Gogo Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Common Stock Our common stock has been listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GOGO” since June 21, 2013. Holders of Record As of February 25, 2022, there were 37 stockholders of record of our common stock, and the closing price of our common stock was $14.08 per share as reported on the NASDAQ. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Repurchases of Equity Securities None. Recent Sale of Unregistered Securities None. Use of Proceeds from Registered Securities None. Securities Authorized for Issuance Under Equity Compensation Plans See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for information regarding securities authorized for issuance. Performance This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Gogo Inc. under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act. The following graph shows a comparison of cumulative total return for our common stock, the Standard & Poor's 500 Stock Index (“S&P 500”) and the Nasdaq Composite Index (“NASDAQ Composite”) for the period from December 31, 2016 through December 31, 2021, the last trading day of 2021. The graph assumes that $100 was invested at the market close on December 31, 2016 in our common stock, the S&P 500 and the NASDAQ Composite 39 and assumes reinvestments of dividends, if any. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock. Item 6. [Reserved] 40 Item 7. Management’s Discussion and Analysis o f Financial Condition and Results of Operations The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our consolidated financial statements and the related notes contained in this Annual Report on Form 10-K. On December 1, 2020, we completed the previously announced sale of our commercial aviation (“CA”) business to a subsidiary of Intelsat Jackson Holdings S.A. (“Intelsat”) for a purchase price of $400.0 million in cash, subject to certain adjustments (the “Transaction”). As a result, all periods presented in our consolidated financial statements and other portions of this Annual Report on Form 10-K have been conformed to present the CA business as discontinued operations. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” in this report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Our fiscal year ends December 31 and, unless otherwise noted, references to years or fiscal are for fiscal years ended December 31. See “— Results of Operations.” Company Overview Gogo is the world’s largest provider of broadband connectivity services for the business aviation market. Our mission is to provide ground-like connectivity to every passenger on every flight around the globe, enabling superior passenger experiences and efficient flight operations. To accomplish our mission, we design, build and operate dedicated air-to-ground (“ATG”) networks, engineer and maintain in-flight systems of proprietary hardware and software, and deliver customizable connectivity and wireless entertainment services and global support capabilities to our aviation partners. Our services include narrowband satellite-based voice and data services made available through strategic partnerships with satellite providers. Our chief operating decision maker evaluates performance and business results for our operations, and makes resource and operating decisions, on a consolidated basis. As we do not have multiple segments, we do not present segment information in this Annual Report on Form 10-K. Impact of COVID-19 Pandemic The COVID-19 pandemic caused a significant decline in international and domestic business aviation travel, which materially and adversely affected our business in 2020. Beginning in March 2020, our business saw a sharp decrease in flight activity, as well as an increase in requests for account suspensions and decreases in new plan activations. Although these and other key metrics began to recover in the third quarter of 2020 and have since reached pre-COVID levels or better, we continue to monitor the status of the pandemic in the United States and internationally. We are unable to predict whether COVID-19 will have a material adverse effect on our business in the future or with what degree of severity or over what length of time such impact may occur. Factors and Trends Affecting Our Results of Operations We believe that our operating and business performance is driven by various factors that affect the business aviation industry, including trends affecting the travel industry and trends affecting the customer bases that we target, as well as factors that affect wireless Internet service providers and general macroeconomic factors. Key factors that may affect our future performance include: • costs associated with the implementation of, and our ability to implement on a timely basis, our technology roadmap, including upgrades to and installation of the ATG technologies we currently offer, Gogo 5G, and any other next generation or other new technology; • our ability to manage issues and related costs that may arise in connection with the implementation of our technology roadmap, including technological issues and related remediation efforts and failures or 41 delays on the part of antenna and other equipment developers and providers, some of which are single-source; • our ability to license additional spectrum and make other improvements to our network and operations as technology and user expectations change; • the number of aircraft in service in our markets, including consolidations or changes in fleet size by one or more of our large-fleet customers; • the economic environment and other trends that affect both business and leisure aviation travel, including the impact of COVID-19 on restrictions on and demand for air travel; • disruptions to supply chains and installations, including COVID-19-related shortages of electronic components that have resulted in longer lead times and delays in obtaining certain electronic components used in the airborne equipment that we manufacture; • the extent of our customers’ adoption of our products and services, which is affected by, among other things, willingness to pay for the services that we provide, the quality and reliability of our products and services, changes in technology and competition from current competitors and new market entrants; • our ability to engage suppliers of equipment components and network services on a timely basis and on commercially reasonable terms; • changes in laws, regulations and interpretations affecting telecommunications services, including those affecting our ability to maintain our licenses for ATG spectrum in the United States, obtain sufficient rights to use additional ATG spectrum and/or other sources of broadband connectivity to deliver our services, expand our service offerings and manage our network; and • changes in laws, regulations and policies affecting our business or the business of our customers and suppliers, including changes that impact the design of our equipment and our ability to obtain required certifications for our equipment. Key Business Metrics Our management regularly reviews financial and operating metrics, including the following key operating metrics, 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. For the Years Ended December 31, 2021 2020 2019 Aircraft online (at period end) ATG 6,400 5,778 5,669 Satellite 4,567 4,702 5,001 Average monthly connectivity service revenue per aircraft online ATG $ 3,238 $ 2,951 $ 3,113 Satellite 250 212 249 Units sold ATG 869 667 909 Satellite 205 199 560 Average equipment revenue per unit sold (in thousands) ATG $ 71 $ 68 $ 69 Satellite 54 59 39 • ATG aircraft online. We define ATG aircraft online as the total number of business aircraft for which we provide ATG services as of the last day of each period presented. This number excludes aircraft receiving ATG service as part of the ATG Network Sharing Agreement with Intelsat. • Satellite aircraft online . We define satellite aircraft online as the total number of business aircraft for which we provide satellite services as of the last day of each period presented. 42 • Average monthly connectivity service revenue per ATG aircraft online. We define average monthly connectivity service revenue per ATG aircraft online as the aggregate ATG connectivity service revenue for the period divided by the number of months in the period, divided by the number of ATG aircraft online during the period (expressed as an average of the month end figures for each month in such period). Revenue share earned from the ATG Network Sharing Agreement with Intelsat is excluded from this calculation. • Average monthly service revenue per satellite aircraft online . We define average monthly service revenue per satellite aircraft online as the aggregate satellite service revenue for the period divided by the number of months in the period, divided by the number of satellite aircraft online during the period (expressed as an average of the month end figures for each month in such period). • Units sold . We define units sold as the number of ATG or satellite units for which we recognized revenue during the period. • Average equipment revenue per ATG unit sold. We define average equipment revenue per ATG unit sold as the aggregate equipment revenue from all ATG units sold during the period, divided by the number of ATG units sold. • Average equipment revenue per satellite unit sold . We define average equipment revenue per satellite unit sold as the aggregate equipment revenue earned from all satellite units sold during the period, divided by the number of satellite units sold. Key Components of Consolidated Statements of Operations As a result of the Transaction, all periods presented in this Annual Report on Form 10-K have been conformed to present the CA business as a discontinued operation. We report the financial results of discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. The results of operations and cash flows of a discontinued operation are restated for all comparative periods presented. Refer to Note 2, "Discontinued Operations," to our consolidated financial statements for further information. The following briefly describes certain key components of revenue and expenses as presented in our consolidated statements of operations. Revenue: We generate two types of revenue: service revenue and equipment revenue. Service revenue primarily consists of monthly subscription and usage fees paid by aircraft owners and operators for telecommunication, data, and in-flight entertainment services. Service revenue is recognized as the services are provided to the customer. Beginning December 2020, service revenue includes revenue earned from the ATG Network Sharing Agreement with Intelsat. Equipment revenue primarily consists of proceeds from the sale of ATG and satellite connectivity equipment and entertainment equipment. Equipment revenue is generally recognized when the equipment is shipped to OEMs and dealers. Cost of Revenue: Cost of service revenue consists of ATG network costs, satellite provider service costs, transaction costs and costs related to network operations. Before closing the Transaction, we operated two divisions – business aviation (“BA”) and commercial aviation (“CA”). In January 2019, BA assumed responsibility for operating and maintaining our ATG network and was allocated the majority of the ATG network costs incurred in fiscal year 2019. In January 2020, we adopted a new allocation methodology for the ATG network costs utilizing pricing and usage for each of CA and BA. This 43 allocation methodology has been applied retrospectively to prior periods presented as the CA business is reported in discontinued operations. Upon the completion of the Transaction, we ceased allocating ATG network costs to the divested CA business. Cost of equipment revenue primarily consists of the costs of purchasing component parts used in the manufacture of our equipment and the production, installation, technical support and quality assurance costs associated with the equipment sales. Engineering, Design and Development Expenses: Engineering, design and development expenses include the costs incurred to design and develop our technologies and products and to obtain and maintain FAA and other regulatory certifications. This includes the design, development and integration of our ATG ground networks and airborne line replaceable units, the design and development of products and enhancements thereto, and program management activities. Engineering, design and development expenses also include costs associated with enhancements to existing products. Sales and Marketing Expenses: Sales and marketing expenses consist of costs associated with activities related to customer sales (including sales commissions), digital marketing and lead generation, advertising and promotions, product management, trade shows and customer service support for end users. General and Administrative Expenses: General and administrative expenses include personnel and related operating costs of the business support functions, including finance and accounting, legal, human resources, administrative, information technology, facilities and executive groups. Depreciation and Amortization: Depreciation expense includes expense associated with the depreciation of our network equipment, office equipment, furniture, fixtures and leasehold improvements, which is recorded over their estimated useful lives. Amortization expense includes the amortization of our finite-lived intangible assets on a straight-line basis over their estimated useful lives, which range from three to ten years depending on the assets being amortized. 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 requires us to make estimates, assumptions and judgments that affect the reported amounts 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 actual results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the assumptions and estimates associated with the valuation allowance related to our deferred income tax assets have the greatest potential impact on and are the most critical to aid in fully understanding and evaluating our reported financial results, and that 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 3, "Summary of Significant Accounting Policies," to our consolidated financial statements. 44 Note that these critical accounting estimates relate solely to our continuing operations. The accounting policies related to our discontinued operations are discussed in Note 2, "Discontinued Operations," to our consolidated financial statements. Deferred Income Taxes - Valuation Allowance: We account for the valuation allowance on our deferred income tax assets in accordance with Accounting Standards Codification Topic 740, Income Taxes ("ASC 740"). On a recurring basis, we assess the need for a valuation allowance related to our deferred income tax assets, which includes consideration of both positive and negative evidence to determine, based on the weight of the available evidence, whether it is more likely than not that some or all of our deferred tax assets will not be realized. In our assessment, we consider recent financial operating results, the scheduled expiration of our net operating losses, potential sources of taxable income, the reversal of existing taxable differences, taxable income in prior carryback years (if permitted under tax law) and tax planning strategies. We have a recent history of financial reporting losses, resulting in cumulative pre-tax losses in the three-year period ending with the current quarter which is objectively verifiable negative evidence regarding future profitability. Cumulative pre-tax losses from continuing operations adjusted for the reduction in interest expense resulting from the Refinancing (as defined below) result in positive normalized income over the same three-year period. This is objectively verifiable positive evidence of our ability to generate positive earnings in the future. When there is a recent history of operating losses and a return to operating profitability has not yet been demonstrated, we cannot rely on projections of future earnings for purposes of assessing recoverability of our deferred tax assets and instead must use our historical earnings for this assessment. In such cases, we use systematic and logical methods to estimate when deferred tax assets will reverse and generate tax deductions. The selection of methodologies and assessment of when temporary differences will result in deductible amounts involves significant management judgment and is inherently complex and subjective. Our determination that we are more likely than not to realize a portion of our deferred tax assets represents our best estimate and considers both positive and negative factors. We considered positive factors including the sale of our CA business, the reduction in interest expense resulting from the Refinancing, strong demand for our products and services and pre-tax income from continuing operations in the third and fourth fiscal quarters of 2021. The negative factors included cumulative pre-tax losses from continuing operations in the three-year period ending with the current quarter and our relatively short history of pre-tax income from continuing operations. It is possible that there will be changes in our business, our performance, our industry or otherwise that cause actual results to differ materially from this estimate. If those changes result in significant and sustained reductions in our pre-tax income or utilization of existing tax carryforwards in future periods, additional valuation allowances may have to be recorded with corresponding adverse impacts on earnings and/or other comprehensive income. Such adverse impacts may be material. For the year ended December 31, 2021, our determination that we are more likely than not to realize a portion of our deferred tax assets resulted in a release of approximately $195.8 million of our valuation allowance. The remaining valuation allowance is still required for deferred tax assets related to certain state and foreign NOLs, capital losses, and the Section 163(j) interest limitation carryforward, as we determined that it was more likely than not that, as of December 31, 2021, these deferred tax assets will not be realized. See Note 16, "Income Tax," to our consolidated financial statements for additional information. Recent Accounting Pronouncements See Note 3, "Summary of Significant Accounting Policies," to our consolidated financial statements for additional information. 45 Results of Operations The following table sets forth, for the periods presented, certain data from our consolidated statements of operations. The information contained in the table below should be read in conjunction with our consolidated financial statements and related notes. Consolidated Statements of Operations Data (in thousands) For the Years Ended December 31, 2021 2020 2019 Revenue: Service revenue $ 259,583 $ 211,987 $ 221,922 Equipment revenue 76,133 57,731 87,063 Total revenue 335,716 269,718 308,985 Operating expenses: Cost of service revenue (exclusive of items shown below) 56,103 45,073 42,142 Cost of equipment revenue (exclusive of items shown below) 46,092 39,299 51,744 Engineering, design and development 24,874 25,227 26,013 Sales and marketing 20,985 15,135 21,236 General and administrative 51,554 54,467 54,628 Depreciation and amortization 15,482 14,166 16,690 Total operating expenses 215,090 193,367 212,453 Operating income 120,626 76,351 96,532 Other (income) expense: Interest income (191 ) (722 ) (4,000 ) Interest expense 67,472 125,787 130,473 Loss on extinguishment of debt and settlement of convertible notes 83,961 — 57,962 Other (income) expense 25 (9 ) 31 Total other expense 151,267 125,056 184,466 Loss from continuing operations before income taxes (30,641 ) (48,705 ) (87,934 ) Income tax provision (benefit) (187,230 ) (146 ) 563 Net income (loss) from continuing operations 156,589 (48,559 ) (88,497 ) Net loss from discontinued operations, net of tax (3,854 ) (201,477 ) (57,507 ) Net income (loss) $ 152,735 $ (250,036 ) $ (146,004 ) Years Ended December 31, 2021 and 2020 Revenue: Revenue and percent change for the years ended December 31, 2021 and 2020 were as follows (in thousands, except for percent change) : For the Years Ended % Change December 31, 2021 over 2021 2020 2020 Service revenue $ 259,583 $ 211,987 22.5 % Equipment revenue 76,133 57,731 31.9 % Total revenue $ 335,716 $ 269,718 24.5 % Revenue increased to $335.7 million for the year ended December 31, 2021, as compared with $269.7 million for the prior year, due to increases in service and equipment revenue. Service revenue increased to $259.6 million for the year ended December 31, 2021, as compared with $212.0 million for the prior year, primarily due to an increase in ATG aircraft online, an increase in average monthly service revenue per aircraft online and, to a lesser extent, an increase in revenue share from the ATG Network 46 Sharing Agreement with Intelsat, which went into effect in the fourth quarter of the prior year. Average monthly service revenue per ATG unit online increased to $3,238 during the year ended December 31, 2021, as compared with $2,951 for the prior year. Equipment revenue increased to $76.1 million for the year ended December 31, 2021, as compared with $57.7 million for the prior year, primarily due to increases in the number of ATG units sold, with 869 ATG units sold during the year ended December 31, 2021 as compared with 667 units for the prior year. We expect service revenue to increase in the future as additional ATG aircraft come online and average monthly connectivity service revenue per ATG aircraft online increases. We expect equipment revenue to increase in the future as additional ATG units are sold, but expect a portion of such increase to be offset by a decrease in the average selling price. Cost of Revenue: Cost of service revenue and percent change for the years ended December 31, 2021 and 2020 were as follows (in thousands, except for percent change) : For the Years Ended % Change December 31, 2021 over 2021 2020 2020 Cost of service revenue $ 56,103 $ 45,073 24.5 % Cost of equipment revenue $ 46,092 $ 39,299 17.3 % Cost of service revenue increased to $56.1 million for the year ended December 31, 2021, as compared with $45.1 million for the prior year, primarily due to an increase in ATG network costs as these costs are no longer shared with the divested CA business and an increase in network and data center operating costs related to the separation from the CA business, partially offset by a credit for regulatory surcharges from which we are now exempt. We expect cost of service revenue to increase over time, primarily due to service revenue growth and increasing ATG network costs associated with Gogo 5G. Cost of equipment revenue increased to $46.1 million for the year ended December 31, 2021, as compared with $39.3 million for the prior year, primarily due to an increase in ATG units sold. We expect that our cost of equipment revenue will increase over time with growth in ATG units sold and, in the near term, an increase in cost per ATG unit. Engineering, Design and Development Expenses: Engineering, design and development expenses decreased to $24.9 million for the year ended December 31, 2021, as compared with $25.2 million for the prior year, due to lower expensed Gogo 5G development costs, partially offset by an increase in personnel costs driven by COVID-related cost controls implemented in the prior year. We expect engineering, design and development expenses as a percentage of total revenue to increase slightly in the near term, driven by Gogo 5G development costs, and decrease over the long term as the level of Gogo 5G investment decreases and revenue increases. Sales and Marketing Expenses: Sales and marketing expenses increased to $21.0 million for the year ended December 31, 2021, as compared with $15.1 million for the prior year, primarily due to an increase in personnel costs driven by COVID-related cost controls implemented in the prior-year and an increase in marketing and promotional costs. 47 We expect sales and marketing expenses as a percentage of total revenue to remain relatively unchanged in the long term but increase slightly in the near term driven by Gogo 5G marketing spend. General and Administrative Expenses: General and administrative expenses decreased to $51.6 million for the year ended December 31, 2021, as compared with $54.5 million for the prior year, primarily due to corporate cost savings, partially offset by an increase in stock-based compensation in the current period and an increase in personnel costs driven by COVID-related cost controls implemented in the prior year. We expect general and administrative expenses as a percentage of total revenue to decrease over time as the business grows given the fixed cost nature of this category and as we realize the full run rate of completed cost savings initiatives. Depreciation and Amortization: Depreciation and amortization expense increased to $15.5 million for the year ended December 31, 2021, as compared with $14.2 million for the prior year, primarily due to the amortization of capitalized software. We expect that our depreciation and amortization expense will increase in the future as we launch our Gogo 5G network. Other (Income) Expense: Other (income) expense and percent change for the years ended December 31, 2021 and 2020 were as follows (in thousands, except for percent change) : For the Years % Change Ended December 31, 2021 over 2021 2020 2020 Interest income $ (191 ) $ (722 ) (73.5 )% Interest expense 67,472 125,787 (46.4 )% Loss on extinguishment of debt and settlement of convertible notes 83,961 — nm Other (income) expense 25 (9 ) nm Total $ 151,267 $ 125,056 21.0 % Percentage changes that are considered not meaningful are denoted with nm. Total other expense increased to $151.3 million for the year ended December 31, 2021, as compared with $125.1 million for the prior year, primarily due to the loss on extinguishment of debt and settlement of convertible notes, partially offset by a decrease in interest expense. We expect our interest expense to decrease in the future as a result of the Refinancing, the conversions and exchanges of the 2022 Convertible Notes that have occurred to date and the maturity or earlier conversion of the remaining 2022 Convertible Notes in 2022. See Note 10, "Long-Term Debt and Other Liabilities," to our consolidated financial statements for additional information. Income Taxes: The effective income tax rate for the year ended December 31, 2021 was 611.0%, as compared with 0.3% for the prior year. The income tax benefit of $187.2 million for the year ended December 31, 2021 was a result of a partial release of the valuation allowance related to our deferred income tax assets during the year. Income tax expense for the year ended December 31, 2020 was not significant primarily due to the full valuation allowance against our net deferred tax assets. See Note 16, "Income Tax," to our consolidated financial statements for additional information. 48 We expect our income tax provision to increase in future periods as we generate positive pre-tax income. Discontinued Operations: Loss from discontinued operations decreased to $3.9 million for the year ended December 31, 2021, as compared with a loss of $201.5 million for the prior year, primarily due to the closing of the Transaction on December 1, 2020. For the year ended December 31, 2021, loss from discontinued operations was primarily related to stock-based compensation expense, partially offset by the recognition of a gain on sale of discontinued operations that was recorded as a deferred gain on sale at December 31, 2020. See Note 2, "Discontinued Operations," to our consolidated financial statements for additional information. Years Ended December 31, 2020 and 2019 " Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021, includes a discussion of changes in our results of operations from fiscal year 2019 to fiscal year 2020. Non-GAAP Measures In our discussion below, we discuss Adjusted EBITDA and Free Cash Flow, as defined below, which are non-GAAP financial measurements. Management uses Adjusted EBITDA and Free Cash Flow for business planning purposes, including managing our business against internally projected results of operations and measuring our performance and liquidity. These supplemental performance measures also provide another basis for comparing period-to-period results by excluding potential differences caused by non-operational and unusual or non-recurring items. These supplemental performance measures may vary from and may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and Free Cash Flow are not recognized measurements under GAAP; when analyzing our performance with Adjusted EBITDA or liquidity with Free Cash Flow, as applicable, investors should (i) evaluate each adjustment in our reconciliation to the corresponding GAAP measure, and the explanatory footnotes regarding those adjustments, (ii) use Adjusted EBITDA in addition to, and not as an alternative to, net income (loss) attributable to common stock as a measure of operating results and (iii) use Free Cash Flow in addition to, and not as an alternative to, consolidated net cash provided by (used in) operating activities when evaluating our liquidity. Definition and Reconciliation of Non-GAAP Measures EBITDA represents net income (loss) attributable to common stock before interest expense, interest income, income taxes and depreciation and amortization expense. Adjusted EBITDA represents EBITDA adjusted for (i) stock-based compensation expense included in the results of continuing operations, (ii) the results of discontinued operations, including stock-based compensation expense and the gain on the sale of CA, (iii) loss on extinguishment of debt and settlement of convertible notes and (iv) separation costs related to the sale of CA. Our management believes that the use of Adjusted EBITDA eliminates items that management believes have less bearing on our operating performance, thereby highlighting trends in our core business which may not otherwise be apparent. It also provides an assessment of controllable expenses, which are indicators management uses to determine whether current spending decisions need to be adjusted in order to meet financial goals and achieve optimal financial performance. We believe that the exclusion of stock-based compensation expense from Adjusted EBITDA is appropriate given the significant variation in expense that can result from using the Black-Scholes model to determine the fair value of such compensation. The fair value of our stock options is determined using the Black-Scholes model and varies based on fluctuations in the assumptions used in this model, including inputs that are not necessarily directly related to the performance of our business, such as the expected volatility, the risk-free interest rate and the expected term of the options. Therefore, we believe that the exclusion of this cost provides a clearer view of the operating performance of our business. Further, stock option grants made at a certain price and point in time do not necessarily 49 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 it is useful for an understanding of our operating performance to exclude the results of our discontinued operations from Adjusted EBITDA because they are not part of our ongoing operations. We believe it is useful for an understanding of our operating performance to exclude the loss on extinguishment of debt and settlement of convertible notes from Adjusted EBITDA because these activities are not related to our operating performance. We believe it is useful for an understanding of our operating performance to exclude separation costs related to the sale of CA from Adjusted EBITDA for the year ended December 31, 2021 because of the non-recurring nature of this activity. We also present Adjusted EBITDA as a supplemental performance measure because we believe that this measure provides investors, securities analysts and other users of our consolidated financial statements with important supplemental information with which to evaluate our performance and to enable them to assess our performance on the same basis as management. Free Cash Flow represents net cash provided by (used in) operating activities, less purchases of property and equipment and the acquisition of intangible assets. We believe that Free Cash Flow provides meaningful information regarding our liquidity. Gogo Inc. and Subsidiaries Reconciliation of GAAP to Non-GAAP Measures (in thousands, except per share amounts) (unaudited) For the Years Ended December 31, 2021 2020 2019 Adjusted EBITDA: Net income (loss) attributable to common stock (GAAP) $ 152,735 $ (250,036 ) $ (146,004 ) Interest expense 67,472 125,787 130,473 Interest income (191 ) (722 ) (4,000 ) Income tax provision (benefit) (187,230 ) (146 ) 563 Depreciation and amortization 15,482 14,166 16,690 EBITDA 48,268 (110,951 ) (2,278 ) Stock-based compensation expense 13,345 7,808 8,654 Loss from discontinued operations 3,854 201,477 57,507 Loss on extinguishment of debt and settlement of convertible notes 83,961 — 57,962 Separation costs related to CA sale 1,550 — — Adjusted EBITDA $ 150,978 $ 98,334 $ 121,845 Free Cash Flow: Net cash provided by (used in) operating activities (GAAP) $ 66,697 $ 4,513 $ (12,872 ) Consolidated capital expenditures (8,660 ) (8,990 ) (6,473 ) Free cash flow $ 58,037 $ (4,477 ) $ (19,345 ) Material limitations of Non-GAAP measures Although EBITDA, Adjusted EBITDA and Free Cash Flow are measurements frequently used by investors and securities analysts in their evaluations of companies, EBITDA, Adjusted EBITDA and Free Cash Flow each 50 have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for, or more meaningful than, amounts determined in accordance with GAAP. Some of these limitations include: • EBITDA and Adjusted EBITDA do not reflect interest income or expense; · EBITDA and Adjusted EBITDA do not reflect cash requirements for our income taxes; · EBITDA and Adjusted EBITDA do not reflect depreciation and amortization, which are significant and unavoidable operating costs given the level of capital expenditures needed to maintain our business; · Adjusted EBITDA does not reflect non-cash components of employee compensation; · Adjusted EBITDA does not reflect the results of discontinued operations; · Adjusted EBITDA for the year ended December 31, 2021 does not reflect the separation costs related to the sale of CA; · Adjusted EBITDA does not reflect the loss on extinguishment of debt and settlement of convertible notes; · Free Cash Flow does not represent the total increase or decrease in our cash balance for the period; and · since other companies in our industry or related industries may calculate these measures differently from the way we do, their usefulness as comparative measures may be limited. Liquidity and Capital Resources We have historically financed our growth and cash needs primarily through the issuance of common stock, non-convertible debt, senior convertible preferred stock, convertible debt, term facilities and cash from operating activities. We continually evaluate our ongoing capital needs in light of increasing demand for our services, capacity requirements, evolving user expectations regarding the in-flight connectivity experience, evolving technologies in our industry and related strategic, operational and technological opportunities. We actively consider opportunities to raise additional capital in the public and private markets utilizing one or more of the types of capital raising transactions through which we have historically financed our growth and cash needs, as well as other means of capital raising not previously used by us. See the disclosure below under the heading “Debt Instruments” for the definitions of the debt and convertible debt instruments to which we refer in this section, as well as the indentures and other agreements that govern them. Based on our current plans, we believe that our cash and cash equivalents and cash flows provided by operating activities will be sufficient to meet our cash requirements for at least the next twelve months, including capital expenditure requirements and the principal amount of any 2022 Convertible Notes that remain outstanding at maturity. Over the long term, we believe that cash flows provided by operating activities and our expected access to capital markets will be sufficient to meet our cash requirements. As detailed in Note 10, "Long-Term Debt and Other Liabilities," on April 30, 2021, GIH entered into the 2021 Credit Agreement with Gogo, the lenders and issuing banks party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, which provides for the Term Loan Facility in an aggregate principal amount of $725.0 million, issued with a discount of 0.5%, and the Revolving Facility, which includes a letter of credit sub-facility. The Term Loan Facility amortizes in nominal quarterly installments equal to 1% of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity on April 30, 2028. There are no amortization payments under the Revolving Facility, and all borrowings under the Revolving Facility mature on April 30, 2026. Our intent is to continue to access the capital markets to refinance our future debt obligations on an as-needed basis. The 2021 Credit Agreement contains covenants that limit the ability of GIH and its subsidiaries to incur additional indebtedness. Further, market conditions and/or our financial performance may limit our access to 51 additional sources of equity or debt financing, or our ability to pursue potential strategic alternatives. As a result, we may be unable to finance the growth of our business to the extent that our cash, cash equivalents and short-term investments and cash generated through operating activities prove insufficient or we are unable to raise additional financing through the issuance of equity, permitted incurrences of debt (by us or by GIH and its subsidiaries), or the pursuit of potential strategic alternatives. The proceeds of the Term Loan Facility were used, together with cash on hand, (i) to redeem in full and pay the outstanding principal amount of the 2024 Senior Secured Notes together with accrued and unpaid interest and redemption premiums and to pay fees associated with the termination of the ABL Credit Agreement (together with the redemption of the 2024 Senior Secured Notes, the “Refinancing”), and (ii) to pay fees and expenses incurred in connection with the Refinancing and the Facilities (the “Transaction Costs”). The Revolving Facility is available for working capital and general corporate purposes of Gogo and its subsidiaries and was undrawn as of December 31, 2021. The 2022 Convertible Notes mature on May 15, 2022, unless earlier converted into shares of our common stock. In November 2021, we informed the trustee under the indenture governing the 2022 Convertible Notes that we intend to settle any conversions of the 2022 Convertible Notes occurring after November 15, 2021 in shares of our common stock. To the extent any 2022 Convertible Notes remain outstanding at maturity, we currently expect to pay such principal amount through cash on hand. In May 2021, we purchased interest rate caps with an aggregate notional amount of $650.0 million for $8.6 million. We receive payments in the amounts calculated pursuant to the caps for any period in which the three-month USD LIBOR rate increases beyond the applicable strike rate. The termination date of the cap agreements is July 31, 2027. The notional amounts of the interest rate caps periodically decrease over the life of the caps. While the interest rate caps are intended to limit our interest rate exposure under our variable rate indebtedness, which includes the Facilities, if our variable rate indebtedness does not decrease in proportion to the periodic decreases in the notional amount hedged under the interest rate caps, then the portion of such indebtedness that will be effectively hedged against possible increases in interest rates will decrease. In addition, the strike prices periodically increase over the life of the caps. As a result, the extent to which the interest rate caps will limit our interest rate exposure will decrease in the future. For additional information on the interest rate caps, see Note 11, "Derivative Instruments and Hedging Activities," to our consolidated financial statements. Consistent with our capital allocation strategy, and given our cash position and the upcoming maturity of the 2022 Convertible Notes, we are evaluating the return of capital to our stockholders, which may take the form of stock repurchases. The implementation of any capital allocation policy, including any declaration of stock repurchases or other distributions, will be at the discretion of, and subject to the approval by, our Board of Directors and will depend on our financial condition, earnings, liquidity and capital requirements, level of indebtedness, contractual restrictions, restrictions imposed by Delaware law, general business conditions and any other factors that our Board of Directors deems relevant in making any such determination. Therefore, there can be no assurance that we will make any stock repurchases or make other distributions or returns on our common stock, or as to the amount of any such stock repurchases, distributions or returns of capital. 52 Contractual Obligations and Commitments The following table summarizes our contractual obligations, comprised of our material future cash requirements and deferred revenue arrangements, as of December 31, 2021 (in thousands) . Less than 1-3 3-5 More than Total 1 year years years 5 years Contractual Obligations: Finance lease obligations $ 247 $ 156 $ 91 $ — $ — Operating lease obligations 113,903 12,815 24,741 22,433 53,914 Purchase obligations (1) 148,730 106,429 42,301 — — Term Loan Facility (2) 721,375 7,250 14,500 14,500 685,125 Interest on Term Loan Facility 202,100 32,788 64,672 63,260 41,380 2022 Convertible Notes (2) 102,788 102,788 — — — Interest on 2022 Convertible Notes 2,313 2,313 — — — Deferred revenue arrangements (3) 1,841 1,825 16 — — Other long-term obligations (4) 51,002 10,570 13,468 1,665 25,299 Total $ 1,344,299 $ 276,934 $ 159,789 $ 101,858 $ 805,718 (1) As of December 31, 2021, our outstanding purchase obligations represented obligations to vendors incurred in order to meet operational requirements in the normal course of business and related primarily to the build out of Gogo 5G, information technology, research and development, sales and marketing and production related activities. (2) See Note 10, "Long-Term Debt and Other Liabilities," to our consolidated financial statements for more information. (3) Amounts represent obligations to provide services for which we have already received cash from our customers. (4) Other long-term obligations consist of estimated payments (undiscounted) for our asset retirement obligations, network transmission services and monthly payments of C$0.1 million (using the December 31, 2021 exchange rate) to the licensor of our Canadian ATG spectrum license over the estimated 25-year term of the agreement. Other long-term obligations exclude tax liability payments due to the uncertainty of their timing. Contractual Commitments: We have agreements with various vendors under which we have remaining commitments to purchase hardware components and development services. Such commitments will become payable as we receive the hardware components or as development services are provided. Leases and Cell Site Contracts: We have lease agreements relating to certain facilities and equipment, which are considered operating leases. See Note 17, "Leases," to our consolidated financial statements for additional information. Indemnifications and Guarantees : In accordance with Delaware law, we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under this indemnification is uncertain and may be unlimited, depending upon circumstances. However, our Directors’ and Officers’ insurance does provide coverage for certain of these losses. In the ordinary course of business, we may occasionally enter into agreements pursuant to which we may be obligated to pay for the failure of performance of others, such as the use of corporate credit cards issued to employees. Based on historical experience, we believe that the risk of sustaining any material loss related to such guarantees is remote. We have entered into a number of agreements pursuant to which we indemnify the other party for losses and expenses suffered or incurred in connection with any patent, copyright, or trademark infringement or misappropriation claim asserted by a third party with respect to our equipment or services. The maximum potential 53 amount of future payments we could be required to make under these indemnification agreements is uncertain and is typically not limited by the terms of the agreements. Cash Flows The following table presents a summary of our cash flow activity for the periods set forth below (in thousands) : For the Years Ended December 31, 2021 2020 2019 Cash flows from continuing operations: Net cash provided by (used in) operating activities $ 66,697 $ 4,513 $ (12,872 ) Net cash provided by (used in) investing activities (16,289 ) (8,990 ) 32,850 Net cash provided by (used in) financing activities (331,037 ) 44,479 (2,830 ) Net cash provided by (used in) discontinued operations (9,013 ) 220,139 (30,339 ) Effect of foreign exchange rate changes on cash 40 (1,946 ) (250 ) Increase (decrease) in cash, cash equivalents and restricted cash (289,602 ) 258,195 (13,441 ) Cash, cash equivalents and restricted cash at beginning of period 435,870 177,675 191,116 Cash, cash equivalents and restricted cash at end of period $ 146,268 $ 435,870 $ 177,675 Supplemental information: Cash, cash equivalents and restricted cash at end of period $ 146,268 $ 435,870 $ 177,675 Less: current restricted cash 25 525 560 Less: non-current restricted cash 330 — 7,099 Cash and cash equivalents at end of period $ 145,913 $ 435,345 $ 170,016 Following is a discussion of the year-over-year changes in cash flow activities. Net cash provided by (used in) operating activities from continuing operations: The following table presents a summary of our cash flows from operating activities from continuing operations for the periods set forth below (in thousands) : For the Years Ended December 31, 2021 2020 2019 Net income (loss) $ 156,589 $ (48,559 ) $ (88,497 ) Non-cash charges and credits (69,027 ) 42,677 103,951 Changes in operating assets and liabilities (20,865 ) 10,395 (28,326 ) Net cash provided by (used in) operating activities from continuing operations $ 66,697 $ 4,513 $ (12,872 ) For the year ended December 31, 2021, cash provided by operating activities from continuing operations was $66.7 million, as compared with cash provided by operating activities from continuing operations of $4.5 million for the prior year. The principal contributors to the increase in operating cash flows were: • A $93.4 million improvement in net income (loss) and non-cash charges and credits, as noted above under “—Results of Operations.” • A $31.3 million decrease in cash flows related to operating assets and liabilities resulting from: o A decrease in cash flows primarily due to the following: ▪ Changes in inventories due to increased equipment purchases; ▪ Changes in accrued interest primarily due to the timing of payments as compared to the prior year and the reduced interest resulting from the Refinancing; and ▪ Changes in prepaid expenses, accounts payable and accrued liabilities due primarily to the timing of payments. 54 o Partially offset by an increase in cash flows due to changes in contract assets as compared to the prior year. For the year ended December 31, 2020, cash provided by operating activities from continuing operations was $4.5 million, as compared with cash used in operating activities from continuing operations of $12.9 million for the prior year. The principal contributors to the increase in operating cash flows were: • A $38.7 million increase in cash flows related to operating assets and liabilities resulting from: o An increase in cash flows primarily due to the following: ▪ Changes in accrued interest due to changes in the timing of payments as compared to the prior year; ▪ Changes in accounts receivable due primarily to the timing of collections and a decrease in revenue as a result of COVID-19; and ▪ Changes in accounts payable and accrued liabilities due primarily to the timing of payments. o Partial offsets to the above due to a decrease in cash flows resulting from changes in contract assets primarily due to additional promotional sales programs in the current year as compared to the prior year. • Partially offset by a $21.3 million change in net loss and non-cash charges and credits, as noted above under “—Results of Operations.” Net cash provided by (used in) investing activities from continuing operations: Cash used in investing activities from continuing operations was $16.3 million and $9.0 million, respectively, for the years ended December 31, 2021 and 2020, while cash provided by investing activities from continuing operations was $32.9 million for the year ended December 31, 2019. Investing activities are comprised of capital expenditures related to software development, data center upgrades and cell site construction. Additionally, cash used in investing activities from continuing operations includes the purchase of interest rate caps for $8.6 million during the year ended December 31, 2021 and net changes in our short-term investments consisting of a cash inflow of $39.3 million for the year ended December 31, 2019. Net cash provided by (used in) financing activities from continuing operations: Cash used in financing activities from continuing operations for the year ended December 31, 2021 was $331.0 million, primarily due to the redemption of all of our outstanding 2024 Senior Secured Notes (including the make-whole premium payable under the indenture governing the 2024 Senior Secured Notes) for a redemption price totaling $1,023.1 million and the payment of $20.3 million of deferred financing fees associated with the issuance of the Facilities, offset in part by $721.4 million of gross proceeds from the Term Loan Facility. Cash provided by financing activities from continuing operations for the year ended December 31, 2020 was $44.5 million, primarily due to the $51.8 million of proceeds from the issuance of additional 2024 Senior Secured Notes, offset by the repurchase of convertible notes, payments on finance leases and stock-based compensation activity. Cash used in financing activities from continuing operations for the year ended December 31, 2019 was $2.8 million, primarily due to the redemption of our outstanding 2022 Senior Secured Notes (including the make-whole premium payable under the indenture governing the 2022 Senior Secured Notes) for a redemption price totaling $741.4 million, the repurchase of $159.5 million of outstanding 2020 Convertible Notes and the payment of $23.0 million of deferred financing costs associated with the issuance of additional 2024 Senior Secured Notes, offset in part by $920.7 million of gross proceeds from the issuance of 2024 Senior Secured Notes. 55 Net cash provided by (used in) discontinued operations: Cash used in discontinued operations for the year ended December 31, 2021 was $9.0 million, primarily due to $7.8 million used in investing activities for a payment to Intelsat in settlement of working capital adjustments relating to the Transaction and $1.2 million used in operating activities primarily to pay the employer portion of taxes related to the vesting of equity awards and the exercise of stock options. Cash provided by discontinued operations for the year ended December 31, 2020 was $220.1 million as compared to cash used by discontinued operations of $30.3 million for the year ended December 31, 2019. The $250.4 million change was primarily due to a $464.0 million increase in cash provided by investing activities offset by a $214.1 million decrease in cash provided by operating activities. The increase in cash provided by investing activities was due to the $386.3 million of proceeds received in the Transaction and a $79.9 million decrease in capital expenditures due to the impact of COVID-19 on the installation of CA equipment on airline partners’ aircraft. The decrease in cash flows from operating activities was due to a $133.1 million increase in net loss and non-cash charges and credits, primarily due to the impact of COVID-19, and an $81.0 million decrease in cash flows related to operating assets and liabilities primarily due to changes in accounts receivable, inventory, deferred lease proceeds and accrued liabilities, offset in part by changes in accounts payable and contract assets. Capital Expenditures Our business requires significant capital expenditures, primarily for technology development, equipment and capacity expansion. Capital spending for continuing operations for the periods presented in this report is associated with the expansion of our ATG network and data centers. We capitalized software development costs related to network technology solutions and new product/service offerings. We also capitalized costs related to the build-out of our office locations. For the periods presented in this report, capital expenditures for our former CA business, presented as discontinued operations, included the significant purchase of airborne equipment related to the roll out and/or upgrade of service to our former airline partners’ fleets. Capital expenditures for continuing operations for the years ended December 31, 2021, 2020 and 2019 were $8.7 million , $9.0 million and $6.5 million, respectively. The decrease in capital expenditures in 2021 as compared with 2020 was primarily due a decrease in capitalized software, partially offset by an increase in network-related equipment, and the increase in 2020 as compared with 2019 was primarily due to an increase in capitalized software. We expect that our capital expenditures will increase in the near term as we build out Gogo 5G and further invest in capitalized software, and decrease significantly after the Gogo 5G build out is substantially completed in 2022. Debt Instruments Following is a discussion of the debt instruments we had in place as of December 31, 2021 as well as those we utilized during the years ended December 31, 2021, 2020 and 2019. 2021 Credit Agreement On April 30, 2021, Gogo Intermediate Holdings LLC (a wholly owned subsidiary of Gogo Inc.) ("GIH") entered into a credit agreement (the "2021 Credit Agreement") among Gogo, GIH, the lenders and issuing banks party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, which provides for (i) a term loan credit facility (the “Term Loan Facility”) in an aggregate principal amount of $725.0 million, issued with a discount of 0.5%, and (ii) a revolving credit facility (the “Revolving Facility” and together with the Term Loan Facility, the “Facilities”) of up to $100.0 million, which includes a letter of credit sub-facility. The Term Loan Facility amortizes in nominal quarterly installments equal to 1% of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity on April 30, 2028. There are no amortization payments under the Revolving Facility, and all borrowings under the Revolving Facility mature on April 30, 2026. The Term Loan Facility bears annual interest at a floating rate measured by reference to, at GIH’s option, either (i) an adjusted London inter-bank offered rate (subject to a floor of 0.75%) plus an applicable margin of 3.75% or (ii) an alternate base rate plus an applicable margin of 2.75%. 56 Loans outstanding under the Revolving Facility bear annual interest at a floating rate measured by reference to, at GIH’s option, either (i) an adjusted London inter-bank offered rate (subject to a floor of 0.00%) plus an applicable margin ranging from 3.25% to 3.75% per annum depending on GIH’s senior secured first lien net leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 2.25% to 2.75% per annum depending on GIH’s senior secured first lien net leverage ratio. Additionally, unused commitments under the Revolving Facility are subject to a fee ranging from 0.25% to 0.50% per annum depending on GIH’s senior secured first lien net leverage ratio. As of December 31, 2021, the fee for unused commitments under the Revolving Facility was 0.25%. The Facilities may be prepaid at GIH’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal payment amount requirements. Subject to certain exceptions and de minimis thresholds, the Term Loan Facility is subject to mandatory prepayments in an amount equal to: (i) 100% of the net cash proceeds of certain asset sales, insurance recovery and condemnation events, subject to reduction to 50% and 0% if specified senior secured first lien net leverage ratio targets are met; (ii) 100% of the net cash proceeds of certain debt offerings; and (iii) 50% of annual excess cash flow (as defined in the 2021 Credit Agreement), subject to reduction to 25% and 0% if specified senior secured first lien net leverage ratio targets are met. The Revolving Facility includes a financial covenant set at a maximum senior secured first lien net leverage ratio of 7.50:1.00, which will apply if the outstanding amount of loans and unreimbursed letter of credit drawings thereunder at the end of any fiscal quarter exceeds 35% of the aggregate of all commitments thereunder. The 2021 Credit Agreement contains customary events of default, which, if any of them occurred, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the Facilities to be due and payable immediately and the commitments under the Revolving Facility to be terminated. 2022 Convertible Notes On November 21, 2018, we issued $215.0 million aggregate principal amount of 6.00% Convertible Senior Notes due 2022 (the “2022 Convertible Notes”) in private offerings to qualified institutional buyers, including pursuant to Rule 144A under the Securities Act, and in concurrent private placements. We granted an option to the initial purchasers to purchase up to an additional $32.3 million aggregate principal amount of 2022 Convertible Notes to cover over-allotments, of which $22.8 million was subsequently exercised during December 2018, resulting in a total issuance of $237.8 million aggregate principal amount of 2022 Convertible Notes. The 2022 Convertible Notes mature on May 15, 2022, unless earlier converted into shares of our common stock. In November 2021, we informed the trustee under the indenture governing the 2022 Convertible Notes that we intend to settle any conversions of the 2022 Convertible Notes occurring after November 15, 2021 in shares of our common stock. We pay interest on the 2022 Convertible Notes semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2019. The 2022 Convertible Notes had an initial conversion rate of 166.6667 common shares per $1,000 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $6.00 per share of our common stock. The shares of common stock subject to conversion are considered in the diluted earnings per share calculations under the if-converted method. Holders may convert the 2022 Convertible Notes, at their option, in multiples of $1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances: • during any fiscal quarter beginning after the fiscal quarter ended December 31, 2018, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2022 Convertible Notes on each applicable trading day (the “Stock Price Condition”); • during the five-business day period following any five consecutive trading day period in which the trading price for the 2022 Convertible Notes is less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2022 Convertible Notes on each such trading day (the “Notes Price Condition”); or 57 • upon the occurrence of specified corporate events. The Stock Price Condition was triggered for the period from October 1, 2020 through December 31, 2020, January 1, 2021 through March 31, 2021, April 1, 2021 through June 30, 2021, July 1, 2021 through September 30, 2021 and October 1, 2021 through December 31, 2021. Regardless of whether any of the foregoing circumstances occurs, a holder may convert its 2022 Convertible Notes, in multiples of $1,000 principal amount, at any time on or after January 15, 2022 until the second scheduled trading day immediately preceding May 15, 2022. In addition, if we undergo a fundamental change (as defined in the indenture governing the 2022 Convertible Notes), holders may, subject to certain conditions, require us to repurchase their 2022 Convertible Notes for cash at a price equal to 100% of the principal amount of the 2022 Convertible Notes to be purchased, plus any accrued and unpaid interest. In addition, following a make-whole fundamental change, we will increase the conversion rate in certain circumstances for a holder who elects to convert its 2022 Convertible Notes in connection with such make-whole fundamental change. In January 2021, $1.0 million aggregate principal amount of 2022 Convertible Notes was converted by holders and settled through the issuance of 166,666 shares of common stock. On March 17, 2021, Gogo entered into separate, privately negotiated exchange agreements (the “March 2021 Exchange Agreements”) with certain holders of 2022 Convertible Notes. Pursuant to the March 2021 Exchange Agreements, such holders exchanged a total of $28,235,000 aggregate principal amount of 2022 Convertible Notes for 5,121,811 shares of our common stock on March 24, 2021. The negotiated exchange rate under the March 2021 Exchange Agreements was 181.40 shares of common stock per $1,000 principal amount of the 2022 Convertible Notes, which resulted in a loss on settlement of $4.4 million, which is included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. On April 1, 2021, Gogo entered into a privately negotiated exchange agreement (the “GTCR Exchange Agreement”) with an affiliate of funds managed by GTCR. Pursuant to the GTCR Exchange Agreement, GTCR exchanged $105,726,000 aggregate principal amount of 2022 Convertible Notes for 19,064,529 shares of our common stock on April 9, 2021. The negotiated exchange rate under the GTCR Exchange Agreement was 180.32 shares of common stock per $1,000 principal amount of 2022 Convertible Notes, which resulted in a loss on settlement of $14.6 million, which is included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. 2024 Senior Secured Notes On April 25, 2019 (the “Issue Date”), GIH and Gogo Finance Co. Inc. (a wholly owned subsidiary of GIH) (“Gogo Finance” and, together with GIH, the “Issuers”) issued $905.0 million aggregate principal amount of 9.875% senior secured notes due 2024 (the “2024 Senior Secured Notes”), at a price equal to 99.512% of their face value, under an indenture, dated as of April 25, 2019, among the Issuers, Gogo, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Issuers issued an additional $20.0 million of 2024 Senior Secured Notes on May 7, 2019, which were issued at a price equal to 100.5% of their face value, and $50.0 million of 2024 Senior Secured Notes on November 13, 2020, which were issued at a price equal to 103.5% of their face value. The 2024 Senior Secured Notes were guaranteed on a senior secured basis by Gogo and all of GIH’s existing and future restricted subsidiaries (other than Gogo Finance), subject to certain exceptions. The 2024 Senior Secured Notes and the related guarantees were secured by certain liens on the Company’s collateral, certain of which were released upon the closing of the Transaction and the remainder on the Redemption Date as defined below. 58 The 2024 Senior Secured Notes were redeemed on May 1, 2021 (the “Redemption Date”) at a redemption price equal to 104.938% of the principal amount of the 2024 Senior Secured Notes redeemed, plus accrued and unpaid interest to (but not including) the Redemption Date. The make-whole premium paid in connection with the redemption was $48.1 million and we wrote off the remaining unamortized deferred financing costs of $15.2 million and the remaining debt discount of $1.3 million, which together are included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. ABL Credit Facility On August 26, 2019, Gogo Inc., GIH and Gogo Finance entered into a credit agreement (the “ABL Credit Agreement”) with the other loan parties party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Morgan Stanley Senior Funding, Inc., as syndication agent, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30.0 million, subject to borrowing base availability, and includes letter of credit and swingline sub-facilities. The obligations under the ABL Credit Agreement were guaranteed by Gogo and all of its existing and future subsidiaries, subject to certain exceptions and secured by certain collateral of the Company. On April 30, 2021, the ABL Credit Agreement and all commitments thereunder were terminated. As a result of the termination, the remaining unamortized deferred financing costs of $0.3 million were written off as of May 1, 2021 and included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. 2022 Senior Secured Notes On June 14, 2016, the Issuers issued $525.0 million aggregate principal amount of 12.500% senior secured notes due 2022 (the “2022 Senior Secured Notes”) under an indenture, dated as of June 14, 2016, among the Issuers, Gogo, the subsidiary guarantors, and U.S. Bank National Association, as trustee and as collateral agent. On January 3, 2017, the Issuers issued $65.0 million aggregate principal amount of additional 2022 Senior Secured Notes at a price equal to 108% of their face value resulting in gross proceeds of $70.2 million. On September 20, 2017, the Issuers issued $100.0 million aggregate principal amount of additional 2022 Senior Secured Notes at a price equal to 113% of their face value resulting in gross proceeds of $113.0 million. Additionally, we received approximately $2.9 million for interest that accrued from July 1, 2017 through September 24, 2017, which was paid in our January 2018 interest payment. The 2022 Senior Secured Notes were redeemed on May 15, 2019. The make-whole premium paid in connection with the redemption was $51.4 million and we wrote off the remaining unamortized deferred financing costs of $9.1 million and the remaining debt premium of $11.7 million relating to the 2022 Senior Secured Notes in connection with the redemption thereof, which together are included in the Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2019. 2020 Convertible Notes On March 3, 2015, we issued $340.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2020 (the “2020 Convertible Notes”) in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act. We granted an option to the initial purchasers to purchase up to an additional $60.0 million aggregate principal amount of 2020 Convertible Notes to cover over-allotments, of which $21.9 million was subsequently exercised during March 2015, resulting in a total issuance of $361.9 million aggregate principal amount of 2020 Convertible Notes. We paid interest on the 2020 Convertible Notes semi-annually in arrears on March 1 and September 1 of each year. Interest payments began on September 1, 2015. In November 2018, in connection with the issuance of the 2022 Convertible Notes, we repurchased $199.9 million outstanding principal amount of the 2020 Convertible Notes at par value. On April 18, 2019, we commenced a cash tender offer (the “Tender Offer”) to purchase any and all of the outstanding 2020 Convertible Notes for an amount equal to $1,000 per $1,000 principal amount of 2020 Convertible Notes purchased, plus accrued and unpaid interest from the last interest payment date on the 2020 Convertible Notes to, but not including, the date of payment for the 2020 Convertible Notes accepted in the Tender Offer. The Tender Offer expired on May 15, 2019, resulting in the purchase of $159.0 million of outstanding 2020 Convertible Notes. As a result of the Tender Offer, the carrying value of the 2020 Convertible Notes was adjusted by $8.5 million to 59 face value and unamortized deferred financing costs of $0.6 million were expensed. These two items are included in the loss on extinguishment of debt in our consolidated statements of operations for the year ended December 31, 2019. During September 2019, we purchased an additional $0.5 million of outstanding 2020 Convertible Notes. The 2020 Convertible Notes matured on March 1, 2020. The 2020 Convertible Notes had an initial conversion rate of 41.9274 common shares per $1,000 principal amount of 2020 Convertible Notes, which was equivalent to an initial conversion price of approximately $23.85 per share of our common stock. We had the option to elect to deliver cash in lieu of all or a portion of such shares. The shares of common stock subject to conversion were excluded from diluted earnings per share calculations under the if-converted method as their impact is anti-dilutive. Forward Transactions In connection with the issuance of the 2020 Convertible Notes, we paid approximately $140.0 million to enter into prepaid forward stock repurchase transactions (the “Forward Transactions”) with certain financial institutions (the “Forward Counterparties”), pursuant to which we purchased approximately 7.2 million shares of common stock for settlement on or around the March 1, 2020 maturity date for the 2020 Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. On December 11, 2019, we entered into an amendment to one of the Forward Transactions (the “Amended and Restated Forward Transaction”) to extend the expected settlement date with respect to approximately 2.1 million shares of common stock held by one of the Forward Counterparties, JPMorgan Chase Bank, National Association (the “2022 Forward Counterparty”), to correspond with the May 15, 2022 maturity date for the 2022 Convertible Notes. In the future, we may request that the 2022 Forward Counterparty modify the settlement terms of the Amended and Restated Forward Transaction to provide that, in lieu of the delivery of the applicable number of shares of our common stock to us to settle a portion of the Amended and Restated Forward Transaction in accordance with its terms, the 2022 Forward Counterparty would pay to us the net proceeds from the sale by the 2022 Forward Counterparty (or its affiliate) of a corresponding number of shares of our common stock in a registered offering (which may include block sales, sales on the NASDAQ Global Select Market, sales in the over-the-counter market, sales pursuant to negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices). Any such sales could potentially decrease (or reduce the size of any increase in) the market price of our common stock. The 2022 Forward Counterparty is not required to effect any such settlement in cash in lieu of delivery of shares of our common stock and, if we request that the 2022 Forward Counterparty effect any such settlement, it will be entered into in the discretion of the 2022 Forward Counterparty on such terms as may be mutually agreed upon at the time. As a result of the Forward Transactions, total shareholders’ equity within our consolidated balance sheets was reduced by approximately $140.0 million. In March 2020, approximately 5.1 million shares of common stock were delivered to us in connection with the Forward Transactions. In April 2021, approximately 1.5 million shares of common stock were delivered to us in connection with the Amended and Restated Forward Transaction. The approximately 0.6 million shares of common stock remaining under the Amended and Restated Forward Transactions are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding. Restricted Cash Our restricted cash balances were $0.4 million and $0.5 million, respectively, as of December 31, 2021 and 2020. The balance as of December 31, 2021 consisted primarily of a letter of credit issued for the benefit of the landlord of our new office location in Chicago, IL. The balance as of December 31, 2020 consisted of a letter of credit issued for the benefit of the landlord of our current office location in Broomfield, CO. For additional information on the 2021 Credit Agreement, the 2022 Convertible Notes, the 2024 Senior Secured Notes, the ABL Credit Facility, the 2022 Senior Secured Notes and the 2020 Convertible Notes, see Note 10, "Long-Term Debt and Other Liabilities," to our consolidated financial statements. 60 Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk Our exposure to market risk is currently confined to our cash and cash equivalents, short-term investments and debt. We have not used derivative financial instruments for speculation or trading purposes. The primary objectives of our investment activities are to preserve our capital for the purpose of funding operations while maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including U.S. Treasury securities, U.S. government agency securities, and money market funds. Our cash and cash equivalents as of both December 31, 2021 and December 31, 2020 primarily included amounts in bank deposit accounts and money market funds, and we did not have any short-term investments as of either such date. We believe that a change in average interest rates would not affect our interest income and results of operations by a material amount. The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on the overall economic activity, nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ. Interest Rate Risk: We are exposed to interest rate risk on our variable rate indebtedness, which includes borrowings under the Term Loan Facility and Revolving Facility (if any). We assess our market risks based on changes in interest rates utilizing a sensitivity analysis that measures the potential impact on earnings and cash flows based on a hypothetical one percentage point change in interest rates. As of December 31, 2021, we had interest rate cap agreements to hedge a portion of our exposure to interest rate movements of our variable rate debt and to manage our interest expense. We receive payments in the amounts calculated pursuant to the caps for any period in which the three-month USD LIBOR rate increases beyond the applicable strike rate. The termination date of the cap agreements is July 31, 2027. Over the life of the interest rate caps, the notional amounts of the caps periodically decrease, while the applicable strike prices increase. The notional amount of outstanding debt associated with interest rate cap agreements as of December 31, 2021 was $650.0 million. Based on our December 31, 2021 outstanding variable rate debt balance, a hypothetical one percentage point increase in the three-month LIBOR interest rate would impact our annual interest expense by approximately $0.3 million, which includes the impact of our interest rate cap at a strike rate of 0.75%. Excluding the impact of our interest rate caps, a hypothetical one percentage point increase in the three-month LIBOR interest rate would impact our annual interest expense by approximately $3.3 million. A hypothetical one percentage point decrease in the three-month LIBOR interest rate would not impact our annual interest expense due to the LIBOR floor of 0.75% in our Term Loan Facility. Our earnings are affected by changes in interest rates due to the impact those changes have on interest income generated from our cash, cash equivalents and short-term investments. Our cash and cash equivalents as of both December 31, 2021 and December 31, 2020 included amounts in bank deposit accounts and money market funds. We believe we have minimal interest rate risk as a 10% decrease in the average interest rate on our portfolio would have reduced interest income for the years ended December 31, 2021, 2020 and 2019 by immaterial amounts. Inflation: We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future. 61 Item 8. Financial Statemen ts and Supplementary Data Gogo Inc. Index to Consolidated Financial Statements Page No. Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 63 Consolidated Balance Sheets 65 Consolidated Statements of Operations 66 Consolidated Statements of Comprehensive Income (Loss) 67 Consolidated Statements of Cash Flows 68 Consolidated Statements of Stockholders’ Equity (Deficit) 69 Notes to Consolidated Financial Statements 70 62 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Gogo Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Gogo Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with the accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 3 to the financial statements, effective January 1, 2021, the Company adopted ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Income Taxes — Realizability of Deferred Tax Assets — Refer to Notes 3 and 16 to the financial statements The Company recognizes deferred income tax assets and liabilities for tax attributes and are based on the differences between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. The Company regularly assesses the need for a valuation allowance related to deferred income tax assets to determine, based on the weight of the available positive and negative evidence, whether it is more likely than not that some or all of such deferred assets will not be realized. The Company’s assessment considers recent financial operating results, the scheduled expiration of its net operating losses, potential sources of taxable income, the reversal of existing taxable differences, taxable income in prior carryback years, if permitted under tax law, and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize $185.1 million of its deferred income taxes as of December 31, 2021. We identified management’s determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred income tax assets as a critical audit matter because of the significant judgments management makes related to taxable income. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates of taxable income. 63 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred income tax assets included the following, among others: • We tested the effectiveness of controls over deferred income tax assets, including management’s controls over the estimates of taxable income and the determination of whether it is more likely than not that the deferred income tax assets will be realized. • We evaluated the reasonableness of the methods, assumptions, and judgments used by management to determine whether it was more likely than not that certain tax attributes and deferred income tax assets could be realized. • With the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred income tax assets under the relevant tax law. This included evaluating management’s assessment of the scheduling of the reversal of existing temporary taxable differences and carryforward lives of the deferred income tax assets, and the availability of tax planning strategies as a source of future taxable income. • We tested the reasonableness of management’s adjusted historical taxable income to project sources of future taxable income, and performed the following procedures related to historical taxable income: • Compared the historical taxable income to the amounts disclosed in the Company’s historical financial statements. • Evaluated the recurring permanent differences included in the historical taxable income for reasonableness. • Tested the adjustments made to historical taxable income for nonrecurring items to assess if they were objectively verifiable. • Compared the historical taxable income to internal budgets and information communicated internally, to the Board of Directors and in Company press releases and investor presentations related to fiscal year 2022 and forward. • We evaluated whether there was taxable income in prior carryback years that was of the appropriate character and available under the tax law. /s/ Deloitte & Touche LLP Chicago, Illinois March 3, 2022 We have served as the Company’s auditor since 2007. 64 Gogo Inc. and Subsidiaries Consolidated B alance Sheets (in thousands, except share and per share data) December 31, December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 145,913 $ 435,345 Accounts receivable, net of allowances of $ 894 and $ 1,044 , respectively 37,730 39,833 Inventories 33,976 28,114 Prepaid expenses and other current assets 32,295 8,934 Total current assets 249,914 512,226 Non-current assets: Property and equipment, net 63,672 63,493 Intangible assets, net 49,554 52,693 Operating lease right-of-use assets 70,989 33,690 Other non-current assets, net of allowances of $ 455 and $ 375 , respectively 28,425 11,486 Deferred income taxes 185,133 — Total non-current assets 397,773 161,362 Total assets $ 647,687 $ 673,588 Liabilities and stockholders’ deficit Current liabilities: Accounts payable $ 17,203 $ 11,013 Accrued liabilities 59,868 83,009 Deferred revenue 1,825 3,113 Current portion of long-term debt 109,620 341,000 Total current liabilities 188,516 438,135 Non-current liabilities: Long-term debt 694,760 827,968 Non-current operating lease liabilities 77,329 38,018 Other non-current liabilities 7,236 10,581 Total non-current liabilities 779,325 876,567 Total liabilities 967,841 1,314,702 Stockholders’ deficit Common stock, par value $ 0.0001 per share; 500,000,000 shares authorized at December 31, 2021 and 2020; 117,407,468 and 91,086,191 shares issued at December 31, 2021 and 2020, respectively; and 110,791,954 and 85,990,499 shares outstanding at December 31, 2021 and 2020, respectively 11 9 Additional paid-in capital 1,258,477 1,088,590 Accumulated other comprehensive income (loss) 1,789 ( 1,013 ) Treasury stock, at cost ( 128,803 ) ( 98,857 ) Accumulated deficit ( 1,451,628 ) ( 1,629,843 ) Total stockholders’ deficit ( 320,154 ) ( 641,114 ) Total liabilities and stockholders’ deficit $ 647,687 $ 673,588 See the Notes to Consolidated Financial Statements 65 Gogo Inc. and Subsidiaries Consolidated Statem ents of Operations (in thousands, except per share amounts) For the Years Ended December 31, 2021 2020 2019 Revenue: Service revenue $ 259,583 $ 211,987 $ 221,922 Equipment revenue 76,133 57,731 87,063 Total revenue 335,716 269,718 308,985 Operating expenses: Cost of service revenue (exclusive of items shown below) 56,103 45,073 42,142 Cost of equipment revenue (exclusive of items shown below) 46,092 39,299 51,744 Engineering, design and development 24,874 25,227 26,013 Sales and marketing 20,985 15,135 21,236 General and administrative 51,554 54,467 54,628 Depreciation and amortization 15,482 14,166 16,690 Total operating expenses 215,090 193,367 212,453 Operating income 120,626 76,351 96,532 Other (income) expense: Interest income ( 191 ) ( 722 ) ( 4,000 ) Interest expense 67,472 125,787 130,473 Loss on extinguishment of debt and settlement of convertible notes 83,961 — 57,962 Other (income) expense 25 ( 9 ) 31 Total other expense 151,267 125,056 184,466 Loss from continuing operations before income taxes ( 30,641 ) ( 48,705 ) ( 87,934 ) Income tax provision (benefit) ( 187,230 ) ( 146 ) 563 Net income (loss) from continuing operations 156,589 ( 48,559 ) ( 88,497 ) Net loss from discontinued operations, net of tax ( 3,854 ) ( 201,477 ) ( 57,507 ) Net income (loss) $ 152,735 $ ( 250,036 ) $ ( 146,004 ) Net income (loss) attributable to common stock per share—basic: Continuing operations $ 1.50 $ ( 0.59 ) $ ( 1.10 ) Discontinued operations ( 0.04 ) ( 2.45 ) ( 0.71 ) Net income (loss) attributable to common stock per share—basic $ 1.46 $ ( 3.04 ) $ ( 1.81 ) Net income (loss) attributable to common stock per share—diluted: Continuing operations $ 1.28 $ ( 0.59 ) $ ( 1.10 ) Discontinued operations — ( 2.45 ) ( 0.71 ) Net income (loss) attributable to common stock per share—diluted $ 1.28 $ ( 3.04 ) $ ( 1.81 ) Weighted average number of shares Basic 103,400 82,266 80,766 Diluted 127,205 82,266 80,766 See the Notes to Consolidated Financial Statements 66 Gogo Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (in thousands) For the Years Ended December 31, 2021 2020 2019 Net income (loss) $ 152,735 $ ( 250,036 ) $ ( 146,004 ) Other comprehensive income (loss), net of tax Currency translation adjustments $ 53 $ 1,243 $ 1,298 Cash flow hedges: Net unrealized gain 2,747 — — Less: income (loss) realized and reclassified to earnings ( 2 ) — — Changes in fair value of cash flow hedges 2,749 — — Other comprehensive income (loss), net of tax 2,802 1,243 1,298 Comprehensive income (loss) $ 155,537 $ ( 248,793 ) $ ( 144,706 ) See the Notes to Consolidated Financial Statements 67 Gogo Inc. and Subsidiaries Consolidated Statem ents of Cash Flows (in thousands) For the Years Ended December 31, 2021 2020 2019 Operating activities from continuing operations: Net income (loss) $ 156,589 $ ( 48,559 ) $ ( 88,497 ) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 15,482 14,166 16,690 Loss on asset disposals, abandonments and write-downs 141 64 496 Provision for expected credit losses 284 1,071 — Deferred income taxes ( 187,320 ) ( 232 ) 178 Stock-based compensation expense 13,345 7,808 8,654 Amortization of deferred financing costs 4,661 5,892 5,260 Accretion and amortization of debt discount and premium 419 13,908 14,711 Loss on extinguishment of debt and settlement of convertible notes 83,961 — 57,962 Changes in operating assets and liabilities: Accounts receivable 1,925 1,315 ( 9,023 ) Inventories ( 5,862 ) 7,091 11,666 Prepaid expenses and other current assets ( 20,844 ) ( 277 ) 1,144 Contract assets ( 5,638 ) ( 9,439 ) ( 2,547 ) Accounts payable 3,806 4,963 ( 264 ) Accrued liabilities 14,099 4,470 2,245 Deferred revenue ( 1,282 ) 898 ( 260 ) Accrued interest ( 8,604 ) 787 ( 29,646 ) Other non-current assets and liabilities 1,535 587 ( 1,641 ) Net cash provided by (used in) operating activities from continuing operations 66,697 4,513 ( 12,872 ) Investing activities from continuing operations: Proceeds from sale of property and equipment 1,000 — — Purchases of property and equipment ( 4,264 ) ( 1,818 ) ( 1,490 ) Acquisition of intangible assets—capitalized software ( 4,396 ) ( 7,172 ) ( 4,983 ) Redemptions of short-term investments — — 39,323 Purchase of interest rate cap ( 8,629 ) — — Net cash provided by (used in) investing activities from continuing operations ( 16,289 ) ( 8,990 ) 32,850 Financing activities from continuing operations: Proceeds from credit facility draw — 26,000 — Repayments of amounts drawn from credit facility — ( 26,000 ) — Repurchase of convertible notes — ( 2,498 ) ( 159,502 ) Proceeds from issuance of senior secured notes — 51,750 920,683 Redemption of senior secured notes ( 1,023,146 ) — ( 741,360 ) Proceeds from term loan, net of discount 721,375 — — Payments on term loan ( 3,625 ) — — Payment of debt issuance costs ( 21,103 ) — ( 22,976 ) Payments on finance leases ( 145 ) ( 546 ) — Stock-based compensation activity ( 4,393 ) ( 4,227 ) 325 Net cash provided by (used in) financing activities from continuing operations ( 331,037 ) 44,479 ( 2,830 ) Cash flows from discontinued operations: Net cash provided by (used in) operating activities ( 1,211 ) ( 137,200 ) 76,933 Net cash provided by (used in) investing activities ( 7,802 ) 357,393 ( 106,559 ) Net cash used in financing activities — ( 54 ) ( 713 ) Net cash provided by (used in) discontinued operations ( 9,013 ) 220,139 ( 30,339 ) Effect of foreign exchange rate changes on cash 40 ( 1,946 ) ( 250 ) Increase (decrease) in cash, cash equivalents and restricted cash ( 289,602 ) 258,195 ( 13,441 ) Cash, cash equivalents and restricted cash at beginning of period 435,870 177,675 191,116 Cash, cash equivalents and restricted cash at end of period $ 146,268 $ 435,870 $ 177,675 Cash, cash equivalents and restricted cash at end of period $ 146,268 $ 435,870 $ 177,675 Less: current restricted cash 25 525 560 Less: non-current restricted cash 330 — 7,099 Cash and cash equivalents at end of period $ 145,913 $ 435,345 $ 170,016 Supplemental Cash Flow Information: Cash paid for interest $ 71,114 $ 106,051 $ 140,833 Cash paid for taxes 376 401 490 Non-cash investing activities: Purchases of property and equipment in current liabilities $ 6,126 $ 84 $ 82 See the Notes to Consolidated Financial Statements 68 Gogo Inc. and Subsidiaries Consolidated Statements of St ockholders’ Equity (Deficit) (in thousands, except share data) Accumulated Additional Other Common Stock Paid-In Comprehensive Accumulated Treasury Stock Shares Par Value Capital Income (Loss) Deficit Shares Amount Total Balance at January 1, 2019 87,560,694 $ 9 $ 963,458 $ ( 3,554 ) $ ( 1,228,674 ) — $ — $ ( 268,761 ) Net loss — — — — ( 146,004 ) — — ( 146,004 ) Currency translation adjustments, net of tax — — — 1,298 — — — 1,298 Stock-based compensation expense — — 16,511 — — — — 16,511 Issuance of common stock upon exercise of stock options 3,338 — 16 — — 16 Issuance of common stock upon vesting of restricted stock units and restricted stock awards 372,030 — — — — — — — Tax withholding related to vesting of restricted stock units — — ( 865 ) — — — — ( 865 ) Issuance of common stock in connection with employee stock purchase plan 304,815 — 1,174 — — — — 1,174 Repurchase of 2020 Convertible Notes — — ( 795 ) — — — — ( 795 ) Impact of the adoption of new accounting standards — — — — ( 1,464 ) — — ( 1,464 ) Balance at December 31, 2019 88,240,877 9 979,499 ( 2,256 ) ( 1,376,142 ) — — ( 398,890 ) Net loss — — — — ( 250,036 ) — — ( 250,036 ) Currency translation adjustments, net of tax — — — 1,243 — — — 1,243 Stock-based compensation expense — — 14,458 — — — — 14,458 Issuance of common stock upon exercise of stock options 87,104 — 262 — — 262 Issuance of common stock upon vesting of restricted stock units and restricted stock awards 2,376,709 — — — — — — — Tax withholding related to vesting of restricted stock units — — ( 5,470 ) — — — — ( 5,470 ) Issuance of common stock in connection with employee stock purchase plan 363,209 1 983 — — — — 984 Settlement of prepaid forward shares ( 5,077,400 ) ( 1 ) 98,858 — — 5,077,400 ( 98,857 ) — Impact of the adoption of new accounting standards — — — — ( 3,665 ) — — ( 3,665 ) Balance at December 31, 2020 85,990,499 9 1,088,590 ( 1,013 ) ( 1,629,843 ) 5,077,400 ( 98,857 ) ( 641,114 ) Net income — — — — 152,735 — — 152,735 Currency translation adjustments, net of tax — — — 53 — — — 53 Fair value adjustments of cash flow hedge, net of tax — — — 2,749 — — — 2,749 Stock-based compensation expense — — 37,318 — — — — 37,318 Issuance of common stock upon exercise of stock options 591,930 — 1,780 — — — — 1,780 Issuance of common stock upon vesting of restricted stock units and restricted stock awards 1,346,008 — — — — — — — Tax withholding related to vesting of restricted stock units — — ( 6,708 ) — — — — ( 6,708 ) Issuance of common stock in connection with employee stock purchase plan 48,560 — 535 — — — — 535 Settlement of convertible notes 24,353,006 2 154,439 — — — — 154,441 Settlement of prepaid forward shares ( 1,538,049 ) — 29,946 — — 1,538,049 ( 29,946 ) — Impact of the adoption of ASU 2020-06 — — ( 47,423 ) — 25,480 — — ( 21,943 ) Balance at December 31, 2021 110,791,954 $ 11 $ 1,258,477 $ 1,789 $ ( 1,451,628 ) 6,615,449 $ ( 128,803 ) $ ( 320,154 ) See the Notes to Consolidated Financial Statements 69 Gogo Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Background Gogo (“we”, “us,” “our”) is the world’s largest provider of broadband connectivity services for the business aviation market. Our mission is to provide ground-like connectivity to every passenger on every flight around the globe, enabling superior passenger experiences and efficient flight operations. To accomplish our mission, we design, build and operate dedicated air-to-ground (“ATG”) networks, engineer and maintain in-flight systems of proprietary hardware and software, and deliver customizable connectivity and wireless entertainment services and global support capabilities to our aviation partners. Our services include narrowband satellite-based voice and data services through our strategic alliances with satellite providers. On December 1, 2020, we completed the previously announced sale of our commercial aviation (“CA”) business to a subsidiary of Intelsat Jackson Holdings S.A. (“Intelsat”) for a purchase price of $ 400.0 million in cash, subject to certain adjustments (the “Transaction”). At the closing of the Transaction, the parties entered into certain ancillary agreements, including a transition services agreement, an intellectual property license agreement and commercial agreements. These agreements include an ATG network sharing agreement, pursuant to which we provide certain in-flight connectivity services on our current ATG network and, when available, our Gogo 5G network, subject to certain revenue sharing obligations. Under the ATG network sharing agreement, Intelsat has exclusive access to the ATG network for commercial aviation in North America, subject to minimum revenue guarantees starting at $ 5.0 million in the first year of the agreement. As a result of the Transaction, the CA business is reported in discontinued operations and all periods presented in this Form 10-K have been conformed to present the CA business as a discontinued operation. We report the financial results of discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal of a component or a group of components (i) meets the held-for-sale classification criteria or is disposed of by sale or other than by sale, and (ii) represents a strategic shift that will have a major effect on our operations and financial results. The results of operations and cash flows of a discontinued operation are restated for all comparative periods presented. Unless otherwise noted, discussion in these Notes to Consolidated Financial Statements refers to our continuing operations. Refer to Note 2, "Discontinued Operations," for further information. Prior to the closing of the Transaction, we historically reported our results of operations in three segments: Commercial Aviation-North America (“CA-NA”), Commercial Aviation-Rest of World (“CA-ROW”) and Business Aviation. We managed and reported these businesses separately, as they generally did not share the same customer base, had different products, pricing and expense structures, and measured operating performance and allocated resources on different bases. As a result of the Transaction, we operate in a single distinct business segment, Business Aviation, for which operating performance is measured and resources are allocated on a consolidated basis, consistent with the financial information regularly reviewed by the chief operating decision maker, our CEO. Therefore, we now report one business segment, comprised of our continuing operations. As we do not have multiple segments, we do not present segment information in this Annual Report on Form 10-K. Our revenue from customers domiciled outside of the United States accounted for less than 10 % of our total revenue for the years ended December 31, 2021, 2020 and 2019. Our assets outside of the United States as of December 31, 2021 and 2020 were immaterial. 2. Discontinued Operations As discussed in Note 1, "Background," on December 1, 2020, we completed the sale of our CA business to Intelsat. As a result of the Transaction, the CA business is reported for all periods as discontinued operations. The following table summarizes the results of discontinued operations which are presented as Net loss from discontinued operations, net of tax, in our consolidated statements of operations (in thousands) : 70 For the Years Ended December 31, 2021 2020 2019 Revenue: Service revenue $ — $ 192,616 $ 442,431 Equipment revenue — 40,483 84,310 Total revenue — 233,099 526,741 Operating expenses: Cost of service revenue (exclusive of items shown below) — 145,958 255,706 Cost of equipment revenue (exclusive of items shown below) — 33,978 82,984 Engineering, design and development — 57,167 82,597 Sales and marketing — 24,121 27,920 General and administrative 6,283 40,551 35,215 Impairment of long-lived assets — 47,375 — Depreciation and amortization — 119,827 102,127 Total operating expenses 6,283 468,977 586,549 Operating loss ( 6,283 ) ( 235,878 ) ( 59,808 ) Other (income) expense: Gain on sale of CA business ( 1,598 ) ( 37,958 ) — Other (income) expense — 3,134 ( 2,744 ) Total other (income) expense: ( 1,598 ) ( 34,824 ) ( 2,744 ) Loss before income taxes ( 4,685 ) ( 201,054 ) ( 57,064 ) Income tax provision (benefit) ( 831 ) 423 443 Net loss from discontinued operations, net of tax $ ( 3,854 ) $ ( 201,477 ) $ ( 57,507 ) The following discussion relates entirely to discontinued operations. Gain on sale – Upon the closing of the Transaction on December 1, 2020, we received initial gross proceeds of $ 386.3 million, which reflects the $ 400.0 million purchase price, adjusted for cash, debt, transaction expenses and working capital. The final purchase price was subject to change due to customary post-closing purchase price adjustment procedures set forth in the purchase and sale agreement between Gogo and Intelsat, that were not yet complete. As the post-closing purchase price adjustment was not yet finalized and therefore represented a contingent gain, $ 9.4 million was recorded as a deferred gain on sale included within Accrued liabilities as of December 31, 2020. During December 2020, we recognized within Gain on sale of CA business a pretax gain on sale of $ 38.0 million, computed as the $386.3 million of initial gross proceeds less (i) the potential $ 9.4 million post-closing purchase price adjustment not yet finalized, (ii) the carrying value of the assets and liabilities transferred in the Transaction and (iii) Transaction-related costs. In October 2021, the independent accounting firm engaged to resolve a dispute between the parties regarding the working capital matter determined the final amount of the working capital adjustments to be $ 7.8 million. In the fourth quarter of 2021, Gogo paid Intelsat the $7.8 million and recognized an additional Gain on sale of CA business of $ 1.6 million. Stock-based compensation – In August 2020, the Compensation Committee of our Board of Directors (the “Compensation Committee”) approved modifications to the vesting conditions and exercise periods of outstanding equity compensation awards held by certain of our then-current employees who became employees of Intelsat in the Transaction. These modifications became effective upon the consummation of the Transaction. Pursuant to such modifications, the options and restricted stock units (“RSUs”) held by Intelsat employees generally vested on the earlier of (i) the original vesting date and (ii) December 1, 2021; provided that the employee did not voluntarily resign from and was not terminated for cause by Intelsat prior to such date. Certain of these awards vested based on conditions that are not classified as a service, market or performance condition and as a result such awards were classified as a liability. Other than mark-to-market adjustments, a ll costs related to stock-based compensation for our prior employees who became employees of Intelsat in the Transaction were recognized as of December 31, 2020. For the year ended December 31, 2021, $ 24.0 million was reclassified from Accrued liabilities to Additional paid-in capital as the awards vested during the period. As of December 31, 2021, there were no remaining liability-classified awards. 71 The following is a summary of our stock-based compensation expense by operating expense line contained within the results of discontinued operations for the years December 31, 2021, 2020 and 2019 (in thousands) : 2021 2020 2019 Cost of service revenue $ — $ 7,647 $ 1,497 Cost of equipment revenue — — — Engineering, design and development — 5,836 2,398 Sales and marketing — 7,911 2,144 General and administrative 4,817 4,413 1,819 Total stock-based compensation expense $ 4,817 $ 25,807 $ 7,858 See Note 15, "Stock-Based Compensation and 401(k) Plan," for additional information on our stock-based compensation plans. Other Costs Classified to Discontinued Operations – During the year ended December 31, 2021, we incurred $ 1.5 million of additional costs (exclusive of the gain on sale, stock-based compensation expense noted above and income tax benefit) primarily due to employer-paid taxes arising from the exercise of stock options by former employees then employed by Intelsat. Change in estimates – During the second quarter of 2020, our agreement with Delta Air Lines, Inc. (“Delta”) to provide 2Ku service on certain Delta aircraft was amended to change the contract expiration date from February 2027 with respect to all aircraft to a staggered, fleet by fleet expiration schedule under which expiration dates will occur between November 2020 and July 2022 (the “Delta amendment”). As a result, the useful lives of the equipment installed on these fleets were shortened to align with the expiration dates in the amended agreement. The change in estimated useful lives resulted in approximately $ 41.0 million of accelerated depreciation during the year ended December 31, 2020. We ceased depreciating these assets and other depreciable assets included as part of discontinued operations when the CA business was classified as held for sale. Additionally, the amortization periods for the remaining deferred airborne lease incentives associated with the equipment installed on the 2Ku fleets were shortened to align with the new expiration dates, which resulted in approximately $ 42.0 million of accelerated amortization during the year ended December 31, 2020. Amortization of deferred airborne lease incentives is a reduction to cost of service revenue. Credit Losses – During the year ended December 31, 2020, we recorded $ 10.7 million of provisions for expected credit losses, primarily related to one international airline partner entering bankruptcy administration, while we had recoveries of approximately $ 0.6 million. Arrangements with commercial airlines – For our divested CA business, pursuant to contractual agreements with our airline partners, we placed our equipment on commercial aircraft operated by the airlines in order to deliver our service to passengers on the aircraft. We had two types of commercial airline arrangements: turnkey and airline-directed. Under the airline-directed model, we transferred control of the equipment to the airline and therefore the airline was our customer in these transactions. Under the turnkey model, we had not transferred control of our equipment to our airline partner and, as a result, the airline passenger was deemed to be our customer. Transactions with our airline partners under the turnkey model were accounted for as an operating lease of space on an aircraft. We recognized $ 71.2 million and $ 28.6 million, respectively, for the years ended December 31, 2020 and 2019 as a reduction to our cost of service revenue from the amortization of deferred airborne lease incentives. The increase during the year ended December 31, 2020 was due to the Delta amendment. Under the turnkey model, the revenue share paid to our airline partners represented operating lease payments. These payments were deemed to be contingent rental payments as the payments due to each airline were based on a percentage of our CA service revenue generated from that airline’s passengers, which was unknown until realized. Therefore, we estimated the lease payments due to an airline at the commencement of our contract with such airline. This rental expense is included in cost of service revenue and is partially offset by the amortization of the deferred airborne lease incentives discussed above. Due to the accelerated amortization resulting from the Delta amendment and a significant reduction in revenue share as a result of COVID-19, the amortization of deferred airborne lease incentives exceeded our revenue share expense by $ 49.1 million for the year ended December 31, 2020. We incurred net rental expense of $ 25.1 million for the year ended December 31, 2019. Asset impairment – We reviewed our long-lived assets, including property and equipment, right-of-use assets, and other non-current assets, for potential impairment whenever events indicated that the carrying amount of such assets might not be recoverable. We performed this review by comparing the carrying value of the long-lived assets to the estimated future undiscounted cash flows expected to result from the use of the assets. We grouped certain long-lived assets by airline contract and by technology. If we 72 determined that an impairment existed, the amount of the impairment was computed as the difference between the asset group’s carrying value and its estimated fair value, following which the assets were written down to their estimated fair values. In light of the COVID-19 pandemic and its impact on air travel, including decreased flights, decreased gross passenger opportunity and our airline partners’ temporary parking of a significant number of their aircraft, we conducted a review as of March 31, 2020 and determined that the carrying values for the asset groups related to three of our airline agreements for the CA business exceeded their estimated undiscounted cash flows, which triggered the need to estimate the fair value of these assets. Fair value reflects our best estimate of the discounted cash flows of the impaired assets. For the airborne assets and right-of-use assets associated with the three airline agreements (the “impaired assets”), we recorded an impairment charge of $ 46.4 million for the three-month period ended March 31, 2020, reflecting the difference between the carrying value and the estimated fair value of the impaired assets. We conducted another review as of June 30, 2020 due to the continuation of the COVID-19 pandemic as well as the signing of the Delta amendment and determined that $ 1.0 million of deferred STC costs was impaired due to the bankruptcy of three airline partners. As such, we recorded a $ 1.0 million charge for impairment of long-lived assets for the three-month period ended June 30, 2020. For the year ended December 31, 2020, charges recorded for impairments of long-lived assets totaled $ 47.4 million. No such charges were recorded for the year ended December 31, 2019. Revenue Recognition We account for revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). CA’s airline-directed contracts contain multiple performance obligations, which primarily include the sale of equipment, installation services, connectivity services and entertainment services. For these contracts, we accounted for each distinct good or service as a separate performance obligation. We allocated the contract’s transaction price to each performance obligation using the relative standalone selling price, which was based on the actual selling price for any good or service sold separately to a similar class of customer, if available. To the extent a good or service was not sold separately, we used our best estimate of the standalone selling price and maximized the use of observable inputs. The primary method we used to estimate the standalone selling price was the expected cost-plus margin approach. The contractual consideration used for allocation purposes includes connectivity and entertainment services, which may be based on a fixed monthly fee per aircraft or a variable fee based on the volume of connectivity activity, or a combination of both. Examples of variable consideration within CA’s airline contracts include megabyte overages and pay-per-use sessions. We constrained our estimates to reduce the probability of a significant revenue reversal in future periods, allocated variable consideration to the identified performance obligations and recognized revenue in the period the services were provided. Our estimates were based on historical experience, anticipated future performance, market conditions and our best judgment at the time. For 2020, our estimates included management’s best assumptions for the continued impact of COVID-19, which included decreased flights and gross passenger opportunity (“GPO”). A significant change in one or more of these estimates could have affected estimated contract value. For example, estimates of variable revenue within certain contracts required estimation of the number of sessions or megabytes that would be purchased over the contract term and the average revenue per connectivity session, which varies based on the connectivity options available to passengers on each airline. Estimated revenue under these contracts anticipated increases in take rates over time and assumed an average revenue per session consistent with our historical experience. We regularly reviewed and updated our estimates, especially in light of COVID-19, and recognized adjustments under the cumulative catch-up method. Any adjustments under this method were recorded as a cumulative adjustment in the period identified and revenue for future periods was recognized using the new adjusted estimate. 3. Summary of Significant Accounting Policies Principles of Consolidation – The consolidated financial statements include our wholly owned subsidiaries. All intercompany transactions and account balances have been eliminated. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 73 revenues and expenses during the reporting period. On an ongoing basis, management evaluates the significant estimates and bases such estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. However, actual results could differ materially from those estimates. Significant Risks and Uncertainties - Our operations are subject to certain risks and uncertainties, including without limitation those associated with continuing losses, fluctuations in operating results, funding of our growth, implementation of our technology roadmap, strategic alliances, relationships with customers, suppliers and dealers, financing terms that may restrict operations, regulatory issues, competition, COVID-19, the economy, technology trends and evolving industry standards. Cash, Cash Equivalents and Short-Term Investments - We consider cash and cash equivalents to be short-term, highly liquid investments that have the following characteristics: readily convertible to known amounts of cash, so near their maturities that there is insignificant risk of changes in value due to any changes in market interest rates, and having maturities of three months or less when purchased. We continually monitor positions with, and the credit quality of, the financial institutions with which we invest. The carrying amounts reported in the balance sheets for cash and cash equivalents approximate the fair market value of these assets. We consider short-term investments to be investments with maturities of twelve months or less (but greater than three months). Restricted Cash - Certain cash amounts are restricted as to use and are classified outside of cash and cash equivalents. Cash amounts with restrictions of twelve months or less are included in Prepaid expenses and other current assets and amounts restricted for greater than twelve months are included in Other non-current assets in our consolidated balance sheets. Our restricted cash balances were $ 0.4 million and $ 0.5 million , respectively, as of December 31, 2021 and 2020. The balance as of December 31, 2021 consisted primarily of a letter of credit issued for the benefit of the landlord of our new office location in Chicago, IL. The balance as of December 31, 2020 consisted of a letter of credit issued for the benefit of the landlord of our current office location in Broomfield, CO which was no longer required as of December 31, 2021. Concentrations of Credit Risk - Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents. All cash and cash equivalents are invested with creditworthy financial institutions. Income Tax - We use an asset- and liability-based approach in accounting for income taxes. Deferred income tax assets and liabilities are recorded for tax attributes and are based on the differences between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. We regularly assess the need for a valuation allowance related to our deferred income tax assets to determine, based on the weight of the available positive and negative evidence, whether it is more likely than not that some or all of such deferred assets will not be realized. We also consider the existence of any uncertain tax positions and, as necessary, provide a reserve for any uncertain tax positions at each reporting date. See Note 16, "Income Tax," for further details. Inventories - Inventories consist primarily of telecommunications systems and parts and are recorded at the lower of average cost or market. We evaluate the need for write-downs associated with obsolete, slow-moving and nonsalable inventory by reviewing net realizable inventory values on a periodic basis. See Note 6, "Inventories," for further details. Property and Equipment and Depreciation - Property and equipment, including leasehold improvements, are stated at historical cost, less accumulated depreciation. Network asset inventory and construction in progress, which include materials, transmission and related equipment, interest and other costs relating to the construction and development of our network, are not depreciated until they are put into service. Network equipment consists of switching equipment, antennas, base transceiver stations, site preparation costs, and other related equipment used in the operation of our network. Depreciation expense totaled $ 7.9 million , $ 7.9 million and $ 10.6 million for the years ended December 31, 2021, 2020 and 2019 , respectively. Subsequent to the issuance of the Company’s 2020 consolidated financial statements, the Company determined that the depreciation expense amounts disclosed in the footnotes to the 2020 Form 10-K represented both depreciation and amortization expense and thus were overstated by $ 6.3 million and $ 6.1 million for the years ended December 31, 2020 and 2019, respectively. During the current year, the Company corrected these disclosed depreciation expense amounts in the footnote. These disclosure adjustments did not impact the amounts recorded in the 74 consolidated financial statements and the Company believes the disclosure adjustments are not material. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives for owned assets, which are as follows: Office equipment, furniture, fixtures and other 3 - 5 years Leasehold improvements 7 - 15 years Network equipment 5 - 25 years See Note 7, "Composition of Certain Balance Sheet Accounts," for further details. Improvements to leased property are depreciated over the shorter of the useful life of the improvement or the term of the related lease. We reassess the useful lives of leasehold improvements when there are changes to the terms of the underlying lease. Such reassessment has resulted in the useful life of specific assets being adjusted to a shorter period than originally estimated, resulting in an increase in annual depreciation expense for those assets. Repairs and maintenance costs are expensed as incurred. Software Development Costs - We capitalize costs for network and non-network software developed or obtained for internal use during the application development stage. These costs include purchased software and direct costs associated with the development and configuration of internal use software that supports the operation of our service offerings. These costs are included in Intangible assets, net, in our consolidated balance sheets and, when the software is placed in service, are amortized on a straight-line basis over their estimated useful lives. Costs incurred in the preliminary project and post-implementation stages, as well as maintenance and training costs, are expensed as incurred. With respect to software sold as part of our equipment sales, we capitalize software development costs once technological feasibility has been established. Such capitalized software costs are amortized on a product-by-product basis over the remaining estimated economic life of the product, based on the greater of the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method. Intangible Assets - Intangible assets with indefinite lives are not amortized but are reviewed for impairment at least annually or whenever events or circumstances indicate the carrying value of the asset may not be recoverable. Our FCC Licenses, as defined in Note 9, "Intangible Assets," are our only material indefinite-lived intangible assets. We perform our annual impairment test of our FCC Licenses during the fourth quarter of each fiscal year. We assess qualitative factors to determine the likelihood of impairment. Our qualitative analysis includes, but is not limited to, assessing the changes in macroeconomic conditions, regulatory environment, industry and market conditions, financial performance versus budget and any other events or circumstances specific to the FCC Licenses. If it is more likely than not that the fair value of the FCC Licenses is greater than the carrying value, no further testing is required. If our qualitative analysis indicates more testing is required, or if we elect not to perform a qualitative analysis, we will apply the quantitative impairment test method. Our quantitative impairment testing of the FCC Licenses uses the Greenfield method, an income-based approach. When performing this quantitative impairment testing, we estimate the value of our FCC spectrum licenses by calculating the present value of the cash flows of a hypothetical new market participant whose only assets are such licenses to determine the fair value of the FCC licenses. The estimate takes into account all costs and expenses necessary to build the Company’s infrastructure during the start-up period, projected revenue, and cash flows once the infrastructure is completed. Since there is limited corroborating data available in the marketplace that would demonstrate a market participant’s experience in establishing an “air-to-ground” business, we utilize our historic results and future projections as the underlying basis for the application of the Greenfield method. We follow the traditional discounted cash flow method, calculating the present value of a new market participant’s estimated debt free cash flows, based on our historical weighted average cost of capital, adjusted to reflect the cost of capital for a new market participant. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, projected operating results and cash flows may not always be achieved. The failure to achieve one or more of our assumptions regarding projected operating results and cash flows in the near term or long term could reduce the estimated fair value below carrying value and result in the recognition of an impairment charge. The results of our annual indefinite-lived intangible asset impairment assessments for 2021, 2020 and 2019 indicated no impairment. Intangible assets that are deemed to have a finite life are amortized over their useful lives as follows: Software 3 - 8 years OEM and dealer relationships 10 years Service customer relationships 5 - 7 years Other intangible assets 4 - 10 years 75 See Note 9, "Intangible Assets," for further details . Long-Lived Assets - We review our long-lived assets to determine potential impairment whenever events indicate that the carrying amount of such assets may not be recoverable. We do this by comparing the carrying value of the long-lived assets with the estimated future undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. If we determine an impairment exists, the asset is written down to estimated fair value. There were no impairments of long-lived assets in 2021, 2020 or 2019 . Revenue Recognition - Our revenue is primarily earned from providing connectivity and entertainment services and through sales of equipment. We account for revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). We determine revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue as we satisfy the performance obligations. Service revenue primarily consists of monthly subscription and usage fees paid by aircraft owners and operators for telecommunication, data, and in-flight entertainment services and is recognized as the services are provided to the customer. Equipment revenue primarily consists of proceeds from the sale of ATG and satellite connectivity equipment and the sale of entertainment equipment and is generally recognized when the equipment is shipped to OEMs and dealers. In all cases, we evaluate whether a contract exists as it relates to collectability of the contract. Once a contract is deemed to exist, we evaluate the transaction price and deliverables under the contract. A limited number of contracts contain multiple equipment and service deliverables. For these contracts, we account for each distinct good or service as a separate performance obligation. We allocate the contract’s transaction price to each performance obligation using the relative standalone selling price, which is based on the actual selling price for any good or service sold separately to a similar class of customer. See Note 5, "Revenue Recognition," for further information. Research and Development Costs - Expenditures for research and development are charged to expense as incurred and totaled $ 24.9 million , $ 25.2 million and $ 26.0 million for the years ended December 31, 2021, 2020 and 2019 , respectively. Research and development costs are reported as engineering, design and development expenses in our consolidated statements of operations. Warranty - We provide warranties on parts and labor related to our products. Our warranty terms range from two to five years. Warranty reserves are established for costs that are estimated to be incurred after the sale, delivery and installation of the products under warranty. The warranty reserves are determined based on known product failures, historical experience and other available evidence, and are included in accrued liabilities in our consolidated balance sheets. See Note 8, "Composition of Certain Reserves and Allowances," for the details of the changes in our warranty reserve. Asset Retirement Obligations - We have certain asset retirement obligations related to contractual commitments to remove our network equipment and other assets from leased cell sites upon termination of the site leases. The asset retirement obligations are classified as a noncurrent liability in our consolidated balance sheets. See Note 7, "Composition of Certain Balance Sheet Accounts," for the details of the changes in our asset retirement obligations. Fair Value of Financial Instruments - We group financial assets and financial liabilities measured at fair value into three levels of hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. 76 See Note 14, "Fair Value of Financial Assets and Liabilities," for further information. Derivatives - We are exposed to interest rate risk on our variable rate borrowings. We currently use interest rate caps to manage our exposure to interest rate changes, and have designated these interest rate caps as cash flow hedges for accounting purposes. We account for these interest rate caps in accordance with ASC 815, Derivatives and Hedging , which requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. We record the effective portion of changes in the fair value of our cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized. See Note 11, "Derivative Instruments and Hedging Activities," for further information. In March 2015, we entered into the Forward Transactions (as defined and described in Note 10, "Long-Term Debt and Other Liabilities") in which we purchased 7.2 million shares of our common stock for approximately $ 140.0 million, with an expected settlement date on or around March 13, 2020 , and in December 2019, we amended a portion of the Forward Transactions to extend the expected settlement date for approximately 2.1 million of those shares to on or around May 15, 2022 . During March 2020, approximately 5.1 million shares of common stock were delivered to us in connection with the Forward Transactions. In April 2021, approximately 1.5 million shares of common stock were delivered to us in connection with the Amended and Restated Forward Transaction (as defined and described in Note 10, "Long-term Debt and Other Liabilities"). We accounted for these shares as Treasury stock and reclassified $ 29.9 million and $ 98.9 million for the years ended December 31, 2021 and 2020, respectively, from Additional paid-in capital to Treasury stock, at cost, in our consolidated balance sheets. Because the Forward Transactions are indexed to our own stock and classified within stockholders’ equity, we do not account for the Forward Transactions as derivative instruments in accordance with ASC 815, Derivatives and Hedging . See Note 10, "Long-Term Debt and Other Liabilities," for further information. Convertible Notes – Proceeds received from the issuance of the 2022 Convertible Notes and the 2020 Convertible Notes (as defined in Note 10, “Long-Term Debt and Other Liabilities”) were initially allocated between a liability component (Long-term debt) and an equity component (Additional paid-in capital), within the consolidated balance sheets. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the 2022 Convertible Notes and the 2020 Convertible Notes. Upon adoption of ASU 2020-06 on January 1, 2021, the 2022 Convertible Notes are accounted for as a single liability. See "- Recently Issued Accounting Pronouncements," for more information on the adoption of ASU 2020-06. See Note 10, "Long-Term Debt and Other Liabilities," for further information. Earnings (Loss) Per Share - We calculate basic earnings (loss) per share using the weighted-average number of common shares outstanding during the period. We calculate diluted earnings (loss) per share using the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding. See Note 4, "Earnings (Loss) Per Share," for further information. Stock-Based Compensation Expense - Compensation cost is measured and recognized at fair value for all stock-based payments, including stock options. For time-based vesting stock options, we estimate fair value using the Black-Scholes option-pricing model, which requires assumptions, such as expected volatility, risk-free interest rate, expected life, and dividends. Forfeitures are recognized when they occur. RSUs and restricted stock are measured based on the fair market value of the underlying stock on the date of grant. For awards with a market condition (which we have used on a limited basis), we estimate fair value using the Monte Carlo Simulation model, which requires assumptions, such as volatility, risk-free interest rate, expected life and dividends. Our stock-based compensation expense is recognized over the applicable vesting period and is included in the same operating expense line items in the consolidated statements of operations as the base cash compensation paid to the underlying employees . See Note 15, "Stock-Based Compensation and 401(k) Plan," for further information. Leases – We account for leases in accordance with Accounting Standards Codification Topic 842, “Leases” (“ASC 842”). We have operating lease agreements for which w e have recorded lease liabilities and right-of-use assets for leases primarily related to cell sites and office buildings. We determine whether a contract contains a lease at contract inception and calculate the lease liability and right-of-use asset using our incremental borrowing rate. Our cell site leases generally have terms of five to ten years , with renewal options for an additional five to 25 years . For certain cell sites, the renewal options are deemed to be reasonably certain to be 77 exercised. During the periods presented, our building leases ranged from one to ten years , with renewal options for an additional one to five years . We recognize operating lease expense on a straight-line basis over the lease term. We have finance leases for computer and office equipment. Covenants within the Term Loan Facility contain certain restrictions on our ability to enter into new finance lease arrangements. See Note 17, "Leases," for further information. Advertising Costs - Costs for advertising are expensed as incurred. Debt Issuance Costs - We defer loan origination fees and financing costs related to our various debt offerings as deferred financing costs. Additionally, we defer fees paid directly to the lenders related to amendments of our various debt offerings as deferred financing costs. We amortize these costs over the term of the underlying debt obligation using the effective interest method and include them in interest expense in the consolidated statement of operations. The fees incurred but not paid directly to the lenders in connection with amendments are expensed as incurred to interest expense. Deferred financing costs associated with future debt issuances are written off in the period during which we determine that the debt will no longer be issued. See Note 10, "Long-Term Debt and Other Liabilities," for further information. Comprehensive Income (Loss) - Comprehensive income for the year ended December 31, 2021 is net income plus unrealized gains and losses on foreign currency translation adjustments and the changes in fair value of cash flow hedges. Comprehensive loss for the years ended December 31, 2020 and 2019 is net loss plus unrealized gains and losses on foreign currency translation adjustments. Recently Issued Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or expected to have minimal impact on our consolidated financial statements. Accounting standards adopted: On January 1, 2021, we adopted ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. This standard is effective beginning on January 1, 2022, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. We elected to early adopt ASU 2020-06 using the modified retrospective approach. The cumulative impact of using the modified retrospective approach for the adoption of ASU 2020-06 on our consolidated balance sheets as of January 1, 2021 is summarized below: Balance at December 31, Impact of Balances with Adoption of 2020 ASU 2020-06 ASU 2020-06 Liabilities Long-term debt $ 827,968 $ 21,943 $ 849,911 Equity Additional paid-in capital $ 1,088,590 $ ( 47,423 ) $ 1,041,167 Accumulated deficit $ ( 1,629,843 ) $ 25,480 $ ( 1,604,363 ) On January 1, 2021, we adopted Accounting Standards Update No. 2019-12 – Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 eliminate certain exceptions to the incremental approach for intraperiod tax allocation and interim period income tax accounting for year-to-date losses that exceed projected losses. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. Adoption of this standard did not have a material impact on our consolidated financial statements. 78 All other new pronouncements: In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance to increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy. ASU 2021-10 requires an entity to disclose information about the nature of the transactions, including the significant terms and conditions, accounting policy used to account for the transactions, and the effect of the transactions on the financial statements. This guidance is effective beginning on January 1, 2022. We are currently evaluating the impact that this guidance will have upon our consolidated financial statements. 4. Earnings (Loss) Per Share Basic and diluted earnings (loss) per share have been calculated using the weighted-average number of common shares outstanding for the period. The shares of common stock effectively repurchased in connection with the Forward Transactions (as defined and described in Note 10, “Long-Term Debt and Other Liabilities”) are considered participating securities requiring the two-class method to calculate basic and diluted earnings per share. Net earnings will be allocated between shares of common stock and participating securities on a one-to-one basis. In periods of a net loss, the shares associated with the Forward Transactions will not receive an allocation of losses, as the counterparties to the Forward Transactions are not required to fund losses. Additionally, the calculation of weighted average shares outstanding as of December 31, 2021, 2020 and 2019 excludes approximately 0.6 million, 2.1 million and 7.2 million shares, respectively, associated with the Forward Transactions. The diluted earnings (loss) per share calculations exclude the effect of stock options, deferred stock units, restricted stock units and convertible notes when the computation is anti-dilutive. For the year ended December 31, 2021, the weighted average number of shares excluded from the computation was 5.7 million shares. As a result of the net loss for each of the years ended December 31, 2020 and 2019, for the periods where such shares or securities were outstanding, all of the outstanding shares of common stock underlying stock options, deferred stock units, restricted stock units and convertible notes were excluded from the computation of diluted shares outstanding because they were anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2021, 2020 and 2019; however, for the reasons described above, the shares associated with the Forward Transactions are excluded from the computation of basic earnings per share ( in thousands, except per share amounts ): 79 For the Year Ended December 31, 2021 Income (Numerator) Shares (Denominator) Per Share Amount Net income from continuing operations $ 156,589 Less: Participation rights on Forward Transactions allocated to continuing operations 1,484 Basic Earnings Per Share from Continuing Operations Undistributed income from continuing operations $ 155,105 103,400 $ 1.50 Effect of Dilutive Securities from Continuing Operations Stock-based compensation — 6,674 2022 Convertible Notes 7,221 17,131 Diluted Earnings Per Share from Continuing Operations Undistributed income from continuing operations and assumed conversions $ 162,326 127,205 $ 1.28 Net loss from discontinued operations $ ( 3,854 ) Less: Participation rights on Forward Transactions allocated to discontinued operations ( 36 ) Basic Loss Per Share from Discontinued Operations Undistributed loss from discontinued operations $ ( 3,818 ) 103,400 $ ( 0.04 ) Effect of Dilutive Securities from Discontinued Operations Stock-based compensation 3,615 6,674 2022 Convertible Notes — 17,131 Diluted Loss Per Share from Discontinued Operations Undistributed loss from discontinued operations and assumed conversions $ ( 203 ) 127,205 $ — Earnings per share - basic $ 1.46 Earnings per share - diluted $ 1.28 For the Years Ended December 31, 2020 2019 Net loss from continuing operations $ ( 48,559 ) $ ( 88,497 ) Net loss from discontinued operations ( 201,477 ) ( 57,507 ) Net loss ( 250,036 ) ( 146,004 ) Less: Participation rights of the Forward Transactions — — Undistributed losses $ ( 250,036 ) $ ( 146,004 ) Weighted-average common shares outstanding-basic and diluted 82,266 80,766 Net loss attributable to common stock per share-basic and diluted: Net loss from continuing operations $ ( 0.59 ) $ ( 1.10 ) Net loss from discontinued operations ( 2.45 ) ( 0.71 ) Net loss $ ( 3.04 ) $ ( 1.81 ) 5. Revenue Recognition Remaining Performance Obligations As of December 31, 2021, the aggregate amount of the transaction price in our customer contracts allocated to unsatisfied performance obligations was approximately $ 95 million . The remaining unsatisfied performance obligations primarily represent connectivity and entertainment service revenues which are recognized as services are provided, which is expected to occur through the 80 remaining term of the contract. We have excluded from this amount consideration from contracts that have an original duration of one year or less. Disaggregation of revenue The following table presents our revenue disaggregated by category (in thousands) : For the Year Ended December 31, 2021 2020 2019 Service revenue Connectivity $ 255,786 $ 209,160 $ 219,450 Entertainment and other 3,797 2,827 2,472 Total service revenue $ 259,583 $ 211,987 $ 221,922 Equipment revenue ATG $ 61,780 $ 45,200 $ 62,899 Satellite 11,048 11,746 21,755 Other 3,305 785 2,409 Total equipment revenue $ 76,133 $ 57,731 $ 87,063 Customer type Aircraft owner/operator/service provider $ 259,583 $ 211,987 $ 221,922 OEM and aftermarket dealer 76,133 57,731 87,063 Total revenue $ 335,716 $ 269,718 $ 308,985 Contract balances Our current and non-current deferred revenue balances totaled $ 1.8 million and $ 3.1 million as of December 31, 2021 and 2020, respectively. Deferred revenue includes, among other things, fees paid for equipment and subscription connectivity products. Our current and non-current contract asset balances totaled $ 17.8 million and $ 12.2 million as of December 31, 2021 and 2020, respectively. Contract assets represent the aggregate amount of revenue recognized in excess of billings primarily for certain sales programs. Major Customers No customer accounted for more than 10 % of total revenue for the years ended December 31, 2021, 2020 and 2019 and no customer accounted for more than 10 % of accounts receivable as of December 31, 2021 or 2020. 6. Inventories Inventories consist primarily of telecommunications systems and parts and are recorded at the lower of average cost or market price. We evaluate the need for write-downs associated with obsolete, slow-moving and nonsalable inventory by reviewing net realizable inventory values on a periodic basis. Inventories as of December 31, 2021 and 2020 were as follows ( in thousands ): December 31, 2021 2020 Work-in-process component parts $ 21,570 $ 15,405 Finished goods 12,406 12,709 Total inventory $ 33,976 $ 28,114 7. Composition of Certain Balance Sheet Accounts Prepaid expenses and other current assets as of December 31, 2021 and 2020 were as follows ( in thousands ): 81 December 31, 2021 2020 Contract assets $ 4,533 $ 2,417 Prepaid inventories 2,525 124 Insurance receivable (1) 17,300 — Tenant improvement allowance receivables 1,936 — Other 6,001 6,393 Total prepaid expenses and other current assets $ 32,295 $ 8,934 (1) See Note 18, "Commitments and Contingencies," for additional information. Property and equipment as of December 31, 2021 and 2020 were as follows ( in thousands ): December 31, 2021 2020 Office equipment, furniture, fixtures and other $ 12,759 $ 10,986 Leasehold improvements 13,545 12,012 Network equipment 142,601 139,884 168,905 162,882 Accumulated depreciation ( 105,233 ) ( 99,389 ) Property and equipment, net $ 63,672 $ 63,493 Other non-current assets as of December 31, 2021 and 2020 were as follows ( in thousands ): December 31, 2021 2020 Contract assets, net of allowances of $ 455 and $ 375 , respectively $ 13,217 $ 9,775 Interest rate cap 11,359 — Revolving credit facility deferred financing costs 1,879 — Other 1,970 1,711 Total other non-current assets $ 28,425 $ 11,486 Accrued liabilities as of December 31, 2021 and 2020 were as follows ( in thousands ): December 31, 2021 2020 Accrued interest $ 6,231 $ 17,836 Employee compensation and benefits (1) 13,791 35,516 Litigation settlement accrual (2) 17,300 — Operating leases 7,444 8,089 Deferred gain on sale of CA business (3) — 9,400 Warranty reserve 2,450 2,400 Taxes 1,997 2,022 Network equipment 3,179 — Other 7,476 7,746 Total accrued liabilities $ 59,868 $ 83,009 (1) Includes $ 19.2 million as of December 31, 2020 expected to be paid in shares of Gogo common stock upon the vesting of certain equity awards issued to former employees now employed by Intelsat and classified within discontinued operations. As all remaining liability-classified awards vested during 2021, the amounts were reclassified from Accrued liabilities to Additional paid-in capital. See Note 2, "Discontinued Operations," for additional information. (2) See Note 18, "Commitments and Contingencies," for additional information. (3) Relates to sale of CA business on December 1, 2020. See Note 2, "Discontinued Operations," for additional information. Other non-current liabilities as of December 31, 2021 and 2020 consist of the following ( in thousands ): 82 December 31, 2021 2020 Asset retirement obligations $ 4,861 $ 4,401 Deferred tax liabilities — 2,108 Other 2,375 4,072 Total other non-current liabilities $ 7,236 $ 10,581 Changes in our non-current asset retirement obligations for the years ended December 31, 2021 and 2020 consist of the following ( in thousands ): Asset Retirement Obligation Balance – January 1, 2020 $ 4,093 Liabilities incurred — Liabilities settled ( 115 ) Accretion expense 416 Foreign exchange rate adjustments 7 Balance – December 31, 2020 4,401 Liabilities incurred — Liabilities settled — Accretion expense 460 Foreign exchange rate adjustments — Balance – December 31, 2021 $ 4,861 8. Composition of Certain Reserves and Allowances Credit Losses — We regularly evaluate our accounts receivable and contract assets for expected credit losses. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of each customer’s trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on the aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of each customer’s financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. We apply a similar methodology to our current and non-current contract asset balances. However, due to the inherent additional risk associated with a long-term receivable, an additional provision for credit loss is applied to contract asset balances that will diminish over time as the contract nears its expiration date. For the year ended December 31, 2020, we also considered the current and estimated future economic and market conditions resulting from the COVID-19 pandemic in the determination of our estimated credit losses. Estimates are used to determine the expected loss allowances. Such allowances are based on management’s assessment of anticipated payment, taking into account available historical and current information as well as management’s assessment of potential future developments. We are continuously monitoring our assumptions used to determine our expected credit losses, including the impact of COVID-19, which could cause us to record additional material credit losses in future periods. Changes in our allowances for credit losses for the years ended December 31, 2021 and 2020 were as follows ( in thousands ): 83 Other Accounts non-current Receivable assets Balance at January 1, 2020 $ 660 $ — Cumulative-effect adjustment of ASC 326 adoption 404 75 Provision for expected credit losses 771 300 Write-offs charged against the allowances ( 727 ) — Other ( 64 ) — Balance at December 31, 2020 1,044 375 Provision for expected credit losses 204 80 Write-offs charged against the allowances ( 371 ) — Other 17 — Balance at December 31, 2021 $ 894 $ 455 Warranties — We provide warranties on parts and labor related to our products. Our warranty terms range from two to five years . Warranty reserves are established for costs that are estimated to be incurred after the sale, delivery and installation of the products under warranty. The warranty reserves are determined based on known product failures, historical experience and other available evidence, and are included in accrued liabilities in our consolidated balance sheets. Changes in our warranty reserve for the years ended December 31, 2021 and 2020 were as follows ( in thousands ): Warranty Reserve Balance – January 1, 2020 $ 2,500 Accruals for warranties issued ( 7 ) Settlements and adjustments to warranties ( 93 ) Balance – December 31, 2020 2,400 Accruals for warranties issued 126 Settlements and adjustments to warranties ( 76 ) Balance – December 31, 2021 $ 2,450 9. Intangible Assets Our intangible assets are comprised of indefinite- and finite-lived intangible assets and goodwill. We own the rights to 3MHz of ATG spectrum in the nationwide 800 MHz Commercial Air-Ground Radiotelephone band (the “3 MHz FCC License”), which is used in the operation of our ATG network, and the license for 1 MHz of ATG spectrum in the nationwide 800MHz Commercial Air-Ground Radiotelephone band (the “1 MHz FCC License”) acquired as part of our acquisition of LiveTV Airfone, LLC. Together we refer to the 3 MHz FCC License and the 1 MHz FCC License as the “FCC Licenses.” The FCC Licenses were originally issued with 10-year terms and we have renewed both licenses for subsequent 10-year terms. Such licenses are subject to further renewal by the FCC, and renewals of licenses held by others have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of the FCC Licenses. As a result, the FCC Licenses are treated as indefinite-lived intangible assets which we do not amortize. We reevaluate the useful life of the FCC Licenses each year to determine whether events and circumstances continue to support an indefinite useful life. Our annual impairment assessment of the FCC Licenses for 2021, 2020 and 2019 indicated no impairment. Our software relates to the development of internal use software which is used to run our network and support our service offerings. Software also includes software embedded in the equipment that we sell to our customers. Our goodwill balance was $ 0.6 million as of December 31, 2021 and 2020. 84 Our intangible assets, other than goodwill, as of December 31, 2021 and 2020 were as follows ( in thousands, except for weighted average remaining useful life ): Weighted Average As of December 31, 2021 As of December 31, 2020 Remaining Gross Net Gross Net Useful Life Carrying Accumulated Carrying Carrying Accumulated Carrying (in years) Amount Amortization Amount Amount Amortization Amount Amortized intangible assets: Software 3.0 $ 54,128 $ ( 39,289 ) $ 14,839 $ 50,029 $ ( 31,739 ) $ 18,290 Other intangible assets 8.3 1,812 — 1,812 1,500 — 1,500 Service customer relationships 8,081 ( 8,081 ) — 8,081 ( 8,081 ) — OEM and dealer relationships 6,724 ( 6,724 ) — 6,724 ( 6,724 ) — Total amortized intangible assets 70,745 ( 54,094 ) 16,651 66,334 ( 46,544 ) 19,790 Unamortized intangible assets: FCC Licenses 32,283 — 32,283 32,283 — 32,283 Total intangible assets $ 103,028 $ ( 54,094 ) $ 48,934 $ 98,617 $ ( 46,544 ) $ 52,073 Amortization expense for the years ended December 31, 2021, 2020 and 2019 was $ 7.5 million , $ 6.3 million and $ 6.1 million, respectively. Amortization expense for each of the next five years and thereafter is estimated to be as follows ( in thousands ): Amortization Years ending December 31, Expense 2022 $ 4,921 2023 $ 2,963 2024 $ 1,496 2025 $ 1,298 2026 $ 1,288 Thereafter $ 4,685 Actual future amortization expense could differ from the estimated amount as the result of future investments and other factors. 10. Long-Term Debt and Other Liabilities Long-term debt as of December 31, 2021 and 2020 was as follows ( in thousands ): December 31, December 31, 2021 2020 Term Loan Facility $ 718,057 $ — 2024 Senior Secured Notes — 973,539 2022 Convertible Notes 102,788 215,122 Total debt 820,845 1,188,661 Less: deferred financing costs ( 16,465 ) ( 19,693 ) Less: current portion of long-term debt ( 109,620 ) ( 341,000 ) Total long-term debt $ 694,760 $ 827,968 2021 Credit Agreement On April 30, 2021, Gogo and Gogo Intermediate Holdings LLC (“GIH”) (a wholly owned subsidiary of Gogo) entered into a credit agreement (the “2021 Credit Agreement”) among Gogo, GIH, the lenders and issuing banks party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, which provides for (i) a term loan credit facility (the “Term Loan Facility”) in an aggregate principal amount of $ 725.0 million, issued with a discount of 0.5 %, and (ii) a revolving credit facility (the “Revolving Facility” and together with the Term Loan Facility, the “Facilities”) of up to $ 100.0 million, which includes a letter of credit sub-facility. The Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity of the Term Loan Facility on April 30, 2028 . There are no amortization payments under the Revolving Facility, and all borrowings under the Revolving Facility mature on April 30, 2026 . 85 The Term Loan Facility bears annual interest at a floating rate measured by reference to, at GIH’s option, either (i) an adjusted London inter-bank offered rate (subject to a floor of 0.75 %) plus an applicable margin of 3.75 % or (ii) an alternate base rate plus an applicable margin of 2.75 %. Loans outstanding under the Revolving Facility bear annual interest at a floating rate measured by reference to, at GIH’s option, either (i) an adjusted London inter-bank offered rate (subject to a floor of 0.00 %) plus an applicable margin ranging from 3.25 % to 3.75 % per annum depending on GIH’s senior secured first lien net leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 2.25 % to 2.75 % per annum depending on GIH’s senior secured first lien net leverage ratio. Additionally, unused commitments under the Revolving Facility are subject to a fee ranging from 0.25 % to 0.50 % per annum depending on GIH’s senior secured first lien net leverage ratio. The Facilities may be prepaid at GIH’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal payment amount requirements. Subject to certain exceptions and de minimis thresholds, the Term Loan Facility is subject to mandatory prepayments in an amount equal to: • 100 % of the net cash proceeds of certain asset sales, insurance recovery and condemnation events, subject to reduction to 50 % and 0 % if specified senior secured first lien net leverage ratio targets are met; • 100 % of the net cash proceeds of certain debt offerings; and • 50 % of annual excess cash flow (as defined in the 2021 Credit Agreement), subject to reduction to 25 % and 0 % if specified senior secured first lien net leverage ratio targets are met. The 2021 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include restrictions on, among other things: incurrence of indebtedness or issuance of disqualified equity interests; incurrence or existence of liens; consolidations or mergers; activities of Gogo and any subsidiary holding a license issued by the Federal Communications Commission; investments, loans, advances, guarantees or acquisitions; asset sales; dividends or other distributions on equity; purchase, redemption or retirement of capital stock; payment or redemption of certain junior indebtedness; entry into other agreements that restrict the ability to incur liens securing the Facilities; and amendment of organizational documents; in each case subject to customary exceptions. The Revolving Facility includes a financial covenant set at a maximum senior secured first lien net leverage ratio of 7.50 :1.00, which will apply if the outstanding amount of loans and unreimbursed letter of credit drawings thereunder at the end of any fiscal quarter exceeds 35 % of the aggregate of all commitments thereunder. The 2021 Credit Agreement contains customary events of default, which, if any of them occurred, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the Facilities to be due and payable immediately and the commitments under the Revolving Facility to be terminated. The proceeds of the Term Loan Facility were used, together with cash on hand, (i) to redeem in full and pay the outstanding principal amount of the 2024 Senior Secured Notes (as defined below) together with accrued and unpaid interest and redemption premiums and to pay fees associated with the termination of the ABL Credit Agreement (as defined below and, together with the redemption of the 2024 Senior Secured Notes, the “Refinancing”), and (ii) to pay fees and expenses incurred in connection with the Refinancing and the Facilities (the “Transaction Costs”). The Revolving Facility is available for working capital and general corporate purposes of Gogo and its subsidiaries and was undrawn as of December 31, 2021. As of December 31, 2021, the outstanding principal amount of the Term Loan Facility was $ 721.4 million , the unaccreted debt discount was $ 3.3 million and the net carrying amount was $ 718.1 million . We paid approximately $ 19.7 million of loan origination and financing costs related to the Facilities which are being accounted for as deferred financing costs on our consolidated balance sheets and are amortized over the terms of the Facilities. Total amortization expense was $ 1.8 million for the year ended December 31, 2021 and is included in Interest expense in our consolidated statements of operations. As of December 31, 2021, the balance of unamortized deferred financing costs related to the Facilities was $ 17.9 million . On April 30, 2021, Gogo, GIH, and each direct and indirect wholly-owned U.S. restricted subsidiary of GIH (Gogo and such subsidiaries collectively, the “Guarantors”) entered into a guarantee agreement (the “Guarantee Agreement”) in favor of Morgan Stanley Senior Funding, Inc., as collateral agent (the “Collateral Agent”), whereby GIH and the Guarantors guarantee the obligations under the Facilities and certain other secured obligations as set forth in the Guarantee Agreement, and GIH and the Guarantors entered into a collateral agreement (the “Collateral Agreement”), in favor of the Collateral Agent, whereby GIH and the Guarantors grant a 86 security interest in substantially all of their respective tangible and intangible assets (including the equity interests in each direct material wholly-owned U.S. restricted subsidiary owned by GIH or any Guarantor, and 65% of the equity interests in any non-U.S. subsidiary held directly by GIH or any Guarantor), subject to certain exceptions, to secure the obligations under the Facilities and certain other secured obligations as set forth in the Collateral Agreement. 2022 Convertible Notes On November 21, 2018, we issued $ 215.0 million aggregate principal amount of 6.00 % Convertible Senior Notes due 2022 (the “2022 Convertible Notes”) in private offerings to qualified institutional buyers, including pursuant to Rule 144A under the Securities Act, and in concurrent private placements. We granted an option to the initial purchasers to purchase up to an additional $ 32.3 million aggregate principal amount of 2022 Convertible Notes to cover over-allotments, of which $ 22.8 million was subsequently exercised during December 2018, resulting in a total issuance of $ 237.8 million aggregate principal amount of 2022 Convertible Notes. The 2022 Convertible Notes mature on May 15, 2022, unless earlier converted into shares of our common stock. We pay interest on the 2022 Convertible Notes semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2019. Under the accounting standards applicable at the time of issuance, the $ 237.8 million of proceeds received from the issuance of the 2022 Convertible Notes was initially allocated between Long-term debt (the liability component) at $ 188.7 million and Additional paid-in capital (the equity component) at $ 49.1 million, within the consolidated balance sheets. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the 2022 Convertible Notes. If we or the note holders elect not to settle the debt through conversion, at maturity we must repay the principal amount at face value in cash. Therefore, the liability component will be accreted up to the face value of the 2022 Convertible Notes, which will result in additional non-cash interest expense being recognized in the consolidated statements of operations through the 2022 Convertible Notes maturity date (see Note 12, "Interest Costs," for additional information). The effective interest rate on the 2022 Convertible Notes, including accretion of the notes to par and debt issuance cost amortization, was approximately 13.6 %. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification. As of December 31, 2020, the outstanding principal amount of the 2022 Convertible Notes was $ 237.8 million, the unaccreted debt discount was $ 22.7 million and the net carrying amount of the liability component was $ 215.1 million. Upon adoption of ASU 2020-06 on January 1, 2021 (see Note 3, "Summary of Significant Accounting Policies," for more information), the 2022 Convertible Notes are accounted for as a single liability. The adoption of this standard resulted in the $ 49.1 million initially recorded to Additional paid-in capital being reclassified and recorded as an increase to Long-term debt in the consolidated balance sheets. Additionally, the $ 26.5 million of accretion recognized life-to-date was reversed and recorded as a reduction to Long-term debt and a reduction to Accumulated deficit in the consolidated balance sheets. In January 2021, $ 1.0 million aggregate principal amount of 2022 Convertible Notes was converted by holders and settled through the issuance of 166,666 shares of common stock. On March 17, 2021, Gogo entered into separate, privately negotiated exchange agreements (the “March 2021 Exchange Agreements”) with certain holders of the 2022 Convertible Notes. Pursuant to the March 2021 Exchange Agreements, such holders exchanged a total of $ 28,235,000 aggregate principal amount of 2022 Convertible Notes for 5,121,811 shares of our common stock on March 24, 2021. The negotiated exchange rate under the March 2021 Exchange Agreements was 181.40 shares of common stock per $ 1,000 principal amount of the 2022 Convertible Notes, which resulted in a loss on settlement of $ 4.4 million, which is included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. On April 1, 2021, Gogo entered into a privately negotiated exchange agreement (the “GTCR Exchange Agreement”) with an affiliate of funds managed by GTCR LLC (“GTCR”). Pursuant to the GTCR Exchange Agreement, GTCR exchanged $ 105,726,000 aggregate principal amount of 2022 Convertible Notes for 19,064,529 shares of our common stock on April 9, 2021. The negotiated exchange rate under the GTCR Exchange Agreement was 180.32 shares of common stock per $ 1,000 principal amount of 2022 Convertible Notes, which resulted in a loss on settlement of $ 14.6 million, which is included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. As of December 31, 2021, the outstanding principal amount of the 2022 Convertible Notes was $ 102.8 million and was classified as Current portion of long-term debt in the consolidated balance sheets. 87 We incurred approximately $ 8.1 million of issuance costs related to the issuance of the 2022 Convertible Notes, of which $ 6.4 million and $ 1.7 million were recorded to deferred financing costs and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the 2022 Convertible Notes. However, upon adoption of ASU 2020-06 on January 1, 2021, the $ 1.7 million that was initially recorded to additional paid-in capital was reclassified and recorded as deferred financing costs, with catch-up amortization of $ 1.0 million recorded to Accumulated deficit in the consolidated balance sheets. The deferred financing costs are being amortized over the term of the 2022 Convertible Notes using the effective interest method. Total amortization expense was $ 1.4 million, $ 1.8 million and $ 1.7 million, respectively, for the years ended December 31, 2021, 2020 and 2019. Amortization expense is included in Interest expense in the consolidated statements of operations. As of December 31, 2021 and 2020, the balance of unamortized deferred financing costs related to the 2022 Convertible Notes was $ 0.4 million and $ 2.7 million, respectively, and is included as a reduction to the carrying amount of the debt in our consolidated balance sheets. See Note 12, "Interest Costs," for additional information. The 2022 Convertible Notes had an initial conversion rate of 166.6667 common shares per $ 1,000 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $ 6.00 per share of our common stock. I n November 2021, we informed the trustee under the indenture governing the 2022 Convertible Notes that we intend to settle any conversions of the 2022 Convertible Notes occurring after November 15, 2021 in shares of our common stock . The shares of common stock subject to conversion are considered in the diluted earnings per share calculations under the if-converted method if their impact is dilutive. Holders may convert the 2022 Convertible Notes, at their option, in multiples of $ 1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances: • during any fiscal quarter beginning after the fiscal quarter ended December 31, 2018, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2022 Convertible Notes on each applicable trading day (the “Stock Price Condition”); • during the five -business day period following any five consecutive trading day period in which the trading price for the 2022 Convertible Notes is less than 98 % of the product of the last reported sale price of our common stock and the conversion rate for the 2022 Convertible Notes on each such trading day (the “Notes Price Condition”); or • upon the occurrence of specified corporate events. The Stock Price Condition was triggered for the period from October 1, 2020 through December 31, 2020, January 1, 2021 through March 31, 2021, April 1, 2021 through June 30, 2021, July 1, 2021 through September 30, 2021 and October 1, 2021 through December 31, 2021. Regardless of whether any of the foregoing circumstances occurs, a holder may convert its 2022 Convertible Notes, in multiples of $1,000 principal amount, at any time on or after January 15, 2022 until the second scheduled trading day immediately preceding May 15, 2022. In addition, if we undergo a fundamental change (as defined in the indenture governing the 2022 Convertible Notes), holders may, subject to certain conditions, require us to repurchase their 2022 Convertible Notes for cash at a price equal to 100 % of the principal amount of the 2022 Convertible Notes to be purchased, plus any accrued and unpaid interest. In addition, following a make-whole fundamental change, we will increase the conversion rate in certain circumstances for a holder who elects to convert its 2022 Convertible Notes in connection with such make-whole fundamental change. Forward Transactions In connection with the issuance of the 3.75 % Convertible Senior Notes due 2020 (the "2020 Convertible Notes"), we paid approximately $ 140.0 million to enter into prepaid forward stock repurchase transactions (the “Forward Transactions”) with certain financial institutions (the “Forward Counterparties”), pursuant to which we purchased approximately 7.2 million shares of common stock for settlement on or around the March 1, 2020 maturity date for the 2020 Convertible Notes, subject to the ability of each Forward Counterparty to elect to settle all or a portion of its Forward Transactions early. On December 11, 2019, we entered into an amendment to one of the Forward Transactions (the “Amended and Restated Forward Transaction”) to extend the expected settlement date with respect to approximately 2.1 million shares of common stock held by one of the Forward Counterparties, JPMorgan Chase Bank, National Association (the “2022 Forward Counterparty”), to correspond with the May 15, 2022 maturity date for the 2022 Convertible Notes. In the future, we may request that the 2022 Forward Counterparty modify the settlement terms of the Amended and Restated Forward Transaction to provide that, in lieu of the delivery of the applicable number of shares of our common stock to us to settle a portion of the Amended and Restated Forward Transaction in accordance with its terms, the 2022 Forward Counterparty would pay to us the net proceeds from the sale by the 2022 Forward 88 Counterparty (or its affiliate) of a corresponding number of shares of our common stock in a registered offering (which may include block sales, sales on the NASDAQ Global Select Market, sales in the over-the-counter market, sales pursuant to negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices). Any such sales could potentially decrease (or reduce the size of any increase in) the market price of our common stock. The 2022 Forward Counterparty is not required to effect any such settlement in cash in lieu of delivery of shares of our common stock and, if we request that the 2022 Forward Counterparty effect any such settlement, it will be entered into in the discretion of the 2022 Forward Counterparty on such terms as may be mutually agreed upon at the time. As a result of the Forward Transactions, total shareholders’ equity within our consolidated balance sheets was reduced by approximately $ 140.0 million. In March, 2020, approximately 5.1 million shares of common stock were delivered to us in connection with the Forward Transactions. In April 2021, approximately 1.5 million shares of common stock were delivered to us in connection with the Amended and Restated Forward Transaction. The approximately 0.6 million shares of common stock remaining under the Amended and Restated Forward Transactions are treated as retired shares for basic and diluted EPS purposes although they remain legally outstanding. 2024 Senior Secured Notes On April 25, 2019, GIH and Gogo Finance Co. Inc. (a wholly owned subsidiary of GIH) (“Gogo Finance” and, together with GIH, the “Issuers”) issued $ 905.0 million aggregate principal amount of 9.875 % senior secured notes due 2024 (the “2024 Senior Secured Notes”), at a price equal to 99.512 % of their face value, under an indenture, dated as of April 25, 2019, among the Issuers, Gogo, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. On May 7, 2019, the Issuers issued an additional $ 20.0 million of 2024 Senior Secured notes, which were issued at a price equal to 100.5 % of their face value, and $ 50.0 million of 2024 Senior Secured Notes on November 13, 2020, which were issued at a price equal to 103.5 % of their face value. The 2024 Senior Secured Notes were guaranteed on a senior secured basis by Gogo and all of GIH’s existing and future restricted subsidiaries (other than Gogo Finance), subject to certain exceptions. The 2024 Senior Secured Notes and the related guarantees were secured by certain liens on the Company’s collateral, which were released upon the closing of the Transaction. As of December 31, 2020, the outstanding principal amount of the 2024 Senior Secured Notes was $ 975.0 million, the unaccreted debt discount was $ 1.5 million and the net carrying amount was $ 973.5 million. We paid approximately $ 22.6 million of origination fees and financing costs related to the issuance of the 2024 Senior Secured Notes, which were accounted for as deferred financing costs on our consolidated balance sheets and were being amortized over the contractual term of the 2024 Senior Secured Notes using the effective interest method. Total amortization expense was $ 1.4 million, $ 3.7 million and $ 2.3 million, respectively, for the years ended December 31, 2021, 2020 and 2019. Amortization expense is included in interest expense in the consolidated statements of operations. As of December 31, 2020, the balance of unamortized deferred financing costs related to the 2024 Senior Secured Notes was $ 16.6 million and is included as a reduction to long-term debt in our consolidated balance sheets. The remaining unamortized deferred financing costs were written off as of May 1, 2021. The 2024 Senior Secured Notes were redeemed on May 1, 2021 (the “Redemption Date”) at a redemption price equal to 104.938 % of the principal amount of the 2024 Senior Secured Notes redeemed, plus accrued and unpaid interest to (but not including) the Redemption Date. The make-whole premium paid in connection with the redemption was $ 48.1 million and we wrote off the remaining unamortized deferred financing costs of $ 15.2 million and the remaining debt discount of $ 1.3 million, which together are included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. ABL Credit Facility On August 26, 2019, Gogo, GIH and Gogo Finance entered into a credit agreement (the “ABL Credit Agreement”) with the other loan parties party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Morgan Stanley Senior Funding, Inc., as syndication agent, which provided for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $ 30 million, subject to borrowing base availability, and includes letter of credit and swingline sub-facilities. The obligations under the ABL Credit Agreement were guaranteed by Gogo and all of its existing and future subsidiaries, subject to certain exceptions and secured by collateral of the Company. As of December 31, 2020, the facility was undrawn. On April 30, 2021, the ABL Credit Agreement and all commitments thereunder were terminated. As a result of the termination, the remaining unamortized deferred financing costs of $ 0.3 million were written off as of May 1, 2021 and included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2021. 89 2022 Senior Secured Notes On June 14, 2016, the Issuers issued $ 525 million aggregate principal amount of 12.500 % senior secured notes due 2022 (the “2022 Senior Secured Notes”) under an indenture, dated as of June 14, 2016, among the Issuers, Gogo, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and as collateral agent. On January 3, 2017, the Issuers issued an additional $ 65 million of 2022 Senior Secured Notes at a price equal to 108 % of their face value. On September 25, 2017, the Issuers issued an additional $ 100 million of 2022 Senior Secured Notes at a price equal to 113 % of their face value. On May 15, 2019, the Issuers redeemed in full all $ 690 million aggregate principal amount outstanding of the 2022 Senior Secured Notes. The make-whole premium paid in connection with the redemption was $ 51.4 million and we wrote off the remaining unamortized deferred financing costs of $ 9.1 million and the remaining debt premium of $ 11.7 million relating to the 2022 Senior Secured Notes in connection with the redemption thereof, which together are included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2019. Total amortization expense was $ 0.9 million for the year ended December 31, 2019. Amortization expense is included in interest expense in the consolidated statements of operations. As noted above, the remaining unamortized deferred financing costs were written off as of May 15, 2019. 2020 Convertible Notes On March 3, 2015, we issued $ 340.0 million aggregate principal amount of 3.75 % Convertible Senior Notes due 2020 (the “2020 Convertible Notes”) in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act. We granted an option to the initial purchasers to purchase up to an additional $ 60.0 million aggregate principal amount of 2020 Convertible Notes to cover over-allotments, of which $ 21.9 million was subsequently exercised during March 2015, resulting in a total issuance of $ 361.9 million aggregate principal amount of 2020 Convertible Notes. In November 2018, in connection with the issuance of the 2022 Convertible Notes, we repurchased $ 199.9 million outstanding principal amount of the 2020 Convertible Notes at par value. On April 18, 2019, we commenced a cash tender offer (the “Tender Offer”) to purchase any and all of the outstanding 2020 Convertible Notes for an amount equal to $ 1,000 per $ 1,000 principal amount of 2020 Convertible Notes purchased, plus accrued and unpaid interest from the last interest payment date on the 2020 Convertible Notes to, but not including, the date of payment for the 2020 Convertible Notes accepted in the Tender Offer. The Tender Offer expired on May 15, 2019, resulting in the purchase of $ 159.0 million of outstanding 2020 Convertible Notes. As a result of the Tender Offer, the carrying value of the 2020 Convertible Notes was adjusted by $ 8.5 million to face value and unamortized deferred financing costs of $ 0.6 million were expensed. These two items are included in Loss on extinguishment of debt and settlement of convertible notes in our consolidated statements of operations for the year ended December 31, 2019. During September 2019, we purchased an additional $ 0.5 million of outstanding 2020 Convertible Notes. The 2020 Convertible Notes matured on March 1, 2020. We incurred approximately $ 10.4 million of issuance costs related to the issuance of the 2020 Convertible Notes, of which $ 7.5 million and $ 2.9 million were recorded to deferred financing costs and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the 2020 Convertible Notes and under the accounting standards applicable at the time of issuance. The $ 7.5 million recorded as deferred financing costs on our consolidated balance sheets was being amortized over the term of the 2020 Convertible Notes using the effective interest method. Total amortization expense of the deferred financing costs was $ 0.2 million for the year ended December 31, 2019. Amortization expense is included in interest expense in the consolidated statements of operations. The shares of common stock subject to conversion were excluded from diluted earnings per share calculations under the if-converted method as their impact is anti-dilutive. 11. Derivative Instruments and Hedging Activities We are exposed to interest rate risk on our variable rate borrowings. We currently use interest rate caps to manage our exposure to interest rate changes, and have designated these interest rate caps as cash flow hedges for accounting purposes. Accordingly, the earnings impact of the derivatives designated as cash flow hedges is recorded upon the recognition of the variable interest payments related to the hedged debt. In May 2021, we purchased interest rate caps with an aggregate notional amount of $ 650.0 million for $ 8.6 million. The cost of the interest rate caps will be amortized to interest expense using the caplet method, from the effective date through termination date. We receive payments in the amount calculated pursuant to the caps for any period in which the three-month USD LIBOR rate increases beyond the applicable strike rate . The notional amounts of the interest rate caps periodically decrease over the life of the caps. 90 The notional amounts, strike rates and end dates of the cap agreements are as follows (notional amounts in thousands) : Start Date End Date Notional Amounts Strike Rate 7/31/2021 7/31/2023 $ 650,000 0.75 % 7/31/2023 7/31/2024 525,000 0.75 % 7/31/2024 7/31/2025 350,000 1.25 % 7/31/2025 7/31/2026 250,000 2.25 % 7/31/2026 7/31/2027 200,000 2.75 % We record the effective portion of changes in the fair value of our cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized. The amounts included in accumulated other comprehensive income will be reclassified to interest expense in the event the hedges are no longer considered effective, in accordance with ASC 815, Derivatives and Hedging . No gains or losses of our cash flow hedges were considered to be ineffective and reclassified from other comprehensive income (loss) to earnings for the year ended December 31, 2021 . We estimate that approximately $ 0.2 million currently recorded in accumulated other comprehensive income (loss) will be recognized in earnings over the next 12 months. We assess the effectiveness of the hedge on an ongoing basis. Cash flows from interest rate caps are classified in the consolidated statement of cash flows as investing activities from continuing operations. For the year ended December 31, 2021, we recorded an unrealized gain on the interest rate caps of $ 2.7 million, net of tax of $ 0.9 million. When derivatives are used, we are exposed to credit loss in the event of non-performance by the counterparties; however, non-performance is not anticipated. ASC 815, Derivatives and Hedging , requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. The fair values of the interest rate derivatives are based on quoted market prices for similar instruments from commercial banks (based on significant observable inputs - Level 2 inputs). The following table presents the fair value of our interest rate derivatives included in the consolidated balance sheets for the periods presented (in thousands): December 31, Derivatives designated as hedging instruments Balance sheet location 2021 2020 Current portion of interest rate caps Prepaid expenses and other current assets $ 925 $ — Non-current portion of interest rate caps Other non-current assets $ 11,359 $ — Fair Value Measurement Our derivative assets and liabilities consist principally of interest rate caps, which are carried at fair value based on significant observable inputs (Level 2 inputs). Derivatives entered into by us are typically executed over-the-counter and are valued using discounted cash flows along with fair value models that primarily use market observable inputs. These models take into account a variety of factors including, where applicable, maturity, interest rate yield curves, and counterparty credit risks. 12. Interest Costs We capitalize a portion of our interest on funds borrowed during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and amortized over the useful lives of the assets. The following is a summary of our interest costs for the years ended December 31, 2021, 2020 and 2019 (in thousands) : For the Years Ended December 31, 2021 2020 2019 Interest costs charged to expense $ 62,390 $ 105,988 $ 110,502 Amortization of deferred financing costs 4,661 5,892 5,260 Accretion of debt discount 419 13,907 15,729 Amortization of interest rate cap premium 2 — — Amortization of debt premium — — ( 1,018 ) Interest expense 67,472 125,787 130,473 Interest costs capitalized to property and equipment 4 — 11 Interest costs capitalized to software 311 885 608 Total interest costs $ 67,787 $ 126,672 $ 131,092 91 13. Common Stock and Preferred Stock Common Stock – We have one class of common stock outstanding as of December 31, 2021 and 2020. Our common stock is junior to our preferred stock, if and when issued. Our Third Amended and Restated Certificate of Incorporation authorizes a total of 500,000,000 shares of common stock with a par value of $ 0.0001 per share. Preferred Stock – Our Third Amended and Restated Certificate of Incorporation authorizes 100,000,000 shares of new preferred stock with a par value of $ 0.01 per share. No shares of this new preferred stock have been issued. The preferred stock may be issued, from time to time, in one or more series as authorized by the Board of Directors, which has the authority to designate the terms of any series of preferred stock issued, including, without limitation, the number of shares to be included in such series of preferred stock, any dividend, redemption, conversion rights or voting powers and the designations, preferences and relative participating, optional or other special rights. Shareholder Rights Plan – On September 23, 2020, our Board of Directors adopted a Section 382 Rights Agreement (the “Rights Agreement”), between the Company and Computershare Trust Company, N.A., as rights agent, and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock of the Company, outstanding on the record date of October 2, 2020, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock, par value $ 0.01 per share, of the Company (the “Preferred Shares”) at a price of $ 38.40 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment. The purpose of the Rights Agreement is to facilitate the Company’s ability to preserve its net operating losses (“NOLs”) and certain other tax attributes in order to be able to offset potential future income taxes for federal income tax purposes. The Company’s ability to use its NOLs and other tax attributes would be substantially limited if it experiences an “ownership change,” as such term is defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). A company generally experiences an ownership change if the percentage of the value of its stock owned by certain “5-percent shareholders,” as such term is defined in Section 382 of the Code, increases by more than 50 percentage points over a rolling three-year period. The Rights Agreement is intended to reduce the likelihood of an ownership change under Section 382 of the Code by deterring any person or group from acquiring beneficial ownership of 4.9% or more of the shares of the Company’s common stock then-outstanding. Initially, the Rights will be attached to all shares of the Company’s common stock. Until the Distribution Date (as defined below), the Rights will be transferred with and only with the common stock. As long as the Rights are attached to the common stock, the Company will issue one Right with each new share of common stock so that all such shares of common stock will have Rights attached (subject to certain limited exceptions). The Rights will separate and begin trading separately from the common stock, and Right certificates will be caused to evidence the Rights, on the earlier to occur of (i) the close of business on the tenth day following public disclosure of facts indicating that a person or group has acquired beneficial ownership of 4.9% or more of the outstanding common stock (an “Acquiring Person”) (or, in the event the Board of Directors determines to effect an exchange in accordance with Section 24 of the Rights Agreement and the Board of Directors determines that a later date is advisable, then such later date) and (ii) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 4.9% or more of the outstanding common stock (the earlier of such dates, the “Distribution Date”). The Rights are not exercisable until the Distribution Date. The Rights will expire on the earlier to occur of (i) the date on which the Board of Directors determines in its sole discretion that (x) the Rights Agreement is no longer necessary for the preservation of material valuable NOLs or tax attributes or (y) the NOLs and tax attributes have been fully utilized and may no longer be carried forward and (ii) the close of business on September 23, 2023. The Rights Agreement was approved by the Company's stockholders at the Company's 2021 annual meeting of stockholders. 92 14. Fair Value of Financial Assets and Liabilities A three-tier fair value hierarchy has been established which prioritizes the inputs used in measuring fair value. These tiers include: • Level 1 - defined as observable inputs such as quoted prices for identical assets or liabilities in active markets; • Level 2 - defined as observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Refer to Note 11, "Derivative Instruments and Hedging Activities," for fair value information relating to our interest rate caps. Long-Term Debt: As of December 31, 2021 and 2020, our financial assets and liabilities that are disclosed but not measured at fair value include the Term Loan Facility, the 2022 Convertible Notes, and, while outstanding, the 2024 Senior Secured Notes, which are reflected on the consolidated balance sheets at cost. The fair value measurements are classified as Level 2 within the fair value hierarchy since they are based on quoted market prices of our instruments in markets that are not active. We estimated the fair value of the Term Loan Facility, the 2022 Convertible Notes, and, while outstanding, the 2024 Senior Secured Notes, by calculating the upfront cash payment a market participant would require to assume these obligations. The upfront cash payments used in the calculations of fair value on our December 31, 2021 consolidated balance sheets, excluding any issuance costs, are the amount that a market participant would be willing to lend at December 31, 2021 to an entity with a credit rating similar to ours and that would allow such an entity to achieve sufficient cash inflows to cover the scheduled cash outflows under the Term Loan Facility and the 2022 Convertible Notes. The calculated fair value of the 2022 Convertible Notes is correlated to our stock price and as a result, significant changes to our stock price could have a significant impact on the calculated fair values. The fair value and carrying value of long-term debt as of December 31, 2021 and 2020 was as follows (in thousands) : December 31, 2021 December 31, 2020 Fair Value (1) Carrying Value Fair Value (1) Carrying Value Term Loan Facility $ 723,000 $ 718,057 (2) $— $— 2022 Convertible Notes $ 230,000 $ 102,788 $ 404,000 $ 215,122 (3) 2024 Senior Secured Notes $— $— $ 1,045,000 $ 973,539 (4) (1) Fair value amounts are rounded to the nearest million. (2) Carrying value of the Term Loan Facility reflects the unaccreted debt discount of $ 3.3 million as of December 31, 2021. See Note 10, "Long-Term Debt and Other Liabilities," for further information. (3) Carrying value of the 2022 Convertible Notes reflects the unaccreted debt discount of $ 22.6 million as of December 31, 2020. See Note 10, "Long-Term Debt and Other Liabilities," for further information. (4) Carrying value of the 2024 Senior Secured Notes reflects the unaccreted debt discount of $ 1.5 million as of December 31, 2020. See Note 10, "Long-Term Debt and Other Liabilities," for further information. 15. Stock-Based Compensation and 401(k) Plan As of December 31, 2021 , we maintained three stock-based incentive compensation plans: the Amended and Restated Gogo Inc. 2016 Omnibus Incentive Plan (the “2016 Omnibus Plan”), the Gogo Inc. 2013 Omnibus Incentive Plan (the “2013 Omnibus Plan”), and The Aircell Holdings Inc. Stock Option Plan, collectively referred to as the “Stock Plans,” as well as an ESPP, as defined and discussed below. Our Stock Plans provide for the grant of both equity and cash awards, including non-qualified stock options, incentive stock options, stock appreciation rights, performance awards (shares and units), restricted stock, restricted stock units (“RSUs”), deferred share units (“DSUs”) and other stock-based awards and dividend equivalents to eligible employees, directors and consultants, as determined by the Compensation Committee. Under the Stock Plans, 27,709,128 shares of common stock were reserved for issuance. As of December 31, 2021 , 3,364,627 shares remained available for grant under our Stock Plans. The contractual life of granted options is 10 years . Except as otherwise approved by the Compensation Committee, all options that are unvested as of the date on which a recipient’s employment terminates, as well as vested options that are not exercised within a prescribed period following termination, are forfeited and become available 93 for future grants. Options granted beginning in 2010 but prior to the Option Exchange (as defined below) include options that (a) vest in specified increments over a four-year period, (b) vest on the date of grant for certain options granted to non-employee members of our Board of Directors or (c) vest on the first anniversary of the date of grant for certain options granted to non-employee members of our Board of Directors. In June 2020, we consummated an option exchange program that was approved by our stockholders at the annual meeting held on April 29, 2020 in which previously outstanding eligible options (which excluded options granted for service by non-executive members of our Board of Directors) to purchase 6,664,773 shares of common stock were surrendered and cancelled and we granted replacement options (the “Replacement Options”) in exchange for the tendered options. Of the 4,168,455 options we granted in 2020, 2,896,383 were Replacement Options. The Replacement Options vest in a single installment on December 31, 2022. Beginning in 2013, we granted RSUs, some of which vest in equal annual increments over a four-year period and others in one installment on December 31, 2022. Vested RSUs will be settled, at the discretion of the Compensation Committee, in shares of our common stock or in cash equal to the value of the applicable number of shares of our common stock on the vesting date. We also granted DSUs to directors, some of which vest on the grant date and others on the first anniversary of the grant date. DSUs will be settled in shares of our common stock 90 days after the director ceases to serve as a director. Beginning in 2014, we granted restricted stock, which vests in equal annual increments over a four-year period. These shares are deemed issued as of the date of grant, but not outstanding until they vest. We intend to settle RSU, DSU and restricted stock awards in stock and we have the shares available to do so. In 2016, 2017, 2018 and 2019, the Compensation Committee approved grants of both non-market-based awards that time vested as described above, and market-based awards. The market-based awards vested based on achieving one or more predetermined market conditions and completion of the same time-based vesting requirements applicable to the non-market-based awards. In 2020, the market-based awards granted in 2016 expired without the market-based condition having been achieved and the Compensation Committee approved removing the market-based vesting conditions in the awards granted in 2017, 2018 and 2019. As of December 31, 2021 and 2020, there are no awards that contain market-based conditions. The following is a summary of our stock-based compensation expense included in the consolidated statements of operations, excluding the stock-based compensation expense for discontinued operations, for the years December 31, 2021, 2020 and 2019 (in thousands) : 2021 2020 2019 Cost of service revenue $ 472 $ 119 $ 118 Cost of equipment revenue 523 235 275 Engineering, design and development 1,358 560 601 Sales and marketing 1,615 880 1,233 General and administrative 9,377 6,014 6,427 Total stock-based compensation expense $ 13,345 $ 7,808 $ 8,654 A summary of stock option activity (which includes amounts for both continuing and discontinued operations) for the year ended December 31, 2021 is as follows: Number of Options Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) Options outstanding – January 1, 2021 5,446,668 $ 4.19 7.33 $ 32,458 Granted 26,726 $ 9.66 Exercised ( 591,930 ) $ 3.01 Forfeited ( 12,897 ) $ 2.91 Expired ( 66,225 ) $ 17.78 Options outstanding – December 31, 2021 4,802,342 $ 4.18 6.57 $ 45,927 Options exercisable – December 31, 2021 2,669,860 $ 5.35 5.16 $ 22,874 As of December 31, 2021, total unrecognized compensation costs related to unvested stock options were approximately $ 1 million which is expected to be recognized over a weighted average period of approximately 1.2 years . The total grant date fair value of stock options vested in 2021, 2020 and 2019 was approximately $ 10 million , $ 16 million and $ 8 million, respectively. 94 We estimate the fair value of stock options using the Black-Scholes option-pricing model. Weighted average assumptions used and weighted average grant date fair value of stock options granted for the years ended December 31, 2021, 2020, and 2019 were as follows: 2021 2020 2019 Approximate risk-free interest rate 1.0 % 0.5 % 2.3 % Average expected life (years) 5.50 6.20 6.02 Dividend yield N/A N/A N/A Volatility 77.0 % 66.8 % 60.5 % Weighted average grant date fair value of common stock underlying options granted $ 9.66 $ 2.59 $ 4.71 Weighted average grant date fair value of stock options granted $ 6.22 $ 1.56 $ 2.69 The risk-free interest rate assumptions were based on the U.S. Treasury yield curve for the term that mirrored the expected term in effect at the time of grant. The expected life of our stock options was determined based upon a simplified assumption 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 life. The dividend yield was based on expected dividends at the time of grant. Beginning in 2020, we calculated volatility based exclusively on our common stock. The following table summarizes the activities for our unvested RSUs and DSUs (which includes amounts for both continuing and discontinued operations) for the year ended December 31, 2021: Number of Underlying Shares Weighted Average Grant Date Fair Value Unvested – January 1, 2021 3,448,169 $ 3.80 Granted 2,751,436 $ 10.06 Vested ( 1,940,374 ) $ 4.51 Forfeited/canceled ( 260,543 ) $ 6.79 Unvested – December 31, 2021 3,998,688 $ 7.40 As of December 31, 2021, there was approximately $ 21 million of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of approximately 2.5 years. The total grant date fair value of RSUs and DSUs vested in 2021 was approximately $ 9 million . The following table summarizes the activity for our restricted stock (which includes amounts for both continuing and discontinued operations) for the year ended December 31, 2021: Number of Underlying Shares Weighted Average Grant Date Fair Value Unvested – January 1, 2021 18,227 $ 12.26 Granted — $ — Vested ( 18,227 ) $ 12.26 Forfeited/canceled — $ — Unvested – December 31, 2021 — $ — As of December 31, 2021 , there was no unrecognized compensation cost related to unvested employee restricted stock. ESPP - In June 2013, the Board of Directors and stockholders approved the Employee Stock Purchase Plan (“ESPP”), which became effective on June 26, 2013, and in 2017 and 2020, the ESPP was amended to increase the number of shares reserved thereunder. The ESPP allows eligible employees to purchase a limited number of shares of common stock during pre-specified offering periods at a discount established by the Compensation Committee which may not exceed 15 % of the fair market value of the common stock at the beginning or end of the offering period (whichever is lower). Under the ESPP, 2,200,000 shares were reserved for issuance and 48,560 shares of common stock were issued during the year ended December 31, 2021. As of December 31, 2021 , 766,580 shares remained available for purchase under the ESPP. 95 401(k) Plan - Under our 401(k) plan, all employees who are eligible to participate are entitled to make tax-deferred contributions, subject to Internal Revenue Service limitations. We match 100 % of the employee’s first 4 % of contributions made, subject to annual limitations. Our matching contributions were $ 1.8 million , $ 1.5 million, and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019 , respectively. 16. Income Tax For financial reporting purposes, the loss from continuing operations before income taxes included the following components for the years ended December 31, 2021, 2020, and 2019 ( in thousands ): For the Years Ended December 31, 2021 2020 2019 United States $ ( 27,557 ) $ ( 45,840 ) $ ( 85,806 ) Foreign ( 3,084 ) ( 2,865 ) ( 2,128 ) Loss before income taxes $ ( 30,641 ) $ ( 48,705 ) $ ( 87,934 ) Significant components of the (benefit) provision for income taxes for continuing operations for the years ended December 31, 2021, 2020, and 2019 are as follows ( in thousands ): For the Years Ended December 31, 2021 2020 2019 Current: Federal $ — $ — $ — State 90 86 385 Foreign — — — 90 86 385 Deferred: Federal ( 166,706 ) ( 318 ) 91 State ( 20,614 ) 86 87 ( 187,320 ) ( 232 ) 178 Total $ ( 187,230 ) $ ( 146 ) $ 563 The (benefit) provision for income taxes for continuing operations differs from income taxes computed at the federal statutory tax rates for the years ended December 31, 2021, 2020, and 2019 as a result of the following items: For the Years Ended December 31, 2021 2020 2019 Federal statutory rate 21.0 % 21.0 % 21.0 % Effect of: Impact of change in tax rate — — ( 0.1 ) Change in valuation allowance 595.5 ( 48.9 ) ( 25.1 ) State income taxes-net of federal tax benefit 3.2 14.0 6.9 R&D credit 8.3 — — Loss on settlement of 2022 Convertible Notes ( 12.9 ) — — Other ( 4.1 ) 14.2 ( 3.1 ) Effective tax rate 611.0 % 0.3 % ( 0.6 )% 96 Components of the net deferred income tax asset as of December 31, 2021 and 2020 are as follows ( in thousands ): December 31, December 31, 2021 2020 Deferred income tax assets: Compensation accruals $ 2,492 $ 7,618 Stock options 7,839 23,263 Inventory 823 1,784 Warranty reserves 609 599 Fixed assets 5,821 — Capital loss 10,425 17,712 Deferred revenue 184 315 Federal net operating loss (NOL) 144,591 135,806 State NOL 29,690 25,896 Foreign NOL 15,478 18,374 Interest carryforward 71,778 66,379 UNICAP adjustment 1,070 1,733 Finite-lived intangible assets 3,374 4,748 Operating lease liability 21,118 11,539 R&D credit 2,538 — Other 4,983 7,671 Total deferred income tax assets 322,813 323,437 Deferred income tax liabilities: Fixed assets — ( 8,673 ) Indefinite-lived intangible assets ( 8,043 ) ( 7,619 ) Convertible Notes discount — ( 5,512 ) Right-of-use asset ( 17,684 ) ( 8,435 ) Interest rate cap valuation ( 909 ) — Other ( 324 ) ( 1,924 ) Total deferred income tax liabilities ( 26,960 ) ( 32,163 ) Total deferred income tax 295,853 291,274 Valuation allowance ( 110,720 ) ( 293,382 ) Net deferred income tax asset (liability) $ 185,133 $ ( 2,108 ) We regularly assess the need for a valuation allowance related to our deferred income tax assets to determine, based on the weight of the available positive and negative evidence, whether it is more likely than not that some or all of such deferred assets will not be realized. In our assessments, the Company considers recent financial operating results, the scheduled expiration of our net operating losses, potential sources of taxable income, the reversal of existing taxable differences, taxable income in prior carryback years, if permitted under tax law, and tax planning strategies. Based on our most recent assessment, for the year ended December 31, 2021, we released $ 195.8 million of the valuation allowance for the portion of our deferred income tax assets that we are more likely than not going to utilize. As of December 31, 2021, we can demonstrate an estimate of objectively verifiable future income based on the prior three years of pre-tax income from continuing operations, adjusted for the change in interest expense resulting from the Refinancing. This estimate of future income, along with our assessment of the other positive and negative evidence considered, supports the release of a portion of the valuation allowance. The remaining valuation allowance is still required for deferred tax assets related to certain state and foreign NOLs, capital losses, and the Section 163(j) interest limitation carryforward as it was more likely than not as of December 31, 2021 that these deferred tax assets will not be realized. If we continue to sustain our current operating performance, additional reversals of our valuation allowance could occur within the next twelve to eighteen months. As of December 31, 2021, the federal net operating loss (“NOL”) carryforward amount was approximately $ 689 million and the state NOL carryforward amount was approximately $ 523 million . The federal NOLs begin to expire in 2031. The state NOLs expire in various tax years beginning in 2022. As of December 31, 2021, the Canadian NOL carryforward amount was approximately $ 58 million, and it will begin to expire in 2032. Utilization of our NOL, interest carryforward and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the NOL and tax credit carryforwards before their utilization. The interest carryforward arises from U.S. Tax Reform and generally limits the interest expense deduction to 30 % of EBITDA for tax years 2018 to 2021 and 30 % of EBIT for 2022 97 and subsequent years. The interest carryforward will not expire as it may be carried forward indefinitely. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50 % over a three-year period. As of December 31,2021, 2020 and 2019 , we did no t have any unrecognized tax benefits. We are subject to taxation and file income tax returns in the United States federal jurisdiction and many states and Canada. With few exceptions, as of December 31, 2021, we are no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2017. We record penalties and interest relating to uncertain tax positions in the income tax provision line item in the consolidated statement of operations. No penalties or interest related to uncertain tax positions were recorded for the years ended December 31, 2021, 2020 or 2019. As of December 31, 2021 and 2020 , we did no t have a liability recorded for interest or potential penalties. We do no t expect a change in the unrecognized tax benefits within the next 12 months. 17. Leases The following is a summary of our lease expense included in the consolidated statement of operations (in thousands) : For the Years Ended December 31, 2021 2020 2019 Operating lease cost $ 13,203 $ 11,688 $ 11,676 Finance lease cost: Amortization of leased assets 35 230 665 Interest on lease liabilities 50 113 56 Total lease cost $ 13,288 $ 12,031 $ 12,397 Other information regarding our leases is as follows (in thousands, except lease terms and discount rates) : For the Years Ended December 31, 2021 2020 2019 Supplemental cash flow information Cash paid for amounts included in measurement of lease liabilities: Operating cash flows used in operating leases $ 13,930 $ 12,733 $ 13,059 Operating cash flows used in finance leases $ 51 $ 113 $ 56 Financing cash flows used in finance leases $ 145 $ 546 $ — Non-cash items: Operating leases obtained $ 43,148 $ 5,342 $ 4,197 Finance leases obtained $ — $ 428 $ 1,268 Weighted average remaining lease term Operating leases 9 years 7 years 8 years Finance leases 2 years 2 years 3 years Weighted average discount rate Operating leases 7.0 % 11.2 % 10.3 % Finance leases 18.6 % 10.5 % 8.3 % 98 Annual future minimum lease payments as of December 31, 2021 (in thousands) : Years ending December 31, Operating Leases Financing Leases 2022 $ 12,815 $ 156 2023 12,698 91 2024 12,043 — 2025 11,249 — 2026 11,184 — Thereafter 53,914 — Total future minimum lease payments 113,903 247 Less: Amount representing interest ( 29,130 ) ( 31 ) Present value of net minimum lease payments $ 84,773 $ 216 Reported as of December 31, 2021 Accrued liabilities $ 7,444 $ 129 Non-current operating lease liabilities 77,329 — Other non-current liabilities — 87 Total lease liabilities $ 84,773 $ 216 As of December 31, 2021 , there were no significant leases which had not yet commenced. 18. Commitments and Contingencies Contractual Commitments - We have agreements with various vendors under which we have remaining commitments to purchase hardware components and development services. Such commitments will become payable as we receive the hardware components or as development services are provided. Indemnifications and Guarantees - In accordance with Delaware law, we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under this indemnification is uncertain and may be unlimited, depending upon circumstances. However, our Directors’ and Officers’ insurance does provide coverage for certain of these losses. In the ordinary course of business, we may occasionally enter into agreements pursuant to which we may be obligated to pay for the failure of the performance of others, such as the use of corporate credit cards issued to employees. Based on historical experience, we believe that the risk of sustaining any material loss related to such guarantees is remote. We have entered into a number of agreements pursuant to which we indemnify the other party for losses and expenses suffered or incurred in connection with any patent, copyright, or trademark infringement or misappropriation claim asserted by a third party with respect to our equipment or services. The maximum potential amount of future payments we could be required to make under these indemnification agreements is uncertain and is typically not limited by the terms of the agreements. Linksmart Litigation - On April 20, 2018 , Linksmart Wireless Technology, LLC filed suit against Gogo Inc., Gogo LLC, our former subsidiary and the entity that operated our CA business (“Gogo LLC”), and eight CA airline partners in the U.S. District Court for the Central District of California alleging that CA’s redirection server and login portal infringe a patent owned by the plaintiff. The suits sought an unspecified amount of damages. Intelsat is required under its contracts with these airlines, which it assumed in the Transaction, to indemnify them for defense costs and any liabilities resulting from the suit. In November 2021, the plaintiff, the successor to Gogo LLC and Gogo Inc. entered into a settlement agreement which included no payment or other obligation on our part other than a release of plaintiff from any claims related to the litigation or the patent at issue. In December 2021, the court dismissed the suit with prejudice. Securities Litigation - On June 27, 2018 , a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Northern District of Illinois, Eastern Division styled Pierrelouis v. Gogo Inc., naming the Company, its former Chief Executive Officer and Chief Financial Officer, its current Chief Financial Officer and its then-current President, Commercial Aviation as defendants purportedly on behalf of all purchasers of our securities from February 27, 2017 through May 4, 2018. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, alleging misrepresentations or omissions by us purporting to relate to the reliability 99 of and installation and remediation costs associated with CA’s 2Ku antenna. The plaintiffs seek to recover from us and the individual defendants an unspecified amount of damages. In December 2018 the plaintiffs filed an amended complaint and in February 2019, we filed a motion to dismiss such amended complaint. In October 2019 the judge granted the motion to dismiss on two independent grounds, finding that plaintiffs failed to plausibly allege that defendants made materially false or misleading statements and that plaintiffs failed to plead with particularity that defendants acted with scienter. The amended complaint was dismissed without prejudice, and in December 2019, defendants filed a second amended complaint. In July 2020, plaintiffs filed a motion requesting leave to file a proposed third amended complaint, which was granted by the Court. Plaintiffs proceeded to file the third amended complaint in July 2020 and we filed a motion to dismiss in September 2020. In April 2021, the Court denied our motion to dismiss, and the defendants filed their answer and affirmative defenses to the third amended complaint in June 2021. The parties engaged in mediation and reached a tentative resolution that includes a cash payment of $ 17.3 million (to be funded by our Directors' and Officers' insurance policy) in exchange for a dismissal with prejudice of the class claims and full releases. As a result of this development, the Company has accrued a $ 17.3 million liability within Accrued liabilities and a corresponding insurance receivable in Prepaid expenses and other current assets in the consolidated balance sheets as of December 31, 2021. This resolution is subject to execution by the parties of a definitive settlement agreement and final approval by the court. While the Company will in good faith negotiate the terms of the definitive settlement agreement and seek court approval, there can be no assurance that these efforts will result in a settlement or, if they do, as to the timing of such settlement. We believe that the claims are without merit and will continue to defend them vigorously should the parties’ settlement efforts be unsuccessful. Derivative Litigation - On September 25, 2018 and September 26, 2018 , two purported stockholders of the Company filed substantively identical derivative lawsuits in the United States District Court for the Northern District of Illinois, Eastern Division, styled Nanduri v. Gogo Inc. and Hutsenpiller v. Gogo Inc., respectively. Both lawsuits were purportedly brought derivatively on behalf of us and name us as a nominal defendant and name as defendants each member of the Company’s Board of Directors, its former Chief Executive Officer and Chief Financial Officer and its current Chief Executive Officer, Chief Financial Officer and President, Commercial Aviation. The complaints assert claims under Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and allege misrepresentations or omissions by us purporting to relate to the 2Ku antenna’s reliability and installation and remediation costs, as well as allegedly excessive bonuses, stock options, and other compensation paid to current Officers and Directors and excessive severance paid to former Officers. The plaintiffs seek to recover, on our behalf, an unspecified amount of damages from the individual defendants. The two lawsuits were consolidated and were stayed pending a final disposition of the motion to dismiss in the class action suit and remain stayed. In addition, a purported stockholder has sent a letter to the Company’s Board of Directors, dated June 21, 2021, demanding based on substantially the same allegations, that the Company sue certain current and former Officers for, inter alia , breach of fiduciary duty. We believe that the claims are without merit and intend to defend them vigorously. No amounts have been accrued for any potential costs under these matters, as we cannot reasonably predict the outcome or the potential costs. We have filed a claim under our Directors’ and Officers’ insurance policy with respect to these suits and the demand from the purported stockholder. We expect any material financial exposure for these matters to be borne by our insurance carriers, although they have reserved their rights under the policies. SmartSky Litigation - On February 28, 2022, SmartSky Networks, LLC brought suit against Gogo Inc. and its subsidiary Gogo Business Aviation LLC in the U.S. District Court for the District of Delaware alleging that Gogo 5G infringes four patents owned by the plaintiff. The suit seeks an unspecified amount of compensatory damages as well as treble damages for alleged willful infringement and asks that the Court temporarily and permanently enjoin defendants from infringing the patents at issue. We believe that the plaintiff’s claims are without merit and intend to defend our position vigorously. The outcome of this litigation is inherently uncertain. No amounts have been accrued for any potential losses under this matter, as we cannot reasonably predict the outcome of the litigation or any potential losses. From time to time we may become involved in legal proceedings arising in the ordinary course of our business. We cannot predict with certainty the outcome of any litigation or the potential for future litigation. Regardless of the outcome of any particular litigation and the merits of any particular claim, litigation can have a material adverse impact on our company due to, among other reasons, any injunctive relief granted, which could inhibit our ability to operate our business, amounts paid as damages or in settlement of any such matter, diversion of management resources and defense costs. 19. Accumulated Other Comprehensive Income (Loss) The following is a summary of changes in accumulated other comprehensive income (loss) by component (in thousands): 100 Change in Currency Fair Value of Translation Cash Flow Adjustment Hedge Total Balance at January 1, 2019 $ ( 3,554 ) $ — $ ( 3,554 ) Other comprehensive income (loss) before reclassifications 1,298 — 1,298 Less: income (loss) realized and reclassified to earnings — — — Net current period comprehensive loss 1,298 — 1,298 Balance at December 31, 2019 $ ( 2,256 ) $ — $ ( 2,256 ) Other comprehensive income (loss) before reclassifications 1,243 — 1,243 Less: income (loss) realized and reclassified to earnings — — — Net current period comprehensive loss 1,243 — 1,243 Balance at December 31, 2020 $ ( 1,013 ) $ — $ ( 1,013 ) Other comprehensive income (loss) before reclassifications 53 2,747 2,800 Less: income (loss) realized and reclassified to earnings — ( 2 ) ( 2 ) Net current period comprehensive income (loss) 53 2,749 2,802 Balance at December 31, 2021 $ ( 960 ) $ 2,749 $ 1,789 101 20. Condensed Financial Information of Registrant The following presents the condensed financial information of our parent company on a standalone basis. Gogo Inc. Condensed Balance Sheets (in thousands) December 31, December 31, 2021 2020 Assets: Cash and cash equivalents $ 55,069 $ 55,065 Prepaid expenses and other current assets 25 25 Deferred income taxes 186,041 — Total assets $ 241,135 $ 55,090 Liabilities and stockholders’ deficit: Other current liabilities $ 740 $ 1,947 Current portion of long-term debt 102,370 — Long-term debt — 212,387 Other non-current liabilities — 2,108 Investments and payables with subsidiaries 458,179 479,762 Total liabilities 561,289 696,204 Total stockholders’ deficit ( 320,154 ) ( 641,114 ) Total liabilities and stockholders’ deficit $ 241,135 $ 55,090 Gogo Inc. Condensed Statements of Operations and Comprehensive Income (Loss) (in thousands) For the Years Ended December 31, 2021 2020 2019 Interest income $ ( 6 ) $ ( 451 ) $ ( 3,083 ) Interest expense 9,504 29,318 33,807 Loss on extinguishment of debt 18,948 — 9,163 Other ( 4 ) 4 3 Total other expense 28,442 28,871 39,890 Loss before income taxes ( 28,442 ) ( 28,871 ) ( 39,890 ) Income tax provision (benefit) ( 187,230 ) ( 146 ) 563 Equity losses of subsidiaries 6,053 221,311 105,551 Net income (loss) $ 152,735 $ ( 250,036 ) $ ( 146,004 ) Comprehensive income (loss) $ 152,735 $ ( 250,036 ) $ ( 146,004 ) 102 Gogo Inc. Condensed Statements of Cash Flows (in thousands) For the Years Ended December 31, 2021 2020 2019 Net income (loss) $ 152,735 $ ( 250,036 ) $ ( 146,004 ) Accretion of debt discount — 13,255 15,276 Amortization of deferred financing costs 1,387 1,781 1,906 Loss on extinguishment of debt 18,948 — 9,163 Subsidiary equity losses 6,053 221,311 105,551 Deferred income taxes ( 187,220 ) ( 232 ) 178 Other operating activities 1,819 ( 114 ) ( 1,224 ) Net cash used in operating activities ( 6,278 ) ( 14,035 ) ( 15,154 ) Redemption of short-term investments — — 39,323 Investments and advances with subsidiaries 11,552 ( 45,097 ) 94,716 Net cash provided by (used in) investing activities 11,552 ( 45,097 ) 134,039 Financing activities: Repurchase of convertible notes — ( 2,498 ) ( 159,502 ) Other financing activities ( 5,245 ) ( 4,227 ) 325 Net cash used in financing activities ( 5,245 ) ( 6,725 ) ( 159,177 ) Increase (decrease) in cash, cash equivalents and restricted cash 29 ( 65,857 ) ( 40,292 ) Cash, cash equivalents and restricted cash at beginning of period 55,065 120,922 161,214 Cash, cash equivalents and restricted cash at end of period $ 55,094 $ 55,065 $ 120,922 Cash, cash equivalents and restricted cash at end of period $ 55,094 $ 55,065 $ 120,922 Less: current restricted cash 25 — — Less: non-current restricted cash — — 2,599 Cash and cash equivalents at end of period $ 55,069 $ 55,065 $ 118,323 103 Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure None.