments, while at the same time continuing to make the interest payments on our outstanding debt. These measures include, but are not limited to, the following:

 

•

Employee and customer safety – Our employees are our most important resource and we are focused on the safety of our people and our customers. Every country in which we operate has issued work from home orders and over 1,000 of our employees are working remotely, with limited personnel in place for certain location-specific activities.

 

•

Personnel actions – We implemented several cost-cutting measures related to personnel, including implementing a hiring freeze, suspending 2020 merit salary increases and deferring the Chief Executive Officer’s 2019 bonus payout.

Additionally, we furloughed approximately 54% of our workforce and reduced compensation for most other employees, starting May 4, 2020. The furloughs impact approximately 600 employees across the entire company. The time and duration of the furloughs will vary based on workload in individual departments. Salary reductions begin at 30% for the Chief Executive Officer, then 20% for the executive leadership team and reducing downward by staff level from there. In addition, the compensation for the members of our Board of Directors has been reduced by 30%. Certain types of employees, such as hourly workers, have not had their compensation reduced.

 

•

Expense management – We have identified responsive action plans / levers that we are implementing, or considering implementing as needed, to dramatically reduce costs in order to ensure our long-term viability, including the following:

 

•

Renegotiating terms with suppliers, including satellite capacity providers;

 

•

Deferring purchases of capital equipment;

 

•

Delaying aircraft equipment installations;

 

•

Reducing marketing, travel and other non-essential spend; and

 

•

Renegotiating terms with airline partners.

 

•

Financing – In March 2020, we drew $22 million under the ABL Credit Facility.

 

•

Government assistance – We applied for an $81 million grant and a $150 million loan under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). If we receive such assistance, we will be subject to certain restrictions and will be required to modify the personnel actions discussed above to comply with the terms of the government assistance. Additionally, receipt of funds may require the consent of a majority of the holders of the 2024 Senior Secured Notes and the consent of the lenders under the ABL Credit Agreement to amend the terms governing such indebtedness.

We expect COVID-19 to continue to have a significant negative impact on our revenue and we are unable to predict how long that impact will continue. The extent of the impact of COVID-19 on our CA and BA businesses and our financial and operational performance will depend on future developments, including the duration, spread and severity of the outbreak, the duration and geographic scope of related travel advisories and restrictions and the extent of the impact of COVID-19 on overall demand for commercial and business aviation travel, all of which are

 

8

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

highly uncertain and cannot be predicted. We are unable to predict how long the pandemic and its negative impact will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on air travel, our business partners and our business. Not only is the duration of the pandemic and future combative measures unknown, the overall situation is extremely fluid, and it is impossible to predict the timing of future material changes in the situation and whether the Company’s actions in response will be sufficient or successful.

Impairment assessments - We review our long-lived assets and indefinite-lived intangible assets for potential impairment whenever events indicate that the carrying amount of such assets may not be recoverable. We conducted a review as of March 31, 2020 in light of the COVID-19 outbreak and its impact on air travel, and recorded an impairment charge with respect to certain long-lived assets. We are continuously monitoring the COVID-19 pandemic and its impact. If the impact of the pandemic exceeds management’s estimates, we could incur additional material impairment charges in future periods. See Note 7, “Composition of Certain Balance Sheet Accounts,” for additional information on our long-lived assets and Note 8, “Intangible Assets,” for additional information on our indefinite-lived assets.

Credit Losses — We regularly evaluate our accounts receivable and contract assets for expected credit losses and recorded credit losses for the three month period ended March 31, 2020. We are continuously monitoring our assumptions used to determine our expected credit losses, including the impact of the COVID-19 pandemic, which could cause us to record additional material credit losses in future periods. See Note 9, “Composition of Certain Reserves and Allowances,” for additional information.

3. Recent Accounting Pronouncements

Accounting standards adopted:

On January 1, 2020, we adopted ASU 2016-13, Financial Instruments-Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

The cumulative effect adjustment from using the modified retrospective approach for the adoption of ASC 326 impacted our unaudited condensed consolidated balance sheet as of January 1, 2020 by the recognition of allowance for credit losses as summarized below:

 

										Balances
		Balance at								with
		December 31,				Impact of				Adoption of
		2019				ASC 326				ASC 326
Assets
Accounts receivable			101,360				(1,386	)			99,974
Prepaid and other current assets			36,305				(356	)			35,949
Other non-current assets			89,672				(1,923	)			87,749
Equity
Accumulated deficit			(1,376,142	)			(3,665	)			(1,379,807	)

See Note 9, “Composition of Certain Reserves and Allowances,” for additional information.

On January 1, 2020, we adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements.

On January 1, 2020, we adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements related to recurring or nonrecurring fair value measurements. Currently all of our fair value measurements are classified as Level 2 within the fair value hierarchy, and as such, the adoption of this standard did not have an impact on our unaudited condensed consolidated financial statements. See Note 14, “Fair Value of Financial Assets and Liabilities,” for additional information.

 

9

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

New pronouncements:

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank offered rates. This guidance is effective beginning on March 12, 2020 through December 31, 2022. We do not currently believe that the adoption of this standard will have a material impact on our consolidated financial statements.

4. Revenue Recognition

Arrangements with commercial airlines

For CA-NA and CA-ROW, pursuant 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 airline-directed. Under the airline-directed model, we have transferred control of the equipment 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 result, 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 space on an aircraft. See Note 12, “Leases,” for additional information on the turnkey model.

Remaining performance obligations

As of March 31, 2020, the aggregate amount of the transaction price in our contracts allocated to the remaining unsatisfied performance obligations was approximately $585 million, most of which relate to our commercial aviation contracts. Approximately $109 million represents future equipment revenue that is expected to be recognized within the next one to three years. The remaining $476 million primarily represents connectivity and entertainment service revenues which are recognized as services are provided, which is expected to occur through the remaining term of the contract (approximately 5-10 years). We have excluded from this amount: all variable consideration derived from our connectivity 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 transferred to the customer.

Disaggregation of revenue

The following table presents our revenue disaggregated by category (in thousands):

 

		For the Three Months Ended
		March 31, 2020
		CA-NA				CA-ROW				BA				Total
Service revenue
Connectivity		$	68,869			$	18,029			$	56,975			$	143,873
Entertainment, CAS and other			4,959				1,199				751				6,909
Total service revenue		$	73,828			$	19,228			$	57,726			$	150,782
Equipment revenue
ATG		$	4,396			$	—			$	9,624			$	14,020
Satellite			1,832				14,184				3,374				19,390
Other			80				—				203				283
Total equipment revenue		$	6,308			$	14,184			$	13,201			$	33,693
Customer type
Airline passenger and aircraft owner/operator		$	43,702			$	6,517			$	57,726			$	107,945
Airline, OEM and aftermarket dealer			26,258				25,399				13,201				64,858
Third party			10,176				1,496				—				11,672
Total revenue		$	80,136			$	33,412			$	70,927			$	184,475

 

10

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

		For the Three Months Ended
		March 31, 2019
		CA-NA				CA-ROW				BA				Total
Service revenue
Connectivity		$	79,818			$	18,854			$	52,685			$	151,357
Entertainment, CAS and other			12,209				918				528				13,655
Total service revenue		$	92,027			$	19,772			$	53,213			$	165,012
Equipment revenue
ATG		$	2,872			$	—			$	11,335			$	14,207
Satellite			630				13,159				5,235				19,024
Other			540				—				766				1,306
Total equipment revenue		$	4,042			$	13,159			$	17,336			$	34,537
Customer type
Airline passenger and aircraft owner/operator		$	54,349			$	5,851			$	53,213			$	113,413
Airline, OEM and aftermarket dealer			30,913				25,491				17,336				73,740
Third party			10,807				1,589				—				12,396
Total revenue		$	96,069			$	32,931			$	70,549			$	199,549

Contract balances

Our current and non-current deferred revenue balances totaled $57.9 million and $56.7 million as of March 31, 2020 and December 31, 2019, respectively. Deferred revenue includes, among other things, equipment, multi-pack and subscription connectivity products, sponsorship activities and airline-directed equipment and connectivity and entertainment service.

Our current and non-current contract asset balances totaled $70.8 million and $64.2 million as of March 31, 2020 and December 31, 2019, respectively. The contract asset balance as of March 31, 2020 was net of allowances of $7.1 million. See Note 9, “Composition of Certain Reserves and Allowances,” for additional information regarding allowances. Contract assets represent the aggregate amount of revenue recognized in excess of billings for our airline-directed contracts.

Capitalized STC balances for our airline-directed contracts were $16.5 million and $17.5 million as of March 31, 2020 and December 31, 2019, 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 $0.8 million and $0.3 million, respectively, for the three month periods ended March 31, 2020 and 2019.

5. Net Loss Per Share

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 10, “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. Additionally, the calculation of weighted average shares outstanding as of March 31, 2020 and 2019 excludes approximately 2.1 million shares and 7.2 million shares, respectively, associated with the Forward Transactions.

As a result of the net loss for the three month periods ended March 31, 2020 and 2019, 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.

 

11

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 month periods ended March 31, 2020 and 2019; 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 2020 and 2019 as undistributed losses are not allocated to these shares (in thousands, except per share amounts):

 

		For the Three Months
		Ended March 31,
		2020				2019
Net loss		$	(84,778	)		$	(16,799	)
Less: Participation rights of the Forward Transactions			—				—
Undistributed losses		$	(84,778	)		$	(16,799	)
Weighted-average common shares outstanding-basic and diluted			81,205				80,446
Net loss attributable to common stock per share-basic and diluted		$	(1.04	)		$	(0.21	)

6. Inventories

Inventories consist primarily of telecommunications systems and parts and are recorded at the lower of 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 March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
Work-in-process component parts		$	23,585			$	23,141
Finished goods			99,594				94,003
Total inventory		$	123,179			$	117,144

7. Composition of Certain Balance Sheet Accounts

Prepaid expenses and other current assets as of March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
Contract assets, net of allowances of $997 and $0, respectively (1)		$	14,319			$	12,364
Prepaid satellite services			7,970				11,299
Restricted cash			560				560
Other			13,613				12,082
Total prepaid expenses and other current assets		$	36,462			$	36,305

 

(1)	Allowance for contract assets as of March 31, 2020 is due to the adoption of ASC 326. See Note 9, “Composition of Certain Reserves and Allowances,” for additional information.

Property and equipment as of March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
Office equipment, furniture, fixtures and other		$	56,482			$	56,205
Leasehold improvements			44,403				44,389
Airborne equipment (1)			709,980				737,593
Network equipment			225,169				229,451
			1,036,034				1,067,638
Accumulated depreciation			(530,450	)			(507,320	)
Total property and equipment, net		$	505,584			$	560,318

 

(1)	Decrease in Airborne equipment is due primarily to the impairment of airborne equipment associated with three of our airline agreements. See below for additional information.

 

12

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Other non-current assets as of March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
Contract assets, net of allowances of $6,111 and $0, respectively (1)		$	56,516			$	51,829
Deferred STC costs			16,475				17,453
Restricted cash			4,601				7,099
Other (2)			8,637				13,291
Total other non-current assets		$	86,229			$	89,672

 

(1)	Allowances for contract assets as of March 31, 2020 is due to the adoption of ASC 326. See Note 9, “Composition of Certain Reserves and Allowances,” for additional information.

(2)	Decrease due in part to the $3.0 million impairment of a cost-basis investment which is included in Other (income) expense within our unaudited condensed consolidated statements of operations for the three month period ended March 31, 2020.

We review our long-lived assets, including property and equipment, right-of-use assets, and other non-current assets, for potential impairment whenever events indicate that the carrying amount of such assets may not be recoverable. We perform this review by comparing the carrying value of the long-lived assets to the estimated future undiscounted cash flows expected to result from the use of the assets. We group certain long-lived assets by airline contract and by connectivity technology. If we determine an impairment exists, the amount of the impairment is computed as the difference between the asset group’s carrying value and its estimated fair value, following which the assets are written down to their estimated fair value.

In light of the COVID-19 outbreak and its impact on air travel, including decreased flights, decreased gross passenger opportunity and our airline partners’ temporary parking of a significant number of their aircraft, we conducted a review as of March 31, 2020 and determined that the carrying values for the asset groups related to three of our airline agreements for the CA business exceeded their estimated undiscounted cash flows, which triggered the need to estimate the fair value of these assets. Fair value reflects our best estimate of the discounted cash flows of the impaired assets. For the airborne assets and right-of-use assets associated with the three airline agreements (the “impaired assets”), we recorded an impairment charge of $46.4 million for the three month period ended March 31, 2020, reflecting the difference between the carrying value and the estimated fair value of the impaired assets.

We are continuously monitoring the COVID-19 pandemic and its impact. If the negative impact of the pandemic on the assets related to our airline agreements continues, including as a result of airline partners’ decisions to temporarily park certain aircraft to reduce capacity, we could incur additional material impairment charges in future periods.

Accrued liabilities as of March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
Airline related accrued liabilities		$	40,882			$	43,592
Accrued interest			43,461				17,048
Employee compensation and benefits			15,136				29,954
Accrued satellite network costs			19,438				13,843
Warranty reserve			12,639				13,165
Operating leases			9,484				12,241
Airborne equipment and installation costs			4,293				11,466
Other			30,905				32,802
Total accrued liabilities		$	176,238			$	174,111

 

13

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Other non-current liabilities as of March 31, 2020 and December 31, 2019 were as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
Deferred revenue		$	29,433			$	21,889
Asset retirement obligations			11,773				11,560
Deferred tax liabilities			2,384				2,340
Other			10,203				10,704
Total other non-current liabilities		$	53,793			$	46,493

8. Intangible Assets

Our intangible assets are comprised of both indefinite-lived and finite-lived intangible assets. Intangible assets with indefinite lives and goodwill are not amortized; 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 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 2019 indicated no impairment. As of March 31, 2020, as a result of COVID-19, we reviewed the carrying value of our indefinite-lived intangible assets and goodwill and concluded there were no impairments.

As of both March 31, 2020 and December 31, 2019, our goodwill balance, all of which related to our BA segment, was $0.6 million.

Our intangible assets, other than goodwill, as of March 31, 2020 and December 31, 2019 were as follows (in thousands, except for weighted average remaining useful life):

 

		Weighted
		Average				As of March 31, 2020												As of December 31, 2019
		Remaining				Gross								Net				Gross								Net
		Useful Life				Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		(in years)				Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets:
Software			2.5			$	180,568			$	(139,943	)		$	40,625			$	177,190			$	(135,154	)		$	42,036
Other intangible assets			7.8				3,000				(1,445	)			1,555				3,000				(1,440	)			1,560
Service customer relationships							8,081				(8,081	)			—				8,081				(8,081	)			—
OEM and dealer relationships							6,724				(6,724	)			—				6,724				(6,724	)			—
Total amortized intangible assets							198,373				(156,193	)			42,180				194,995				(151,399	)			43,596
Unamortized intangible assets:
FCC Licenses							32,283				—				32,283				32,283				—				32,283
Total intangible assets						$	230,656			$	(156,193	)		$	74,463			$	227,278			$	(151,399	)		$	75,879

Amortization expense was $4.8 million and $5.3 million, respectively, for the three month periods ended March 31, 2020 and 2019.

 

14

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):

 

		Amortization
Years ending December 31,		Expense
2020 (period from April 1 to December 31)		$	13,092
2021		$	14,451
2022		$	9,670
2023		$	2,808
2024		$	547
Thereafter		$	1,612

Actual future amortization expense could differ from the estimated amount as a result of future investments and other factors.

9. Composition of Certain Reserves and Allowances

Credit Losses — We regularly evaluate our accounts receivable and contract assets for expected credit losses. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of each customer’s trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on the aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of each customer’s financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. We apply a similar methodology towards our current and non-current contract asset balances. However, due to the inherent additional risk associated with a long-term receivable, an additional provision is applied towards contract asset balances that will diminish over time as the contract nears its expiration date. For the three months ended March 31, 2020, we also considered the current and estimated future economic and market conditions resulting from the COVID-19 pandemic in the determination of our estimated credit losses.

Estimates are used to determine the expected loss allowances. Such allowances are based on management’s assessment of anticipated payment, taking into account available historical and current information as well as management’s assessment of potential future developments. We are continuously monitoring our assumptions used to determine our expected credit losses, including the impact of COVID-19, which could cause us to record additional material credit losses in future periods.

A summary of our allowances for credit losses were as follows (in thousands):

 

						Prepaid				Other
		Accounts				and other				non-current
		receivable				current assets				assets
Balance at January 1, 2020		$	686			$	—			$	—
Cumulative-effect adjustment of ASC 326 adoption			1,386				356				1,923
Current-period provision for expected credit losses (1)			1,935				641				4,188
Write-offs charged against the allowances			—				—				—
Other, including dispositions and foreign currency			(37	)			—				—
Balance at March 31, 2020		$	3,970			$	997			$	6,111

 

(1)

The current-period provision for expected credit losses was due primarily to the impact of COVID-19. One international airline partner in particular accounted for approximately 70% of the provision recorded during the three month period ended March 31, 2020. Subsequent to March 31, 2020, such airline partner’s financial condition continued to deteriorate and we expect to record additional credit losses during the three month period ending June 30, 2020.

Warranties — We provide warranties on parts and labor related to our products. Our warranty terms range from two to ten 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 $12.6 million and $13.2 million, respectively, as of March 31, 2020 and December 31, 2019.

 

15

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

10. Long-Term Debt and Other Liabilities

Long-term debt as of March 31, 2020 and December 31, 2019 was as follows (in thousands):

 

		March 31,				December 31,
		2020				2019
2024 Senior Secured Notes		$	921,310			$	921,137
2022 Convertible Notes			205,020				201,868
ABL Credit Facility			22,000				—
2020 Convertible Notes			—				2,498
Total debt			1,148,330				1,125,503
Less deferred financing costs			(23,617	)			(24,255	)
Total long-term debt		$	1,124,713			$	1,101,248

2024 Senior Secured Notes - On April 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) (“Gogo Finance” and, together with GIH, the “Issuers”) issued $905 million aggregate principal amount of 9.875% senior secured notes due 2024 (the “Initial Notes”) under an indenture (the “Base Indenture”), dated as of April 25, 2019, among the Issuers, us, as guarantor, certain subsidiaries of GIH, as guarantors (the “Initial 2024 Subsidiary Guarantors” and, together with us, the “Initial 2024 Guarantors”), and U.S. Bank National Association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”). On May 3, 2019, the Issuers, the Initial 2024 Guarantors and the Trustee entered into the first supplemental indenture (the “First Supplemental Indenture”) to 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 (as defined below) by $20 million in aggregate principal amount. On March 6, 2020, the Issuers, the Initial 2024 Guarantors, Gogo Air International GmbH (an indirect subsidiary of GIH) (“Gogo International” and, together with the Initial 2024 Guarantors, the “2024 Guarantors”) and the Trustee entered into a second supplemental indenture (together with the Base Indenture and the First Supplemental Indenture, the “2024 Indenture”) to add Gogo International as a guarantor to the 2024 Indenture. On May 7, 2019, the Issuers issued an additional $20 million aggregate principal amount of 9.875% senior secured notes due 2024 (the “Additional Notes”). We refer to the Initial Notes and the Additional Notes collectively as the “2024 Senior Secured Notes”. The Initial 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 100.5% of their face value, resulting in aggregate gross proceeds of $920.7 million. Additionally, we received approximately $0.1 million for interest that accrued from April 25, 2019 through May 7, 2019 with respect to the Additional Notes that was included in our interest payment on November 1, 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 Gogo Finance), subject to certain exceptions. The 2024 Senior Secured Notes and the related guarantees are secured by second-priority liens on the ABL Priority Collateral (as defined below) and by first-priority liens on the Cash Flow Priority Collateral (as defined below), including pledged equity interests of the Issuers and all of GIH’s existing and future restricted subsidiaries guaranteeing the 2024 Senior Secured Notes, except for certain excluded assets and subject to permitted liens.

As of March 31, 2020 and December 31, 2019, the outstanding principal amount of the 2024 Senior Secured Notes was $925.0 million for both dates, the unaccreted debt discount was $3.7 million and $3.9 million, respectively, and the net carrying amount was $921.3 million and $921.1 million, respectively.

We used a portion of the net proceeds from the issuance of the 2024 Senior Secured Notes to 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).

The 2024 Senior Secured Notes will mature on May 1, 2024. The 2024 Senior Secured Notes bear interest at a rate of 9.875% per year, payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2019.

 

16

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

We paid approximately $22.0 million of origination fees and financing costs related to the issuance of the 2024 Senior Secured Notes, which have been accounted for as deferred financing costs. 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 $0.9 million for the three month period ended March 31, 2020. Amortization expense is included in interest expense in the unaudited condensed consolidated statements of operations. As of March 31, 2020 and December 31, 2019, the balance of unamortized deferred financing costs related to the 2024 Senior Secured Notes was $18.9 million and $19.7 million, respectively, and was included as a reduction to long-term debt in our unaudited condensed consolidated balance sheet. See Note 11, “Interest Costs,” for additional information.

The 2024 Senior Secured Notes are the senior secured indebtedness of the Issuers and are:

 

•

effectively senior to (i) all of the Issuers’ existing and future senior unsecured indebtedness to the extent of the value of the collateral securing the 2024 Senior Secured Notes and (ii) the Issuers’ indebtedness secured on a junior priority basis by the same collateral securing the 2024 Senior Secured Notes to the extent of the value of such collateral, including the obligations under the ABL Credit Facility (as defined below) to the extent of the value of the Cash Flow Priority Collateral;

 

•

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 (as defined below);

 

•

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;

 

•

structurally subordinated to all of the indebtedness and other liabilities of any non-2024 Guarantors (other than the Issuers); and

 

•

effectively subordinated to all of our existing and future indebtedness secured on a senior priority basis by the same collateral securing the 2024 Senior Secured Notes to the extent of the value of such collateral, including the obligations under the ABL Credit Facility to the extent of the value of ABL Priority Collateral.

Each guarantee is a senior secured obligation of such 2024 Guarantor and is:

 

•

effectively senior in right of payment to all existing and future (i) senior unsecured indebtedness to the extent of the value of the collateral securing such guarantee owned by such 2024 Guarantor and (ii) indebtedness secured on a junior priority basis by the same collateral securing the guarantee owned by such 2024 Guarantor to the extent of the value of the collateral securing the guarantee, including the obligations under the ABL Credit Facility to the extent of the value of the Cash Flow Priority Collateral;

 

•

effectively equal in right of payment with all existing and future unsubordinated indebtedness and indebtedness secured on a junior priority basis by the same collateral securing the guarantee owned by such 2024 Guarantor, if any, in each case to the extent of any insufficiency in the collateral securing such guarantee;

 

•

effectively subordinated to the obligations under the ABL Credit Facility of each 2024 Guarantor to the extent of the value of the ABL Priority Collateral 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 any non-2024 Guarantor subsidiary of such 2024 Guarantor (excluding, in the case of our guarantee, the Issuers).

 

17

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

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. Under certain circumstances, GIH 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. In addition, the 2024 Indenture permits indebtedness incurred under the ABL Credit Facility to be secured on a first-priority basis by certain of the same collateral that secures the 2024 Senior Secured Notes.

The Issuers may redeem the 2024 Senior Secured Notes, in whole or in part, 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 May 1 of the following years:

 

		Redemption
Year		Price
2021			104.938	%
2022			102.469	%
2023 and thereafter			100.000	%

In addition, at any time prior to May 1, 2021, the Issuers may redeem up to 40% of the aggregate principal amount of the 2024 Senior Secured Notes with the proceeds of certain equity offerings at a redemption price of 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 50% of the principal amount of the 2024 Senior Secured Notes remain outstanding immediately after each such redemption.

In addition, if GIH receives cash proceeds in connection with the entry into or continuation of a strategic relationship, or equity from us in connection with the sale of stock to a complimentary business (in each case, a “strategic investment”) at any time prior to May 1, 2020, the Issuers may redeem up to $150 million of the aggregate principal amount of the 2024 Senior Secured Notes at 103% of the principal amount of the 2024 Senior Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to (but not including) the redemption 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 GIH’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. 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 May 1, 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 2024 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 March 31, 2020, no event of default had occurred.

ABL Credit Facility – On August 26, 2019, Gogo Inc., GIH and Gogo Finance (together GIH and Gogo Finance are referred to as the “Borrowers”) entered into a credit agreement (the “ABL Credit Agreement”) among the Borrowers, the other loan parties party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and Morgan Stanley Senior Funding, Inc., as syndication agent, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30 million, subject to borrowing base availability, and includes letter of credit and swingline sub-facilities.

 

18

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Borrowing availability under the ABL Credit Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible accounts receivable (including eligible unbilled accounts receivable) and eligible credit card receivables, less certain reserves and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. As of March 31, 2020 and December 31, 2019, $22.0 million and zero, was outstanding under the ABL Credit Facility, respectively.

The final maturity of the ABL Credit Facility is August 26, 2022, unless the aggregate outstanding principal amount of our 2022 Convertible Notes (as defined below) has not, on or prior to December 15, 2021, been repaid in full or refinanced with a new maturity date no earlier than February 26, 2023, in which case the final maturity date shall instead be December 16, 2021.    

Loans outstanding under the ABL Credit Facility bear interest at a floating rate measured by reference to, at the Borrowers’ option, either (i) an adjusted London inter-bank offered rate plus an applicable margin ranging from 1.50% to 2.00% per annum depending on a fixed charge coverage ratio, or (ii) an alternate base rate plus an applicable margin ranging from 0.50% to 1.00% per annum depending on a fixed charge coverage ratio. Unused commitments under the ABL Credit Facility are subject to a per annum fee ranging from 0.25% to 0.375% depending on the average quarterly usage of the revolving commitments.    

The obligations under the ABL Credit Agreement are guaranteed by Gogo Inc. and all of its existing and future subsidiaries, subject to certain exceptions (collectively, the “ABL Guarantors”), and such obligations and the obligations of the ABL Guarantors are secured on a (i) senior basis by a perfected security interest in all present and after-acquired inventory, accounts receivable, deposit accounts, securities accounts, and any cash or other assets in such accounts and other related assets owned by each ABL Guarantor and the proceeds of the foregoing, subject to certain exceptions (the “ABL Priority Collateral”) and (ii) junior basis by a perfected security interest in substantially all other tangible and intangible assets owned by each ABL Guarantor (the “Cash Flow Priority Collateral”).

The ABL Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include restrictions on, among other things: the incurrence of additional indebtedness; the incurrence of additional liens; dividends or other distributions on equity; the purchase, redemption or retirement of capital stock; the payment or redemption of certain indebtedness; loans, guarantees and other investments; entering into other agreements that create restrictions on the ability to pay dividends or make other distributions on equity, make or repay certain loans, create or incur certain liens or guarantee certain indebtedness; asset sales; sale-leaseback transactions; swap agreements; consolidations or mergers; amendment of certain material documents; certain regulatory matters; Canadian pension plans; and affiliate transactions. The negative covenants are subject to customary exceptions and also permit dividends and other distributions on equity, investments, permitted acquisitions and payments or redemptions of indebtedness upon satisfaction of the “payment conditions.” The payment conditions are deemed satisfied upon Specified Availability (as defined in the ABL Credit Agreement) on the date of the designated action and Specified Availability for the prior 30-day period exceeding agreed-upon thresholds, the absence of the occurrence and continuance of any default and, in certain cases, pro forma compliance with a fixed charge coverage ratio of no less than 1.10 to 1.00.

The ABL Credit Agreement includes a minimum fixed charge coverage ratio test of no less than 1.00 to 1.00, which is tested only when Specified Availability is less than the greater of (A) $4.5 million and (B) 15.0% of the then effective commitments under the ABL Credit Facility, and continuing until the first day immediately succeeding the last day of the calendar month which includes the thirtieth (30th) consecutive day on which Specified Availability is in excess of such threshold so long as no default has occurred and is continuing and certain other conditions are met. As of March 31, 2020, Specified Availability had not fallen below the amount specified and therefore the minimum fixed charge coverage ratio test was not applicable. Full availability under the ABL Credit Facility may be limited by our ability to comply with the fixed charge coverage ratio in future periods.

The ABL Credit Agreement provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the ABL Credit Facility to be due and payable immediately and the commitments under the ABL Credit Facility to be terminated.

 

19

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

On August 26, 2019, the Borrowers and the ABL Guarantors entered into an ABL collateral agreement (the “ABL Collateral Agreement”), in favor of the Administrative Agent, whereby the Borrowers and the ABL Guarantors granted a security interest in substantially all tangible and intangible assets of each Borrower and each ABL Guarantor, to secure all obligations of the Borrowers and the ABL Guarantors under the ABL Credit Agreement, and U.S. Bank National Association, as cash flow collateral representative, and JPMorgan Chase Bank, N.A., as ABL agent, entered into a crossing lien intercreditor agreement (the “Intercreditor Agreement”) to govern the relative priority of liens on the collateral that secures the ABL Credit Agreement and the 2024 Senior Secured Notes and certain other rights, priorities and interests.

We paid approximately $0.9 million of origination fees and financing costs related to the issuance of the ABL Credit Facility, which have been accounted for as deferred financing costs. The deferred financing costs on our unaudited condensed consolidated balance sheet are being amortized over the contractual term of the ABL Credit Facility using the effective interest method. Total amortization expense was $0.1 million for the three month period ended March 31, 2020. Amortization expense is included in interest expense in the unaudited condensed consolidated statements of operations. As of March 31, 2020 and December 31, 2019, the balance of unamortized deferred financing costs related to the ABL Credit Facility was $0.7 million and $0.8 million, respectively, and is included as a reduction to long-term debt in our unaudited condensed consolidated balance sheet. See Note 11, “Interest Costs,” for additional information.

2022 Senior Secured Notes – On June 14, 2016, the Issuers issued $525 million aggregate principal amount of 12.500% senior secured notes due 2022 (the “Original 2022 Senior Secured Notes”) under an Indenture, dated as of June 14, 2016 (as amended and supplemented thereafter, the “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 25, 2017, the Issuers issued $100 million aggregate principal amount of additional 12.500% senior secured notes due 2022 (the “September 2017 Additional Notes”). 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 consolidated statements of operations for the year ended December 31, 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 $0.8 million for the three month period ended March 31, 2019. Amortization expense is included in interest expense in the unaudited condensed consolidated statements of operations. As noted above, the remaining unamortized deferred financing costs were written off as of May 15, 2019.

 

20

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Convertible Notes

2022 Convertible Notes

On November 21, 2018, we issued $215.0 million aggregate principal amount of 6.00% Convertible Senior Notes due 2022 (the “2022 Convertible Notes”) in private offerings to qualified institutional buyers, including pursuant to Rule 144A under the Securities Act, and in concurrent private placements. We granted an option to the initial purchasers to purchase up to an additional $32.3 million aggregate principal amount of 2022 Convertible Notes to cover over-allotments, of which $22.8 million was subsequently exercised during December 2018, resulting in a total issuance of $237.8 million aggregate principal amount of 2022 Convertible Notes. The 2022 Convertible Notes mature on 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 May 15 and November 15 of each year, beginning on May 15, 2019.

The $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 $188.7 million and additional paid-in capital (the equity component) at $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 additional non-cash interest expense being recognized in the consolidated statements of operations through the 2022 Convertible Notes maturity date (see Note 11, “Interest 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 13.6%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.

As of March 31, 2020 and December 31, 2019, the outstanding principal on the 2022 Convertible Notes was $237.8 million on both dates, the unaccreted debt discount was $32.7 million and $35.9 million, respectively, and the net carrying amount of the liability component was $205.0 million and $201.9 million, respectively.

We incurred approximately $8.1 million of issuance costs related to the issuance of the 2022 Convertible Notes, of which $6.4 million and $1.7 million were recorded to deferred financing costs and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the 2022 Convertible Notes. The $6.4 million recorded as deferred financing costs on our consolidated balance sheet is being amortized over the term of the 2022 Convertible Notes using the effective interest method. Total amortization expense was $0.4 million for each of the three month periods ended March 31, 2020 and 2019. Amortization expense is included in interest expense in the consolidated statements of operations. As of March 31, 2020 and December 31, 2019, the balance of unamortized deferred financing costs related to the 2022 Convertible Notes was $4.1 million and $4.5 million, respectively, and is included as a reduction to long-term debt in our consolidated balance sheets. See Note 11, “Interest Costs,” for additional information.

The 2022 Convertible Notes had an initial conversion rate of 166.6667 shares of common stock per $1,000 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $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 the if-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.

 

21

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

None of the above events allowing for conversion prior to January 15, 2022 occurred during the three month period ended March 31, 2020 or the year ended December 31, 2019. 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 that were not repurchased prior to maturity, as described below, matured on March 1, 2020. We paid interest on the 2020 Convertible Notes semi-annually in arrears on March 1 and September 1 of each year from September 1, 2015 through March 1, 2020. 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 statements 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 consolidated statements of operations for the year ended December 31, 2019. During September 2019, we purchased an additional $0.5 million of outstanding 2020 Convertible Notes. The remaining $2.5 million of outstanding 2020 Convertible Notes matured on March 1, 2020 and we repaid the remaining outstanding aggregate principle amount of the 2020 Convertible Notes, plus accrued and unpaid interest, in order to satisfy our obligations in full and retire the securities.

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 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 2020 Convertible Notes. If we or the holders of 2020 Convertible Notes elected not to settle the debt through conversion, we were required to 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 additional non-cash interest expense being recognized in the consolidated statements of operations (see Note 11, “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%.

As noted above, the 2020 Convertible Notes were no longer outstanding upon maturity on March 1, 2020. As of December 31, 2019, the outstanding principal on the 2020 Convertible Notes and the net carrying amount of the liability component was $2.5 million and the unamortized debt discount was zero.

 

22

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

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 additional paid-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 was amortized over the term of the 2020 Convertible Notes using the effective interest method. As of December 31, 2019, the balance of unamortized deferred financing costs related to the 2020 Convertible Notes was zero. Total amortization expense of the deferred financing costs was $0.2 million for the three month period ended March 31, 2019 and is included in interest expense in the unaudited condensed consolidated statements of operations. See Note 11, “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 was equivalent to an initial conversion price of approximately $23.85 per share of our common stock. The shares of common stock subject to conversion were excluded from diluted earnings per share calculations under the if-converted method as their impact was anti-dilutive.

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.

On December 11, 2019, we entered into an amendment to one of the Forward Transactions (the “Amended and Restated Forward Transaction”) to extend the expected settlement date with respect to approximately 2.1 million shares of common stock held by one of the Forward Counterparties, JPMorgan Chase Bank, National Association (the “2022 Forward Counterparty”), to correspond with the May 15, 2022 maturity date for the 2022 Convertible Notes. In the future, we may request that the 2022 Forward Counterparty modify the settlement terms of the Amended and Restated 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 the Amended and Restated Forward Transaction in accordance with its terms, the 2022 Forward Counterparty would pay to us the net proceeds from the sale by the 2022 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 the over-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 2022 Forward Counterparty is not required to effect any such settlement in cash in lieu of delivery of shares of our common stock and, if we request that the 2022 Forward Counterparty effect any such settlement, it will be entered into in the discretion of the 2022 Forward Counterparty on such terms as may be mutually agreed upon at the time. As a result of the Forward Transactions, total shareholders’ equity within our consolidated balance sheet was reduced by approximately $140 million. During March 2020, approximately 5.1 million shares of common stock were delivered to us in connection with the Forward Transactions (as defined and described in Note 10, “Long-Term Debt and Other Liabilities”). We accounted for these shares as Treasury Stock and reclassified $98.9 million from Additional Paid-In Capital to Treasury Stock, at cost, in our unaudited condensed consolidated balance sheet.

Restricted Cash - Our restricted cash balances were $5.2 million and $7.7 million, respectively, as of March 31, 2020 and December 31, 2019 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.

 

23

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

 

11. Interest Costs

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 month periods ended Mach 31, 2020 and 2019 (in thousands):

 

		For the Three Months
		Ended March 31,
		2020				2019
Interest costs charged to expense		$	26,429			$	26,531
Amortization of deferred financing costs			1,419				1,249
Accretion of debt discount			3,326				5,534
Amortization of debt premium			—				(760	)
Interest expense			31,174				32,554
Interest costs capitalized to property and equipment			—				4
Interest costs capitalized to software			89				125
Total interest costs		$	31,263			$	32,683

12. Leases

Operating and Financing Leases — We determine 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 March 31, 2020, there are no significant leases which have not commenced.

The following is a summary of our lease expense included in the unaudited condensed consolidated statements of operations (in thousands):

 

		For the Three				For the Three
		Months Ended				Months Ended
		March 31, 2020				March 31, 2019
Operating lease cost		$	4,857			$	4,918
Financing lease cost
Amortization of leased assets			91				205
Interest on lease liabilities			26				11
Total lease cost		$	4,974			$	5,134

 

24

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				For the Three
		Months Ended				Months Ended
		March 31, 2020				March 31, 2019
Supplemental cash flow information
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows used in operating leases		$	5,700			$	6,117
Operating cash flows used in financing leases			26				11
Financing cash flows used in financing leases			247				125
Non-cash items:
Operating leases obtained			7,274				279
Weighted average remaining lease term
Operating leases			8 years				9 years
Financing leases			2 years				1 year
Weighted average discount rate
Operating leases			9.4	%			10.3	%
Financing leases			8.3	%			8.7	%

Annual future minimum lease payments as of March 31, 2020 (in thousands):

 

		Operating				Financing
Years ending December 31,		Leases				Leases
2020 (period from April 1 to December 31)		$	12,456			$	529
2021			20,566				530
2022			18,994				451
2023			15,023				—
2024			11,451				—
Thereafter			56,550				—
Total future minimum lease payments			135,040				1,510
Less: Amount representing interest			(42,581	)			(124	)
Present value of net minimum lease payments		$	92,459			$	1,386
Reported as of March 31, 2020
Accrued liabilities		$	9,484			$	543
Non-current operating lease liabilities			82,975				—
Other non-current liabilities			—				843
Total lease liabilities		$	92,459			$	1,386

Arrangements with Commercial Airlines — 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. Under 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 this model, we refer to the airline as a “partner.”

Under the turnkey model, the assets are recorded as airborne equipment on our unaudited condensed consolidated balance sheets, as noted in Note 7, “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 $7.1 million and $9.0 million,

 

25