S-1/A 1 d267959ds1a.htm AMENDMENT NO. 6 TO FORM S-1 Amendment No. 6 to Form S-1
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As filed with the Securities and Exchange Commission on November 8, 2012

 

Registration No. 333-178727

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Amendment No. 6

to

FORM S-1

REGISTRATION STATEMENT

UNDER THE

SECURITIES ACT OF 1933

 

 

GOGO INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4899   27-1650905
(State or other jurisdiction of
incorporation or organization)
 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

 

1250 N. Arlington Heights Road, Suite 500

Itasca, IL 60143

(630) 647-1400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Marguerite M. Elias

Senior Vice President and General Counsel

1250 N. Arlington Heights Road, Suite 500

Itasca, IL 60143

(630) 647-1400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

with copies to:

 

Matthew E. Kaplan, Esq.

Debevoise & Plimpton LLP

919 Third Avenue

New York, New York 10022

(212) 909-6000

 

Rachel W. Sheridan, Esq.

Latham & Watkins LLP

555 Eleventh Street, NW

Suite 1000

Washington, D.C. 20004

(202) 637-2200

 

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:

 

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of

Securities to be Registered

 

Proposed Maximum

Aggregate Offering Price(1)

 

Amount of

Registration Fee(2)

Common stock, par value $0.0001 per share

  $100,000,000   $11,460.00

 

 

  (1)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933. Includes the offering price of additional shares that the underwriters have the option to purchase.
  (2)   Previously paid.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

 

Issued                     , 2012

 

            Shares

 

LOGO

GOGO INC.

COMMON STOCK

 

 

 

This is the initial public offering of the common stock of Gogo Inc. We are offering          shares of the common stock to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional          shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. No public market currently exists for our common stock. We anticipate that the initial public offering price will be between $          and $          per share.

 

 

 

We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “GOGO.”

 

 

 

We are an “emerging growth company” as defined under applicable federal securities laws and may utilize reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 15 of this prospectus.

 

 

 

PRICE $                 A SHARE

 

 

 

      

Price to
Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
Company

    

Proceeds to Selling
Stockholders

Per Share

     $                  $                  $                  $            

Total

     $                  $                  $                  $            

 

The underwriters also may purchase up to          additional shares from us and from the selling stockholders at the initial offering price less the underwriting discounts and commissions to cover over-allotments, if any.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares to purchasers on or about                         , 2012.

 

 

 

MORGAN STANLEY   J.P. MORGAN   UBS INVESTMENT BANK

 

 

 

ALLEN & COMPANY LLC    EVERCORE PARTNERS   WILLIAM BLAIR

 

                        , 2012


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Prospectus Summary

     1   

Risk Factors

     15   

Special Note Regarding Forward-Looking Statements

     45   

Use of Proceeds

     47   

Dividend Policy

     48   

Capitalization

     49   

Dilution

     51   

Selected Consolidated Financial Data

     52   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54   

Business

     98   

Management

     125   
 

 

 

 

You should rely only on information contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We, the selling stockholders and the underwriters have not authorized anyone to provide you with additional or different information. Neither this prospectus nor any free writing prospectus constitutes an offer to sell, or a solicitation of an offer to buy, any of the shares of common stock offered hereby by any person in any jurisdiction in which it is unlawful for such person to make such an offering or solicitation. The information contained in this prospectus is accurate only as of the date of this prospectus or such free writing prospectus, as applicable.

 

Until              (25 days after the commencement of this offering) all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

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MARKET, INDUSTRY AND OTHER DATA

 

Information in this prospectus about the markets in which we operate, including the commercial and business aviation markets, and our position within those markets, is based on estimates prepared using data from independent industry publications, reports by market research firms and other published independent sources, as well as independent research commissioned by us and internal company surveys and our good faith estimates and assumptions, which are derived from such data and our knowledge of and experience in these markets. Although we believe the third party sources are credible, we have not verified the data or information obtained from these sources. Similarly, third party and internal company surveys, which we believe to be reliable, have not been verified by any independent sources. By including such market data and industry information, we do not undertake a duty to provide such data in the future or to update such data if it is updated. Our estimates, in particular as they relate to our general expectations concerning the commercial and business aviation markets, have not been verified by any independent source, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors.” In this prospectus, unless specifically stated or the context otherwise requires, the term “Gogo-commissioned survey” refers to independent research commissioned by us and the term “Gogo survey” refers to internal company surveys.

 

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PROSPECTUS SUMMARY

 

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to those statements, before making an investment decision. Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “Gogo,” and the “Company,” as used in this prospectus, refer to Gogo Inc. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated or where it is clear that the terms mean only Gogo Inc. exclusive of its subsidiaries.

 

Mission

 

Our mission is to make Gogo everyone’s favorite part of flying.

 

We transform the in-cabin experience for airline passengers by delivering ground-breaking and branded in-flight internet connectivity and an array of digital entertainment solutions. We enable our commercial airline partners to differentiate their service offerings, increase customer satisfaction and unlock new revenue streams. We provide our media partners with access to an attractive and undistracted audience. We provide our business aviation customers with a full suite of in-flight internet connectivity and other voice and data communications products and services, allowing discerning private jet passengers the ability to stay connected in flight. Our goal is to enable the connected lifestyle of today’s business and leisure travelers in the air.

 

Who We Are

 

Gogo is the world’s leading provider of in-flight connectivity with the largest number of internet-connected aircraft in service, and a pioneer in wireless in-cabin digital entertainment solutions. Through our proprietary platform and dedicated air-to-ground, or ATG, network, and a variety of in-cabin offerings, we provide turnkey solutions that make it easy and convenient for passengers to extend their connected lifestyles to the aircraft cabin. We operate our business through three operating segments: commercial aviation, or CA, business aviation, or BA, and International.

 

Our CA business provides in-flight connectivity and digital entertainment solutions to commercial airline passengers through their personal Wi-Fi enabled devices. Through our Gogo platform, passengers can access an array of services including:

 

   

Gogo Connectivity. Allows passengers to connect to the internet through various user-purchase options, including subscriptions, individual sessions and multiple session packages as well as third-party sponsored access.

 

   

Gogo Vision. Offers passengers the ability to watch a broad selection of on-demand movies and television shows on a pay-per-view basis.

 

   

Gogo Signature Services. Includes a variety of entertainment and informational content and services customized for each airline, such as destination-based event ticketing, e-commerce, flight tracker and access to travel sites and weather.

 

We provide Gogo Connectivity to passengers on commercial aircraft operated by our North American airline partners, including Delta Air Lines, American Airlines and US Airways, which have long-term agreements with us. As of June 30, 2012, we had 1,565 commercial aircraft online, representing approximately 84% of internet-enabled North American commercial aircraft at such date, which were operated on over 6,000 daily flights on average in the second quarter of 2012. From July 1, 2012 through July 31, 2012, we added an additional five aircraft online. As of July 31, 2012, we have signed contracts with our airline partners to install

 

 

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Gogo on approximately 415 additional aircraft, and we currently expect to complete substantially all of those installations by the end of 2013. As evidence of the extent of passenger interest in our service, from the inception of our service in August 2008 to June 30, 2012, passengers used Gogo Connectivity over 24.5 million times. We refer to each such use as a “session.”

 

Our BA business sells equipment and provides services for in-flight internet connectivity and other voice and data communications under our Gogo Biz and Aircell branded products and services. BA’s customers include original equipment manufacturers of private jet aircraft such as Gulfstream, Cessna, Hawker Beechcraft, Bombardier, Dassault, and Embraer, leading aftermarket dealers and all of the largest fractional jet operators including NetJets, Flexjets, Flight Options and CitationAir. We sell equipment for three of the primary connectivity network options in the business aviation market: Gogo Biz, which delivers broadband internet connectivity over our ATG network, and the Iridium and Inmarsat SwiftBroadband satellite networks. As of June 30, 2012, we had 1,166 Gogo Biz systems in operation and 4,920 aircraft with Iridium satellite communications systems in operation. Since 2009, we have sold 211 Inmarsat SwiftBroadband systems. In July 2012, we signed an agreement with Inmarsat pursuant to which we became, for the first time, a reseller of Inmarsat’s SwiftBroadband service. Our Gogo Biz offering is the only ATG broadband connectivity service available in the business aviation market, and we are the largest reseller of Iridium satellite services to the business aviation market.

 

Our International business is in the start-up phase as we initiated our international expansion efforts in the first quarter of 2012. Through our International business, we intend to provide in-flight connectivity and wireless digital entertainment solutions to passengers flying on foreign-based commercial airlines and international routes of U.S.-based commercial airlines.

 

We provide in-flight broadband connectivity across the contiguous United States and portions of Alaska via 3 MHz of Federal Communications Commission, or FCC, licensed ATG spectrum and our proprietary network of ground-based cell sites. While we provide the Gogo service primarily over land, our air-to-ground network extends to Gogo-equipped aircraft flying over water near the coast on certain routes. We believe the reliability of Gogo’s in-flight connectivity is unmatched. Our customized airborne network allows us to actively manage data traffic in order to maintain the speed and quality of the Gogo service through sophisticated bandwidth management. We are implementing a technology roadmap that will allow us to significantly increase our network capacity by utilizing a combination of the best available and developing technologies, including the next generation of ATG, or ATG-4, and Ka-band, Ku-band and other satellite-based solutions. The addition of Ka-band, Ku-band and other satellite-based solutions will also allow us to provide the Gogo service on routes outside of our existing ATG network area including trans-oceanic and other over-water routes.

 

Our CA business generates revenue primarily from fees paid for Gogo Connectivity and from products and services available through Gogo Vision and Gogo Signature Services. We generate Gogo Connectivity related revenue through both retail and non-retail sales channels. Retail revenue is derived from purchases of individual sessions (which includes multiple individual session packages) and subscriptions (including both monthly and annual subscriptions). Non-retail revenue is primarily derived from fees paid by third parties who sponsor free or discounted access to Gogo Connectivity to passengers and, to a lesser extent, from other non-retail connectivity services. We generate Gogo Vision related revenue from fees paid by passengers for access to content on Gogo Vision, a service that we launched in August 2011 and October 2011 on aircraft operated by American Airlines and Delta Air Lines, respectively, and which we have agreed to launch on US Airways. We generate Gogo Signature Services related revenue from advertising fees and e-commerce revenue share arrangements. Our BA business generates revenue from the sale of satellite and ATG equipment and from subscriptions for in-flight internet connectivity and other voice and data communications services.

 

We have grown significantly since the launch of Gogo Connectivity in August 2008. We increased the number of commercial aircraft online from 30 to 1,565 between December 31, 2008 and June 30, 2012, and the aggregate number of passengers on flights with Gogo Connectivity, or our gross passenger opportunity, increased

 

 

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from approximately 624,000 in 2008 to approximately 192 million in 2011 and from approximately 91.0 million during the six month period ended June 30, 2011 to 120.2 million during the six month period ended June 30, 2012. See Note 8 to the tables under the heading “Summary Historical Consolidated Financial and Other Operating Data” for the definition of gross passenger opportunity. Since 2006, our BA business has sold approximately 7,000 ATG and satellite-based communications systems for private aircraft and signed agreements with all of the largest fractional jet operators.

 

Our consolidated revenue increased 69.2% from $94.7 million in 2010 to $160.2 million in 2011, and over the same period our net loss decreased from $113.4 million to net income of $23.6 million, our consolidated Adjusted EBITDA increased from $(44.9) million to $(0.9) million and our consolidated net loss attributable to common stock decreased from $140.1 million to $17.9 million. For the six month period ended June 30, 2012 as compared with the six month period ended June 30, 2011, consolidated revenue increased 53.8% from $72.9 million to $112.2 million, net income decreased from $15.9 million to a net loss of $0.6 million, consolidated Adjusted EBITDA increased from $(1.3) million to $8.2 million and consolidated net loss attributable to common stock increased from $1.2 million to $30.7 million. We present Adjusted EBITDA in this prospectus as a supplemental performance measure because, as presented, it eliminates the items set forth in the definition of Adjusted EBITDA in Note 7 to the tables under the heading “Summary Historical Consolidated Financial and Other Operating Data,” which items management believes have less bearing on our operating performance, thereby highlighting trends in our core business which may not otherwise be apparent. See the same Note 7 for additional information about Adjusted EBITDA, including the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss attributable to common stock.

 

We Are Enabling the Connected Lifestyle In-Cabin

 

Passengers on commercial and business aircraft are increasingly seeking to remain connected in flight. Airlines are under pressure to remain competitive and must attract passengers by improving services while simultaneously reducing costs. We believe the intersection of these trends creates a meaningful opportunity for Gogo.

 

   

Large, Underserved Air Travel Market. In 2010, there were approximately 2.7 billion scheduled passengers on commercial aircraft worldwide, including approximately 630 million in the U.S., and according to International Air Transport Association, or IATA, the number of passengers worldwide is expected to grow to nearly 3 billion in 2012. With the number of both business and leisure travelers expected to continue to grow in the near term and with only approximately 16% of commercial aircraft in the North American market and approximately 6% of commercial aircraft in the global market equipped to provide connectivity to passengers in 2010, we believe there is significant opportunity for us to continue to expand into this underserved market. The number of business jets in the North American and global business aviation markets is projected to grow by approximately 10% and 13%, respectively, by 2015 according to JetNet. With only a minority of North American business jets equipped with broadband internet access, we believe that the potential for expansion of our Gogo Biz service in the North American market is significant. We further believe that the projected increase in business jets globally represents a significant opportunity for us to grow our satellite-based equipment and services in the international market.

 

   

Emergence of the Connected Lifestyle. The proliferation of mobile devices and the wide availability of terrestrial Wi-Fi and mobile broadband services have led consumers to expect connectivity wherever they may be. The need for mobile connectivity among business professionals to access corporate email and VPNs has increased significantly. According to a survey conducted by Egencia in 2011, 48% of business travelers were willing to pay for in-flight Wi-Fi over other amenities. Leisure travelers are also looking for ways to stay connected and online at all times. According to Forrester Research Inc., in 2010 approximately 79% of U.S. on-line leisure travelers owned a laptop or notebook, and in 2011 over $160 billion was spent in the U.S. through retail e-commerce channels.

 

 

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Commercial Aviation Industry Focused on New Revenue Sources, Cost Management and Passenger Experience. In the competitive airline industry, airlines are being forced to balance various, and at times contradictory, market dynamics. The growth of low-cost carriers has created a more competitive environment for airlines. Airline expenses, such as fuel cost, are rapidly increasing, and airlines have generally been unable to increase ticket prices enough to generate revenues sufficient to offset these expenses. As a result, airlines are increasingly asking passengers to pay for formerly complimentary services, including in-flight entertainment offerings. By offering cost-effective in-flight connectivity and entertainment solutions that passengers can access through Wi-Fi enabled devices that passengers now routinely carry on board, we provide our airline partners with new revenue streams and a way to attract passengers by enhancing the in-cabin experience.

 

The Gogo Advantage

 

We believe the following strengths provide us competitive advantages in realizing the potential of our opportunity:

 

   

Compelling User Experience. The Gogo service helps the airline create a compelling in-cabin experience for its passengers. According to a Gogo-commissioned survey, 67% of our users are likely to recommend Gogo Connectivity to others and 34% of our users have indicated that they are likely to switch airlines to be on a Gogo-equipped flight. According to another Gogo survey, 17% of our users have specifically changed their flight plans to be on a flight with in-flight internet.

 

   

Leading Brand. We believe that Gogo has strong brand equity in the marketplace and is becoming associated with in-flight connectivity by our customers. According to a Gogo-commissioned survey, 62% of Gogo users indicated they would use Gogo again on their next flight, 29% of leisure travelers and 50% of business travelers are aware of Gogo and 76% of Gogo users have indicated that their travel experience was made more satisfying because of Gogo. The same survey also indicates that Gogo has 23 times the top of mind unaided awareness as our competitors.

 

   

Compelling Offering for Airlines. Our services allow our airline partners to delight their passengers with a co-branded in-flight experience that can be customized for each airline. By providing the Gogo service to our airlines partners’ passengers on a co-branded basis, we help our airline partners enhance their brand appeal, increase customer loyalty and earn additional revenue. Gogo also saves our airline partners time and money by providing turnkey solutions. Our in-flight connectivity and entertainment systems can generally be installed overnight, limiting the amount of time an aircraft is out of service, and are the lowest weight among competitive offerings, reducing drag and incremental fuel consumption. We believe we are the only provider of in-flight broadband internet connectivity that can cost-effectively equip an airline’s entire North American fleet, including regional jets, enabling our partners to provide a seamless experience to passengers throughout their itineraries.

 

   

Strong Incumbent Position. We are the world’s leading provider of in-flight connectivity to the commercial aviation market with the largest number of internet-connected aircraft in service, and a leading provider of in-flight internet connectivity and other voice and data communications equipment and services to the business aviation market. As of June 30, 2012, Gogo-equipped planes represented approximately 84% of North American commercial aircraft that provide internet connectivity to their passengers. Approximately 96% of Gogo-equipped planes, representing approximately 47% and 43% of our consolidated revenue for the six month period ended June 30, 2012 and the year ended December 31, 2011, respectively, are contracted under ten-year agreements. We believe that our nationwide ATG network, FCC spectrum license, customized network management processes and other proprietary intellectual property, as well as our technological, management and industry expertise would take significant time and capital to replicate. Our CA business accounted for approximately 56% and 54% of our consolidated revenue for the six month period ended June 30, 2012 and the year ended December 31, 2011, respectively.

 

 

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We have nearly two decades of experience in the business aviation market, and we sell equipment for three of the primary network options to all of the largest OEMs of business aircraft, leading aftermarket dealers and all of the largest fractional jet operators. We sell Gogo Biz and Iridium services to owners and operators of private aircraft, we are the only provider of ATG broadband internet connectivity, via Gogo Biz, in the business aviation market, and we are the largest reseller of Iridium satellite services to the business aviation market. As of June 30, 2012, we had 4,920 aircraft online with Iridium satellite communications systems and 1,166 Gogo Biz systems in operation. We had an additional 35 aircraft online with Iridium satellite communications systems and an additional 54 aircraft online with Gogo Biz systems by July 31, 2012. We had 4,119 aircraft operating in North America as of June 30, 2012, which represented approximately 34% of business aircraft in North America. Our BA business accounted for approximately 44% and 46% of our consolidated revenue for the six month period ended June 30, 2012 and the year ended December 31, 2011, respectively.

 

   

Efficient, Reliable and Expandable Proprietary Technology. We believe that Gogo has the most cost-efficient and scalable network providing in-flight connectivity and entertainment to passengers. We actively manage data traffic through sophisticated bandwidth management to maintain the speed, quality and reliability of the Gogo service. Our technology approach and architecture provide us with the flexibility to utilize the best currently available and future available technologies and, going forward, will facilitate our transition to the next-generation ATG-4 and Ka-band, Ku-band and other satellite-based solutions, which will expand our network capacity in the United States and facilitate planned future international expansion.

 

Growth Strategy

 

Our mission is to make Gogo everyone’s favorite part of flying, and we intend to execute the following strategies:

 

   

Expand Commercial Aircraft Footprint. To expand our footprint, we intend to continue deploying the Gogo service on contracted planes on our airline partners’ fleets, target full-fleet availability of the Gogo service for all of our airline partners and enter into new airline partnerships.

 

   

Drive Consumer Adoption and Monetization. We intend to improve and expand our consumer reach by continuing to promote brand loyalty and target new users, grow sales through existing and new distribution channels, offer compelling content through Gogo Vision, expand e-commerce opportunities and destination-specific offerings and provide passengers with predictable availability and a seamless connectivity experience across flights.

 

   

Innovate and Evolve Our Technology. We will continue to execute our technology roadmap, maintain technical network flexibility, collaborate with our airline partners to ensure the development of important services and technical applications and upgrade our installed equipment and software.

 

   

Grow Business Aviation. To grow our BA business, we intend to increase the penetration of Gogo Biz, offer additional revenue-generating services over our ATG network, develop new and innovative equipment offerings such as the Aircell Smartphone and continue to provide superior customer care.

 

   

Expand Internationally. We intend to grow internationally by leveraging our strong commercial aviation partnerships and flexible technology to capitalize on the large transoceanic and international in-flight opportunity, utilizing our relationships with existing domestic airlines to help us to partner with members of the major global airline alliances outside North America and providing Inmarsat’s Global Xpress or other satellite broadband service to the international commercial airline and business aviation markets.

 

 

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Our Risks

 

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully under the caption “Risk Factors,” and include but are not limited to the following:

 

   

our business is dependent upon our connectivity agreements with our airline partners which allow us to provide the Gogo service to our customers, the airlines’ passengers;

 

   

we have incurred operating losses in every quarter since we launched the Gogo service, and we may not be able to generate sufficient revenue in the future to generate operating income;

 

   

our Senior Term Facility contains financial and operating covenants that may restrict how we conduct our business and could lead to serious adverse consequences if we fail to comply with them. In addition, a portion of our BA segment’s excess cash flows may be required to be used to repay principal under the Senior Term Facility. The debt outstanding under the Senior Term Facility bears interest at variable rates and an increase in the interest rate applicable to the Senior Term Facility would increase the cost of servicing this debt and could materially reduce our profitability and cash flows;

 

   

we expect to experience significant capacity constraints by the second half of 2013, and we may experience significant capacity constraints earlier unless we and our airline partners successfully implement our “technology roadmap” including the timely adoption and installation of our ATG-4 service;

 

   

among other risks associated with the American Airlines bankruptcy proceedings, the Bankruptcy Code allows American to reject its contracts, including its connectivity agreement with us. In addition, American may make reductions or other changes to its fleet, including the elimination of Gogo-equipped aircraft or aircraft scheduled for installation of the Gogo service;

 

   

we expect to rely more heavily on satellite technology in the future, which may diminish the benefit of the technological advantage our ATG network currently provides us; and

 

   

our international expansion will require the use of satellite technology, and we may not have a scalable solution for providing broadband internet access to airlines internationally unless we enter into a definitive agreement with Inmarsat and until the launch of the first Inmarsat-5 satellite, which is currently scheduled for mid-2013. Certain competitors, including Panasonic Avionics, Row 44 and OnAir, are currently offering satellite-based broadband internet internationally, and other competitors may be able to offer these services sooner.

 

Organizational Structure and History

 

Gogo Inc. is a holding company that does business through its two indirect operating subsidiaries, Gogo LLC and Aircell Business Aviation Services LLC, and holds its FCC license through a third subsidiary, AC BidCo LLC.

 

Air-cell, Inc. was incorporated in Texas on June 11, 1991 to develop and market airborne telecommunication systems for the business aviation market, and on December 10, 1996 merged with Aircell, Inc., a Delaware corporation. AC HoldCo LLC and its subsidiary AC BidCo LLC, were formed as Delaware limited liability companies on March 20, 2006. During 2006, Aircell, Inc. and AC HoldCo LLC entered into a series of agreements to pursue the FCC license governing our ATG spectrum and to provide capital to develop and operate our ATG network. In June 2006, AC BidCo LLC won the spectrum auction, and the FCC license was issued on October 21, 2006. On January 31, 2007, Aircell, Inc. converted to a limited liability company (Aircell LLC) and was acquired by AC HoldCo LLC. On June 3, 2008, Aircell Business Aviation Services LLC was

 

 

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formed as a separate operating subsidiary. Aircell Holdings Inc. was formed on December 31, 2009 via a two-step merger resulting in a conversion of AC HoldCo LLC into Aircell Holdings Inc., a Delaware corporation. The underlying corporate structure of the company did not change and included the same limited liability company subsidiaries that existed under AC HoldCo LLC as of the date of the two-step merger. On June 15, 2011, Aircell Holdings Inc. changed its name to Gogo Inc. and Aircell LLC changed its name to Gogo LLC. On June 8, 2012, we formed Gogo Intermediate Holdings LLC, a Delaware limited liability company and a direct, wholly-owned subsidiary of Gogo Inc. On June 8, 2012, Gogo LLC and Aircell Business Aviation Services LLC, which had previously been direct, wholly-owned subsidiaries of Gogo Inc., became direct, wholly-owned subsidiaries of Gogo Intermediate Holdings LLC.

 

Principal Stockholders

 

As of July 31, 2012, AC Acquisition I LLC and AC Acquisition II LLC, or Ripplewood, owned approximately 38% of our outstanding common stock, on an as converted basis, and Oakleigh Thorne, including the entities affiliated with Mr. Thorne as described under “Principal and Selling Stockholders”, or the Thorne Entities, owned approximately 34% of our outstanding common stock, on an as converted basis. Following the completion of this offering and assuming that the underwriters do not exercise their option to purchase additional shares, Ripplewood and the Thorne Entities will own approximately             % and             % of our outstanding common stock, respectively.

 

Our Corporate Information

 

We are incorporated in Delaware and our corporate offices are located at 1250 North Arlington Heights Rd., Suite 500, Itasca, IL 60143. Our telephone number is (630) 647-1400. As of July 31, 2012, we had 507 full-time, non-union employees. Our website addresses are www.gogoair.com and www.aircell.com. None of the information contained on, or that may be accessed through, our websites or any other website identified herein is part of, or incorporated into, this prospectus. All website addresses in this prospectus are intended to be inactive textual references only.

 

Gogo®, Aircell®, Aircell Axxess®, the Gogo and Aircell logos, and other trademarks or service marks of Gogo Inc. and its subsidiaries appearing in this prospectus, are the property of Gogo Inc. or one of its subsidiaries. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply relationships with, or endorsements of us by, these other companies.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

 

Common stock offered by selling stockholders

             shares

 

Total common stock offered

             shares

 

Option to purchase additional shares of common stock

The underwriters have a 30-day option to purchase an additional              shares of common stock from us and the selling stockholders to cover over-allotments, if any.

 

Common stock to be outstanding after this offering

             shares

 

Use of proceeds

We intend to use the net proceeds we receive from this offering for working capital and other general corporate purposes, including costs associated with international expansion. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market trading symbol

“GOGO”

 

 

 

The number of shares of our common stock to be outstanding immediately following this offering is based on the number of our shares of common stock outstanding as of                         , but excludes:

 

   

             shares of common stock issuable upon exercise of options outstanding as of                          at a weighted average exercise price of $             per share;

 

   

             shares of common stock reserved for future issuance under our stock option plan.

 

Unless otherwise indicated, all information in this prospectus:

 

   

reflects a              for 1 stock split of our shares of common stock;

 

   

reflects the conversion of all outstanding shares of our Class A Senior Convertible Preferred Stock, Class B Senior Convertible Preferred Stock and Junior Convertible Preferred Stock into              shares, in the aggregate, of our common stock upon the closing of this offering;

 

   

reflects 7,975 shares of common stock (on a pre-stock split basis) issued to AC Management LLC, an affiliate of the Company whose units are owned by members of our management. Gogo Inc. is the managing member of AC Management LLC, and thereby controls AC Management LLC, and as a result AC Management LLC is consolidated into our consolidated financial statements. As a result of such consolidation, the 7,975 shares are not considered outstanding for purposes of our financial statements, including net income (loss) per share attributable to common stock;

 

 

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gives effect to the issuance of              shares of common stock in this offering;

 

   

reflects the sale of              shares of common stock by the selling stockholders named in this prospectus in this offering;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares;

 

   

assumes that the initial public offering price of our common stock will be $             per share (which is the midpoint of the price range set forth on the cover page of this prospectus); and

 

   

gives effect to amendments to our certificate of incorporation and bylaws to be adopted prior to the completion of this offering.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL

AND OTHER OPERATING DATA

 

The following tables provide a summary of our historical financial and other operating data for the periods indicated. You should read this information together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.

 

The consolidated statement of operations data and other financial data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and other financial data for the six month periods ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results to be expected in any future period, and the unaudited interim results for the six month periods ended June 30, 2012 are not necessarily indicative of results that may be expected for the full year ending December 31, 2012. The other operating data as of and for the years ended December 31, 2009, 2010 and 2011, and as of and for the six month periods ended June 30, 2011 and 2012, have been derived from our operating information used by management.

 

     Year Ended December 31,     Six Months Ended June 30,  
         2009             2010             2011             2011             2012      
     (in thousands, except per share amounts)  

Consolidated Statement of Operations Data:

          

Revenue:

          

Service revenue

   $ 15,626      $ 58,341      $ 103,918      $ 46,113      $ 76,664   

Equipment revenue

     21,216        36,318        56,238        26,827        35,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     36,842        94,659        160,156        72,940        112,152   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of service revenue (exclusive of items shown below)

     37,903        46,474        54,605        24,932        37,065   

Cost of equipment revenue (exclusive of items shown below)

     9,874        14,919        23,240        10,877        14,758   

Engineering, design and development

     21,901        19,228        22,245        10,634        15,312   

Sales and marketing

     27,762        23,624        25,116        11,396        12,740   

General and administrative

     28,340        36,384        36,101        16,550        24,033   

Depreciation and amortization

     21,898        30,991        32,673        16,379        17,427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     147,678        171,620        193,980        90,768        121,335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (110,836     (76,961     (33,824     (17,828     (9,183

Other (income) expense:

          

Interest expense

     30,067        37        280        132        599   

Interest income

     (214     (98     (72     (43     (25

Fair value derivative adjustments

            33,219        (58,740     (34,253     (9,640

Loss on extinguishment of debt

     1,577                               

Other expense

                   40        40          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expense

     31,430        33,158        (58,492     (34,124     (9,066
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     (142,266     (110,119     24,668        16,296        (117

Income tax provision

            3,260        1,053        433        449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (142,266     (113,379     23,615        15,863        (566

Class A and Class B senior convertible preferred stock return

            (18,263     (31,331     (11,943     (24,905

Accretion of preferred stock

            (8,501     (10,181     (5,084     (5,198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stock(1)

   $ (142,266   $ (140,143   $ (17,897   $ (1,164   $ (30,669
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stock(2):

          

Basic

   $ (2,155.55   $ (2,123.38   $ (271.17   $ (17.64   $ (464.68

Diluted

   $ (2,155.55   $ (2,123.38   $ (271.17   $ (29.61   $ (464.68

Weighted average shares used in computing net loss per share attributable to common stock:

          

Basic

     66        66        66        66        66   

Diluted

     66        66        66        621        66   

 

 

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     Year Ended December 31,    Six Months Ended
June 30,
 
         2009            2010            2011            2011            2012      
     (in thousands, except per share amounts)  

Pro forma net income (loss) per share attributable to common stock(2)(3)(4):

              

Basic

               $ (16.28

Diluted

               $ (16.28

Weighted average common shares used in computing pro forma net income (loss) per share attributable to common stock(3)(4):

              

Basic

                 627   

Diluted

                 627   

 

     As of December 31,     As of June 30, 2012  
     2010    

2011

             
     actual     actual     Actual     As adjusted(6)  
     (in thousands)  
Consolidated Balance Sheet Data:                         

Cash and cash equivalents

   $ 18,883      $ 42,591      $ 153,501     

Working capital(5)

     12,459        31,314        129,717     

Total assets

     236,940        285,636        425,711     

Indebtedness and long-term capital leases, net of current portion

     2,000        2,224        133,611        133,611   

Total liabilities

     113,928        87,846        226,770        226,770   

Convertible preferred stock

     453,385        551,452        581,555          

Total stockholders’ deficit

     (330,373     (353,662     (382,614  

 

     Year Ended December 31,     Six Months Ended June 30,  
         2009             2010             2011             2011             2012      

Other Financial Data:

          

EBITDA (in thousands)(7)

   $ (90,515   $ (105,953   $ 16,037      $ 15,737      $ (12,219

Adjusted EBITDA (in thousands)(7)

   $ (88,618   $ (44,878   $ (852   $ (1,279   $ 8,233   

Other Operating Data(8):

          

Commercial Aviation

          

Aircraft online

     692        1,056        1,345        1,147        1,565   

Gross passenger opportunity (GPO) (in thousands)

     59,804        152,744        192,074        91,003        120,167   

Total average revenue per passenger opportunity (ARPP)

   $ 0.15      $ 0.32      $ 0.43      $ 0.41      $ 0.51   

Total average revenue per session (ARPS)

   $ 4.67      $ 6.62      $ 9.01      $ 9.31      $ 9.18   

Connectivity take rate(9)

     3.2     4.7     4.7     4.3     5.4

Business Aviation

          

Satellite aircraft online

     4,311        4,553        4,733        4,647        4,920   

ATG aircraft online

     49        318        860        614        1,166   

Average monthly service revenue per satellite aircraft online

   $ 124      $ 127      $ 131      $ 132      $ 135   

Average monthly service revenue per ATG aircraft online

   $ 488      $ 1,530      $ 1,791      $ 1,839      $ 1,820   

Satellite units shipped

     460        574        618        303        379   

ATG units shipped

     139        374        613        306        363   

Average equipment revenue per satellite unit shipped (in thousands)

   $ 32      $ 33      $ 39      $ 40      $ 41   

Average equipment revenue per ATG unit shipped (in thousands)

   $ 37      $ 44      $ 48      $ 46      $ 51   

 

  (1)   Prior to December 31, 2009, we operated as a limited liability company under the name AC HoldCo LLC.
  (2)   Does not reflect 7,975 shares (actual) and              shares (pro forma) of common stock issued to AC Management LLC, an affiliate of the Company whose units are owned by members of our management. Gogo Inc. is the managing member of AC Management LLC, and thereby controls AC Management LLC, and as a result AC Management LLC is consolidated into our consolidated financial statements. As a result of such consolidation, the common shares held by AC Management LLC are not considered outstanding for purposes of our financial statements, including basic net loss per share attributable to common stock.
  (3)  

Reflects a          for 1 stock split of our outstanding shares of common stock to be effected prior to the completion of this offering.

 

 

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  (4)   Pro forma net income (loss) per share attributable to common stock holders and number of weighted average common shares used in computing pro forma net income (loss) per share attributable to common stock in the table above give effect to (i) this offering and (ii) the conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering as if such conversion had occurred as of January 1, or upon issuance, if later.
  (5)   We define working capital as total current assets less total current liabilities.
  (6)   As adjusted balance sheet data gives effect to the issuance of          shares of common stock in this offering at an initial public offering price of $         per share as if it had occurred on June 30, 2012.
  (7)   EBITDA represents net income (loss) attributable to common stock before income taxes, interest income, interest expense, depreciation expense and amortization of other intangible assets. Adjusted EBITDA represents EBITDA adjusted for (i) fair value derivative adjustments, (ii) preferred stock dividends, (iii) accretion of preferred stock, (iv) stock-based compensation expense, (v) amortization of deferred airborne lease incentives and (vi) loss on extinguishment of debt. EBITDA and Adjusted EBITDA are financial data that are not calculated in accordance with accounting principles generally accepted in the United States of America (GAAP). The table below provides a reconciliation of these non-GAAP financial measures to net income (loss) attributable to common stock. EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (loss) attributable to common stock, operating loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate Adjusted EBITDA or similarly titled measures in the same manner as we do. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures and the manner in which we compensate for those limitations.

 

Our management uses Adjusted EBITDA (a) as a measure of operating performance; (b) as a performance measure for determining management’s incentive compensation; (c) as a measure for allocating resources to our operating segments; and (d) in communications with our board of directors concerning our financial performance. Our management believes that the use of Adjusted EBITDA eliminates items that, management believes, have less bearing on our operating performance, thereby highlighting trends in our core business which may not otherwise be apparent. It also provides an assessment of controllable expenses, which are indicators management uses to determine whether current spending decisions need to be adjusted in order to meet financial goals and achieve optimal financial performance.

 

More specifically, we believe that it is appropriate to exclude fair value derivative adjustments from Adjusted EBITDA because of the significant variance in income or expense that can result from changes in fair value using a probability-weighted expected return method (“PWERM”), which does not directly correlate to the underlying performance of our business operations. For additional discussion, see Note 4 “Fair Value of Financial Assets and Liabilities,” to our consolidated financial statements for the year ended December 31, 2011 included elsewhere in this prospectus. Additionally, we believe excluding fair value derivative adjustments from Adjusted EBITDA is useful to investors because these adjustments relate to our preferred stock, which will no longer be a part of our capital structure once we are a public company. Similarly, we believe it is useful to exclude Class A and Class B senior convertible preferred stock return and accretion of preferred stock from Adjusted EBITDA because these expenses also relate to our preferred stock, which will no longer be a part of our capital structure once we become a public company.

 

Additionally, we believe the exclusion of stock-based compensation expense from Adjusted EBITDA is appropriate given the significant variation in expense that can result from using the Black-Scholes model to determine the fair value of such compensation. The fair value of our stock options as determined using the Black-Scholes model varies based on fluctuations in the assumptions used in this model, including inputs that are not necessarily directly related to the performance of our business, such as the expected volatility, the risk-free interest rate, the expected life of the options and future dividends to be paid by the Company. Therefore, excluding this cost gives us a clearer view of the operating performance of our business. Further, non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time. While we believe that investors should have information about any dilutive effect of outstanding options and the cost of that compensation, we also believe that stockholders should have the ability to consider our performance using a non-GAAP financial measure that excludes these costs and that management uses to evaluate our business.

 

We believe the exclusion of the amortization of deferred airborne lease incentives from Adjusted EBITDA is useful as it allows an investor to view operating performance across time periods in a manner consistent with how management measures segment profit and loss. Management evaluates segment profit and loss in this manner (for a description of segment profit (loss), see Note 10 “Business Segments” to our consolidated financial statements for the year ended December 31, 2011 included elsewhere in this prospectus), excluding the amortization of deferred lease incentives, as such presentation reflects operating decisions and activities from the current period, without regard to the prior period decision on form of connectivity agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Components of Consolidated Statements of Operations—Cost of Service Revenue—Commercial Aviation” for a discussion of the accounting treatment of deferred airborne lease incentives.

 

We believe it is useful to an understanding of our operating performance to exclude loss on extinguishment of debt from Adjusted EBITDA because of the non-recurring nature of this charge.

 

We also present Adjusted EBITDA in this prospectus as a supplemental performance measure because we believe that this measure provides investors and securities analysts with important supplemental information with which to evaluate our performance and to enable them to assess our performance on the same basis as management.

 

 

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Material limitations of non-GAAP measures

Although EBITDA and Adjusted EBITDA are measurements frequently used by investors and securities analysts in their evaluations of companies, EBITDA and Adjusted EBITDA each have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for, or more meaningful than, amounts determined in accordance with GAAP.

 

Some of these limitations are:

 

   

they do not reflect interest income or expense;

 

   

they do not reflect cash requirements for our income taxes;

 

   

they do not reflect depreciation and amortization, which are significant and unavoidable operating costs given the level of capital expenditures needed to maintain the Company’s business;

 

   

they do not reflect non-cash components related to employee compensation; and

 

   

other companies in our or related industries may calculate these measures differently from the way we do, limiting their usefulness as comparative measures.

 

Management compensates for the inherent limitations associated with the EBITDA and Adjusted EBITDA measures through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss) attributable to common stock. Further, management also reviews GAAP measures and evaluates individual measures that are not included in Adjusted EBITDA such as our level of capital expenditures, equity issuances and interest expense, among other measures.

 

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net loss attributable to common stock, the most comparable GAAP measure for each of the periods indicated:

 

     Year Ended December 31,      Six Months
Ended June 30,
 
     2009     2010         2011          2011      2012  
     (in thousands)  

Net loss attributable to common stock

   $ (142,266   $ (140,143   $ (17,897    $ (1,164    $ (30,669

Interest expense

     30,067        37        280         132         599   

Interest income

     (214     (98     (72      (43      (25

Income tax provision

            3,260        1,053         433         449   

Depreciation and amortization

     21,898        30,991        32,673         16,379         17,427   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

   $ (90,515   $ (105,953   $ 16,037       $ 15,737       $ (12,219
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Fair value derivative adjustments

            33,219        (58,740      (34,253      (9,640

Class A and Class B senior convertible preferred stock return

            18,263        31,331         11,943         24,905   

Accretion of preferred stock

            8,501        10,181         5,084         5,198   

Stock-based compensation expense

     320        1,614        1,795         802         1,695   

Amortization of deferred airborne lease incentives(a)

            (522     (1,456      (592      (1,706

Loss on extinguishment of debt

     1,577                                 
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (88,618   $ (44,878   $ (852    $ (1,279    $ 8,233   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

  (a)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Components of Consolidated Statements of Operations—Cost of Service Revenue—Commercial Aviation” for a discussion of the accounting treatment of deferred airborne lease incentives.

 

  (8)   Commercial Aviation

 

Aircraft online. We define aircraft online as the total number of commercial aircraft on which our ATG network equipment is installed and Gogo service has been made commercially available as of the last day of each period presented.

 

Gross passenger opportunity (“GPO”). We define GPO as the estimated aggregate number of passengers who board commercial aircraft on which Gogo service has been made available for the period presented. We calculate passenger estimates by multiplying the number of flights flown by Gogo-equipped aircraft, as published by Air Radio Inc. (ARINC), by the number of seats on those aircraft, and adjusting the product by a passenger load factor for each airline, which represents the percentage of seats on aircraft that are occupied by passengers. Load factors are provided to us by our airline partners and are based on historical data.

 

 

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Total average revenue per passenger opportunity (“ARPP”). We define ARPP as revenue from Gogo Connectivity, Gogo Vision, Gogo Signature Services and other service revenue for the period, divided by GPO for the period.

 

Total average revenue per session (“ARPS”). We define ARPS as revenue from Gogo Connectivity divided by the total number of times passengers used Gogo Connectivity during the period.

 

Connectivity take rate. We define connectivity take rate as the number of times passengers used Gogo Connectivity during the period expressed as a percentage of GPO.

 

Business Aviation

 

Satellite aircraft online. We define satellite aircraft online as the total number of business aircraft on which we have satellite equipment in operation as of the last day of each period presented.

 

ATG aircraft online. We define ATG aircraft online as the total number of business aircraft on which we have ATG network equipment in operation as of the last day of each period presented.

 

Average monthly service revenue per satellite aircraft online. We define average monthly service revenue per satellite aircraft online as the aggregate satellite service revenue for the period, divided by the number of satellite aircraft online during the period (expressed as an average of the month end figures for each month in such period).

 

Average monthly service revenue per ATG aircraft online. We define average monthly service revenue per ATG aircraft online as the aggregate ATG service revenue for the period, divided by the number of ATG aircraft online during the period (expressed as an average of the month end figures for each month in such period).

 

Units shipped. We define units shipped as the total number of satellite or ATG network equipment units shipped during the period.

 

Average equipment revenue per satellite unit shipped. We define average equipment revenue per satellite unit shipped as the aggregate equipment revenue earned from all satellite shipments during the period, divided by the number of satellite units shipped.

 

Average equipment revenue per ATG unit shipped. We define average equipment revenue per ATG unit shipped as the aggregate equipment revenue from all ATG shipments during the period, divided by the number of ATG units shipped.

 

  (9)   A large sponsorship in the fourth quarter of 2010 increased our average connectivity take rate by approximately 1.3% in 2010, which resulted in the average connectivity take rate remaining constant at 4.7% in 2010 and 2011. Included in our connectivity take-rate calculation are sessions for which we did not receive revenue, including those provided pursuant to free promotional campaigns and, to a lesser extent, as a result of complimentary passes distributed by our customer service representatives or unforeseen technical issues. For the periods listed above, other than the fiscal year ended December 31, 2009, the number of sessions for which we did not receive revenue was less than 3% of the total number of sessions. Because we launched the Gogo service in August of 2008, we provided a significant number of free sessions as part of numerous promotional and advertising campaigns during fiscal 2009 in order to promote our service through the startup phase of our service, including the use of “gate teams,” which handed out free and reduced-price session passes to passengers boarding Gogo-equipped aircraft. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

 

 

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RISK FACTORS

 

Investing in our common stock involves substantial risks. In addition to the other information in this prospectus, you should carefully consider the following risk factors before investing in our common stock. As described more fully below, our business is subject to risks and uncertainties that fall in the following categories:

 

   

Risks Related to Our CA Business;

 

   

Risks Related to Our BA Business;

 

   

Risks Related to Our Technology and Intellectual Property and Regulation;

 

   

Risks Related to Our Business and Industry;

 

   

Risks Related to Our Indebtedness; and

 

   

Risks Related to the Offering and Our Common Stock.

 

Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also materially adversely affect our business, financial condition or results of operations. We cannot assure you that any of the events discussed in the risk factors below, or other risks, will not occur. If they do, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment.

 

Risks Related to Our CA Business

 

We are dependent on existing agreements with our airline partners to be able to access our customers. Payments by these customers for our services have provided, and we expect will continue to provide, a significant portion of our revenue. Our failure to realize the anticipated benefits from these agreements on a timely basis or to renew any of these agreements upon expiration or termination could have a material adverse effect on our financial condition and results of operations.

 

Under existing contracts with nine North American airlines, we provide ATG equipment for installation on, and provide our Gogo service to passengers on, all or a portion of these airlines’ North American fleets. For the six months ended June 30, 2012 and the year ended December 31, 2011, the Gogo service we provide to passengers on aircraft operated by these airlines generated approximately 54% and 52% of our consolidated revenue, respectively. Our growth is dependent on our ability to have our equipment installed on additional aircraft and increased use of the Gogo service on installed aircraft. Any delays in installations under these contracts may negatively affect our ability to grow our user base and revenue. In addition, we have no assurance that any of our current airline partners will renew their existing contracts with us upon expiration, or that they will not terminate their contracts prior to expiration upon the occurrence of certain contractually stipulated events. Contractual termination events include our material breach of contract, including material breach of our service level agreements, and our bankruptcy. Additionally, our contracts with airline partners from which we derive a majority of our CA segment revenue permit each of these airline partners to terminate its contract with us if another company provides an alternate connectivity service that is a material improvement over Gogo Connectivity, such that failing to adopt such service would likely cause competitive harm to the airline, or if the percentage of passengers using Gogo Connectivity on such airline’s flights falls below certain negotiated thresholds. In addition, one contract with an airline partner from which we derive a significant minority of our CA segment revenue permits such airline partner to terminate its contract with us if the airline’s revenue share falls below certain negotiated thresholds based on the airline’s costs incurred to provide the service and Gogo elects to not make the airline whole for such revenue share shortfall. To the extent that our airline partners terminate or fail to renew their contracts with us for any reason, our business prospects, financial condition and results of operations would be materially adversely affected.

 

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A failure to maintain airline satisfaction with our ATG equipment or the Gogo service could have a material adverse effect on our revenue and results of operations.

 

Our relationships with our airline partners are critical to the growth and ongoing success of our business. For the six months ended June 30, 2012 and the year ended December 31, 2011, use of the Gogo service by passengers flying on Delta Air Lines aircraft accounted for approximately 46% and 44% of revenue generated by our CA segment, respectively. For the six months ended June 30, 2012 and the year ended December 31, 2011, use of the Gogo service by passengers flying on American Airlines aircraft accounted for approximately 23% and 19% of revenue generated by our CA segment, respectively. If our airline partners are not satisfied with our ATG equipment or the Gogo service, they may reduce efforts to co-market the Gogo service to their passengers, which could result in lower passenger usage and reduced revenue, which could in turn give certain airlines the right to terminate their contracts with us. In addition, airline dissatisfaction with us for any reason could negatively affect our ability to have our equipment installed and provide the Gogo service on additional aircraft. Any of these events would adversely affect our results of operations and growth prospects.

 

If we are unable to successfully implement planned or future technology enhancements to increase our network capacity, or our airline partners do not agree to such enhancements, our ability to maintain sufficient network capacity and our business could be materially and adversely affected.

 

All providers of wireless connectivity services, including all providers of in-flight connectivity services, face escalating capacity constraints due to expanding consumption of wireless services and the increasing prevalence of higher bandwidth uses. In response to increased usage of the Gogo service, we are in the process of implementing a plan, our “technology roadmap,” that is intended to enhance our existing ATG network to meet increasing capacity demands through a number of improvements, including cell-site splitting and the addition of new cell sites, the use of ATG-4 and, in the future, the use of K-band and/or other satellite-based solutions.

 

We currently expect to begin the roll-out of the next stage of our technology roadmap, our ATG-4 service, during the second half of 2012 with certain of our airline partners. However, the exact timing of this roll-out depends on certain variables that are not within our control, including the preferred schedule of our airline partners, US Airways and United Airlines, that have committed to upgrading to ATG-4, the decision by our other airline partners whether to upgrade to ATG-4 and the schedule for any such upgrades, which will be affected by the speed with which we are able to obtain Supplemental Type Certificates, or STCs, from the FAA for our ATG-4 equipment. As of August 1, 2012, we had obtained STCs for our ATG-4 equipment on one aircraft type, and we have STC applications in process for seven additional aircraft types. We currently expect to obtain approvals for a significant majority of our STC applications currently pending during 2012. We are obligated, under certain of our contracts with airline partners, to bear costs of upgrading certain aircraft from ATG to ATG-4 and our associated costs under any such contract would be material. If we are unable to implement enhancements to our network infrastructure, including those called for by our technology roadmap, on a timely or cost-effective basis, or at all, or our airline partners do not agree to install additional or new equipment necessary to support these efforts, we will experience significant capacity constraints by the second half of 2013. While US Airways and United Airlines have agreed to upgrade to ATG-4, to the extent that usage of the Gogo service continues to increase, these upgrades alone may not alleviate such future capacity constraints. See “—Our network infrastructure and bandwidth may not be able to accommodate the expected growth in demand for in-flight broadband service” below.

 

The successful roll-out of our technology roadmap also requires the use of satellite and additional ATG technology, which may currently, or in the future, not be available on a cost-effective or timely basis, or at all. There is no guarantee that the use of such technology or Ka-band, Ku-band and/or other satellite-based services will effectively alleviate then extant or future capacity constraints. Implementation of satellite solutions will depend on the availability of capacity from satellite service providers and regulatory approvals for aeronautical services using those satellites. Further, we may experience unanticipated delays, complications, and expenses in implementing, integrating, and operating our systems using these new technologies. Any interruptions in operations during periods of implementation could adversely affect our ability to maintain satisfactory service levels, properly allocate resources and process billing information in a timely manner, which could result in

 

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customer dissatisfaction, reputational harm, termination of key contracts and delayed or reduced cash flow. Additionally, satellite-based solutions generally have installed equipment that is heavier than ATG equipment, thus increasing drag and fuel costs, which could make them less attractive to our airline partners. Accordingly, to the extent that we rely on satellite-based solutions in the future, our airline partners may become less satisfied with our services or we may find it more difficult to attract new airline partners.

 

If we are unable to implement our technology roadmap, or other network enhancements, on a timely and cost-effective basis, or at all, for any reason, including a failure to obtain necessary regulatory approvals, or our airline partners do not agree to adopt such enhancements, our business prospects and results of operations may be materially adversely affected.

 

Our network infrastructure and bandwidth may not be able to accommodate the expected growth in demand for in-flight broadband service.

 

The success of our CA segment depends on our ability to provide adequate bandwidth to meet customer demands while in-flight. Penetration of mobile Wi-Fi devices is increasing significantly and, as a result, we expect demand for in-flight broadband services to grow considerably. Further, applications and activities that require substantial bandwidth and that could increase our network response time, such as file downloads and streaming media content, are becoming increasingly common. An increasing number of passengers accessing Gogo services for bandwidth-intensive uses on an increasing number of airplanes requires us to expand our network infrastructure in order to meet capacity demands. Our ATG network is inherently limited by the spectrum licensed from the FCC. To the extent that a large number of passengers are attempting to access the Gogo service on a single plane, or a large number of planes are flying within range of the same cell site within our ATG network, we may be unable to maintain sufficient capacity in our network infrastructure or available bandwidth to adequately service passenger demand. If the demand exceeds our available capacity, the Gogo service on such airplane (or airplanes) may operate slowly or not at all. Like others in the wireless industry, our network is experiencing capacity constraints. Based on current projections for increased demands on network capacity, we expect to experience significant capacity constraints by the second half of 2013, unless our airline partners adopt, and we are able to successfully install, our ATG-4 service on a significant number of planes by that time. Even if we are able to upgrade a significant number of planes, the deployment of ATG-4 may not sufficiently mitigate or delay these capacity constraints due to certain variables that are not within our control, including increased connectivity take rates on existing planes and growth in usage due to additional planes being equipped to provide the Gogo service. We also may experience significant capacity constraints earlier than our projections indicate as a result of these same variables. To effectively manage increasing demand for bandwidth, we utilize a number of additional means to ensure our network meets passenger expectations, including the construction of additional cell sites and other investments in our network, the creation of effective price plans intended to calibrate usage while maximizing Gogo service revenue, and sophisticated bandwidth management tools. In addition, while our technology roadmap calls for the use of Ka-band, Ku-band and/or other satellite-based services to further alleviate capacity constraints, there is no guarantee that these technologies will be sufficient to alleviate any such capacity constraints on our network if usage increases. If our network experiences capacity constraints and the Gogo service slows down, or does not operate at all, it could harm our reputation with customers, our airline partners could terminate their contracts with us for a failure to meet our service level agreements or we could be unable to enter into new contracts with other airline partners. If we fail to meet capacity demands our business prospects and results of operations may be materially adversely affected.

 

Our business is highly dependent on the airline industry, which is itself affected by factors beyond the airlines’ control. The airline industry is highly competitive and sensitive to changing economic conditions.

 

Our business is directly affected by the number of passengers flying on commercial aircraft, the financial condition of the airlines and other economic factors. If consumer demand for air travel declines, including due to increased use of technology such as videoconferencing for business travelers, or the number of aircraft and flights shrinks due to, among other reasons, reductions in capacity by airlines, the number of passengers available

 

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to use the Gogo service will be reduced, which would have a material adverse effect on our business and results of operations. Unfavorable general economic conditions and other events that are beyond the airlines’ control, including higher unemployment rates, higher interest rates, reduced stock prices, reduced consumer and business spending and terrorist attacks or threats could have a material adverse effect on the airline industry. A general reduction or shift in discretionary spending can result in decreased demand for leisure and business travel and lead to a reduction in airline flights offered and the number of passengers flying. For example, the economic turmoil that started in 2008 and resulted in an overall decrease in demand for air transportation in the United States, coupled with record high fuel prices, required airlines to take significant steps to reduce their overall capacity. Certain of our domestic airline partners have recently announced plans to reduce capacity in anticipation of decreased customer demand and other airlines may reduce capacity, which could have a significant negative impact on our business for an extended period of time. Consolidation within the airline industry, including acquisitions of our airline partners by commercial airlines with which we do not currently have connectivity agreements, could also adversely affect our relationships with our existing airline partners or lead to Gogo-equipped aircraft being taken out of service. Further, unfavorable economic conditions could also limit airlines’ ability to counteract increased fuel, labor or other costs though raised prices. Our airline partners operate in a highly competitive business market and, as a result, continue to face pressure on offerings and pricing. These unfavorable conditions and the competitiveness of the air travel industry could cause one or more of our airline partners, including one or more of the airlines we are dependent upon for a material portion of our revenue, to reduce expenditures on passenger services including deployment of the Gogo service or file for bankruptcy. If one or more of our airline partners were to file for bankruptcy, bankruptcy laws could give them rights to terminate their contracts with us, they could reduce their total fleet size and capacity and/or their total number of flights, and/or they could attempt to renegotiate the terms of their contracts with us including their revenue share percentage. Any of these events would have a material adverse effect on our business prospects, financial condition and results of operations.

 

The recent bankruptcy filing of American Airlines could have a material adverse affect on our revenue and results of operations.

 

On November 29, 2011, American Airlines, filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Use of the Gogo service by passengers flying on American Airlines aircraft accounted for approximately 23% and 19% of our CA revenue for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. While American Airlines has announced that it will continue to operate its business and fly normal flight schedules, there can be no assurance that the filing will not have a material adverse affect on our revenue or results of operations in the short- or long-term. Under the Bankruptcy Code, American Airlines may reject certain of its contracts, including its connectivity agreement with us, or may use this possibility to renegotiate the terms of those contracts. In addition, American Airlines may make reductions or other changes to its fleet, including the elimination of its older or less efficient aircraft, which may represent a material portion of its Gogo-equipped fleet, or may take planes scheduled for installation of Gogo equipment out of service. In each case, our future revenue would decrease and our growth prospects and results of operations could be materially adversely affected to the extent that such aircraft are not proximately replaced with new Gogo-equipped aircraft.

 

We may not be able to grow our business with current airline partners or successfully negotiate agreements with airlines to which we do not currently provide the Gogo service.

 

We are currently in negotiations or discussions with certain of our airline partners to provide our ATG equipment and the Gogo service on additional aircraft in their fleets. We have no assurance that these efforts will be successful. We are also in discussions with other airlines to provide our ATG equipment and the Gogo service to some or all of the aircraft flying their North American routes. Negotiations with prospective airline partners require substantial time, effort and resources. The time required to reach a final agreement with an airline is unpredictable and may lead to variances in our operating results from quarter to quarter. We may ultimately fail in our negotiations and any such failure could harm our results of operations due to, among other things, a diversion of our focus and resources, actual costs and opportunity costs of pursuing these opportunities. In

 

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addition, the terms of any future agreements could be materially different and less favorable to us than the terms included in our existing agreements with our airline partners. To the extent that any negotiations with current or potential airline partners are unsuccessful, or any new agreements contain terms that are less favorable to us, our growth prospects could be materially and adversely affected. In addition, to the extent that we enter into agreements with new airline partners, we may be required by the terms of our existing agreements to offer the terms of such new agreements to our existing airline partners.

 

Competition from a number of companies could result in price reduction, reduced revenue and loss of market share and could harm our results of operations.

 

We face competition from satellite-based providers of broadband services that include in-flight internet and live television services. Competition from such providers has had in the past and could have in the future an adverse effect on our ability to maintain or gain market share. Three major U.S. airlines have announced arrangements with competitors to provide internet connectivity on all or a significant portion of their fleets. Some of our competitors are larger, more diversified corporations and have greater financial, marketing, production, and research and development resources. As a result, they may be better able to withstand the effects of periodic economic downturns or may offer a broader product line to customers. Competition within the in-flight broadband internet access and in-cabin digital entertainment markets may also subject us to downward pricing pressures. Pricing at too high a level could adversely affect the rate of consumer acceptance for the Gogo service, while increased competition could force us to lower our prices or lose market share and could adversely affect growth prospects and profitability. Competition could increase our sales and marketing expenses and related customer acquisition costs. We may not have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully. A failure to effectively respond to established and new competitors could have a material adverse impact on our business and results of operations.

 

In the future, improvements in satellite technology and our increased reliance on satellite technology could lessen the competitive advantage we believe our ATG network currently provides to us.

 

We believe our ATG spectrum license from the FCC and our ATG network provide us with a current technological advantage over competitors in North America. However, as satellite technology improves and next generation satellite services become available, this advantage may lessen or be eliminated. Further, in the future, we expect to rely more heavily on satellite technology as our current ATG network experiences increasing capacity constraints, which will further diminish the benefit of the technological advantage that we believe our ATG network provides to us in North America. In addition, competitors or potential competitors may attempt to provide a similar service over a ground-based network using spectrum not currently designated for air-to-ground services, or may provide services that we do not currently provide and may not provide in the future.

 

Our CA business has a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

 

Prior to August 2008, our operations were limited to our BA segment. We launched our Gogo Connectivity service in August 2008 and had fewer than 300 commercial aircraft online as of June 2009. In addition, both Gogo Vision and our in-air multimedia platform, which provides the majority of our Gogo Signature Services, were not launched until the second half of 2011. The limited operating history of our CA business may make it difficult to accurately evaluate the CA business and predict its future performance, and the growth of our CA business since inception is not necessarily indicative of potential future growth. Any assessments of our current business and predictions that we or you make about our future success or viability may not be as accurate as they could be if we had a longer operating history. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, and the size and nature of our market opportunity will change as we scale our business and increase deployment of the Gogo service. In addition, we may encounter market and technological changes over which we may have no control, and we may not have the requisite size or experience necessary to address any such changes. If we do not address any of the foregoing risks successfully, our business will be harmed.

 

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We face limitations on our ability to grow our domestic operations which could harm our operating results and financial condition.

 

Our addressable market and our ability to expand domestically at our current rate of growth are inherently limited by various factors, including limitations on the number of U.S. commercial airlines with which we could partner, the number of planes in which our equipment can be installed, the passenger capacity within each plane and the ability of our network infrastructure or bandwidth to accommodate increasing capacity demands. Expansion is also limited by our ability to develop new technologies and successfully implement our technology roadmap on a timely and cost-effective basis. Our growth may slow, or we may stop growing altogether, to the extent that we have exhausted all potential airline partners and as we approach installation on full fleets and maximum penetration rates on all flights. To continue to grow our domestic revenue if and when Gogo Connectivity gains wider acceptance and we reach maximum penetration, we will have to rely on customer adoption of new services and additional offerings, including Gogo Vision and Gogo Signature Services. We cannot assure you that we will be able to profitably expand our existing market presence or establish new markets and, if we fail to do so, our business and results of operations could be materially adversely affected.

 

We may be unsuccessful in generating revenue from Gogo Vision and Gogo Signature Services.

 

We are currently working with our airline partners to develop a suite of offerings, the Gogo Signature Services, that will be available to passengers through the Gogo in-air homepage. We expect these offerings to include merchandise deals and targeted internet access offered by content providers, advertisers and e-commerce retailers, which we collectively refer to as our media partners. We also have rolled out Gogo Vision with two airline partners, we have agreed to launch Gogo Vision on US Airways and we are in discussions with other airline partners to add Gogo Vision to the suite of services offered to their passengers. We are working to increase the number of on-demand movies and television shows and the variety of other content available on Gogo Vision. The future growth prospects for our CA business depend, in part, on revenue from advertising fees and e-commerce revenue share arrangements on passenger purchases of goods and services through Gogo Signature Services, and on passengers paying for Gogo Vision on-demand video content. Our ability to generate revenue from Gogo Vision and Gogo Signature Services depends on:

 

   

growth of our customer base;

 

   

our customer base being attractive to media partners;

 

   

rolling out Gogo Vision on more aircraft and with additional airline partners and increasing passenger adoption;

 

   

establishing and maintaining beneficial contractual relationships with media partners whose content, products and services are attractive to airline passengers; and

 

   

our ability to customize and improve our Gogo Signature Service offerings in response to trends and customer interests.

 

If we are unsuccessful in generating revenue from Gogo Vision and Gogo Signature Services, it could have a material adverse effect on our growth prospects.

 

We may be unsuccessful in expanding our operations internationally, which could harm the growth of our business, operating results and financial condition.

 

Our ability to expand internationally involves various risks, including the need to invest significant resources in unfamiliar markets, the amount of which is subject to certain limitations under our new senior secured credit facility, and the possibility that there may not be returns on these investments in the near future or at all. In addition, we have incurred and expect to continue to incur expenses before we generate any material revenue in these new markets. Our expansion plans will require significant management attention and resources. Our CA segment has limited experience in selling our solutions in international markets or in conforming to local cultures, standards or policies. Expansion of international marketing and advertising efforts could lead to a

 

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significant increase in our marketing and advertising expenses and would increase our customer acquisition costs. We may not be able to compete successfully in these international markets. Our ability to expand will also be limited by the demand for in-flight broadband internet access in international markets. Different privacy, censorship, aerospace and liability standards and regulations and different intellectual property laws and enforcement practices in foreign countries may cause our business and operating results to suffer. Additionally, any failure to compete successfully in international markets could negatively impact our reputation and domestic operations.

 

Any future international operations may fail to succeed due to risks inherent in foreign operations, including:

 

   

different technological solutions for broadband internet than those used in North America;

 

   

varied, unfamiliar and unclear legal and regulatory restrictions;

 

   

unexpected changes in international regulatory requirements and tariffs;

 

   

legal, political or systemic restrictions on the ability of U.S. companies to do business in foreign countries, including restrictions on foreign ownership of telecommunications providers;

 

   

inability to find content or service providers to partner with on commercially reasonable terms, or at all;

 

   

Foreign Corrupt Practices Act compliance and related risks;

 

   

difficulties in staffing and managing foreign operations;

 

   

currency fluctuations;

 

   

potential adverse tax consequences; and

 

   

fewer transatlantic flights due to continuing economic turmoil in Europe.

 

As a result of these obstacles, we may find it difficult or prohibitively expensive to grow our business internationally or we may be unsuccessful in our attempt to do so, which could harm our future operating results and financial condition.

 

In addition, international expansion of in-flight broadband internet access will require the use of satellite technology. Pursuant to a memorandum of understanding, dated November 28, 2011, with Inmarsat S.A., we expect to provide Inmarsat’s Global Xpress broadband internet access to international aircraft fleets using Inmarsat’s Ka-band satellite service. Assuming that we enter into a definitive agreement with Inmarsat, given the potentially extended lead time and cost necessary to implement Inmarsat’s Ka-band satellite solution, potential delays in launching Inmarsat’s services (due to, among other things, any inability to launch its satellites into orbit or obtain necessary regulatory approvals), the fact that we would not be the exclusive provider of Inmarsat satellite service and the inherent uncertainties discussed above regarding international expansion generally, we may not realize any of the expected benefits from an agreement with Inmarsat, and, as a result, our growth prospects would be materially and adversely affected. To the extent that we fail to enter into a definitive agreement with Inmarsat, Inmarsat’s service does not satisfy our or our airline partners’ needs for any reason, including delays in the launch of the first Inmarsat-5 satellite, our agreement with Inmarsat does not yield the expected benefits, we fail to meet sales targets and milestones set forth in the definitive agreement or we otherwise fail to maintain a good working relationship with Inmarsat, our other current or future providers of satellite service may be unable to support our current international expansion plans.

 

A future act or threat of terrorism or other events could result in a prohibition on the use of Wi-Fi enabled devices on aircraft.

 

A future act of terrorism, the threat of such acts or other airline accidents could have an adverse effect on the airline industry. In the event of a terrorist attack, terrorist threats or unrelated airline accidents, the industry

 

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would likely experience significantly reduced passenger demand. The U.S. federal government could respond to such events by prohibiting the use of Wi-Fi enabled devices on aircraft, which would eliminate demand for our equipment and service. In addition, any association or perceived association between our equipment or service and accidents involving aircraft on which our equipment or service operates would likely have an adverse effect on demand for our equipment and service. Reduced demand for our products and services would adversely affect our business prospects, financial condition and results of operations.

 

Air traffic congestion at airports, air traffic control inefficiencies, weather conditions, such as hurricanes or blizzards, increased security measures, new travel-related taxes, the outbreak of disease or any other similar event could harm the airline industry.

 

Airlines are subject to cancellations or delays caused by factors beyond their control. Cancellations or delays due to weather conditions or natural disasters, air traffic control problems, breaches in security or other factors could reduce the number of passengers on commercial flights and thereby reduce demand for the Gogo service and harm our business, results of operations and financial condition.

 

Risks Related to Our BA Business

 

Equipment sales to original equipment manufacturers (OEMs) and after-market dealers account for the substantial majority of our revenue and earnings in the BA segment, and the loss of an OEM or dealer customer could materially and adversely affect our business and profitability.

 

Revenue from equipment sales on contracts with OEMs and after-market dealers accounted for more than 65% of revenue generated by our BA segment for each fiscal period presented in our consolidated financial statements included elsewhere in this prospectus, and 11% and 16% of revenue generated by our BA segment for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively, was generated through our agreement with Gulfstream Aerospace Corporation. Almost all of our contracts with our OEM and dealer customers are terminable at will by either party and do not obligate our customers to purchase any of our equipment or services. If a key OEM or dealer terminates its relationship with us for any reason or our contract expires and is not renewed, we may not be able to replace or supplement such lost revenue with another OEM or dealer or other customers, which could materially and adversely affect our business and profitability.

 

Our OEM customers were materially adversely impacted by the economic downturn and market disruption that began in 2008 and may be similarly affected by current or future global macro-economic conditions. In anticipation of worsening economic conditions, our customers may be more conservative in their production, which would result in fewer new aircraft available to receive our equipment. Further, unfavorable market conditions could cause one or more of our OEM customers to file for bankruptcy and suspend and ultimately cease purchases of and payments for our equipment which could have an adverse effect on our business prospects, financial condition and results of operations. For example, Hawker Beechcraft Inc., an OEM that accounted for approximately 4% and 6% of revenue generated by our BA segment for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively, filed for bankruptcy protection on May 3, 2012. There can be no assurance that Hawker Beechcraft will remain in business and pay its vendors, including us, on a timely basis, or at all, notwithstanding its public statement that it expects to continue its operations and continue paying its vendors.

 

We face specific risks related to the provision of telecommunications and data services by satellite to BA customers.

 

We generated approximately 8% and 10% of total BA segment revenue from subscriptions for voice and data services provided via satellite for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. These voice and data services are provided in our BA segment through the resale on a non-exclusive basis of satellite-based telecommunications and data services owned and operated by a third party. We currently rely on a single satellite partner to provide these services to our BA customers and have a number of satellite resellers as our competitors. Our agreement with our satellite partner is short-term in nature and is

 

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subject to termination for convenience on 90 days notice. If this agreement were terminated, we could face material delays or interruptions in the provision of service to our customers. If our agreement with our satellite partner was terminated or expired and was not renewed, we may not be able to find an alternative satellite partner on terms that are acceptable to us, or at all. Further, if our satellite partner increased the fees it charges us for resale of its services and we could not pass these increased costs on to our customers, it would increase our cost of service revenue and adversely impact our business and results of operations.

 

We operate in highly competitive markets with competitors who may have greater resources than we possess, which could reduce the volume of products we can sell and our operating margins.

 

Our BA equipment and service are sold in highly competitive markets. Some of our competitors are larger, more diversified corporations and have greater financial, marketing, production, and research and development resources. As a result, they may be better able to withstand the effects of periodic economic downturns or may offer a broader product line to customers. Our operations and financial performance will be negatively impacted if our competitors:

 

   

develop service that is superior to our service;

 

   

develop service that is priced more competitively than our service;

 

   

develop methods of more efficiently and effectively providing products and services; or

 

   

adapt more quickly than we do to new technologies or evolving customer requirements.

 

We believe that the principal points of competition in our BA segment are technological capabilities, price, customer service, product development, conformity to customer specifications, quality of support after the sale and timeliness of delivery and installation. Maintaining and improving our competitive position will require continued investment in technology, manufacturing, engineering, quality standards, marketing and customer service and support. If we do not maintain sufficient resources to make these investments or are not successful in maintaining our competitive position, our operations and financial performance will suffer. In addition, competition may subject us to downward pricing pressures. Pricing at too high a level could adversely affect our ability to gain new customers and retain current customers, while increased competition could force us to lower our prices or lose market share and could adversely affect growth prospects and profitability. We may not have the financial resources, technical expertise or support capabilities to continue to compete successfully. A failure to respond to established and new competitors could have a material adverse impact on our business and results of operations.

 

We generally do not have guaranteed future sales of our equipment. Further, we enter into fixed price contracts with some of our customers, so we take the risk for cost overruns.

 

Many of our OEM customers may terminate their contracts with us on short notice and, in many cases, our customers have not committed to buy any minimum quantity of our equipment. In addition, in certain cases, we must anticipate the future volume of orders based upon non-binding production schedules provided by OEMs, the historical purchasing patterns of customers, and informal discussions with customers as to their anticipated future requirements. Cancellations, reductions or delays by a customer or group of customers could have a material adverse effect on our business, financial condition and results of operations.

 

Furthermore, pursuant to many of our contracts with our OEM customers, we have agreed to deliver equipment and/or services for a fixed price (which may be subject to recalculation or renegotiation in certain circumstances) and, accordingly, realize all the benefit or detriment resulting from any decreases or increases in the costs for making that equipment or providing that service. Also, we may accept a fixed-price contract for equipment that we have not yet produced, and the fact that we have not yet produced the equipment increases the risk of cost overruns or delays in the completion of the design and manufacturing of the product.

 

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Many of the risks that could harm our CA business could also adversely affect our BA business.

 

For the six months ended June 30, 2012 and the year ended December 31, 2011, approximately 54% and 55% of the equipment revenue, respectively, and approximately 74% and 64% of the service revenue, respectively, for our BA segment was attributable to the sale of ATG equipment and subscriptions for our Gogo Biz in-flight broadband internet service. As such, many of the risks described above relating to CA and Gogo Connectivity could also have a material adverse effect on our BA business, including expected capacity constraints on our network in the near-term and our ability to successfully implement technology enhancements to our network.

 

Risks Related to Our Technology and Intellectual Property and Regulation

 

We are dependent on our right to use spectrum exclusively licensed to us.

 

In June 2006, we purchased at FCC auction an exclusive ten-year, 3 MHz license for ATG spectrum that expires in October 2016. Prior to expiration of the initial license term, we expect to apply to renew our license for an additional ten-year term without further payment. Any breach of the terms of our FCC license or FCC regulations including foreign ownership restrictions, permitted uses of the spectrum and compliance with Federal Aviation Administration (“FAA”) regulations, could result in the revocation, suspension, cancellation or reduction in the term of our license or a refusal by the FCC to renew the license upon its expiration. Further, in connection with an application to renew our license upon expiration, a competitor could file a petition opposing such renewal on anti-competitive or other grounds. Our ability to offer in-flight broadband internet access through our ATG service depends on our ability to maintain rights to use this ATG spectrum in the U.S. and our failure to do so would have a material adverse effect on our business and results of operations. Our ability to meet capacity demands, expand our service offerings and enter other geographical markets may depend upon obtaining sufficient rights to use additional means to provide in-flight internet connectivity including spectrum for ATG or satellite. Obtaining such spectrum can be a lengthy and costly process. We may not be able to license or maintain the spectrum necessary to execute our business strategy.

 

While our 3 MHz FCC license allows us to be the exclusive provider of ATG broadband connectivity and is one of our primary competitive advantages, the FCC could auction additional ATG spectrum in the future.

 

The FCC may in the future decide to auction additional spectrum for ATG use that is not currently designated for that purpose, or a competitor could develop technology or a business plan that allows it to cost effectively use spectrum not specifically reserved for ATG, but on which ATG use is not prohibited, to provide broadband connectivity. Recently, one of our suppliers filed a petition with the FCC requesting that the FCC designate certain spectrum, currently designated for non-ATG use, for use by ATG devices in an amount sufficient to accommodate more than one additional ATG network, though, under rules proposed by the petition, one provider could acquire all of the spectrum. If the FCC were to grant the petition and, as a result of the petition or otherwise, decide to auction off spectrum for ATG use and we failed to adequately secure rights to such additional spectrum, the additional ATG spectrum, which may have greater capacity than our current spectrum, could be held by, or available for license to, our competitors. Additionally, a competitor currently holds rights to 1 MHz of ATG spectrum. Although we have recently signed an agreement to purchase such spectrum, we are required to obtain a waiver of certain restrictions in the FCC’s rules in order to consummate this purchase and if the purchase is not consummated for this, or any other reason, this spectrum could be used by the current owner or made available to other competitors for lease or sale. In order to remain competitive, we may have to make significant expenditures to purchase or lease spectrum that is currently held by competitors or that is newly auctioned for ATG use. The availability of additional spectrum in the marketplace that is authorized for ATG use may reduce any technological advantage we may have over current and future competitors and increase the possibility that we may be forced to compete with one or more other ATG service providers in the future.

 

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If we fail to comply with the Communications Act and FCC regulations limiting ownership and voting of our capital stock by non-U.S. persons we could lose our FCC license.

 

The Communications Act and FCC regulations impose restrictions on ownership of certain FCC licensees by non-U.S. persons. These requirements generally forbid more than 20% ownership or control of an FCC licensee holding spectrum used for common carrier purposes by non-U.S. persons directly and more than 25% ownership or control of an FCC licensee indirectly (e.g. through a parent company) by non-U.S. persons. The FCC classifies our ATG spectrum license as a common carrier license. Since we serve as a holding company for our subsidiary, AC BidCo LLC, which holds the ATG spectrum license, we are effectively restricted from having more than 25% of our capital stock owned or voted directly or indirectly by non-U.S. persons, including individuals or corporations, partnerships or limited liability companies organized outside the United States or controlled by non-U.S. persons. The FCC may, in certain circumstances and upon application for approval by the FCC, authorize such persons to hold equity in a licensee’s parent in excess of the 25% cap if the FCC finds it to be in the public interest. We have established procedures to ascertain the nature and extent of our foreign ownership, and we believe that the indirect ownership of our equity by foreign persons or entities is below the benchmarks established by the Communications Act and FCC regulations. However, as a publicly traded company we may not be able to determine with certainty the exact amount of our stock that is held by foreign persons or entities at any given time. A failure to comply with applicable restrictions on ownership by non-U.S. persons could result in an order to divest the offending ownership, fines, denial of license renewal and/or license revocation proceedings against our subsidiary, AC BidCo LLC, by the FCC, any of which would likely have a material adverse effect on our results of operations.

 

We could be adversely affected if we suffer service interruptions or delays, technology failures or damage to our equipment.

 

Our brand, reputation and ability to attract, retain and serve our customers depend upon the reliable performance of our in-air website, network infrastructure, content delivery processes and payment systems. We have experienced interruptions in these systems in the past, including server failures that temporarily slowed down our website’s performance and users’ access to the internet, or made our website inaccessible, and we may experience service interruptions, service delays or technology or systems failures in the future, which may be due to factors beyond our control. In the past, service failures or delays of our website have been remedied by bypassing the payment processing step for users and directly connecting such users to the internet, leading to a loss of revenue for those sessions. If we experience frequent system or network failures, our reputation, brand and customer retention could be harmed, we may lose revenue to the extent that we have to bypass the payment processing step in order to maintain customers’ connectivity to the internet and our airline partners may have the right to terminate their contracts with us or pursue other remedies.

 

Our operations and services depend upon the extent to which our equipment and the equipment of our third-party network providers is protected against damage from fire, flood, earthquakes, power loss, solar flares, telecommunication failures, computer viruses, break-ins, acts of war or terrorism and similar events. Damage to our networks could cause interruptions in the services that we provide. Such interruptions in our services could have a material adverse effect on service revenue, our reputation and our ability to attract or retain customers.

 

We rely on single service providers for certain critical components of our network.

 

We currently, and may in the future, rely on single source suppliers for a number of critical components of our network and operations. For example, we purchase all of the aircards used for our ATG service from a single provider that we believe holds all of the patents for this component. If we are required to find one or more alternative suppliers for aircards or any other component for which we may rely on a single source supplier, we may not be able to contract with them on a timely basis, on commercially reasonable terms, or at all. Additionally, we purchase equipment for all of the base stations used at our cell-sites from a single provider. The base stations used at our cell-sites may require six to nine months lead time to produce and are highly integrated with other components of our network. If we needed to seek one or more alternate suppliers for our base stations,

 

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we estimate that it could take up to a year or more before any such alternate supplier could deliver a component that meets our network requirements. The lack of alternative suppliers could lead to higher prices and a failure by any of our single source providers to continue to produce the component, or to otherwise fulfill its obligations, could have a material adverse effect on our business, results of operations and financial condition.

 

Assertions by third parties of infringement, misappropriation or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

 

In recent years, there has been significant litigation involving intellectual property rights in many technology-based industries, including the wireless communications industry. We currently face, and we may face from time to time in the future, allegations that we or a supplier or customer have violated the rights of third parties, including patent, trademark and other intellectual property rights. For example, on December 19, 2011, Advanced Media Networks, L.L.C. filed suit in the United States District Court for the Central District of California against us for allegedly infringing one of its patents, seeking injunctive relief and unspecified monetary damages. The complaint was subsequently amended to name as additional defendants certain of our airline partners and BA customers.

 

If, whether with respect to the Advanced Media Networks suit or any other claim against us for infringement, misappropriation, misuse or other violation of third party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business and competitive position may be materially adversely affected. Many companies, including our competitors, are devoting significant resources to obtaining patents that could potentially cover many aspects of our business. In addition, there are numerous patents that broadly claim means and methods of conducting business on the internet. We have not exhaustively searched patents relevant to our technologies and business and therefore it is possible that we may be unknowingly infringing the patents of others.

 

Any infringement, misappropriation or related claims, whether or not meritorious, are time-consuming, divert technical and management personnel and are costly to resolve. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease providing certain products or services, adjust our merchandizing or marketing and advertising activities or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. Pursuant to our contracts with our airline partners and certain BA customers, we have agreed to indemnify our airline partners and such customers against such claims and lawsuits, including the suit brought by Advanced Media Networks, and, in some cases, our contracts do not cap our indemnification obligations, which, in addition to obligating us to pay defense costs, could result in significant indemnification obligations in the event of an adverse ruling in such an action. In addition, certain of our suppliers do not indemnify us for third party infringement or misappropriation claims arising from our use of supplier technology. As a result, we may be liable in the event of such claims. Any of these events could result in increases in operating expenses, limit our service offerings or result in a loss of business if we are unable to meet our indemnification obligations and our airline partners terminate or fail to renew their contracts.

 

If we fail to meet agreed upon minimums under certain supply agreements, such suppliers may sell critical components to third parties, leading to increased competition, or could terminate their agreements with us, which could have a material adverse effect on the expected growth of our business.

 

Our agreement with one of our suppliers of wireless access points includes provisions permitting such supplier to sell to third parties if we fail to meet specified minimum purchase requirements. Our agreement with our supplier of aircards provides for termination by the supplier in the event that we fail to purchase minimum quantities from such supplier. Any of these events could cause us to face increased competition, which could have a material adverse effect on our business.

 

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We or our technology suppliers may be unable to continue to innovate and provide products and services that are useful to consumers.

 

The market for our services is characterized by evolving technology, changes in customer needs and frequent new service and product introductions. Our future success will depend, in part, on our and our suppliers’ ability to continue to enhance or develop new technology and services that meet customer needs on a timely and cost-effective basis. For example, the success of our technology roadmap depends in part on the ability of third parties to develop certain equipment to successfully adopt Ka-band or other satellite-based technology. If we or our suppliers fail to adapt quickly enough to changing technology, customer requirements and/or industry standards, our service offerings may fail to meet customer needs or regulatory requirements. We may have to invest significant capital to keep pace with innovation and changing technology, which could negatively impact our results of operations.

 

Furthermore, the proliferation of new mobile devices and operating platforms poses challenges for our research and development efforts. If we are unable to create, or obtain rights to, simple solutions for a particular device or operating platform, we will be unable to effectively attract users of these devices or operating platforms and our business will be adversely affected.

 

We may not be able to protect our intellectual property rights.

 

We regard our trademarks, service marks, copyrights, patents, trade secrets, proprietary technologies, domain names and similar intellectual property as important to our success. We rely on trademark, copyright and patent law, trade secret protection, and confidentiality agreements with our employees, vendors, airline partners, customers and others to protect our proprietary rights. We have sought and obtained patent protection for certain of our technologies in the United States and certain other countries. Many of the trademarks that we use (including marks we have applied to register) contain words or terms having a somewhat common usage, such as “In Air. Online.” and “Gogo Vision” and, as a result, we may have difficulty registering them in certain jurisdictions. We do not own, for example, the domain www.gogo.com and we have not yet obtained registrations for our most important marks in all markets in which we may do business in the future, including China and India. If other companies have registered or have been using in commerce similar trademarks for services similar to ours in foreign jurisdictions, we may have difficulty in registering, or enforcing an exclusive right to use, our marks in those foreign jurisdictions.

 

There can be no assurance that the efforts we have taken to protect our proprietary rights will be sufficient or effective, that any pending or future patent and trademark applications will lead to issued patents and registered trademarks in all instances, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated, misappropriated or infringed by others. Furthermore, the intellectual property laws and enforcement practices of other countries in which our service is or may in the future be offered may not protect our products and intellectual property rights to the same extent as the laws of the United States. If we are unable to protect our intellectual property from unauthorized use, our brand image may be harmed and our business and results of operations may suffer.

 

Our use of open source software could limit our ability to commercialize our technology.

 

Open source software is software made widely and freely available to the public in human-readable source code form, usually with liberal rights to modify and improve such software. Some open source licenses require as a condition of use that proprietary software that is combined with licensed open source software and distributed must be released to the public in source code form and under the terms of the open source license. Accordingly, depending on the manner in which such licenses were interpreted and applied, we could face restrictions on our ability to commercialize certain of our products and we could be required to (i) release the source code of certain of our proprietary software to the public, including competitors; (ii) seek licenses from third parties for replacement software; and/or (iii) re-engineer our software in order to continue offering our products. Such consequences could materially adversely affect our business.

 

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The failure of our equipment or material defects or errors in our software may damage our reputation, result in claims against us that exceed our insurance coverage, thereby requiring us to pay significant damages and impair our ability to sell our service.

 

Our products contain complex systems and components that could contain errors or defects, particularly when we incorporate new technology. If any of our products are defective, we could be required to redesign or recall those products or pay substantial damages or warranty claims. Such events could result in significant expenses, disrupt sales and affect our reputation and that of our products. If our on-board equipment has a severe malfunction, or there is a problem with the equipment installation, which damages an airplane or impairs its on-board electronics or avionics, significant property loss and serious personal injury or death could result. Any such failure could expose us to substantial product liability claims or costly repair obligations. In particular, the passenger jets operated by our airline partners are very costly to repair and therefore the damages in any product liability claims could be material. We carry aircraft and non-aircraft product liability insurance consistent with industry norms. However, this insurance coverage may not be sufficient to fully cover the payment of any claims. A product recall or a product liability claim not covered by insurance could have a material adverse effect on our business, financial condition and results of operations. Further, we indemnify most of our airline partners for losses due to third-party claims and in certain cases the causes for such losses may include failure of our products.

 

The software underlying our services is inherently complex and may contain material defects or errors, particularly when the software is first introduced or when new versions or enhancements are released. We have from time to time found defects or errors in our software, and defects or errors in our existing software may be detected in the future. Any defects or errors that cause interruptions to the availability of our services could result in:

 

   

termination or failure to renew contracts by our airline partners;

 

   

a reduction in sales or delay in market acceptance of our service;

 

   

sales credits or refunds to our customers and airline partners;

 

   

loss of existing customers and difficulty in attracting new customers;

 

   

diversion of development resources;

 

   

harm to our reputation and brand image;

 

   

increased insurance costs; and

 

   

claims for substantial damages.

 

The costs incurred in correcting any material defects or errors in our software may be substantial and could harm our results of operations.

 

Regulation by United States and foreign government agencies, including the FCC, which issued our exclusive ATG spectrum license, and the FAA, which regulates the civil aviation manufacturing and repair industries in the United States, may increase our costs of providing service or require us to change our services.

 

We are subject to various regulations, including those regulations promulgated by various federal, state and local regulatory agencies and legislative bodies and comparable agencies outside the United States where we may do business. The two U.S. government agencies that have primary regulatory authority over our operations are the FCC and the FAA.

 

The FCC regulates our use of the spectrum licensed to us and the licensing, construction, modification, operation, ownership, sale and interconnection of wireless telecommunications systems. Any breach of the terms of our ATG spectrum license or other licenses and authorizations obtained by us from time to time, or any violation of the Communications Act or the FCC’s rules, could result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. From time to time, the FCC may monitor or audit

 

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compliance with the Communications Act and the FCC’s rules or with our license, including if a third party were to bring a claim of breach or non-compliance. In addition, the Communications Act, from which the FCC obtains its authority, may be amended in the future in a manner that could be adverse to us. The FCC is currently conducting rulemaking proceedings to consider the service rules for certain aeronautical services, and has before it a petition to initiate a rulemaking proceeding to further facilitate provision of broadband internet access to aircraft in fixed satellite service spectrum bands.

 

The commercial and private aviation industries, including civil aviation manufacturing and repair industries, are highly regulated in the United States by the FAA. FAA certification is required for all equipment we install on commercial aircraft and type certificated business aircraft, and certain of our operating activities require that we obtain FAA certification as a parts manufacturer. As discussed in more detail in the section entitled “Business—Licenses and Regulation—Federal Aviation Administration, “ FAA approvals required to operate our business include Supplemental Type Certificates (STCs) and Parts Manufacturing Authority (PMA). Obtaining STCs and PMAs is an expensive and time-consuming process that requires significant focus and resources. Any inability to obtain, delay in obtaining, or change in, needed FAA certifications, authorizations, or approvals, could have an adverse effect on our ability to meet our installation commitments, manufacture and sell parts for installation on aircraft, or expand our business and could, therefore, materially adversely affect our growth prospects, business and operating results. The FAA closely regulates many of our operations. If we fail to comply with the FAA’s many regulations and standards that apply to our activities, we could lose the FAA certifications, authorizations, or other approvals on which our manufacturing, installation, maintenance, preventive maintenance, and alteration capabilities are based. In addition, from time to time, the FAA or comparable foreign agencies adopt new regulations or amend existing regulations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business. To the extent that any such new regulations or amendments to existing regulations or policies apply to our activities, those new regulations or amendments to existing regulations generally increase our costs of compliance.

 

As a provider of telecommunications services in the BA segment, we are required to contribute a percentage of all revenue generated from interstate or international telecommunications services (or voice over internet protocol (VoIP) services, which we plan to offer) to the federal Universal Service Fund, which subsidizes telecommunications services in areas that are expensive to serve. Current FCC rules permit us to pass this contribution amount on to our customers. However, it can be difficult to determine which portion of our revenues forms the basis for this contribution, in part because our revenue is derived from both interstate and international telecommunications services, which create such contribution obligations, and intrastate telecommunications services, which do not. The FCC currently is considering a number of reforms to its Universal Service Fund mechanisms that would expand the scope of that regulatory regime to cover broadband internet access services. Such reforms may include, but are not limited to, imposing obligations on broadband internet access service providers to contribute a percentage of the revenue earned from such services to the Universal Service Fund. To the extent the FCC adopts new contribution requirements that apply to broadband internet providers or otherwise imposes additional contribution obligations, such requirements and obligations may increase the costs we incur to comply with such regulations.

 

As a broadband internet provider, we must comply with the Communications Assistance for Law Enforcement Act of 1994, or CALEA, which requires communications carriers to ensure that their equipment, facilities and services can accommodate certain technical capabilities in executing authorized wiretapping and other electronic surveillance. Currently, our CALEA solution is fully deployed in our network. However, we could be subject to an enforcement action by the FCC or law enforcement agencies for any delays related to meeting, or if we fail to comply with, any current or future CALEA, or similarly mandated law enforcement related, obligations. Such enforcement actions could subject us to fines, cease and desist orders, or other penalties, all of which could adversely affect our business. Further, to the extent the FCC adopts additional capability requirements applicable to broadband internet providers, its decision may increase the costs we incur to comply with such regulations.

 

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Adverse decisions or regulations of these regulatory bodies could negatively impact our operations and costs of doing business. We are unable to predict the scope, pace or financial impact of regulations and other policy changes that could be adopted by the various governmental entities that oversee portions of our business.

 

If government regulation of the internet, including e-commerce or online video distribution changes, we may need to change the way we conduct our business to a manner that incurs greater operating expenses, which could harm our results of operations.

 

The current legal environment for internet communications, products and services is uncertain and subject to statutory, regulatory or interpretive change. Certain laws and regulations applicable to our business were adopted prior to the advent of the internet and related technologies and often do not contemplate or address specific issues associated with those technologies. We cannot be certain that we, our vendors and media partners or our customers are currently in compliance with applicable regulatory or other legal requirements in the countries in which our service is used. Our failure, or the failure of our vendors and media partners, customers and others with whom we transact business to comply with existing or future legal or regulatory requirements could materially adversely affect our business, financial condition and results of operations. Regulators may disagree with our interpretations of existing laws or regulations or the applicability of existing laws or regulations to our business, and existing laws, regulations and interpretations may change in unexpected ways. For example, the FCC recently adopted regulations regarding net neutrality that, in certain situations, limit mobile broadband providers to “network management” techniques that are reasonable. Although these rules are currently being challenged in Federal court, future guidance or precedent from the FCC regarding the interpretation of what techniques are considered “reasonable” could adversely impact our ability to monitor and manage the network to optimize our users’ internet experience. Further, as we promote exclusive content and services and increase targeted advertising with our media partners to customers of the Gogo service, we may attract increased regulatory scrutiny.

 

We cannot be certain what positions regulators may take regarding our compliance with, or lack of compliance with, current and future legal and regulatory requirements or what positions regulators may take regarding any past or future actions we have taken or may take in any jurisdiction. Regulators may determine that we are not in compliance with legal and regulatory requirements, and impose penalties, or we may need to make changes to the Gogo platform, which could be costly and difficult. Any of these events would adversely affect our operating results and business.

 

Risks Related to Our Business and Industry

 

If our efforts to retain and attract customers are not successful, our revenue will be adversely affected.

 

We currently generate substantially all of our revenue from sales of services, some of which are on a subscription basis, and equipment. We must continue to retain existing subscribers and attract new and repeat customers. If our efforts to satisfy our existing customers are not successful, we may not be able to retain them, and as a result, our revenue would be adversely affected. If consumers do not perceive the Gogo service to be reliable or valuable or if we introduce new services that are not favorably received by the market, we may not be able to retain existing subscribers or attract new or repeat customers. If our airline partners, OEMs and dealers do not view our equipment as high-quality or cost-effective or if our equipment does not keep pace with innovation, our current and potential customers may choose to do business with our competitors. If we are unable to effectively retain existing subscribers and attract new and repeat customers, our business, financial condition and results of operations would be adversely affected.

 

Unreliable service levels, uncompetitive pricing, lack of availability, security risk and lack of related features of our equipment and services are some of the factors that may adversely impact our ability to retain existing customers and partners and attract new and repeat customers. In our CA segment, if consumers are able to satisfy their in-flight entertainment needs through activities other than broadband internet access, at no or lower cost, they may not perceive value in our products and services. If our efforts to satisfy and retain our

 

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existing customers and subscribers are not successful, we may not be able to continue to attract new customers through word-of-mouth referrals. Any of these factors could cause our customer growth rate to fall, which would adversely impact our business, financial condition and results of operations. In addition, our contracts with certain airlines allow for termination rights if the percentage of passengers using Gogo Connectivity aboard their flights falls below certain thresholds.

 

The demand for in-flight broadband internet access service may decrease or develop more slowly than we expect. We cannot predict with certainty the development of the U.S. or international in-flight broadband internet access market or the market acceptance for our products and services.

 

Our future success depends upon growing demand for in-flight broadband internet access services, which is inherently uncertain. We have invested significant resources towards the roll-out of new service offerings, which represent a substantial part of our growth strategy. We face the risk that the U.S. and international markets for in-flight broadband internet access services may decrease or develop more slowly or differently than we currently expect, or that our services, including our new offerings, may not achieve widespread market acceptance. We may be unable to market and sell our services successfully and cost-effectively to a sufficiently large number of customers.

 

Our business depends on the continued proliferation of Wi-Fi as a standard feature in mobile devices. The growth in demand for in-flight broadband internet access services also depends in part on the continued and increased use of laptops, smartphones, tablet computers, and other Wi-Fi enabled devices and the rate of evolution of data-intensive applications on the mobile internet. If Wi-Fi ceases to be a standard feature in mobile devices, if the rate of integration of Wi-Fi on mobile devices decreases or is slower than expected, or if the use of Wi-Fi enabled devices or development of related applications decreases or grows more slowly than anticipated, the market for our services may be substantially diminished.

 

We have incurred operating losses in every quarter since we launched the Gogo service and may continue to incur quarterly operating losses, which could negatively affect our stock price.

 

We have incurred operating losses in every quarter since we launched the Gogo service in August 2008, and we may not be able to generate sufficient revenue in the future to generate operating income. We also expect our costs to increase materially in future periods, which could negatively affect our future operating results. We expect to continue to expend substantial financial and other resources on the roll-out of our technology roadmap and international expansion. The amount and timing of these costs are subject to numerous variables. Such variables include, for our technology roadmap, the availability and timing of certain next-generation technologies such as ATG-4 and Ka-band, Ku-band and other satellite technology, as well as costs incurred to develop and implement changes to ground and airborne software and hardware and, with respect to satellite technologies, the cost of obtaining satellite capacity. With respect to our international expansion, such variables may include, in addition to costs associated with satellite technology as discussed in the preceding sentence, costs incurred to modify our portal for international deployment, costs related to sales and marketing activities and administrative support functions and additional legal and regulatory expenses associated with operating in the international commercial aviation market. In addition, we expect to incur additional general administrative expenses, including legal and accounting expenses, related to being a public company. These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and overall business, it could adversely affect our financial condition and results of operations.

 

Current economic conditions may have a material adverse effect on our business.

 

As a result of the macro-economic challenges currently affecting the economy of the United States and other parts of the world, including the European sovereign debt and economic crisis, the current economic climate is turbulent and volatile. Unfavorable economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures, increased focus by businesses on reducing operating costs, and lower spending by consumers can

 

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reduce expenditures on both leisure and business travel. For many travelers, air travel and spending on in-flight internet access are discretionary purchases that they can eliminate in difficult economic times. Additionally, a weaker business environment may lead to a decrease in overall business travel, which has historically been an important contributor to our Gogo service revenue. In addition, continued deteriorating conditions may place market or political pressure on the customers that are served by our BA segment to cut costs including by reducing use of private aircraft.

 

These conditions may make it more difficult or less likely for customers to purchase our equipment and services. If economic conditions in the United States or globally deteriorate further or do not show improvement, we may experience material adverse effects to our business, cash flow and results of operations.

 

Our operating results may fluctuate unexpectedly, which makes them difficult to predict and may cause us to fail to meet the expectations of investors, adversely affecting our stock price.

 

We operate in a highly dynamic industry and our future quarterly operating results may fluctuate significantly. Our revenue and operating results may vary from quarter to quarter due to many factors, many of which are not within our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Further, it is difficult to accurately forecast our revenue, margin and operating results, and if we fail to match our expected results or the results expected by financial analysts or investors, the trading price of our common stock may be adversely affected.

 

In addition, due to generally lower demand for business travel during the summer months and holiday periods, and leisure and other travel at other times during the year, our quarterly results may not be indicative of results for the full year. Due to these and other factors, quarter-to-quarter comparisons of our historical operating results should not be relied upon as accurate indicators of our future performance.

 

We may need additional financing to execute our business plan, which we may not be able to secure on acceptable terms, or at all.

 

We may require additional financing in the near or long term future to execute our business plan, including our technology roadmap, international or domestic expansion plans or other changes. Our success may depend on our ability to raise such additional financing on reasonable terms and on a timely basis. The amount and timing of our capital needs will depend in part on the extent of deployment of the Gogo service, the rate of customer penetration, the adoption of our service by airline partners and other factors set forth above that could adversely affect our business. Conditions in the economy and the financial markets may make it more difficult for us to obtain necessary additional capital or financing on acceptable terms, or at all. If we cannot secure sufficient additional financing, we may be forced to forego strategic opportunities or delay, scale back or eliminate additional service deployment, operations and investments or employ internal cost savings measures.

 

If our marketing and advertising efforts fail to generate additional revenue on a cost-effective basis, or if we are unable to manage our marketing and advertising expenses, it could harm our results of operations and growth.

 

Our future growth and profitability, as well as the maintenance and enhancement of our Gogo and Aircell brands, will depend in large part on the effectiveness and efficiency of our marketing and advertising expenditures. We use a diverse mix of television, print, trade show and online marketing and advertising programs to promote our CA and BA businesses. Significant increases in the pricing of one or more of our marketing and advertising channels would increase our marketing and advertising expenses or cause us to choose less expensive, but potentially less effective, marketing and advertising channels. In addition, to the extent we implement new marketing and advertising strategies, we may in the future have significantly higher expenses. We have incurred, and may in the future incur, marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not continue to result in increased revenue or generate sufficient levels of brand awareness. If

 

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we are unable to maintain our marketing and advertising channels on cost-effective terms or replace existing marketing and advertising channels with similarly effective channels, our marketing and advertising expenses could increase substantially, our customer levels could be affected adversely, and our business, financial condition and results of operations may suffer.

 

In addition, our expanded marketing efforts may increase our customer acquisition cost. For example, a decision to expand our international marketing and advertising efforts could lead to a significant increase in our marketing and advertising expenses. Any of these additional expenses may not result in sufficient customer growth to offset cost, which would have an adverse effect on our business, financial condition and results of operations.

 

Increased costs and other demands associated with our growth could impact our ability to achieve profitability over the long term and could strain our personnel, technology and infrastructure resources.

 

We expect our costs to increase in future periods, which could negatively affect our future operating results. We continue to experience growth in our headcount and operations, which has placed significant demands on our management, administrative, technological, operational and financial infrastructure. Anticipated future growth, including growth related to the broadening of our service offerings, the roll-out of the technology roadmap and other network enhancements and international expansion of our CA business, could require the outlay of significant operating and capital expenditures and will continue to place strains on our personnel, technology and infrastructure. Our success will depend in part upon our ability to contain costs with respect to growth opportunities. For example, if we cannot scale capital expenditures associated with our technology roadmap, we may not be able to successfully roll out these network enhancements on a timely basis or at all. The additional costs associated with improvements in our network infrastructure will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. To successfully manage the expected growth of our operations, including our network, on a timely and cost-effective basis we will need to continue to improve our operational, financial, technological and management controls and our reporting systems and procedures. In addition, as we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, and we must maintain the beneficial aspects of our corporate culture. If we fail to successfully manage our growth, it could adversely affect our business, financial condition and results of operations.

 

Our possession and use of personal information and the use of credit cards by our customers present risks and expenses that could harm our business. Unauthorized disclosure or manipulation of such data, whether through breach of our network security or otherwise, could expose us to costly litigation and damage our reputation.

 

Maintaining our network security is of critical importance because our online systems store confidential registered user, employee and other sensitive data, such as names, email addresses, addresses and other personal information. We depend on the security of our networks and, in part, on the security of the network infrastructures of our third-party telecommunications service providers, our customer support providers and our other vendors. Unauthorized use of our, or our third-party service providers’, networks, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of our customers. There can be no assurance that any security measures we, or third parties, take will be effective in preventing these activities. As a result of any such breaches, customers may assert claims of liability against us as a result of any failure by us to prevent these activities. Further, our in-cabin network operates as an open, unsecured Wi-Fi hotspot, and non-encrypted transmissions users send over this network may be vulnerable to access by users on the same plane. These activities may subject us to legal claims, adversely impact our reputation, and interfere with our ability to provide our services, all of which could have a material adverse effect on our business prospects, financial condition and results of operations.

 

Failure to protect confidential customer data or to provide customers with adequate notice of our privacy policies could also subject us to liabilities imposed by federal and state regulatory agencies. For example, the

 

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FCC’s Customer Proprietary Network Information rules, applicable to our satellite-based BA offerings, require us to comply with a range of marketing and privacy safeguards. The Federal Trade Commission (“FTC”) could assert jurisdiction to impose penalties related to our Gogo Connectivity service if it found our privacy policies or security measures to be inadequate under existing federal law. We could also be subject to certain state laws that impose data breach notification requirements, specific data security obligations, or other consumer privacy-related requirements. Our failure to comply with any of these rules or regulations could have an adverse effect on our business, financial condition and results of operations.

 

In addition, all Gogo Connectivity customers use credit cards to purchase our products and services. Problems with our or our vendors billing software could adversely affect our customer satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment services. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our subscribers’ credit cards on a timely basis or at all, our business, financial condition and results of operations could be adversely affected.

 

We depend upon third parties to manufacture equipment components, provide services for our network and install our equipment.

 

We rely on third-party suppliers for equipment components and services that we use to provide our ATG and satellite telecommunication Wi-Fi services. The supply of third party components and services could be interrupted or halted by a termination of our relationships, a failure of quality control or other operational problems at such suppliers or a significant decline in their financial condition. We also rely on a third party to provide the links between our data centers and our ground network. If we are not able to continue to engage suppliers with the capabilities or capacities required by our business, or if such suppliers fail to deliver quality products, parts, equipment and services on a timely basis consistent with our schedule, our business prospects, financial condition and results of operations could be adversely affected.

 

In our CA segment, installation and maintenance of our ATG equipment is performed by employees of third party service providers who are trained by us and, in a number of cases, our airline partners have the right to elect to have their own employees or a third-party service provider of their choice install our equipment directly. In our BA segment, installation of our equipment is performed by the OEMs or dealers who purchase our equipment. Having third parties or our customers install our equipment reduces our control over the installation process, including the timeliness and quality of the installation. If there is an equipment failure, including due to problems with the installation process, our reputation and our relationships with our customers could be harmed. The passenger jets operated by our airline partners are very costly to repair and therefore damages in any claims related to faulty installation could be material. Additionally, we may be forced to pay significant remediation costs to cover equipment failure due to installation problems and we may not be able to be indemnified for a portion or all of these costs.

 

We may fail to recruit, train and retain the highly skilled employees that are necessary to remain competitive and execute our growth strategy. The loss of one or more of our key personnel could harm our business.

 

Competition for key technical personnel in high-technology industries such as ours is intense. We believe that our future success depends in large part on our continued ability to hire, train, retain and leverage the skills of qualified engineers and other highly skilled personnel needed to maintain and grow our ATG network and related technology and develop and successfully deploy our technology roadmap and new wireless telecommunications products and technology. We may not be as successful as our competitors at recruiting, training, retaining and utilizing these highly skilled personnel. In particular, we may have more difficulty attracting or retaining highly skilled personnel during periods of poor operating performance. Any failure to recruit, train and retain highly skilled employees could negatively impact our business and results of operations.

 

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We depend on the continued service and performance of our key personnel, including Michael Small, our President and Chief Executive Officer. Such individuals have acquired specialized knowledge and skills with respect to Gogo and its operations. As a result, if any of these individuals were to leave Gogo, we could face substantial difficulty in hiring qualified successors and could experience a loss of productivity while any such successor obtains the necessary training and expertise. We do not maintain key man insurance on any of our officers or key employees. In addition, much of our key technology and systems are custom-made for our business by our personnel. The loss of key personnel, including key members of our management team, as well as certain of our key marketing or technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business.

 

We believe our business depends on strong brands, and if we do not maintain and enhance our brand, our ability to gain new customers and retain customers may be impaired.

 

We believe that our brands are a critical part of our business. We collaborate extensively with our airline partners on the look and feel of the in-air homepage that their passengers encounter when logging into the Gogo service in flight. In order to maintain strong relationships with our airline partners, we may have to reduce the visibility of the Gogo brand or make other decisions that do not promote and maintain the Gogo brand. In addition, many of our trademarks contain words or terms having a somewhat common usage and, as a result, we may have trouble registering or protecting them in certain jurisdictions, for example, the domain www.gogo.com is not owned by us. If we fail to promote and maintain the “Gogo®” or “Aircell®” brands, or if we incur significant expenses to promote the brands and are still unsuccessful in maintaining strong brands, our business prospects, financial condition and results of operations may be adversely affected.

 

Businesses or technologies we acquire could prove difficult to integrate, disrupt our ongoing business, dilute stockholder value or have an adverse effect on our results of operations.

 

As part of our business strategy, we may engage in acquisitions of businesses or technologies to augment our organic or internal growth. We do not have any meaningful experience with integrating and managing acquired businesses or assets. Acquisitions involve challenges and risks in negotiation, execution, valuation and integration. Moreover, we may not be able to find suitable acquisition opportunities on terms that are acceptable to us. Even if successfully negotiated, closed and integrated, certain acquisitions may not advance our business strategy, may fall short of expected return-on-investment targets or may fail. Any future acquisition could involve numerous risks, including:

 

   

potential disruption of our ongoing business and distraction of management;

 

   

difficulty integrating the operations and products of the acquired business;

 

   

use of cash to fund the acquisition or for unanticipated expenses;

 

   

limited market experience in new businesses;

 

   

exposure to unknown liabilities, including litigation against the companies we acquire;

 

   

additional costs due to differences in culture, geographical locations and duplication of key talent;

 

   

delays associated with or resources being devoted to regulatory review and approval;

 

   

acquisition-related accounting charges affecting our balance sheet and operations;

 

   

difficulty integrating the financial results of the acquired business in our consolidated financial statements;

 

   

controls in the acquired business;

 

   

potential impairment of goodwill;

 

   

dilution to our current stockholders from the issuance of equity securities; and

 

   

potential loss of key employees or customers of the acquired company.

 

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In the event we enter into any acquisition agreements, closing of the transactions could be delayed or prevented by regulatory approval requirements, including antitrust review, or other conditions. We may not be successful in addressing these risks or any other problems encountered in connection with any attempted acquisitions, and we could assume the economic risks of such failed or unsuccessful acquisitions.

 

Difficulties in collecting accounts receivable could have a material effect on our results of operations.

 

The provision of equipment to our airline partners involves significant accounts receivable attributable to equipment receivables, which may not be settled on a timely basis. The large majority of our service revenue in our CA segment is generated from credit card transactions and credit card accounts receivable are typically settled between one and five business days. Service and equipment revenues in our BA segment are directly billed to customers. Difficulties in enforcing contracts, collecting accounts receivables or longer payment cycles could lead to material fluctuations in our cash flows and could adversely affect our business, operating results and financial condition.

 

Expenses or liabilities resulting from litigation could adversely affect our results of operations and financial condition.

 

From time to time, we may be subject to claims or litigation in the ordinary course of our business, including for example, claims related to employment matters. Any such claims or litigation may be time-consuming and costly, divert management resources, require us to change our products and services, or have other adverse effects on our business. Any of the foregoing could have a material adverse effect on our results of operations and could require us to pay significant monetary damages. In addition, costly and time-consuming litigation could be necessary to enforce our existing contracts and, even if successful, could have an adverse effect on us. For example, on March 7, 2012, in response to a letter from Southwest Airlines Co. informing us that AirTran Airways would be deinstalling our equipment from its fleet in connection with the merger of AirTran and Southwest Airlines, we filed suit in the Circuit Court of Cook County, Illinois seeking a preliminary injunction barring AirTran from deinstalling our equipment in violation of the in-flight internet connectivity agreement we entered into with AirTran. While we believe that AirTran’s connectivity agreement does not permit it to deinstall our equipment from these aircraft under these circumstances, the results of this and any other litigation are inherently uncertain and there can be no assurances that we will prevail. Even if we do prevail in the AirTran litigation or any other litigation, such litigation could result in substantial costs and a diversion of our management’s attention and resources, which could harm our business, operating results and financial condition. In addition, prolonged litigation against AirTran or any other airline partner, customer or supplier could have the effect of negatively impacting our reputation and goodwill with existing and potential airline partners, customers and suppliers.

 

Risks Related to Our Indebtedness

 

We and our subsidiaries may incur additional debt in the future, which could substantially reduce our profitability, limit our ability to pursue certain business opportunities and reduce the value of your investment.

 

As of June 30, 2012, we had $135 million of debt outstanding under the senior secured credit facility, our “Senior Term Facility,” that we entered into with certain financial institutions on June 21, 2012. Subject to certain limitations set forth in the Senior Term Facility, we or our subsidiaries may incur additional debt in the future, which could increase the risks described below and lead to other risks. The amount of our debt or such other obligations could have important consequences for holders of our common stock, including, but not limited to:

 

   

our ability to satisfy obligations to lenders may be impaired, resulting in possible defaults on and acceleration of our indebtedness;

 

   

our ability to obtain additional financing for refinancing of existing indebtedness, working capital, capital expenditures, including costs associated with our international expansion, product and service development, acquisitions, general corporate purposes and other purposes may be impaired;

 

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a substantial portion of our cash flow from operations could be used to repay the principal and interest on our debt;

 

   

we may be increasingly vulnerable to economic downturns and increases in interest rates;

 

   

our flexibility in planning for and reacting to changes in our business and the markets in which we operate may be limited; and

 

   

we may be placed at a competitive disadvantage relative to other companies in our industry.

 

Our Senior Term Facility contains financial and operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them.

 

The Senior Term Facility contains certain financial and operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. Additionally, depending on the leverage ratio of our BA segment, up to 50% of that segment’s annual excess cash flow may be required to be used to repay principal under the Senior Term Facility and, as a result, will not be available for investment in our business, including required expenditures and investments in our CA business or international operations.

 

Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the Senior Term Facility that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries, 65% of the capital stock of our foreign subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash flows provided by (used in) Financing Activities—Senior Term Facility” for additional information about the financial and operating covenants set forth in the Senior Term Facility and also the Senior Term Facility generally.

 

Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.

 

Our debt outstanding under the Senior Term Facility bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our debt and could materially reduce our profitability and cash flows.

 

We may have future capital needs and may not be able to obtain additional financing on acceptable terms, or at all.

 

The market conditions and the macroeconomic conditions that affect the markets in which we operate could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. We may be unable to secure additional financing on favorable terms or at all or our operating cash flow may be insufficient to satisfy our financial obligations under the indebtedness outstanding from time to time. Our ability to satisfy our financial obligations will depend upon our future operating performance, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. Furthermore, if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. If additional funds are raised through the issuance of additional equity securities, our stockholders may experience significant dilution.

 

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Risks Relating to This Offering and Our Common Stock

 

Our common stock has no prior public market and the market price of our common stock may be volatile and could decline after this offering.

 

Prior to this offering, there has not been a public market for our common stock, and an active market for our common stock may not develop or be sustained after this offering. We will negotiate the initial public offering price per share with the representatives of the underwriters and therefore, that price may not be indicative of the market price of our common stock after this offering. We cannot assure you that an active public market for our common stock will develop after this offering or, if it does develop, it may not be sustained. In the absence of a public trading market, you may not be able to liquidate your investment in our common stock. In addition, the market price of our common stock may fluctuate significantly and fluctuations in market price and volume are particularly common among securities of technology companies. Among the factors that could affect our stock price are:

 

   

airline industry or general market conditions;

 

   

domestic and international economic factors unrelated to our performance;

 

   

changes in technology or customer usage of Wi-Fi and internet broadband services;

 

   

any inability to timely and efficiently roll out our technology roadmap;

 

   

any inability to sufficiently execute our international growth strategy;

 

   

new regulatory pronouncements and changes in regulatory guidelines;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

 

   

changes in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

 

   

action by institutional stockholders or other large stockholders, including future sales;

 

   

speculation in the press or investment community;

 

   

investor perception of us and our industry;

 

   

changes in market valuations or earnings of similar companies;

 

   

announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;

 

   

developments or disputes concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with intellectual property lawsuits we may initiate, or in which we may be named as defendants;

 

   

failure to complete significant sales;

 

   

any future sales of our common stock or other securities;

 

   

renewal of our FCC license; and

 

   

additions or departures of key personnel.

 

In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price. The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against such company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s attention and resources, which would harm our business, operating results and financial condition.

 

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Future sales of shares by existing stockholders could cause our stock price to decline.

 

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Based on shares outstanding as of         , upon completion of this offering, we will have          outstanding shares of common stock (or          outstanding shares of common stock, assuming exercise of the underwriters’ overallotment option in full). All of the shares sold pursuant to this offering will be immediately tradeable without restriction under the Securities Act unless held by “affiliates”, as that term is defined in Rule 144 under the Securities Act. The remaining          shares of common stock outstanding as of          will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, means of sale, holding period and other limitations of Rule 144 or pursuant to an exception from registration under Rule 701 under the Securities Act, subject to the terms of the lock-up agreements entered into among us, the underwriters and stockholders holding approximately                  shares of our common stock. Our board of directors and Morgan Stanley & Co. LLC, the representative of the underwriters, may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements entered into in connection with this offering. See “Underwriting.” Upon completion of this offering, we intend to file one or more registration statements under the Securities Act to register the shares of common stock to be issued under our equity compensation plans and, as a result, all shares of common stock acquired upon exercise of stock options granted under our plans will also be freely tradable under the Securities Act, subject to the terms of the lock-up agreements, unless purchased by our affiliates. A total of 41,925 shares of common stock are reserved for issuance under our stock incentive plans. As of July 31, 2012, there were stock options outstanding to purchase a total of 39,475 shares of our common stock.

 

We, stockholders holding approximately              shares of common stock, including              shares held by Ripplewood and the Thorne Entities, our executive officers and directors have agreed to a “lock-up,” meaning that, subject to certain exceptions, neither we nor they will sell any shares without the prior consent of each of (i) our board of directors and (ii) only following the prior written consent of our board of directors, Morgan Stanley & Co. LLC, for 180 days after the date of this prospectus. Following the expiration of this 180-day lock-up period,              shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future. In addition, certain of our significant stockholders may distribute shares that they hold to their investors who themselves may then sell into the public market following the expiration of the lock-up period. Such sales may not be subject to the volume, manner of sale, holding period and other limitations of Rule 144A. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, holders of approximately              shares, or             %, of our common stock, including              shares, or             %, of our common stock held by Ripplewood and              shares, or             %, of our common stock held by the Thorne Entities, will have registration rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders in the future. Once we register the shares for the holders of registration rights, they can be freely sold in the public market upon issuance, subject to the restrictions contained in the lock-up agreements.

 

In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement or employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.

 

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research

 

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coverage by securities and industry analysts. If there is no coverage of our company by securities or industry analysts, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage or if one or more of these analysts downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

 

A few significant stockholders control the direction of our business. If the ownership of our common stock continues to be highly concentrated, it could prevent you and other stockholders from influencing significant corporate decisions.

 

Following the completion of this offering, Ripplewood and the Thorne Entities will beneficially own approximately             % and             %, respectively, of the outstanding shares of our common stock, assuming that the underwriters do not exercise their option to purchase additional shares. As a result, either Ripplewood or the Thorne Entities alone could exercise significant influence over all matters requiring stockholder approval for the foreseeable future, including approval of significant corporate transactions, which may reduce the market price of our common stock. In addition, together, Ripplewood and the Thorne Entities would be able to exercise control over such matters following this offering, which similarly may reduce the market price of our common stock.

 

The interests of our existing stockholders may conflict with the interests of our other stockholders. Our Board of Directors intends to adopt corporate governance guidelines that will, among other things, address potential conflicts between a director’s interests and our interests. In addition, we intend to adopt a code of business conduct that, among other things, requires our employees to avoid actions or relationships that might conflict or appear to conflict with their job responsibilities or the interests of Gogo Inc. and to disclose their outside activities, financial interests or relationships that may present a possible conflict of interest or the appearance of a conflict to management or corporate counsel. These corporate governance guidelines and code of business ethics will not, by themselves, prohibit transactions with our principal stockholders.

 

Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, will be expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price.

 

We have historically operated as a private company and have not been subject to the same financial and other reporting and corporate governance requirements as a public company. After this offering, we will be required to file annual, quarterly and other reports with the Securities and Exchange Commission (“SEC”). We will need to prepare and timely file financial statements that comply with SEC reporting requirements. We will also be subject to other reporting and corporate governance requirements, under the listing standards of the NASDAQ Stock Market, or Nasdaq, and the Sarbanes-Oxley Act of 2002, which will impose significant new compliance costs and obligations upon us. The changes necessitated by becoming a public company will require a significant commitment of additional resources and management oversight which will increase our operating costs. These changes will also place significant additional demands on our finance and accounting staff, which may not have prior public company experience or experience working for a newly public company, and on our financial accounting and information systems. We may in the future hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we will be required, among other things, to:

 

   

prepare and file periodic reports, and distribute other stockholder communications, in compliance with the federal securities laws and Nasdaq rules;

 

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define and expand the roles and the duties of our Board of Directors and its committees;

 

   

institute more comprehensive compliance, investor relations and internal audit functions; and

 

   

evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with rules and regulations of the SEC and the Public Company Accounting Oversight Board.

 

In particular, beginning with the year ending December 31, 2013, we will be required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act of 2002. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 unless we choose to utilize the exemption from such attestation requirement available to “emerging growth companies.” As described in the following risk factor, we expect to qualify as an emerging growth company upon completion of this offering and could potentially qualify as an emerging growth company until December 31, 2017. In addition, upon completion of this offering, we will be required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to maintain disclosure controls and procedures and internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal control over financial reporting (at such time as it is required to do so), investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, Nasdaq, or other regulatory authorities.

 

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure and other requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting and other requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

We expect to qualify as an emerging growth company upon completion of this offering and will remain an emerging growth company until the earliest of (a) the last day of our fiscal year following the fifth anniversary of this offering; (b) the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (d) the date on which we are deemed to be a “large accelerated filer,” which will occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (2) have been required to file annual, quarterly and current reports under the Securities Exchange Act of 1934 for a period of at least 12 calendar months, and (3) have filed at least one annual report pursuant to the Securities Act of 1934. As a result, we may qualify as an emerging growth company until as late as December 31, 2017.

 

We cannot predict if investors will find our common stock less attractive if we choose to rely on one or more of these exemptions or if our decision to avail ourselves of the reduced requirements may make it more difficult for investors and securities analysts to evaluate our company. If some investors find our common stock

 

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less attractive as a result of our decision to utilize one or more of the exemptions available to us as an emerging growth company, there may be a less active trading market for our common stock and the market price of our common stock may be adversely affected.

 

Under Section 102(b) of the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Pursuant to Section 107(b) of the Jumpstart Our Business Startups Act, we have irrevocably elected to “opt out” of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

If we need additional capital in the future, it may not be available on favorable terms, or at all.

 

We have historically relied primarily on private placements of our equity securities and cash flow from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or debt financing in the future to fund our operations or respond to competitive pressures or strategic opportunities. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of additional financing may limit our financial and operating flexibility.

 

If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

 

We could be the subject of securities class action litigation due to future stock price volatility, which could divert management’s attention and adversely affect our results of operations.

 

The stock market in general, and market prices for the securities of technology companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. A certain degree of stock price volatility can be attributed to being a newly public company. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In several recent situations in which the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a similar lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.

 

Anti-takeover provisions in our charter documents and Delaware law, and certain provisions in our existing and any future credit facility could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

 

Our amended and restated certificate of incorporation and amended and restated bylaws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, we anticipate that, prior to the completion of this offering, our amended and restated certificate of incorporation and amended and restated bylaws will:

 

   

authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;

 

   

establish a classified Board of Directors, as a result of which our board will be divided into three classes, with each class serving for staggered three-year terms, which prevents stockholders from electing an entirely new Board of Directors at an annual meeting;

 

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require that directors only be removed from office for cause and only upon a supermajority stockholder vote;

 

   

provide that vacancies on the Board of Directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;

 

   

limit who may call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders; and

 

   

require supermajority stockholder voting to effect certain amendments to our amended and restated certificate of incorporation and amended and restated bylaws.

 

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. In addition, our current credit facility with Alaska Airlines has, and other credit facilities we may enter into in the future may have, covenants that restrict our rights to engage in certain change of control transactions. See “Description of Capital Stock—Certain Certificate of Incorporation, By-Law and Statutory Provisions.”

 

Our amended and restated certificate of incorporation and amended and restated bylaws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.

 

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

 

Our management will have broad discretion to use the net proceeds we receive from this offering, and you will be relying on the judgment of our management regarding the use of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, which may in the future include investments in, or acquisitions of, complementary businesses, products, services or technologies, as well as international expansion. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use the net proceeds from this offering.

 

Investors purchasing common stock in this offering will experience immediate and substantial dilution as a result of this offering and future equity issuances.

 

The initial public offering price per share will significantly exceed the net tangible book value per share of our common stock outstanding. As a result, investors purchasing common stock in this offering will experience immediate substantial dilution of $         a share, based on an initial public offering price of $        , which is the midpoint of the price range set forth on the cover page of this prospectus. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors purchasing shares of common stock in this offering will contribute approximately         % of the total amount we have raised since our inception, but will own only approximately         % of our total common stock immediately following the completion of this offering. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering. In addition, if the underwriters exercise their over-allotment option, or if we issue additional equity securities, investors purchasing common stock in this offering will experience additional dilution.

 

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We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We do not intend to declare and pay dividends on our capital stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. In addition, the operations of Gogo Inc. are conducted almost entirely through its subsidiaries. As such, to the extent that we determine in the future to pay dividends on our common stock, none of our subsidiaries will be obligated to make funds available to us for the payment of dividends.

 

Our corporate charter and bylaws include provisions limiting ownership by non-U.S. citizens, including the power of our board of directors to redeem shares of our common stock from non-U.S. citizens.

 

The Communications Act and FCC regulations impose restrictions on foreign ownership of FCC licensees, as described in the above risk factor, “If we fail to comply with the Communications Act and FCC regulations limiting ownership and voting of our capital stock by non-U.S. persons we could lose our FCC license.” Our corporate charter and bylaws include provisions that permit our board of directors to take certain actions in order to comply with FCC regulations regarding foreign ownership, including but not limited to, a right to redeem shares of common stock from non-U.S. citizens at prices at or below fair market value. Non-U.S. citizens should consider carefully the redemption provisions in our certificate of incorporation prior to investing in our common stock.

 

These restrictions may also decrease the liquidity and value of our stock by reducing the pool of potential investors in our company and making the acquisition of control of us by third parties more difficult. In addition, these restrictions could adversely affect our ability to attract additional equity financing in the future or consummate an acquisition of a foreign entity using shares of our capital stock. See “Description of Capital Stock—Limited Ownership by Foreign Entities.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, international expansion, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this prospectus.

 

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:

 

   

the loss of, or failure to realize benefits from, agreements with our airline partners;

 

   

any inability to timely and efficiently roll out our technology roadmap or the failure by our airline partners to roll out equipment upgrades in order to support increased network capacity demands;

 

   

the loss of relationships with original equipment manufacturers or dealers;

 

   

our ability to develop network capacity sufficient to accommodate growth in passenger demand;

 

   

unfavorable economic conditions in the airline industry and economy as a whole;

 

   

the effects, if any, on our business of the American Airlines and Hawker Beechcraft bankruptcy filings;

 

   

our ability to expand our domestic or international operations, including our ability to grow our business with current and potential future airline partners or successfully partner with satellite service providers, including Inmarsat;

 

   

an inability to compete effectively;

 

   

a diminution in the competitive advantage we believe our ATG network currently provides us;

 

   

our reliance on third-party satellite service providers and equipment and other suppliers, including single source providers and suppliers;

 

   

a revocation of, or reduction in, our right to use licensed spectrum or grant of a license to use air-to-ground spectrum to a competitor;

 

   

our use of open source software and licenses;

 

   

the effects of service interruptions or delays, technology failures, material defects or errors in our software or damage to our equipment;

 

   

the limited operating history of our CA and International segments;

 

   

our, or our technology suppliers’, inability to effectively innovate;

 

   

costs associated with defending pending or future intellectual property infringement and other litigation or claims;

 

   

our ability to protect our intellectual property;

 

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increases in our projected capital expenditures due to, among other things, unexpected costs incurred in connection with the roll out of our technology roadmap or our international expansion;

 

   

any negative outcome or effects of pending or future litigation;

 

   

limitations and restrictions in the agreements governing our indebtedness and our ability to service our indebtedness;

 

   

our ability to obtain additional financing on acceptable terms or at all;

 

   

fluctuation in our operating results;

 

   

our ability to attract and retain customers and to capitalize on revenue from our platform;

 

   

the demand for in-flight broadband internet access services or market acceptance for our products and services;

 

   

changes or developments in the regulations that apply to us, our business and our industry;

 

   

the attraction and retention of qualified employees and key personnel;

 

   

the effectiveness of our marketing and advertising and our ability to maintain and enhance our brands;

 

   

our inability to manage our growth in a cost-effective manner and integrate and manage acquisitions;

 

   

difficulties in collecting accounts receivable; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

 

Any one of these factors or a combination of these factors could materially affect our financial condition or future results of operations and could influence whether any forward-looking statements contained in this prospectus ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and you should not place undue reliance on them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $         per share, which is the mid-point of the price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering of approximately $         million, after deducting estimated underwriting discounts and commissions in connection with this offering and estimated offering expenses payable by us of $         million. See “Underwriting.”

 

We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders in this offering.

 

The principal purposes of this offering are to obtain additional capital, create a public market for our common stock, facilitate our future access to the capital markets, increase awareness of our company among potential customers and improve our competitive position. We currently intend to use the net proceeds we receive from this offering for working capital and other general corporate purposes, including (i) costs associated with international expansion, including costs incurred to modify our portal for international deployment, costs related to sales and marketing activities and administrative support functions and additional legal and regulatory expenses associated with operating in the international commercial aviation market and (ii) certain costs associated with satellite or other technologies, such as costs incurred to develop and implement changes to ground and airborne software and hardware and the cost of obtaining satellite capacity. We will have broad discretion over the way that we use the net proceeds of this offering received by us. See “Risk Factors—Risks Relating to This Offering and Our Common Stock—Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.”

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the front cover of this prospectus) would increase or decrease the net proceeds to us from this offering by $        , assuming the number of shares offered by us remains the same and after deducting estimated underwriting discounts and commission and estimated offering expenses payable by us. An increase or decrease of          shares in the number of shares offered by us would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $         million, assuming the initial public offering price of $         per share (the mid-point of the price range set forth on the front cover of this prospectus) remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.

 

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DIVIDEND POLICY

 

We do not currently expect to declare or pay dividends on our common stock for the foreseeable future. Instead, we intend to retain earnings to finance the growth and development of our business and for working capital and general corporate purposes. Any payment of dividends will be at the discretion of our Board of Directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that our Board of Directors may deem relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Expenditures.”

 

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CAPITALIZATION

 

The following table sets forth our total cash and cash equivalents and capitalization as of June 30, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect:

 

   

the filing of an amended and restated certificate of incorporation to authorize              shares of common stock and              shares of undesignated preferred stock;

 

   

a              for 1 stock split of our shares of common stock; and

 

   

the conversion of all of our outstanding shares of convertible preferred stock into              shares of common stock; and

 

   

on a pro forma as adjusted basis to reflect the pro forma adjustments above and our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds to us from this offering as described in “Use of Proceeds.”

 

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial offering price and other terms of this offering determined at pricing. The table below should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes included elsewhere in this prospectus.

 

     As of June 30, 2012  
       Actual         Pro Forma       Pro Forma
  (as adjusted)(1)  
 
     (unaudited)  
     (amounts in thousands, except for share numbers)  

Cash and cash equivalents

   $ 153,501      $ 153,501      $                
  

 

 

   

 

 

   

 

 

 

Long term obligations, including current portion

   $ 137,649      $ 137,649      $     

Convertible preferred stock, $0.01 par value:

      

Class A Senior Convertible Preferred Stock, 15,000 shares authorized; 14,126 shares issued and outstanding actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     163,004                 

Class B Senior Convertible Preferred Stock, 30,000 shares authorized; 22,488 shares issued and outstanding actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     266,924                 

Junior Convertible Preferred Stock, 20,000 shares authorized; 19,070 shares issued and outstanding actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     151,627                 

Stockholders’ equity (deficit):

      

Common stock, $0.0001 par value, 1,000,000 shares authorized, 73,975 shares issued and 66,000 shares outstanding, actual;              shares authorized, and              shares issued and outstanding, pro forma and pro forma as adjusted(2)

                

Additional paid-in capital

     22,541        604,096     

Accumulated deficit

     (405,155     (405,155  
  

 

 

   

 

 

   

Total stockholders’ equity (deficit)

     (382,614     198,941     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 336,590      $ 336,590      $     
  

 

 

   

 

 

   

 

 

 

 

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  (1)   Each $1.00 increase or decrease in the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, our pro forma as adjusted cash and cash equivalents, additional paid-in capital and stockholders equity by $             million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of              shares in the number of shares offered by us would increase or decrease, as applicable our pro forma as adjusted cash and cash equivalents, additional paid-in capital and stockholders equity by $             million, assuming the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the front cover page of this prospectus) remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
  (2)   The difference between the number of shares of common stock issued (actual) and the number of shares of common stock outstanding (actual) is attributable to the 7,975 shares of our common stock that are held by AC Management LLC, which is consolidated into our consolidated financial statements. For further discussion of the consolidation of AC Management LLC, see Note 2 to our consolidated financial statements for the year ended December 31, 2011 included elsewhere in this prospectus.

 

The share information as of June 30, 2012 shown in the table above excludes:

 

   

39,175 shares of common stock issuable upon exercise of options outstanding as of June 30, 2012 at a weighted average exercise price of $1,219.41 per share; and

 

   

2,750 shares of common stock reserved for future issuance under our stock option plan.

 

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DILUTION

 

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering.

 

Our net tangible book value as of              was $             , and our pro forma net tangible book value per share was $            . Pro forma net tangible book value per share before the offering has been determined by dividing net tangible book value (total book value of tangible assets less total liabilities) by the number of shares of common stock outstanding at .

 

After giving effect to the sale of shares of our common stock sold by us in this offering at an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value at              would have been $             million, or $             per share. This represents an immediate increase in net tangible book value per share of $             to the existing stockholders and dilution in net tangible book value per share of $             to new investors who purchase shares in this offering. The following table illustrates this per share dilution to new investors:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of December 31, 2011

   $                   

Increase in net tangible book value per share attributable to new investors in this offering

   $        

Pro forma net tangible book value per share after this offering

      $     
  

 

 

    

 

 

 

Dilution of net tangible book value per share to new investors

      $     
  

 

 

    

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by $             million, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of              million shares in the number of shares offered by us would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $             million, assuming the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table summarizes, as of             , the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering (amounts in thousands, except percentages and per share data):

 

     Shares Purchased     Total Consideration     Average
Price

Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

The foregoing table does not reflect proceeds to be realized by existing stockholders in connection with the sales by them in this offering, options outstanding under our stock option plans or stock options to be granted after this offering. As of July 31, 2012, there were options to purchase 39,475 shares of our common stock outstanding with an average exercise price of $1,224.05 per share, and 2,450 shares remained available for grant.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following tables present selected historical financial data as of and for the periods indicated. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

The consolidated statement of operations data and other financial data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and other financial data for the six month periods ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and other financial data for the years ended December 31, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of our results to be expected in any future period, and the unaudited interim results for the six month periods ended June 30, 2012 are not necessarily indicative of results that may be expected for the full year ending December 31, 2012.

 

    Year Ended December 31,     Six Months
Ended June 30,
 
    2007     2008     2009     2010         2011         2011     2012  
    (in thousands, except per share amounts)  

Consolidated Statement of Operations Data(1):

             

Revenue:

             

Service revenue

  $ 3,838      $ 6,019      $ 15,626      $ 58,341      $ 103,918      $ 46,113      $ 76,664   

Equipment revenue

    30,041        30,771        21,216        36,318        56,238        26,827        35,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    33,879        36,790        36,842        94,659        160,156        72,940        112,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    80,285        145,898        147,678        171,620        193,980        90,768        121,335   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (46,406     (109,108     (110,836     (76,961     (33,824     (17,828     (9,183

Other (income) expense:

             

Interest expense

    4,895        14,176        30,067        37        280        132        599   

Fair value derivative adjustments

                         33,219        (58,740     (34,253     (9,640

Loss on extinguishment of debt

                  1,577                               

Interest income and other

    (2,418     (905     (214     (98     (32     (3     (25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expense

    2,477        13,271        31,430        33,158        (58,492     (34,124     (9,066
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (48,883     (122,379     (142,266     (110,119     24,668        16,296        (117

Income tax provision

                         3,260        1,053        433        449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (48,883     (122,379     (142,266     (113,379     23,615        15,863        (566

Class A and Class B senior convertible preferred stock return

                         (18,263     (31,331     (11,943     (24,905

Accretion of preferred stock

                         (8,501     (10,181     (5,084     (5,198
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stock(2)

  $ (48,883   $ (122,379   $ (142,266   $ (140,143   $ (17,897   $ (1,164   $ (30,669
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stock(3):

             

Basic

  $ (1,110.98   $ (1,973.85   $ (2,155.55   $ (2,123.38   $ (271.17   $ (17,64   $ (464.68

Diluted

  $ (1,110.98   $ (1,973.85   $ (2,155.55   $ (2,123.38   $ (271.17   $ (29.61   $ (464.68

Weighted average shares used in computing net loss per share attributable to common stock:

             

Basic

    44        62        66        66        66        66        66   

Diluted

    44        62        66        66        66        621        66   

 

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     As of December 31,     As of June  30,
2012
 
     2007     2008     2009     2010         2011        
     (in thousands)  

Consolidated Balance Sheet Data:

            

Cash and cash equivalents

   $ 12,253      $ 24,072      $ 68,452      $ 18,883      $ 42,591      $ 153,501   

Working capital(4)

     898        773        52,162        12,459        31,314        129,717   

Total assets

     128,082        172,471        274,849        236,940        285,636        425,711   

Indebtedness and long-term capital leases, net of current portion(5)

     99,815        202,043               2,000        2,224        133,611   

Total liabilities

     128,921        247,099        61,126        113,928        87,846        226,770   

Convertible preferred stock

                   405,567        453,385        551,452        581,555   

Total stockholders’ deficit(2)

     (839     (74,628     (191,844     (330,373     (353,662     (382,614

 

  (1)   Prior to December 31, 2009, we operated as a limited liability company under the name AC HoldCo LLC. AC HoldCo LLC was formed as a Delaware limited liability company on March 20, 2006. During 2006, Aircell, Inc. and AC HoldCo LLC entered into a series of agreements to pursue the FCC license governing our ATG spectrum and to provide capital to develop and operate our ATG network. On January 31, 2007, Aircell, Inc. converted to a limited liability company (Aircell LLC) and was acquired by AC HoldCo LLC.
  (2)   Prior to December 31, 2009, we operated as a limited liability company under the name AC HoldCo LLC. The net loss was attributable to members of AC HoldCo LLC for the years ended December 31, 2007, 2008 and 2009. Total equity (deficit) as of December 31, 2007 and 2008 was attributable to members of AC HoldCo LLC.
  (3)   Does not reflect 7,975 shares of common stock issued to AC Management LLC, an affiliate of the Company whose units are owned by members of our management. Gogo Inc. is the managing member of AC Management LLC, and thereby controls AC Management LLC, and as a result AC Management LLC is consolidated into our consolidated financial statements. As a result of such consolidation, the common shares held by AC Management LLC are not considered outstanding for purposes of our consolidated financial statements, including net loss per share attributable to common stock.
  (4)   We define working capital as total current assets less current liabilities.
  (5)   Includes long-term accrued interest of $6.3 million and $15.8 million as of December 31, 2007 and 2008, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. It should be read in conjunction with “Selected Consolidated Financial Data,” and is qualified in its entirety by reference to our consolidated financial statements and related notes beginning on page F-1 of this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward Looking Statements.”

 

Company Overview

 

Gogo Inc. is the world’s leading provider of in-flight connectivity with the largest number of internet-connected aircraft in service, and a pioneer in wireless in-cabin digital entertainment solutions. We operate our business through our three operating segments: commercial aviation, or CA, and business aviation, or BA, and International. Our CA business provides “Gogo®” branded in-flight connectivity and wireless digital entertainment solutions to commercial airline passengers, using our nationwide network of cell towers and airborne equipment (the “ATG network”), and our exclusive nationwide air-to-ground (“ATG”) spectrum. Our BA business sells equipment for in-flight telecommunications and provides in-flight internet connectivity and other voice and data communications products and services to the business aviation market. BA services include Gogo Biz, our in-flight broadband service that utilizes both our ATG network and our ATG spectrum, and satellite-based voice and data services through our strategic alliances with satellite companies. Our International business is in the start-up phase as we initiated our international expansion efforts in the first quarter of 2012. Through our International business, we intend to provide in-flight connectivity and wireless digital entertainment solutions to passengers flying on foreign-based commercial airlines and international routes of U.S.-based commercial airlines. The following is a timeline of significant events in our company’s history:

 

   

Our business aviation operations were formed in 1991 as Air-cell, Inc. for the purpose of providing in-flight telecommunication service to customers in the business aviation market.

 

   

In 1997, Aircell, Inc. (formerly Air-cell, Inc.) installed its first in-flight analog phone system and, in 2002, partnered with Iridium satellite to provide in-flight voice and data services to our business aviation customers.

 

   

In June 2006, our subsidiary AC BidCo LLC won and purchased an exclusive ten-year 3 MHz FCC license for ATG spectrum.

 

   

In January 2007, we acquired Aircell LLC (formerly Aircell, Inc.).

 

   

In January 2008, we completed construction of our initial nationwide ATG network.

 

   

In August 2008, we launched our Gogo service for commercial aircraft.

 

   

In June 2009, we began providing ATG service to our business aviation customers.

 

   

On December 31, 2009, we underwent a corporate restructuring whereby our predecessor company was converted from a limited liability company into a corporation (Aircell Holdings Inc.). As a result of the conversion, our capitalization structure changed as all outstanding convertible debt was converted into one of three classes of preferred stock.

 

   

On June 15, 2011, we officially changed our name from Aircell Holdings Inc. to Gogo Inc.

 

   

In the first quarter of 2012, we initiated our international expansion efforts.

 

   

On June 8, 2012, we formed Gogo Intermediate Holdings LLC (“GIH”). GIH is a direct, wholly-owned subsidiary of Gogo Inc., and on June 8, 2012, Gogo LLC and Aircell Business Aviation Services LLC, which had previously been direct, wholly-owned subsidiaries of Gogo Inc., became direct, wholly-owned subsidiaries of GIH.

 

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On June 21, 2012, we entered into a $135 million senior secured credit facility (the “Senior Term Facility”). See “—Liquidity and Capital Resources” for additional information regarding the Senior Term Facility.

 

Consolidated revenue increased to $160.2 million for the year ended December 31, 2011 as compared with $94.7 million during the prior year and increased to $112.2 million for the six month period ended June 30, 2012 as compared with $72.9 million for the comparable prior year period. As of June 30, 2012, the CA segment had 1,565 commercial aircraft online to provide the Gogo service as compared with 1,147 as of June 30, 2011. As of June 30, 2012, the BA segment had 4,920 aircraft online with Iridium satellite communications systems and 1,166 Gogo Biz systems online as compared with 4,647 and 614 as of June 30, 2011, respectively. In addition, the BA segment has sold 211 Inmarsat SwiftBroadband systems to business aviation customers since 2009.

 

Factors and Trends Affecting Our Results of Operations

 

We believe our operating and business performance is driven by various factors that affect the commercial airline and business aviation industries, including trends affecting the travel industry and trends affecting the customer bases that we target, as well as factors that affect wireless internet service providers and general macroeconomic factors. Key factors that may affect our future performance include:

 

   

the costs associated with implementing our technology roadmap, including the need for additional cell sites in our ATG network, and implementing improvements to our network and operations as technology changes and we experience increased network capacity constraints;

 

   

the costs associated with our international expansion, including modification to our network to accommodate satellite technology, compliance with applicable foreign regulations and expanded operations outside of the U.S.;

 

   

the number of aircraft in service in our markets, including consolidation of the airline industry or changes in fleet size by one or more of our airline partners;

 

   

the economic environment and other trends that affect both business and leisure travel;

 

   

the extent of customers’ adoption of our products and services, which is affected by, among other things, willingness to pay for the services that we provide and changes in technology;

 

   

the continued demand for connectivity and proliferation of Wi-Fi enabled devices, including smartphones, tablets and laptops; and

 

   

regulatory changes, including those affecting our ability to maintain our ten-year 3 MHz license for ATG spectrum in the U.S., obtain sufficient rights to use additional ATG spectrum and/or other sources of broadband connectivity to deliver our services, and expand our service offerings.

 

Recent Developments

 

On November 29, 2011, we announced the signing of a memorandum of understanding with Inmarsat S.A. to bring its Global Xpress satellite service to the commercial airline market. Assuming that we enter into a definitive agreement with Inmarsat, we would provide Inmarsat’s Ka-band satellite broadband internet access to international commercial aircraft fleets and the BA market. We currently expect that we will begin testing of the Global Xpress Ka-band aeronautical services after the launch of the first of the three Inmarsat-5 satellites, which is currently scheduled for mid-2013. We currently expect to offer Global Xpress Ka-band satellite service to international commercial aircraft starting in late 2014 or early 2015 after the launch of all three Inmarsat-5 satellites.

 

On November 29, 2011, American Airlines filed for reorganization under Chapter 11 of the United States Bankruptcy Code. While American Airlines has announced that it will continue to operate its business and fly

 

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normal flight schedules, there can be no assurance that the filing will not have a material effect on our revenue or results of operations in the short- or long-term. See “Risk Factors—Risks Related to Our CA Business—The recent bankruptcy filing of American Airlines could have a material adverse affect on our revenue and results of operations.”

 

On December 19, 2011, Advanced Media Networks, L.L.C. filed suit in the United States District Court for the Central District of California against us for allegedly infringing one of its patents, seeking injunctive relief that would affect both our CA and BA businesses and unspecified monetary damages. On April 9, 2012, the plaintiff filed an amended complaint that named as additional defendants certain of our commercial airline partners and BA customers. Under our contracts, we are required to indemnify these partners and customers for defense costs and any damages arising from the litigation. We have not accrued any liability related to this matter because, due to the early stage of this litigation, a range of possible loss, if any, cannot be determined. The outcome of this matter is inherently uncertain and may have a material adverse effect on our financial position, results of operation and cash flows. See “Risk Factors—Assertions by third parties of infringement, misappropriation or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.”

 

On January 23, 2012, we received a letter from Southwest Airlines Co. notifying us that AirTran Airways, which became a wholly-owned subsidiary of Southwest Airlines Co. on May 2, 2011, would be deinstalling our internet connectivity equipment from its fleet as part of the process by which Southwest Airlines’ and AirTran’s fleets will be merged. On March 7, 2012, we filed for a preliminary injunction in the Circuit Court of Cook County, Illinois, seeking to bar AirTran from proceeding with the deinstallation in violation of our connectivity agreement with AirTran. AirTran subsequently filed a motion to dismiss and on June 13, 2012, the court granted the motion. On August 3, 2012, the court granted us the right to file an interlocutory appeal and to amend the complaint. Revenue from passengers using the Gogo service while flying on aircraft operated by AirTran accounted for less than 3% of our consolidated revenue for the year ended December 31, 2011 and for the six month period ended June 30, 2012. If we do not succeed in our attempt to enjoin AirTran from deinstalling our equipment, our results of operations would be adversely affected. See “Risk Factors—Risks Related to Our Business and Industry—Expenses or liabilities from litigation could adversely affect our results of operations and financial condition.”

 

On March 21, 2012, we announced the signing of an amended connectivity agreement with US Airways, Inc. to add additional US Airways aircraft to the scope of our existing agreement and begin the roll out of Gogo Vision on certain US Airways aircraft. The expansion covers 209 additional US Airways mainline aircraft, which will be outfitted with our ATG-4 technology, as well as 73 regional jets on which our ATG equipment will be installed. In addition, during the expansion process, current Gogo-equipped US Airways aircraft will be upgraded to our ATG-4 technology. The installation is expected to begin in the fall of 2012.

 

On April 20, 2012, we entered into a Purchase Agreement with LiveTV, LLC, or LiveTV, under which we have agreed to purchase from LiveTV its wholly-owned subsidiary LiveTV Airfone, LLC (including its network infrastructure and back-office operational assets) and an FCC license for 1 MHz of ATG spectrum held by LiveTV for a purchase price of $9.4 million subject to certain adjustments in accordance with the purchase agreement. In connection with the acquisition, we also agreed to license certain intellectual property rights from LiveTV. The parties’ obligations to complete the acquisition are conditioned upon receiving all necessary consents from the FCC and other standard conditions to closing. Following the closing, we intend to continue to provide services to LiveTV Airfone’s current customers during a transition period and will then use the 1 MHz of acquired spectrum to increase our ATG network capacity.

 

On May 3, 2012, Hawker Beechcraft Inc., an original equipment manufacturer customer of our BA business, filed for reorganization under Chapter 11 of the United States Bankruptcy Code. While Hawker Beechcraft, Inc. has stated that it expects to continue its operations and to pay its vendors there can be no assurance that the filing will not have a material effect on our results of operations in the short- or long-term.

 

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Hawker Beechcraft accounted for approximately 4% of our BA segment revenue for the six month period ended June 30, 2012. We have provided reserves against our outstanding receivables with Hawker Beechcraft as of June 30, 2012.

 

In May 2012, Innovatio IP Ventures, LLC filed suit in the United States District Court for the Northern District of Illinois against a number of defendants, including Delta Airlines and AirTran Airways, for alleged infringement of several patents in the field of wireless local area networking. AirTran and Delta have requested indemnification from us and under our contracts we are required to indemnify these airlines for defense costs and any damages arising from such litigation to the extent it relates to Gogo technology or services. We intend to seek indemnification, in turn, from certain of our equipment vendors. We have not accrued any liability related to this matter because, due to the early stage of the litigation, the strength of our defenses and a range of possible loss, if any, cannot be determined. The outcome of this matter is inherently uncertain and may have a material adverse effect on our financial position, results of operations and cash flows.

 

On June 21, 2012, we borrowed $135.0 million under a five-year term loan that matures on June 21, 2017, the terms of which are set forth in a Credit Agreement, dated as of June 21, 2012, among GIH, Aircell Business Aviation Services LLC (“ABAS”), and Gogo LLC, as borrowers, the lenders named therein, and Morgan Stanley Senior Funding, Inc., as Administrative Agent and Collateral Agent. We received net cash proceeds of $125.4 million following the payment of debt issuance fees of $9.6 million. We will use these proceeds for general corporate purposes, including funding for our international expansion to the extent permitted by the Senior Term Facility. See “—Liquidity and Capital Resources” for additional information regarding the Senior Term Facility.

 

On July 17, 2012, Industry Canada issued to our Canadian subsidiary a subordinate license that allows us to use Canadian ATG spectrum of which SkySurf Canada Communications Inc. (“SkySurf”) is the primary licensee. On July 24, 2012, we entered into a subordinate license agreement (the “License Agreement”) with SkySurf. The License Agreement supersedes the spectrum manager lease agreement (the “Spectrum Agreement”) that we entered into with SkySurf on July 27, 2011. The License Agreement provides for our exclusive rights to use SkySurf’s ATG spectrum licenses in Canada. The License Agreement has an initial term of ten years commencing on August 14, 2012 and is renewable at our option for ten years following the initial expiration and for an additional five year term. The terms of the License Agreement call for us to pay SkySurf an initial deposit of 0.2 million Canadian Dollars, which is equivalent to approximately U.S. $0.2 million, which had been previously paid upon execution of the Spectrum Agreement. Pursuant to the License Agreement, we are to make an additional 0.2 million Canadian Dollar payment to SkySurf, which is equivalent to approximately $0.2 million, as well as a one-time payment of 3.3 million Canadian Dollars, which is equivalent to approximately U.S. $3.2 million, less the two payments noted above. We are to pay SkySurf 0.2 million Canadian Dollars, which is equivalent to U.S. $0.2 million, monthly during the ten-year term of the License Agreement. Additionally, we are to make variable monthly payments based on the number of cell sites in Canada and the number of Canadian-domiciled commercial aircraft on which we provide our service.

 

On October 4, 2012, James Stewart filed suit in the United States District Court for the Northern District of California against us, on behalf of putative classes of national purchasers and a subclass of California purchasers of our service. The complaint alleges claims for monopolization and exclusive dealing under the federal antitrust laws and California state antitrust and unfair practices laws related to the Gogo service offered through our domestic commercial airline partners. We have not accrued any liability related to this matter because, due to the early stage of the litigation, the strength of our defenses and a range of possible loss, if any, cannot be determined. Based on currently available information, we believe that we have strong defenses and intend to defend this lawsuit vigorously, but the outcome of this matter is inherently uncertain and may have a material adverse effect on our financial position, results of operations and cash flows.

 

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Key Business Metrics

 

Our management regularly reviews a number of financial and operating metrics, including the following key operating metrics for the CA and BA segments to evaluate the performance of our business and our success in executing our business plan, make decisions regarding resource allocation and corporate strategies and evaluate forward-looking projections.

 

Commercial Aviation

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
     2009     2010     2011     2011     2012  

Aircraft online

     692        1,056        1,345        1,147        1,565   

Gross passenger opportunity (GPO) (in thousands)

     59,804        152,744        192,074        91,003        120,167   

Total average revenue per passenger opportunity (ARPP)

   $ 0.15      $ 0.32      $ 0.43      $ 0.41      $ 0.51   

Total average revenue per session (ARPS)

   $ 4.67      $ 6.62      $ 9.01      $ 9.31      $ 9.18   

Connectivity take rate

     3.2     4.7     4.7     4.3     5.4

 

   

Aircraft online. We define aircraft online as the total number of commercial aircraft on which our ATG network equipment is installed and Gogo service has been made commercially available as of the last day of each period presented.

 

   

Gross passenger opportunity (“GPO”). We define GPO as the estimated aggregate number of passengers who board commercial aircraft on which Gogo service has been made available for the period presented. We calculate passenger estimates by taking the maximum capacity of flights with Gogo service, which is calculated by multiplying the number of flights flown by Gogo-equipped aircraft, as published by Air Radio Inc. (ARINC), by the number of seats on those aircraft, and adjusting the product by a passenger load factor for each airline, which represents the percentage of seats on aircraft that are occupied by passengers. Load factors are provided to us by our airline partners and are based on historical data.

 

   

Total average revenue per passenger opportunity (“ARPP”). We define ARPP as revenue from Gogo Connectivity, Gogo Vision, Gogo Signature Services and other service revenue for the period, divided by GPO for the period.

 

   

Total average revenue per session (“ARPS”). We define ARPS as revenue from Gogo Connectivity divided by the total number of times passengers used Gogo Connectivity during the period.

 

   

Connectivity take rate. We define connectivity take rate as the number of times passengers used Gogo Connectivity during the period expressed as a percentage of GPO. Included in our connectivity take-rate calculation are sessions for which we did not receive revenue, including those provided pursuant to free promotional campaigns and, to a lesser extent, as a result of complimentary passes distributed by our customer service representatives or unforeseen technical issues. For the periods listed above other than the fiscal year ended December 31, 2009, the number of sessions for which we did not receive revenue was less than 3% of the total number of sessions. Because we launched the Gogo service in August of 2008, we provided a significant number of free sessions as part of numerous promotional and advertising campaigns during fiscal 2009 in order to promote our service through the startup phase of our service, including the use of “gate teams”, which handed out free and reduced-price session passes to passengers boarding Gogo-equipped aircraft.

 

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Business Aviation

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2009      2010      2011      2011      2012  

Aircraft online

              

Satellite

     4,311         4,553         4,733         4,647         4,920   

ATG

     49         318         860         614         1,166   

Average monthly service revenue per aircraft online

              

Satellite

   $ 124       $ 127       $ 131       $ 132       $ 135   

ATG

     488         1,530         1,791         1,839         1,820   

Units shipped

              

Satellite

     460         574         618         303         379   

ATG

     139         374         613         306         363   

Average equipment revenue per unit shipped (in thousands)

              

Satellite

   $ 32       $ 33       $ 39       $ 40       $ 41   

ATG

     37         44         48         46         51   

 

   

Satellite aircraft online. We define satellite aircraft online as the total number of business aircraft on which we have satellite equipment in operation as of the last day of each period presented.

 

   

ATG aircraft online. We define ATG aircraft online as the total number of business aircraft on which we have ATG network equipment in operation as of the last day of each period presented.

 

   

Average monthly service revenue per satellite aircraft online. We define average monthly service revenue per satellite aircraft online as the aggregate satellite service revenue for the period, divided by the number of satellite aircraft online during the period (expressed as an average of the month end figures for each month in such period).

 

   

Average monthly service revenue per ATG aircraft online. We define average monthly service revenue per ATG aircraft online as the aggregate ATG service revenue for the period, divided by the number of ATG aircraft online during the period (expressed as an average of the month end figures for each month in such period).

 

   

Units shipped. We define units shipped as the number of satellite or ATG network equipment units, respectively, shipped during the period.

 

   

Average equipment revenue per satellite unit shipped. We define average equipment revenue per satellite unit shipped as the aggregate equipment revenue earned from all satellite shipments during the period, divided by the number of satellite units shipped.

 

   

Average equipment revenue per ATG unit shipped. We define average equipment revenue per ATG unit shipped as the aggregate equipment revenue from all ATG shipments during the period, divided by the number of ATG units shipped.

 

Key Components of Consolidated Statements of Operations

 

We conduct our business through three operating segments, the CA, BA and International segments. Our International business is in the start-up phase as we initiated our international expansion efforts in the first quarter of 2012, and as of June 30, 2012 had generated minimal revenues. Expenses for the International segment include development costs for next generation products, costs related to the expansion of our international sales and marketing teams, and other costs related to the start-up of our international business. See “—Results of Operations” for additional information regarding the International segment’s activities.

 

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The following briefly describes certain key components of revenue and expenses as presented in our consolidated statements of operations for the CA and BA segments.

 

Revenue:

 

We generate two types of revenue through each of our operating segments: service revenue and equipment revenue.

 

Commercial Aviation:

 

Service revenue. Service revenue for the CA segment, which currently represents substantially all of the CA segment revenue, is derived primarily from Gogo Connectivity related revenue through both retail and non-retail sales channels. Retail revenue is derived from purchases of individual sessions (which includes multiple individual session packages) and subscriptions (including both monthly and annual subscriptions). Non-retail revenue is primarily derived from fees paid by third parties who sponsor free or discounted access to Gogo Connectivity to passengers and, to a lesser extent, from other non-retail connectivity services. Other non-retail connectivity revenue includes our enterprise channel (such as Gogo Connectivity sold to customers through travel management companies), our roaming channel (Gogo Connectivity sold to Wi-Fi internet provides who resell to their customers) and our wholesale channel (Gogo Connectivity sold to companies who in turn make Gogo Connectivity available through customer loyalty programs or as incentives for their direct customers). The CA segment also generates revenue through third-party advertising fees and e-commerce revenue share arrangements which we refer to as our Gogo Signature Services. Additionally, we generate revenue from fees paid by passengers for access to content on Gogo Vision, which we launched in August 2011 and October 2011 on aircraft operated by American Airlines and Delta Air Lines, respectively, and which we have agreed to launch on US Airways. Under the terms of agreements with each of our airline partners, we provide our Gogo service directly to airline passengers and set the pricing for the service. Our customers remit payment directly to us and we remit a share of the revenue to the applicable airline. Although we expect to continue to derive a substantial majority of the CA service revenue from Gogo Connectivity related revenue, we expect our revenue from Gogo Signature Services and Gogo Vision to increase in future periods.

 

Equipment revenue. We currently have three types of connectivity agreements with our airline partners. Equipment transactions under one form of agreement, which we have used with only one airline partner, qualify for sale treatment due to the specific provisions of the agreement. Equipment revenue generated under this one agreement accounted for less than 2% of the CA segment’s revenue for the year ended December 31, 2011 and the six month period ended June 30, 2012, and we do not expect it to be a material portion of the CA segment revenue going forward. The remaining two types of connectivity agreements are treated as operating leases of space for our equipment on the aircraft. See “—Cost of Service Revenue” below for further information regarding accounting for equipment transactions under these other two forms of connectivity agreements.

 

Business Aviation:

 

Service revenue. Service revenue for the BA segment is principally derived from subscription fees paid by aircraft owners and operators for telecommunication and data services that include Gogo Biz in-flight broadband internet access using our ATG network and satellite-based services that we resell. For the year ended December 31, 2011, revenue derived from subscription fees for our Gogo Biz service and for our satellite based services that we resell was 64% and 36% of the BA segment’s total service revenue, respectively, as compared with 32% and 68%, respectively, during the prior year. In the six month period ended June 30, 2012, revenue derived from subscription fees for our Gogo Biz service and for our satellite based services that we resell was 74% and 26% of the BA segment’s total service revenue, respectively, as compared with 59% and 41%, respectively, in the comparable prior year period.

 

Equipment revenue. Equipment revenue for the BA segment is derived from the sale of ATG and satellite-based telecommunication equipment to original equipment manufacturers of aircraft (“OEMs”) and a network of

 

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aftermarket dealers who are FAA certified to install avionics on business aircraft, including aircraft used in the fractional jet market. For the year ended December 31, 2011, revenue derived from sales of ATG and satellite-based telecommunications equipment was 55% and 45% of the BA segment’s total equipment revenue, respectively, as compared with 47% and 53%, respectively, during the prior year. In the six month period ended June 30, 2012, revenue derived from sales of ATG and satellite-based equipment was 54% and 46% of the BA segments’ total equipment revenue, respectively, as compared with 53% and 47%, respectively, in the comparable prior year period.

 

Cost of Service Revenue:

 

Commercial Aviation:

 

Cost of service revenue for the CA segment includes network operations, revenue share, and transactional costs.

 

Network operations represent the costs to operate and maintain our ATG network, including backhaul, site leases, cell site operations, data centers, network operations center, network technical support, aircraft operations, component assembly and portal maintenance. Our network operations costs include a significant portion of costs that are relatively fixed in nature and do not fluctuate directly with revenue.

 

Revenue share consists of payments made to our airline partners under our connectivity agreements. Under connectivity agreements representing a majority of aircraft online as of June 30, 2012, we maintain legal title to our equipment and no payments in respect of such equipment are made to us by our airline partners. Under these agreements, the initial revenue share percentages earned by our airline partners for Gogo Connectivity-related revenue are below our standard rates. Upon the occurrence of stipulated triggering events, such as the passage of time or the achievement of certain revenue or installation thresholds, the revenue share percentage increases to a contractually agreed upon rate in line with our standard rates. We also have connectivity agreements pursuant to which our airline partners make an upfront payment for our ATG equipment and take legal title to such equipment. Under these agreements, the revenue share percentage earned by our airline partners is set at a fixed percentage of service revenue at our standard rates throughout the term of the agreement. Upfront payments made pursuant to these agreements are accounted for as deferred airborne lease incentives which are amortized on a straight-line basis as a reduction of cost of service revenue over the term of the agreement. We expect the share of our connectivity agreements under which our airline partners make an upfront payment for our ATG equipment to increase going forward as this type of connectivity agreement is the primary type we are currently offering to prospective North American airline partners and to existing airline partners that wish to expand the Gogo service into additional fleets. In addition to the revenue share percentage for Gogo Connectivity-related revenue, many of our agreements delineate negotiated revenue share percentages to be earned by our airline partners for revenue derived from Gogo Vision and Gogo Signature Services. These revenue share percentages vary by airline partner, but are generally higher than the revenue share percentages for Gogo Connectivity.

 

Transactional costs include billing costs and transaction fees charged by third-party service providers.

 

Business Aviation:

 

Cost of service revenue for the BA segment primarily consists of satellite provider service costs, and also includes transaction costs as well as costs related to technical support. Starting in July 2010, we began charging a portion of the CA segment’s network costs to the BA segment as BA’s customers’ usage of the ATG network expanded beyond an immaterial amount. This charge to the BA segment is made based on a charge per megabyte used.

 

Cost of Equipment Revenue:

 

Our cost of equipment, for each of the CA, BA and International segments, primarily consists of the purchase costs for component parts used in the manufacture of our equipment and, for the BA segment, production costs associated with the equipment sales.

 

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Engineering, Design and Development Expenses:

 

Commercial Aviation:

 

Engineering, design and development expenses for the CA segment include activities related to the development of ground and airborne systems, including customization of network and airborne equipment, design of airborne system installation processes, design and development of next generation technologies and costs associated with obtaining and maintaining FAA certifications.

 

Business Aviation:

 

Engineering, design and development expenses for the BA segment include activities related to the enhancement of existing products, the design and development of next generation products and costs associated with obtaining and maintaining FAA certifications.

 

Sales and Marketing Expenses:

 

Commercial Aviation:

 

Sales and marketing expenses for the CA segment consist primarily of costs associated with cultivating our relationships with our airline partners and attracting additional Gogo customers. Sales and marketing activities related to the airlines include contracting with new airlines to offer Gogo service on their aircraft, contracting to add additional aircraft operated by our existing airline partners to the Gogo-installed fleet, joint marketing of the Gogo service with our airline partners and program management related to Gogo service launches and trade shows. Sales and marketing activities related to our Gogo customers include advertising and marketing campaigns and promotions as well as customer service related activities to our Gogo customers.

 

Business Aviation:

 

Sales and marketing expenses for the BA segment consist of costs associated with activities related to customer sales, advertising and promotions, trade shows, and customer service support related activities. Customer service provides support to end users.

 

General and Administrative Expenses:

 

For both the CA and BA segments, general and administrative expenses include staff and related operating costs of the business support functions, including finance and accounting, legal, human resources, administrative, information technology and executive groups. Starting in January 2012, we began allocating to our BA and International segments certain corporate operating expenses included in the CA segment but shared by our CA, BA and International segments. We did not allocate these expenses prior to January 2012 because they were not deemed material to either the CA or BA segment, or our consolidated results.

 

Upon the completion of this offering, we will be required to comply with new accounting, financial reporting and corporate governance standards as a public company that we expect will cause our general and administrative expenses to increase. Such costs will include, among others, increased auditing and legal fees, board of director fees, investor relations expenses, and director and officer liability insurance costs. We do not expect these costs to be material.

 

Depreciation and Amortization:

 

Depreciation expense for both the CA and BA segments includes depreciation expense associated with our office equipment, furniture, fixtures and leasehold improvements. Additionally the depreciation expense for the CA segment includes depreciation of our airborne and network related equipment. We depreciate these assets on a straight-line method over their estimated useful lives that range from 3-25 years, depending on the assets being depreciated.

 

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Amortization expense for both the CA and BA segments includes the amortization of our finite lived intangible assets on a straight-line basis over the estimated useful lives that range from 3-10 years, depending on the items being amortized.

 

Segment Profit (Loss)

 

We measure our segments’ performance on the basis of segment profit (loss), which is calculated internally as net income (loss) attributable to common stock before interest expense, interest income, income taxes, depreciation and amortization, and certain non-cash charges (including amortization of deferred airborne lease incentives, stock compensation expense, fair value derivative adjustments, Class A and Class B senior convertible preferred stock return, accretion of preferred stock, and loss on extinguishment of debt).

 

Critical Accounting Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our consolidated financial statements and related disclosures require us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related exposures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. In some instances, we could reasonably use different accounting estimates, and in some instances results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

 

We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates. For a discussion of our significant accounting policies to which many of these critical estimates relate, see Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements for the year ended December 31, 2011 included elsewhere in this prospectus.

 

Long-Lived Assets:

 

Our long-lived assets (other than goodwill and indefinite-lived assets which are separately tested for impairment) are evaluated for impairment whenever events indicate that the carrying amount of such assets may not be recoverable. We evaluate long-lived assets for impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. If the future net undiscounted cash flows are less than the carrying value, we then calculate an impairment loss. The impairment loss is calculated by comparing the long-lived assets carrying value with the estimated fair value, which may be based on estimated future discounted cash flows. We would recognize an impairment loss by the amount the long-lived asset’s carrying value exceeds the estimated fair value. If we recognize an impairment loss, the adjusted balance becomes the new cost basis and is depreciated (amortized) over the remaining useful life of the asset.

 

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and long-lived asset fair values, including forecasting useful lives of the long-lived assets and selecting discount rates.

 

We do not believe there is a reasonable likelihood that there will be a material change in the nature of the estimates or assumptions we use to calculate our long-lived asset impairment losses. However, if actual results are not consistent with our assumptions used, we could experience an impairment triggering event and be exposed to losses that could be material.

 

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Indefinite-Lived Asset:

 

We have one indefinite-lived intangible asset, our FCC license. Indefinite-lived intangible assets are not amortized but are reviewed for impairment at least annually or whenever events indicate that the carrying amount of such assets may not be recoverable. We perform our annual impairment test during the fourth quarter of each fiscal year. In determining which approach was most appropriate, we considered the cost approach, market approach and income approach. We determined that the income approach, utilizing the Relief from Royalty and the Greenfield methods, is the most appropriate way to value our indefinite-lived asset.

 

The Relief from Royalty method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The Relief from Royalty method involves two steps: (i) estimation of reasonable royalty rates for the assets and (ii) the application of these royalty rates to a net sales stream and discounting the resulting cash flows to determine a value. We multiplied the selected royalty rate by the forecasted net sales stream to calculate the cost savings (relief from royalty payment) associated with the asset. The cash flows are then discounted to present value by the selected discount rate and compared to the carrying value of the asset.

 

For the Greenfield method we estimate the value of an intangible asset by calculating the present value of the cash flows of a hypothetical new market participant whose only asset is the FCC license to determine the enterprise value of the entire company. It includes all necessary costs and expenses to build the company’s infrastructure during the start-up period, projected revenue, and cash flows once the infrastructure is completed. Since there are no corroborating data available in the market place that would demonstrate a market participant’s experience in setting up an “air-to-ground” business, we utilized our historic results and future projections as the basis for the application of the Greenfield method. We followed the traditional discounted cash flow method, calculating the present value of a new market participant’s estimated debt free cash flows.

 

We weighted the values derived under the Relief from Royalty method 70% and Greenfield method 30% to arrive at the weighted fair value of the FCC spectrum license. Both valuation methods returned results that indicated no impairment.

 

We determined that a higher weighting was appropriate for the Relief from Royalty method as we were able to observe publicly available information on transactions in the telecommunications industry that we believe are a reasonable proxy for our air-to-ground system, whereas, the Greenfield method incorporates assumptions based on our own data, without independent corroboration.

 

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future projected results and estimated respective growth rates, royalty rates, and discount rates, as well as new market participant assumptions. In our 2011 and previous annual impairment assessments, we used a 5% to 6% range for our estimated royalty rates. Estimates used in connection with the discounted cash flow analysis were consistent with the plans and estimates that we used to manage the business, although there was inherent uncertainty in these estimates. The discount rate used in the calculation was consistent with the discount rate used to discount the CA segment cash flows in the discounted cash flow analysis described below under “Derivative Liabilities and Fair Value Derivative Adjustments.” We determined that using a consistent rate was appropriate given the critical nature of the FCC spectrum license to the operations of the CA segment. In establishing the discount rate for the Greenfield method, we considered that a new market participant in 2011 would benefit from the market awareness of in-flight connectivity services already established and the proven technological feasibility of the air-to-ground network.

 

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate the fair value of our indefinite-lived intangible asset. However, if actual results are not consistent with our assumptions used, we could be exposed to losses that could be material. At the 2011 annual impairment test date, our conclusion that there was no indication of impairment would not have changed had the test been conducted assuming: 1) a 100 basis point increase in the discount rate used to discount the

 

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aggregated estimated cash flows of the asset to their net present value in determining the asset’s estimated fair value (without any change in the aggregate estimated cash flows), 2) a 100 basis point decrease in the terminal growth rate (without a change in the discount rate used), or 3) a 100 basis point decrease in the royalty rate applied to the forecasted net sales stream of the FCC spectrum license in the Relief from Royalty method. The weighted fair value of the FCC spectrum license exceeded its carrying value by more than 100%.

 

Derivative Liabilities and Fair Value Derivative Adjustments:

 

Our Class A Preferred Stock and Junior Preferred Stock include features that qualify as embedded derivatives. The embedded derivatives were bifurcated from the host contract and separately accounted for as derivative liabilities. As derivative liabilities, these features are required to be initially recorded at the fair value on the date of issuance and marked to fair value at the end of each reporting period. The fair value of the Company’s preferred stock, common stock and embedded derivatives has historically been determined on a quarterly basis by management with input from an independent third-party valuation specialist. We determined the fair value of the embedded derivatives utilizing methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Aid. The fair value of the derivatives was estimated using a probability-weighted expected return method (“PWERM”). Under the PWERM, the value of all of our various equity securities, including the embedded derivatives, was estimated based upon an analysis of expected future values at the time of a liquidity event, including an IPO and a sale of the Company. The estimated fair value of the embedded derivatives was based upon the probability-weighted present value of the expected value of our various equity securities at the time of a future IPO or sale of the Company, as well as the rights of each class of security. The scenarios included in the PWERM analysis reflect the possible different levels of financial performance as a result of varying the timing and pace of market acceptance for the Gogo service, as well as overall market conditions and varying the timing of any potential IPO or sale of the Company. For each scenario of the PWERM our value at the time of the future liquidity event was estimated under the income approach using a discounted cash flow analysis. The business assumptions underlying each of the discounted cash flow scenarios were consistent with the plans and estimates that we used at the time to manage the business, although there was inherent uncertainty in these estimates.

 

The PWERM and the discounted cash flow analyses underlying each scenario represent Level 3 unobservable inputs. The PWERM and the income approach were deemed to best represent the valuation models investors would likely use in valuing us.

 

Our derivative liabilities contain uncertainties because they require management to make assumptions and to use its judgment to estimate the following inputs into our PWERM model (listed in order of significance):

 

  1)   Projected Future Cash Flows. Our projected future cash flows assume future increases in the number of aircraft online and in the adoption rate of our service, and introduction of new products and services. In addition, we make certain assumptions relating to the development cost of new products and technologies, operating costs and capital expenditures.

 

  2)   Discount Rate. The discount rate used to calculate the present value of the prospective cash flows is estimated using the Capital Asset Pricing Model (CAPM) inputs. The most significant estimates in the CAPM model are the average risk premiums specific to the CA, BA and International segments’ future cash flows. We evaluate quantitative and qualitative factors every quarter that help us assess the level of risk inherent in our projections. Generally speaking, the average risk premiums have declined over time as our operations have matured and we have achieved operating and financial results that were consistent with previously issued projections.

 

  3)   Discount for the Lack of Marketability. The discount for the lack of marketability of our preferred and common stock is estimated using both quantitative and qualitative methods. The discount for the lack of marketability has declined as we approach a potential liquidity event.

 

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  4)   Timing and Probability of Potential Liquidity Events. We utilize four liquidity scenarios in our PWERM model, each of which has different financial performance and liquidity event timing assumptions. As of December 31, 2011, the first two scenarios, which represent 60% of the overall enterprise value, assume the IPO occurs within six months. The other two scenarios, which represent 40% of the overall enterprise value, assume a delayed IPO or a sale of the Company occurring in 2013. The weighting of the four scenarios stayed consistent between December 2011 and June 2012, however the timing of each of the expected liquidity events has been delayed 5-9 months from what was anticipated in December 2011. Each scenario has a set of assumptions that represents sensitivity around future revenue and cash flow projections.

 

Our derivative liabilities will typically decrease, resulting in other income in our statement of operations, when our enterprise value increases, and will typically increase, resulting in other expense, when our enterprise value declines. Our current derivative liabilities stem from features in our Class A Senior Convertible Preferred Stock (the “Class A Preferred Stock”) and Junior Convertible Preferred Stock (the “Junior Preferred Stock”) that are tied to our enterprise valuation. For example, the Class A Preferred Stock contains a liquidation preference feature that provides for a minimum cumulative return to the holder of the Class A Preferred Stock if a Deemed Liquidation Event occurs. As our total enterprise value increases, the value of that special liquidation preference declines as eventually the increase in our total enterprise value will reach a level where the holders of the Class A Preferred Stock will convert to common stock in order to receive a cumulative return larger than the minimum levels defined in the liquidation preference, thus making such liquidation preference worthless. Upon consummation of this offering, at our election, all of our outstanding shares of convertible preferred stock will convert into shares of our common stock and any amounts recorded in preferred stock and derivative liabilities will be reclassified into additional paid-in capital. If, as anticipated, we make such election, we will not have, and our financial statements will not reflect, such derivative liabilities after the consummation of this offering.

 

For the six month periods ended June 30, 2012 and 2011, we recorded $9.6 million and $34.3 million, respectively, of other income associated with the fair value derivative adjustments driven by an increase in our estimated enterprise value. The increase in enterprise value for the six month period ended June 30, 2012 was primarily due to a reduction in the discount rate applied to our projected future cash flows, an increase in our future cash flow projections based on current market outlook, and to a lesser extent the addition of the projected future cash flows for our International segment and timing of an expected liquidity event. Specifically, we reduced the discount rate for our CA domestic business due to better visibility into our future projections, increased future cash flow projections for BA based on strong operating performance to-date and better visibility into future cash flow projections. The increase in enterprise value for the six month period ended June 30, 2011 was primarily due to a reduction in the discount rate applied to our projected future cash flows based on strong operating and financial performance and better visibility into our future projections.

 

For the year ended December 31, 2011, we recorded $58.7 million of other income associated with the fair value derivative adjustments driven by the increase in our estimated enterprise value. The increase in enterprise value was primarily due to a reduction in the discount rate applied to our projected future cash flows. We reduced the discount rate due to strong operating and financial performance against 2011 projections and better visibility into our future projections. For the year ended December 31, 2010, we recorded $33.2 million of expense associated with fair value derivative adjustments. The expense recorded for the year ended December 31, 2010 primarily related to a reduction in our projections that occurred in mid-2010, based on an updated assessment of market conditions and the pace of market acceptance for our Gogo service, which resulted in a reduction of our estimated enterprise value.

 

In 2011, the value of embedded derivatives associated with our Class A Preferred Stock substantially declined as our enterprise value increased. As a result of the increase in enterprise value, more investors of our Class A Preferred Stock would choose to forego their liquidation preference in lieu of a higher return triggered by conversion into common stock upon the occurrence of a liquidity event. In the six month period ended June 30, 2012, the value of the embedded derivatives associated with our Class A Preferred Stock continued to decline

 

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and was reduced to zero due to an increase in our enterprise value. The value of embedded derivatives associated with our Junior Preferred Stock declined to zero as the fair value of the Junior Preferred Stock increased above $10,000 per share, the level at which the derivative liability is zero.

 

Should our enterprise value decrease in future periods, we will likely incur other expense as the value of the embedded derivatives will likely increase; however, future increases in our enterprise value, assuming the other valuation assumptions remain constant, will not result in other income as the value of the derivative liabilities have now been reduced to zero. Such fluctuations could be material to our financial position and results of operations for any single period.

 

Share-Based Compensation:

 

We account for stock-based compensation based on the grant date fair value of the award. We recognize this cost as an expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are estimated based on our historical analysis of attrition levels, and such estimates are generally updated annually for actual forfeitures or when any significant changes to attrition levels occur. We use the Black-Scholes option-pricing model to determine the estimated fair value of stock options. Critical inputs into the Black-Scholes option-pricing model include: the estimated grant date fair value of our common stock; the option exercise price; the expected term of the option in years; the annualized volatility of the stock; the risk-free interest rate; and the annual rate of quarterly dividends on the stock, which are estimated as follows:

 

   

Fair Value of Our Common Stock. Our common stock has not yet been publicly traded, therefore we estimate the fair value of the common stock underlying our stock options. The fair value of our common stock has historically been determined on a quarterly basis by management with input from an independent third-party valuation specialist in connection with the valuation discussed above related to our embedded derivative liabilities. Please refer to “—Common Stock Valuations” below for a detailed discussion about assumptions used in estimating the grant date fair value of the common stock underlying our stock options.

 

   

Option Exercise Price. The exercise price of stock options is determined by the Compensation Committee of our Board of Directors with the input of the same independent third-party valuation specialist. The table, as set forth in “—Common Stock Valuations” below, summarizes our option grants under the Aircell Holdings Inc. Stock Option Plan during 2010 and 2011, including the number of options granted, the option exercise price, the estimated fair value of our common stock on the grant date, and the fair value of the options granted.

 

   

Expected Term. The expected term of the stock options is determined based upon the simplified approach, allowed under SEC Staff Accounting Bulletin No. 110, which assumes that the stock options will be exercised evenly from vesting to expiration, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. As we obtain data associated with future exercises, the expected term of future grants will be adjusted accordingly.

 

   

Volatility. Expected volatility is calculated as of each grant date based on reported data for a peer group of publicly traded companies for which historical information is available. We intend to continue to use peer group volatility information until our historical volatility can be regularly measured against an open market. While we are not aware of any news or disclosure by our peers that may impact their respective volatility, there is a risk that peer group volatility may increase, thereby increasing any prospective future compensation expense that will result from future option grants.

 

   

Risk-free Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

   

Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

 

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If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. The inputs that create the most sensitivity in our option valuation model are the estimated grant date fair value of our common stock and volatility. The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:

 

     2012     2011     2010  

Approximate risk-free interest rate

     1.1     1.2     2.6

Average expected life

     6.25 years        6.25 years        6 years   

Dividend yield

     N/A        N/A        N/A   

Volatility

     44.6     44.7     73.8

Weighted average grant date fair value of common stock underlying options granted

   $ 1,611.17      $ 1,464.71      $ 457.14   

Weighted average grant date fair value of stock options granted

   $ 652.92      $ 572.21      $ 240.41   

 

Common Stock Valuations

 

We determined the estimated fair value of our common stock utilizing methodologies, approaches, and assumptions consistent with the AICPA Practice Aid. The estimated fair value of the common stock underlying our stock options has been valued using an income approach and a PWERM using Level 3 unobservable inputs, as the income approach and PWERM were deemed to best represent the valuation models investors would likely use in valuing us. Estimates used in connection with the discounted cash flow analysis were consistent with the plans and estimates that we used to manage the business, although there was inherent uncertainty in these estimates.

 

In the absence of a public trading market, our management exercised significant judgment and considered numerous objective and subjective factors to determine the estimated fair value of our common stock as of the date of each option grant. Such factors include:

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

the hiring of key personnel;

 

   

the market performance of comparable publicly-traded companies;

 

   

the U.S. and global capital market conditions;

 

   

our stage of development and related discount rate;

 

   

the prices, rights, preferences and privileges of our preferred stock relative to the common stock;

 

   

timing of potential liquidity events and their probability of occurring; and

 

   

any adjustment necessary to recognize a lack of marketability of our common stock.

 

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We granted stock options under the Aircell Holdings, Inc. Stock Option Plan with the following exercise prices during 2010, 2011 and 2012:

 

Option Grant

   Number
of Options
Granted
     Exercise
Price
     Estimated Fair
Value of
Common Stock
     Gross Fair
Value  of
Options
 

June 2010

     21,985       $ 935.18       $ 443.27       $ 5,211,865   

September 2010

     2,615       $ 935.18       $ 523.22       $ 795,802   

October 2010

     2,000       $ 935.18       $ 523.22       $ 531,145   

March 2011

     250       $ 935.18       $ 838.81       $ 93,944   

April 2011

     600       $ 935.18       $ 838.81       $ 225,467   

December 2011

     10,455       $ 1,830.96       $ 1,515.60       $ 6,149,382   

January 2012

     800       $ 1,830.96       $ 1,515.60       $ 470,541   

March 2012

     675       $ 1,830.96       $ 1,576.15       $ 424,769   

April 2012

     200       $ 1,830.96       $ 1,576.15       $ 125,852   

May 2012

     50       $ 1,830.96       $ 1,576.15       $ 31,251   

June 2012

     250       $ 1,830.96       $ 1,809.08       $ 197,515   

July 2012

     300       $ 1,830.96       $ 1,809.08       $ 235,464   

 

Significant factors that affected the fair value of our common stock at these grant periods include:

 

Options Granted in June 2010

 

In December 2009, at the time of our C-Corp conversion, based on our then current financial projections, expectation as to the timing of a liquidity event, the terms and preferences of our various classes of capital stock, and the valuation implied by the Class A Preferred Stock investment by new investors, we estimated the value of our common stock at $876.68 per share. Between such date and June 30, 2010, the estimated fair value of our common stock declined to $443.27 per share. The decrease in fair value was driven primarily by changes in the underlying financial projections related to the CA segment resulting from a slower pace of installations driven by a slowdown in the post-recession economic recovery as well as airline consolidations, and changes in the underlying financial projections in the BA segment due primarily to the negative effect of the economic downturn on the business aviation industry. Given the depressed business environment and lack of visibility in the economic recovery, we also delayed our liquidity event timing assumptions by 6-9 months, thereby increasing the discount for lack of marketability from 20% to 25%. We granted options to purchase 21,985 shares of common stock in June 2010 with an exercise price of $935.18 per share.

 

Options Granted in September 2010 and October 2010

 

The estimated fair value of our common stock increased to $523.22 per share from June 2010 to September 2010. The increase in value was primarily driven by the time value of money as we executed well against the revised projections and moved one quarter closer to the anticipated timing of the liquidity event. As a result, the discount for lack of marketability of our common stock was adjusted from 25% to 20%. We granted options to purchase 4,615 shares of common stock in September and October 2010 with an exercise price of $935.18 per share.

 

Options Granted in March 2011 and April 2011

 

The estimated fair value of our common stock increased to $838.81 per share from September 2010 to March 2011. The increase in value was driven by strong operating results during the second half of 2010 as compared to the revised forecast and an improved outlook for the CA segment. In addition, the discount for lack of marketability declined from 20% to 10% as we moved closer to a potential liquidity event. Such increases in fair value were offset to some extent by dilution resulting from the issuance of additional Class A Preferred Stock. We granted options to purchase 850 shares of common stock in March and April of 2011 at an exercise price of $935.18 per share.

 

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Options Granted in December 2011 and January 2012

 

The estimated fair value of our common stock increased to $1,515.60 per share from March 2011 to December 2011. The increase in fair value was primarily driven by a reduction in the discount rate that we apply to projected cash flows. We reduced the discount rate based on strong operating and financial performance by the CA and BA segments against 2011 projections and better visibility into our future projections. We estimate enterprise value and fair value of common stock quarterly, by analyzing four potential liquidity scenarios. The relative weighting of the scenarios stayed consistent between March 2011 and December 2011. However, the projected length of time to a potential liquidity event has decreased and the Company’s enterprise value has increased as a result of the reduction in the discounting period in the present value calculation. We granted options to purchase 10,455 shares of common stock in December 2011 and 800 shares of common stock in January 2012, each at an exercise price of $1,830.96 per share.

 

Options Granted in March 2012 and April 2012

 

The estimated fair value of our common stock increased to $1,576.15 per share from December 2011 to March 2012. The increase in fair value was driven by a reduction in the discount rate applied to projected cash flows for our CA and BA segments and the inclusion of projections related to our International segment. We reduced the discount rate based on strong operating performance, better visibility into our future projections related to the updated projections for our two domestic businesses and application of a 37% discount rate to our International segment projections. As discussed under “—Derivative Liabilities and Fair Value Derivatives Adjustments” above, we estimate enterprise value and fair value of common stock quarterly, by analyzing four potential liquidity scenarios. The relative weighting of the scenarios stayed consistent between December 2011 and March 2012. However, liquidity dates were adjusted to reflect current expectations of a liquidity event. We granted options to purchase 675 shares of common stock in March 2012 and 200 shares of common stock in April 2012 each at an exercise price of $1,830.96 per share.

 

Options Granted in May 2012, June 2012 and July 2012

 

The estimated fair value of our common stock increased to $1,809.08 per share from March 2012 to June 2012. The increase in fair value was driven by an increase in future cash flows specifically for our BA business segment, and a reduction in the discount rate applied to projected cash flows for our CA and International business segments. The discount rate applied to projected cash flows for CA declined due to a reduction in the risk free interest rate. The discount rate applied to projected cash flows for International was reduced as a result of gaining better visibility into our future cash flow projections. The relative weighting of the four liquidity scenarios stayed consistent between March and June 2012. However, liquidity dates were adjusted to reflect current expectations of a liquidity event. We granted options to purchase 50 shares of common stock in May 2012, 250 shares of common stock in June 2012 and 300 shares of common stock in July 2012, all at an exercise price of $1,830.96 per share.

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Codification update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (“ASU 2011-04”). This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. We applied the provisions of ASU 2011-04 to our fair value measurements during 2012; however, the adoption did not have a material effect on our financial statements. See Note 12, “Fair Value of Financial Assets and Liabilities,” to our unaudited condensed consolidated financial statements for the disclosures required by ASU 2011-04.

 

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Under Section 102(b) of the Jumpstart Our Business Startups Act, an “emerging growth company” such as Gogo can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Pursuant to Section 107(b) of the Jumpstart Our Business Startups Act, we have irrevocably elected to “opt out” of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Results of Operations

 

The following table sets forth, for the periods presented, certain data from our consolidated statement of operations. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes.

 

Statement of Operations Data

 

     Year Ended December 31,     

Six Months

    Ended June 30,    

 
     2009     2010     2011     

    2011    

    2012  
     (in thousands)               

Consolidated Statement of Operations Data:

           

Revenue:

           

Service Revenue

   $ 15,626      $ 58,341        $103,918       $ 46,113      $ 76,664   

Equipment Revenue

     21,216        36,318        56,238         26,827        35,488   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Revenue

     36,842        94,659        160,156         72,940        112,152   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

           

Cost of service revenue (exclusive of items shown below)

     37,903        46,474        54,605         24,932        37,065   

Cost of equipment revenue (exclusive of items shown below)

     9,874        14,919        23,240         10,877        14,758   

Engineering, design and development

     21,901        19,228        22,245         10,634        15,312   

Sales and marketing

     27,762        23,624        25,116         11,396        12,740   

General and administrative

     28,340        36,384        36,101         16,550        24,033   

Depreciation and amortization

     21,898        30,991        32,673         16,379        17,427   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     147,678        171,620        193,980         90,768        121,335   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating loss

     (110,836     (76,961     (33,824)         (17,828     (9,183

Total other (income) expense

     31,430        33,158        (58,492)         (34,124     (9,066
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax provision

     (142,266     (110,119     24,668         16,296        (117

Income tax provision

            3,260        1,053         433        449   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

     (142,266     (113,379     23,615         15,863        (566

Class A and Class B senior convertible preferred stock return

            (18,263     (31,331)         (11,943     (24,905

Accretion of preferred stock

            (8,501     (10,181)         (5,084     (5,198
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss attributable to common stock

   $ (142,266   $ (140,143     $(17,897)       $ (1,164   $ (30,669
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Six Months Ended June 30, 2012 and 2011

 

Revenue:

 

Revenue by segment and percent change for the six month periods ended June 30, 2011 and 2012 was as follows:

 

     For the Six Months
Ended June 30,
     % Change  
     2011      2012      2012 Over 2011  
     (in thousands)         

Service Revenue:

        

CA

   $ 37,287       $ 61,309         64.4

BA

     8,826         15,355         74.0
  

 

 

    

 

 

    

Total Service Revenue

   $ 46,113       $ 76,664         66.3
  

 

 

    

 

 

    

Equipment Revenue:

        

CA

   $ 509       $ 839         64.8

BA

     26,318         34,169         29.8

International

             480         n/a   
  

 

 

    

 

 

    

Total Equipment Revenue

   $ 26,827       $ 35,488         32.3
  

 

 

    

 

 

    

Total Revenue:

        

CA

   $ 37,796       $ 62,148         64.4

BA

     35,144         49,524         40.9

International

             480         n/a   
  

 

 

    

 

 

    

Total Revenue

   $ 72,940       $ 112,152         53.8
  

 

 

    

 

 

    

 

Commercial Aviation:

 

CA revenue increased to $62.1 million for the six month period ended June 30, 2012 as compared with $37.8 million in the prior year period primarily due to an increase in service revenue. The increase in CA service revenue was primarily due to an increase in GPO and ARPP. GPO increased to 120.2 million for the six month period ended June 30, 2012 from 91.0 million in the six month period ended June 30, 2011, driven by an increase in aircraft online to 1,565 as of June 30, 2012 from 1,147 as of June 30, 2011. The 32% increase in GPO was not as high as the 36% increase in aircraft online because a significant portion of the new aircraft online were smaller regional jets, which typically have a lower gross passenger opportunity. ARPP increased to $0.51 for the six month period ended June 30, 2012 as compared with $0.41 for the prior year period primarily due to an increase in connectivity take rate partially offset by a decline in ARPS. The connectivity take-rate increased to 5.4% for the six month period ended June 30, 2012 as compared with 4.3% in the prior year period due to the expansion of our footprint across a larger number of aircraft, which led to increased passenger awareness and adoption of the Gogo service, as well as increased sponsorship related activities. ARPS decreased to $9.18 for the six month period ended June 30, 2012 as compared with $9.31 in the prior year period. The decrease in ARPS was due primarily to the increase in sponsored sessions noted above, which historically have had a lower ARPS than Gogo Connectivity user-purchased sessions. The impact of the increase in sponsored sessions was partially offset by an increase in subscription sessions, which historically have had a higher ARPS than other Gogo Connectivity user-purchased sessions and, to a lesser extent, a reduction in the discounts offered on Gogo Connectivity during the six month period ended June 30, 2012. Subscription revenue increased to approximately 39% of Gogo Connectivity revenue for the six month period ended June 30, 2012 as compared with approximately 25% in the prior year period. Passengers used Gogo Connectivity 6.5 million times in the six month period ended June 30, 2012 as compared with 3.9 million times in the prior year period.

 

Our retail revenue increased to $56.2 million for the six month period ended June 30, 2012 as compared with $35.2 million for the prior year period due to growth in both individual sessions and subscriptions. Revenue

 

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from individual sessions and subscriptions increased to $32.7 million and $23.6 million, respectively, for the six month period ended June 30, 2012 from $26.0 million and $9.2 million for the prior year period, respectively, due primarily to the expansion of our footprint across a larger number of aircraft and increased passenger awareness. The increase in subscription revenue was also driven by the cancelation of the non-renewable 30-day pass in July 2011, which we treated as individual session revenue. We believe many Gogo users who previously purchased the non-renewable 30-day pass transitioned to our subscription based purchase options. Our non-retail revenue increased to $3.8 million for the six month period ended June 30, 2012 from $1.2 million for the prior year period primarily due to a $1.6 million increase in sponsorship activity. Sponsorship revenue accounted for approximately 65% and 74% of non-retail revenue for the six month periods ended June 30, 2012 and 2011, respectively.

 

A summary of the components of CA’s service revenue for the six month periods ended June 30, 2011 and 2012 is as follows:

 

     For the Six Months
Ended June 30,
 
     2011      2012  
     (in thousands)  

Gogo Connectivity revenue

   $ 36,371       $ 59,991   

Gogo Vision, Gogo Signature Services and other service revenue(1)

     916         1,318   
  

 

 

    

 

 

 

Total service revenue

   $ 37,287       $ 61,309   
  

 

 

    

 

 

 

 

  (1)   Other service revenue includes content filtering, VoIP access for airlines’ flight crews and portal development services.

 

Business Aviation:

 

BA revenue increased to $49.5 million for the six month period ended June 30, 2012 as compared with $35.1 million in the prior year period due to increases in both equipment and service revenue. BA service revenue increased to $15.4 million for the six month period ended June 30, 2012 as compared with $8.8 million in the prior year period primarily due to more customers subscribing to our Gogo Biz service. The number of ATG aircraft online increased to 1,166 as of June 30, 2012 as compared with 614 as of June 30, 2011.

 

BA equipment revenue increased 29.8% to $34.2 million for the six month period ended June 30, 2012 as compared with $26.3 million for the prior year period, due to increased demand for both our ATG and satellite product lines. The BA segment’s ATG equipment revenue increased to $18.5 million for the six month period ended June 30, 2012 from $14.1 million for the prior year period primarily due to an 18.6% increase in the number of ATG units shipped as demand for our ATG equipment offerings increased due to heightened demand for our Gogo Biz service. ATG equipment revenue also increased due to a price increase implemented in February 2012 and changes in product mix to higher priced products. Satellite equipment revenue increased to $15.7 million for the six month period ended June 30, 2012 from $12.3 million for the prior year period, primarily due to a 25.1% increase in the number of satellite equipment units shipped.

 

International:

 

Our International business is in the start-up phase as we initiated our international expansion efforts in the first quarter of 2012. Through our International business, we intend to provide in-flight connectivity and wireless digital entertainment solutions to passengers flying on foreign-based commercial airlines and international routes of U.S.-based commercial airlines. For the six month period ended June 30, 2012, our International business generated $0.5 million of equipment revenue.

 

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Cost of Service Revenue:

 

Cost of service revenue by segment and percent change for the six month periods ended June 30, 2011 and 2012 were as follows:

 

     For the Six  Months
Ended June 30,
     % Change  
     2011      2012      2012 Over 2011  
     (in thousands)         

CA

   $ 22,342       $ 33,143         48.3%   

BA

     2,590         3,611         39.4

International

             311         n/a   
  

 

 

    

 

 

    

Total

   $ 24,932       $ 37,065         48.7
  

 

 

    

 

 

    

 

CA cost of service revenue increased to $33.1 million for the six month period ended June 30, 2012 as compared with $22.3 million in the prior year period primarily due to a $7.1 million increase in the amount of revenue share earned by our airline partners. The revenue share increase was driven by the increase in CA service revenue for the period and by an increase in the average revenue share percentage earned by our airline partners. CA cost of service revenue also increased due to increased network operations, billing and transaction related expenses as a result of an increase in the number of Gogo Connectivity sessions.

 

BA cost of service revenue increased to $3.6 million for the six month period ended June 30, 2012 as compared with $2.6 million in the prior year period primarily due to an increase in the number of ATG units online from 614 to 1,166, which resulted in an increase in ATG related network service costs associated with providing Gogo Biz services that are charged to our BA segment. Our satellite service fees also increased for the six month period ended June 30, 2012 as compared with the prior year period as the number of subscribers to our satellite services increased from 4,647 to 4,920.

 

International cost of service revenue was $0.3 million for the six month period ended June 30, 2012 as we initiated our international expansion efforts in the first quarter of 2012.

 

We expect cost of service revenue to increase in future periods due to increases in revenue share, billing and transaction expenses as our service revenue increases. We also expect revenue share expense to increase as the revenue share percentage under certain of our connectivity agreements increases due to the occurrence of contractually stipulated triggering events by the end of 2012. We currently estimate that such increases will amount to approximately 3% of the CA segment’s service revenue. In addition, revenue share expense and percentage may increase in future periods driven by growth in Gogo Vision and Gogo Signature Services. Revenue share expense could also increase to the extent (if any) that future connectivity agreements provide for increased revenue share percentages in favor of our airline partners. We believe that our network related expenses will increase to support the projected increased use and expansion of our network. Additionally, due to the relatively young age of our ATG network, maintenance expenses have historically been relatively low compared to what we expect our maintenance costs will be in future periods. However, a significant portion of our network operations costs is relatively fixed in nature and does not fluctuate directly with revenue. As such, we expect network expenses as a percentage of service revenue to decline as we continue to achieve economies of scale in our business. We expect total cost of service revenue to decline as a percentage of total service revenue in future periods as we realize efficiencies inherent in the scalability of our business.

 

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Cost of Equipment Revenue:

 

Cost of equipment revenue by segment and percent change for the six month periods ended June 30, 2011 and 2012 were as follows:

 

     For the Six
Months  Ended
June 30,
     % Change  
     2011      2012      2012 Over 2011  
     (in thousands)         

CA

   $ 306       $ 481         57.2

BA

     10,571         14,081         33.2

International

             196         n/a   
  

 

 

    

 

 

    

Total

   $ 10,877       $ 14,758         35.7
  

 

 

    

 

 

    

 

Cost of equipment revenue increased to $14.8 million for the six month period ended June 30, 2012 as compared with $10.9 million in the prior year period primarily due to an increase in the BA segment’s equipment shipments to 742 units for the six month period ended June 30, 2012 as compared with 609 units for the prior year period. We expect that our cost of equipment revenue will vary with changes in equipment revenue.

 

Engineering, Design and Development Expenses:

 

Engineering, design and development expenses increased 44.0% to $15.3 million for the six month period ended June 30, 2012 as compared with $10.6 million for the prior year period, primarily due to international development initiatives, a 45.6% increase in spending in the BA segment, and a 7.8% increase in spending in the CA segment. Engineering, design and development expenses related to international expansion efforts totaled $2.4 million in the six month period ended June 30, 2012 which included the development of satellite systems and expenses incurred to obtain related Supplemental Type Certificates (“STC”) to support international commercial airlines. The increase in engineering, design and development expenses for the BA segment was due to an increase in spending on next generation products, including the Aircell Smartphone. The increase in engineering, design and development expenses for the CA segment was due to an increase in spending on the development of our next generation products, including ATG-4, and an increase in STCs in process.

 

We expect engineering, design and development expenses to increase in future periods as we execute our technology roadmap, expand internationally, and continue the development of next generation products and services.

 

Sales and Marketing Expenses:

 

Sales and marketing expenses increased 11.8% to $12.7 million for the six month period ended June 30, 2012 as compared with $11.4 million for the prior year period, primarily due to spending on international sales and marketing initiatives and a 7.3% increase in spending in the CA segment, partially offset by a 9.6% decrease in spending in the BA segment. Consolidated sales and marketing expenses as a percentage of total consolidated revenue decreased to 11.4% for the six month period ended June 30, 2012 as compared with 15.6% for the prior year period. Sales and marketing expenses related to international expansion efforts totaled $1.1 million in the six month period ended June 30, 2012 which included expenses incurred to build our international sales and marketing teams and attend various tradeshows to introduce our services to international commercial airlines. The increase in sales and marketing expenses in the CA segment was primarily due to an increase in personnel expense to support the growth of the business and an increase in certain other marketing related activities, partially offset by a decrease in the use of “gate teams”.

 

We expect our sales and marketing expenses to increase in future periods as we increase advertising and promotional initiatives to attract new customers and launch and expand programs to retain our existing users. We also expect sales and marketing expenses to increase in future periods as we increase headcount to support the international expansion. Additionally, the BA segment’s sales and marketing expenses will fluctuate with its equipment revenue. However, overall we expect consolidated sales and marketing expenses to decline as a percentage of consolidated revenue.

 

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General and Administrative Expenses:

 

General and administrative expenses increased in all three segments by a total of 45.2% to $24.0 million for the six month period ended June 30, 2012 as compared with $16.6 million for the prior period. The BA segment increased 120.2% and the CA segment increased 18.3% for the six month period ended June 30, 2012 as compared with the prior year period. The increase in both the CA and BA segments’ general and administrative expenses was primarily due to an increase in personnel related expenses to manage the growth of the business and an increase in employee bonuses as bonus expense for all employees is reported as part of general and administrative expense. The increase in the BA segments’ general and administrative expense was also due to recognition of a $0.9 million receivable reserve related to the Hawker Beechcraft bankruptcy. The International segment’s general and administrative expenses related to international expansion efforts totaled $2.3 million in the six month period ended June 30, 2012 including costs to manage the international business. Consolidated general and administrative expenses as a percentage of total consolidated revenue decreased to 21.4% for the six month period ended June 30, 2012 as compared with 22.7% for the prior year period.

 

We expect our general and administrative expenses to increase in future periods as we expand our workforce to support the growth of our business both domestically and internationally. However, we expect general and administrative expenses to decrease as a percentage of consolidated revenue.

 

Depreciation and Amortization:

 

Depreciation and amortization expense increased 6.4% to $17.4 million for the six month period ended June 30, 2012 as compared with $16.4 million for the prior year period. The increase in depreciation and amortization expense was primarily due to the increase in the number of aircraft outfitted with our ATG equipment by our CA business and the expansion of our ATG network. As noted above, we had 1,565 and 1,147 aircraft online as of June 30, 2012 and 2011, respectively. These increases were partially offset by a decline in the amortization expense as certain of our software intangible assets became fully amortized during 2012 and 2011.

 

Other (Income) Expense:

 

Other (income) expense and percent change for the six month periods ended June 30, 2011 and 2012 were as follows:

 

    

  For the Six Months  

Ended June 30,

    % Change  
     2011     2012     2012 Over 2011  
     (in thousands)        

Interest income

   $ (43   $ (25     (41.9 )% 

Interest expense

     132        599        353.8

Fair value derivative adjustment

     (34,253     (9,640     (71.9 )% 

Other expense

     40               (100.0 )% 
  

 

 

   

 

 

   

Total

   $ (34,124   $ (9,066     (73.4 )% 
  

 

 

   

 

 

   

 

Other income was $9.1 million for the six month period ended June 30, 2012 as compared with other income of $34.1 million in the prior year period. The substantial majority of other (income) expense in the periods presented relates to fluctuations associated with the recording of changes to our derivative liabilities associated with our Class A Preferred Stock and Junior Preferred Stock at fair value at each reporting date. For the six month periods ended June 30, 2012 and 2011 we recorded $9.6 million and $34.3 million, respectively, of income associated with the fair value derivative adjustments as our estimated enterprise value increased in both periods. The increase in enterprise value was primarily due to a reduction in the discount rate applied to our projected future cash flows. See Note 12, “Fair Value of Financial Assets and Liabilities,” in our unaudited condensed consolidated financial statements for additional discussion related to our derivative liabilities. The six months ended June 30, 2012 also included $0.6 million of interest expense as we entered into the Senior Term Facility on June 21, 2012.

 

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We expect interest expense to increase in future periods related to our Senior Term Facility. See “—Liquidity and Capital Resources” for additional information regarding the Senior Term Facility.

 

Income Taxes:

 

The effective income tax rates for the six month periods ended June 30, 2012 and 2011 were (383.8%) and 2.7%, respectively. Income tax expense recorded in each period was similar with differences in pre-tax income causing the change in effective tax rate. The difference between our effective tax rates as compared with the U.S. federal statutory rate of 35% for the six month period ended June 30, 2012 and 34% for the six month period ended June 30, 2011 was primarily due to the recording of a valuation allowance against our net deferred tax assets and the effect of the fair value adjustments to our derivative liabilities, which are excluded from taxable income (loss).

 

We expect our income tax provision to increase in future periods if and when we become profitable.

 

Segment Profit (Loss):

 

CA’s segment loss decreased 66.9% to $4.6 million for the six month period ended June 30, 2012, as compared with $13.8 million for the prior year period. The decline in CA’s segment loss was due to the significant increase in service revenue, partially offset by an increase in CA’s operating expenses, as discussed above.

 

BA’s segment profit increased 48.7% to $18.7 million for the six month period ended June 30, 2012, as compared with $12.6 million for the prior year period. The increase in BA’s segment profit was due to the increases in service and equipment revenue and a decrease in sales and marketing expenses, partially offset by increases in cost of equipment revenue, general and administrative expenses, engineering, design and development and cost of service revenue, as discussed above.

 

International’s segment loss was $5.9 million for the six month period ended June 30, 2012 due to the International segment’s operating expenses, as discussed above.

 

Years Ended December 31, 2010 and 2011

 

Revenue:

 

Revenue by segment and percent change for the years ended December 31, 2010 and 2011 was as follows:

 

     For the Years
Ended December 31,
     % Change  
     2010      2011      2011 Over 2010  
     (in thousands)         

Service Revenue:

        

CA

   $ 48,318       $ 83,421         72.6

BA

     10,023         20,497         104.5