GOGO 10-Q Quarter ended June 30, 2019

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 June 30, 2019

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).    Yes  ☒    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 August 5, 2019, 88,068,387 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			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			53
Item 4.		Controls and Procedures			54
Part II.		Other Information
Item 1.		Legal Proceedings			55
Item 1A.		Risk Factors			56
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			56
Item 3.		Defaults Upon Senior Securities			56
Item 4.		Mine Safety Disclosures			56
Item 5.		Other Information			57
Item 6.		Exhibits			57
Signatures					59

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)

		June 30,				December 31,
		2019				2018
Assets
Current assets:
Cash and cash equivalents		$	181,867			$	184,155
Short-term investments			—				39,323
Total cash, cash equivalents and short-term investments			181,867				223,478
Accounts receivable, net of allowances of $5,357 and $500, respectively			113,975				134,308
Inventories			151,533				193,045
Prepaid expenses and other current assets			30,458				34,695
Total current assets			477,833				585,526
Non-current assets:
Property and equipment, net			549,908				511,867
Goodwill and intangible assets, net			81,161				83,491
Operating lease right-of-use assets			68,702				—
Other non-current assets			104,544				84,212
Total non-current assets			804,315				679,570
Total assets		$	1,282,148			$	1,265,096
Liabilities and Stockholders’ deficit
Current liabilities:
Accounts payable		$	29,617			$	23,860
Accrued liabilities			185,193				213,111
Deferred revenue			30,551				38,571
Deferred airborne lease incentives			24,737				24,145
Total current liabilities			270,098				299,687
Non-current liabilities:
Long-term debt			1,092,321				1,024,893
Deferred airborne lease incentives			137,231				129,086
Non-current operating lease liabilities			97,619				—
Other non-current liabilities			48,486				80,191
Total non-current liabilities			1,375,657				1,234,170
Total liabilities			1,645,755				1,533,857
Commitments and contingencies (Note 12)			—				—
Stockholders’ deficit
Common stock, par value $0.0001 per share; 500,000,000 shares authorized at June 30, 2019 and December 31, 2018; 88,116,072 and 87,678,812 shares issued at June 30, 2019 and December 31, 2018, respectively; and 88,062,965 and 87,560,694 shares outstanding at June 30, 2019 and December 31, 2018, respectively			9				9
Additional paid-in-capital			971,130				963,458
Accumulated other comprehensive loss			(2,217	)			(3,554	)
Accumulated deficit			(1,332,529	)			(1,228,674	)
Total stockholders’ deficit			(363,607	)			(268,761	)
Total liabilities and stockholders’ deficit		$	1,282,148			$	1,265,096

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								For the Six Months
		Ended June 30,								Ended June 30,
		2019				2018				2019				2018
Revenue:
Service revenue		$	173,731			$	159,056			$	338,743			$	309,734
Equipment revenue			39,954				68,402				74,491				149,549
Total revenue			213,685				227,458				413,234				459,283
Operating expenses:
Cost of service revenue (exclusive of items shown below)			71,494				73,650				139,615				148,597
Cost of equipment revenue (exclusive of items shown below)			35,571				64,350				65,302				116,643
Engineering, design and development			26,912				28,409				51,640				58,186
Sales and marketing			12,994				15,427				25,312				31,328
General and administrative			27,081				21,133				49,535				46,292
Depreciation and amortization			29,967				31,938				60,716				67,857
Total operating expenses			204,019				234,907				392,120				468,903
Operating income (loss)			9,666				(7,449	)			21,114				(9,620	)
Other (income) expense:
Interest income			(1,230	)			(1,328	)			(2,379	)			(2,404	)
Interest expense			36,150				30,641				68,704				61,195
Loss on extinguishment of debt			57,962				—				57,962				—
Other (income) expense			443				374				(2,922	)			(131	)
Total other expense			93,325				29,687				121,365				58,660
Loss before income taxes			(83,659	)			(37,136	)			(100,251	)			(68,280	)
Income tax provision (benefit)			304				71				511				(3,654	)
Net loss		$	(83,963	)		$	(37,207	)		$	(100,762	)		$	(64,626	)
Net loss attributable to common stock per share—basic and diluted		$	(1.04	)		$	(0.47	)		$	(1.25	)		$	(0.81	)
Weighted average number of shares—basic and diluted			80,702				79,783				80,575				79,718

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								For the Six Months
		Ended June 30,								Ended June 30,
		2019				2018				2019				2018
Net loss		$	(83,963	)		$	(37,207	)		$	(100,762	)		$	(64,626	)
Currency translation adjustments, net of tax			927				(1,379	)			1,337				(2,213	)
Comprehensive loss		$	(83,036	)		$	(38,586	)		$	(99,425	)		$	(66,839	)

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 Six Months
		Ended June 30,
		2019				2018
Operating activities:
Net loss		$	(100,762	)		$	(64,626	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization			60,716				67,857
Loss on asset disposals, abandonments and write-downs			4,425				6,529
Gain on transition to airline-directed model			—				(21,551	)
Deferred income taxes			89				(3,911	)
Stock-based compensation expense			8,645				8,599
Amortization of deferred financing costs			2,573				2,083
Accretion and amortization of debt discount and premium			8,374				9,204
Loss on extinguishment of debt			57,962				—
Changes in operating assets and liabilities:
Accounts receivable			20,730				(23,522	)
Inventories			(5,297	)			(6,223	)
Prepaid expenses and other current assets			6,409				(4,472	)
Contract assets			(20,313	)			(14,469	)
Accounts payable			5,736				9,263
Accrued liabilities			(7,295	)			6,498
Deferred airborne lease incentives			(1,486	)			(2,986	)
Deferred revenue			(3,858	)			1,223
Accrued interest			(28,375	)			—
Warranty reserves			948				5,355
Other non-current assets and liabilities			(3,686	)			(3,880	)
Net cash provided by (used in) operating activities			5,535				(29,029	)
Investing activities:
Purchases of property and equipment			(33,598	)			(103,599	)
Acquisition of intangible assets—capitalized software			(8,647	)			(11,567	)
Purchases of short-term investments			—				(39,323	)
Redemptions of short-term investments			39,323				128,924
Other, net			360				—
Net cash used in investing activities			(2,562	)			(25,565	)
Financing activities:
Proceeds from issuance of senior secured notes			920,683				—
Redemption of senior secured notes			(741,360	)			—
Repurchase of convertible notes			(158,954	)			—
Payment of debt issuance costs			(22,645	)			—
Payments on financing leases			(383	)			(1,187	)
Stock-based compensation activity			(178	)			(257	)
Net cash used in financing activities			(2,837	)			(1,444	)
Effect of exchange rate changes on cash			(378	)			(373	)
Decrease in cash, cash equivalents and restricted cash			(242	)			(56,411	)
Cash, cash equivalents and restricted cash at beginning of period			191,116				203,729
Cash, cash equivalents and restricted cash at end of period		$	190,874			$	147,318
Cash, cash equivalents and restricted cash at end of period		$	190,874			$	147,318
Less: current restricted cash			1,035				1,738
Less: non-current restricted cash			7,972				5,160
Cash and cash equivalents at end of period		$	181,867			$	140,420
Supplemental Cash Flow Information:
Cash paid for interest		$	86,420			$	49,911
Cash paid for taxes			412				374
Noncash Investing and Financing Activities:
Purchases of property and equipment in current liabilities		$	16,014			$	19,001
Purchases of property and equipment paid by commercial airlines			9,914				4,816

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 June 30, 2019
														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive				Accumulated
		Shares				Par Value				Capital				Loss				Deficit				Total
Balance at March 31, 2019			87,797,614			$	9			$	967,727			$	(3,144	)		$	(1,248,566	)		$	(283,974	)
Net loss			—				—				—				—				(83,963	)			(83,963	)
Currency translation adjustments, net of tax			—				—				—				927				—				927
Stock-based compensation expense			—				—				4,318				—				—				4,318
Issuance of common stock upon vesting of restricted stock units and restricted stock awards			183,446				—				—				—				—				—
Tax withholding related to vesting of restricted stock units			—				—				(456	)			—				—				(456	)
Issuance of common stock in connection with employee stock purchase plan			81,905				—				336				—				—				336
Repurchase of 2020 Convertible Notes			—				—				(795	)			—				—				(795	)
Balance at June 30, 2019			88,062,965			$	9			$	971,130			$	(2,217	)		$	(1,332,529	)		$	(363,607	)
		For the Three Months Ended June 30, 2018
														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive				Accumulated
		Shares				Par Value				Capital				Loss				Deficit				Total
Balance at March 31, 2018			87,007,075			$	9			$	903,045			$	(1,767	)		$	(1,092,623	)		$	(191,336	)
Net loss			—				—				—				—				(37,207	)			(37,207	)
Currency translation adjustments, net of tax			—				—				—				(1,379	)			—				(1,379	)
Stock-based compensation expense			—				—				4,213				—				—				4,213
Issuance of common stock upon exercise of stock options			2,500				—				21				—				—				21
Issuance of common stock upon vesting of restricted stock units and restricted stock awards			256,537				—				—				—				—				—
Tax withholding related to vesting of restricted stock units			—				—				(601	)			—				—				(601	)
Issuance of common stock in connection with employee stock purchase plan			85,188				—				393				—				—				393
Impact of the adoption of ASC 606			—				—				—				—				(2,316	)			(2,316	)
Balance at June 30, 2018			87,351,300			$	9			$	907,071			$	(3,146	)		$	(1,132,146	)		$	(228,212	)

See the Notes to Unaudited Condensed Consolidated Financial Statements

6

Gogo Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except share data)

		For the Six Months Ended June 30, 2019
														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive				Accumulated
		Shares				Par Value				Capital				Loss				Deficit				Total
Balance at January 1, 2019			87,560,694			$	9			$	963,458			$	(3,554	)		$	(1,228,674	)		$	(268,761	)
Net loss			—				—				—				—				(100,762	)			(100,762	)
Currency translation adjustments, net of tax			—				—				—				1,337				—				1,337
Stock-based compensation expense			—				—				8,645				—				—				8,645
Issuance of common stock upon vesting of restricted stock units and restricted stock awards			345,113				—				—				—				—				—
Tax withholding related to vesting of restricted stock units			—				—				(807	)			—				—				(807	)
Issuance of common stock in connection with employee stock purchase plan			157,158				—				629				—				—				629
Repurchase of 2020 Convertible Notes			—				—				(795	)			—				—				(795	)
Impact of the adoption of ASC 842			—				—				—				—				(3,093	)			(3,093	)
Balance at June 30, 2019			88,062,965			$	9			$	971,130			$	(2,217	)		$	(1,332,529	)		$	(363,607	)
		For the Six Months Ended June 30, 2018
														Accumulated
										Additional				Other
		Common Stock								Paid-In				Comprehensive				Accumulated
		Shares				Par Value				Capital				Loss				Deficit				Total
Balance at January 1, 2018			86,843,928			$	9			$	898,729			$	(933	)		$	(1,089,369	)		$	(191,564	)
Net loss			—				—				—				—				(64,626	)			(64,626	)
Currency translation adjustments, net of tax			—				—				—				(2,213	)			—				(2,213	)
Stock-based compensation expense			—				—				8,599				—				—				8,599
Issuance of common stock upon exercise of stock options			2,500				—				21				—				—				21
Issuance of common stock upon vesting of restricted stock units and restricted stock awards			363,872				—				—				—				—				—
Tax withholding related to vesting of restricted stock units			—				—				(1,127	)			—				—				(1,127	)
Issuance of common stock in connection with employee stock purchase plan			141,000				—				849				—				—				849
Impact of the adoption of ASC 606			—				—				—				—				21,849				21,849
Balance at June 30, 2018			87,351,300			$	9			$	907,071			$	(3,146	)		$	(1,132,146	)		$	(228,212	)

See the Notes to Unaudited Condensed Consolidated Financial Statements

7

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 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, 2018 as filed with the Securities and Exchange Commission (“SEC”) on February 21, 2019 (the “2018 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 and six month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.

We have one class of common stock outstanding as of June 30, 2019 and December 31, 2018.

Reclassifications —To conform with the current year presentation, $652 thousand of the current portion of financing lease liabilities has been combined with accrued liabilities within our unaudited condensed consolidated balance sheet as of December 31, 2018.

Transition of airline models —The accounting treatment for one of our airline agreements transitioned from our turnkey model to our airline-directed model in January 2018 due to specific provisions elected by the airline that resulted in the transfer of control of the previously installed connectivity equipment. Upon transition to the airline-directed model, the net book value of all previously delivered equipment classified within property and equipment was reclassified to cost of equipment revenue. Additionally, the unamortized proceeds previously received for equipment and classified within current and non-current deferred airborne lease incentives were eliminated and included as part of estimated contract value, which was then allocated amongst the various performance obligations under the agreement. The value allocated to previously delivered equipment was immediately recognized as equipment revenue in our unaudited condensed consolidated financial statements; refer to Note 3, “Revenue Recognition,” for additional disclosures relating to the allocation of consideration among identified performance obligations. For amounts recognized in equipment revenue that were in excess of the amounts billed, we recorded current and non-current contract assets included within prepaid expenses and other current assets and other non-current assets, respectively; refer to Note 3, “Revenue Recognition,” for additional details. In connection with the transition of this airline agreement to the airline-directed model, we also established warranty reserves related to previously sold equipment that are still under a warranty period, which is included within accrued liabilities.

8

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

See Note 8, “Warranties,” for additional information. This transition from the turnkey model to the airline-directed model occurred on January 4, 2018 and the total financial statement effect on our unaudited condensed consolidated balance sheet and unaudited condensed consolidated statement of operations was as follows ( in thousands ):

		Increase (decrease)
Unaudited condensed consolidated balance sheet
Prepaid expense and other current assets		$	6,603
Property and equipment, net			(32,716	)
Other non-current assets			18,783
Accrued liabilities			2,000
Current deferred airborne lease incentive			(13,592	)
Non-current deferred airborne lease incentive			(17,289	)
Unaudited condensed consolidated statement of operations
Equipment revenue			45,396
Cost of equipment revenue			23,845

As of January 1, 2019, one airline transitioned from the airline-directed model to the turnkey model. As a result of such transition, $46.8 million of Inventory was reclassified to Property and equipment, net as of January 1, 2019. See Note 2, “Summary of Significant Accounting Policies—Inventories,” in our 2018 10-K for information regarding the allocation of airborne equipment between Inventories and Property and equipment, net.

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.	Recent Accounting Pronouncements

Accounting standards adopted:

On January 1, 2019, we adopted Accounting Standards Codification Topic 842, Leases (“ASC 842”) using the cumulative effect method. As a result, we recognized the cumulative effect of initially applying ASC 842 as an adjustment to the opening balance of retained earnings as of January 1, 2019. Our historical financial statements have not been restated and continue to be reported under the lease accounting standard in effect for those periods.

We elected the practical expedients regarding use of hindsight to evaluate lease terms as well as maintaining lease classifications established under the prior lease accounting standard. Through this practical expedient, we did not reevaluate contracts to determine if they contained a lease. We did not elect the practical expedients regarding short-term leases or the separation of lease and non-lease components.

Adoption of ASC 842 had a material impact on our consolidated balance sheet through recognition of right-of-use (“ROU”) assets and operating lease liabilities. Adoption did not have a material impact on our consolidated statements of operations or our consolidated statements of cash flows and did not result in the recognition of incremental financing leases, formerly referred to as capital leases.

9

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

The discount rate used to calculate the adjustment to the opening balance was our incremental borrowing rate as of the adoption date, January 1, 2019. The cumulative effect of the adoption of ASC 842 to our unaudited condensed consolidated balance sheet as of January 1, 2019 was as follows ( in thousands) :

		Balance at December 31, 2018				Impact of ASC 842				Balances with Adoption of ASC 842
Assets
Operating lease right-of-use assets		$	—			$	72,188			$	72,188
Liabilities
Accrued liabilities			213,111				9,019				222,130
Non-current operating lease liabilities			—				102,440				102,440
Other non-current liabilities			80,191				(36,178	)			44,013
Equity
Accumulated deficit			(1,228,674	)			(3,093	)			(1,231,767	)

See Note 11, “Leases,” for additional information.

On January 1, 2019, we adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. Adoption of this standard did not have a material impact on our consolidated financial statements.

On January 1, 2019, we adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of ASC 718, Compensation – Stock Compensation , to include share-based payment transactions for acquiring goods or services from nonemployees. Adoption of this standard did not have a material impact on our consolidated financial statements.

3.	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 11, “Leases,” for additional information on the turnkey model.

Remaining performance obligations

As of June 30, 2019, the aggregate amount of the transaction price in our contracts allocated to the remaining unsatisfied performance obligations is approximately $784 million, most of which relates to our commercial aviation contracts. Approximately $101 million represents future equipment revenue that is expected to be recognized within the next one to three years. The remaining $683 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.

10

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

Disaggregation of revenue

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

		For the Three Months Ended June 30, 2019
		CA-NA				CA-ROW				BA				Total
Service revenue
Connectivity		$	90,233			$	21,656			$	54,176			$	166,065
Entertainment, CAS and other			6,169				917				580				7,666
Total service revenue		$	96,402			$	22,573			$	54,756			$	173,731
Equipment revenue
ATG		$	5,636			$	—			$	12,344			$	17,980
Satellite			3,329				14,144				3,809				21,282
Other			360				—				332				692
Total equipment revenue		$	9,325			$	14,144			$	16,485			$	39,954
Customer type
Airline passenger and aircraft owner/operator		$	55,900			$	6,767			$	54,756			$	117,423
Airline, OEM and aftermarket dealer			36,883				27,680				16,485				81,048
Third party			12,944				2,270				—				15,214
Total revenue		$	105,727			$	36,717			$	71,241			$	213,685
		For the Three Months Ended June 30, 2018
		CA-NA				CA-ROW				BA				Total
Service revenue
Connectivity		$	88,833			$	14,548			$	47,831			$	151,212
Entertainment, CAS and other			6,913				637				294				7,844
Total service revenue		$	95,746			$	15,185			$	48,125			$	159,056
Equipment revenue
ATG		$	2,254			$	—			$	20,497			$	22,751
Satellite			21,650				18,460				4,461				44,571
Other			—				—				1,080				1,080
Total equipment revenue		$	23,904			$	18,460			$	26,038			$	68,402
Customer type
Airline passenger and aircraft owner/operator		$	54,718			$	5,097			$	48,125			$	107,940
Airline, OEM and aftermarket dealer			49,141				26,311				26,038				101,490
Third party			15,791				2,237				—				18,028
Total revenue		$	119,650			$	33,645			$	74,163			$	227,458

11

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

		For the Six Months Ended June 30, 2019
		CA-NA				CA-ROW				BA				Total
Service revenue
Connectivity		$	170,051			$	40,510			$	106,861			$	317,422
Entertainment, CAS and other			18,378				1,835				1,108				21,321
Total service revenue		$	188,429			$	42,345			$	107,969			$	338,743
Equipment revenue
ATG		$	8,508			$	—			$	23,679			$	32,187
Satellite			3,959				27,303				9,044				40,306
Other			900				—				1,098				1,998
Total equipment revenue		$	13,367			$	27,303			$	33,821			$	74,491
Customer type
Airline passenger and aircraft owner/operator		$	110,249			$	12,618			$	107,969			$	230,836
Airline, OEM and aftermarket dealer			67,796				53,171				33,821				154,788
Third party			23,751				3,859				—				27,610
Total revenue		$	201,796			$	69,648			$	141,790			$	413,234
		For the Six Months Ended June 30, 2018
		CA-NA				CA-ROW				BA				Total
Service revenue
Connectivity		$	170,873			$	28,197			$	95,223			$	294,293
Entertainment, CAS and other			13,656				1,233				552				15,441
Total service revenue		$	184,529			$	29,430			$	95,775			$	309,734
Equipment revenue
ATG (1)		$	47,016			$	—			$	35,918			$	82,934
Satellite (1)			31,926				23,384				8,719				64,029
Other			—				—				2,586				2,586
Total equipment revenue		$	78,942			$	23,384			$	47,223			$	149,549
Customer type
Airline passenger and aircraft owner/operator		$	107,642			$	9,826			$	95,775			$	213,243
Airline, OEM and aftermarket dealer (2)			126,567				39,005				47,223				212,795
Third party			29,262				3,983				—				33,245
Total revenue		$	263,471			$	52,814			$	142,998			$	459,283

1)

ATG and satellite equipment revenue for the CA-NA segment includes the $45.4 million related to the accounting impact of the transition of one of our airline partners to the airline-directed model. Approximately $43.4 million was included in ATG equipment revenue and approximately $2.0 million was included in satellite equipment revenue.

2)	Airline, OEM and aftermarket dealer revenue includes all equipment revenue for our three segments, including the $45.4 million accounting impact of the transition of one of our airline partners to the airline-directed model.

Contract balances

Our current and non-current deferred revenue balances totaled $56.2 million and $60.1 million as of June 30, 2019 and December 31, 2018, respectively. Deferred revenue includes, among other things, equipment, multi-pack and subscription connectivity products, sponsorship activities and airline-directed connectivity and entertainment.

Our current and non-current contract asset balances totaled $81.0 million and $59.9 million as of June 30, 2019 and December 31, 2018, respectively. Contract assets represent the aggregate amount of revenue recognized in excess of billings for our airline-directed contracts.

12

Gogo Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements – (Continued)

Capitalized STC balances for our airline-directed contracts were $19.3 million and $16.5 million as of June 30, 2019 and December 31, 2018, respectively. The capitalized STC costs are amortized over the life of the associated airline-directed contracts as part of our engineering, design and development costs in our unaudited condensed consolidated statements of operations. Total amortization expense was $0.3 million and $0.6 million, respectively, for the three and six month periods ended June 30, 2019, and $0.2 million and $0.4 million for the respective prior-year periods.

4.	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 9, “Long-Term Debt and Other Liabilities”) are considered participating securities requiring the two-class method to calculate basic and diluted earnings per share. Net earnings in future periods will be allocated between common shares and participating securities. In periods of a net loss, the shares associated with the Forward Transactions will not receive an allocation of losses, as the counterparties to the Forward Transactions are not required to fund losses. Accordingly, the calculation of weighted average shares outstanding as of June 30, 2019 and 2018 excludes approximately 7.2 million shares that will be repurchased as a result of the Forward Transactions.

As a result of the net loss for the three and six month periods ended June 30, 2019 and 2018, all of the outstanding shares of common stock underlying stock options, deferred stock units and restricted stock units were excluded from the computation of diluted shares outstanding because they were anti-dilutive.

The following table sets forth the computation of basic and diluted earnings per share for the three and six month periods ended June 30, 2019 and 2018; however, because of the undistributed losses, the shares of common stock associated with the Forward Transactions are excluded from the computation of basic earnings per share in 2019 and 2018 as undistributed losses are not allocated to these shares ( in thousands, except per share amounts ):

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2019				2018				2019				2018
Net loss		$	(83,963	)		$	(37,207	)		$	(100,762	)		$	(64,626	)
Less: Participation rights of the Forward Transactions			—				—				—				—
Undistributed losses		$	(83,963	)		$	(37,207	)		$	(100,762	)		$	(64,626	)
Weighted-average common shares outstanding-basic and diluted			80,702				79,783				80,575				79,718
Net loss attributable to common stock per share-basic and diluted		$	(1.04	)		$	(0.47	)		$	(1.25	)		$	(0.81	)

5.	Inventories

Inventories consist primarily of telecommunications systems and parts and are recorded at the lower of cost (average cost) or market. We evaluate the need for write-downs associated with obsolete, slow-moving and nonsalable inventory by reviewing net realizable inventory values on a periodic basis.

Inventories as of June 30, 2019 and December 31, 2018 were as follows ( in thousands ):

		June 30, 2019				December 31, 2018
Work-in-process component parts		$	31,343			$	30,340
Finished goods (1)			120,190				162,705
Total inventory		$	151,533			$	193,045

(1)	The change between June 30, 2019 and December 31, 2018 primarily relates to the accounting impact of one of our airline partner agreements transitioning to the turnkey model (see Note 1, “Basis of Presentation,” for additional information).

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