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Fair Value of Financial Assets and Liabilities
 6 Months Ended
Jun. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value of Financial Assets and Liabilities
11.
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 9, “Derivative Instruments and Hedging Activities,” for fair value information relating to our interest rate caps.

Investment in Convertible Note:

On February 26, 2024, Gogo invested $5 million in a convertible note offering (“Investment in Convertible Note”). The Investment in Convertible Note accrues interest at 5% per annum, payable upon maturity of the note or upon conversion, and matures two years after the date of issuance. We have elected to measure our Investment in Convertible Note using the fair value option and record changes in fair value, including accrued interest, in Other (income) expense, net on the Unaudited Condensed Consolidated Statements of Operations. The Company elected the fair value option for the Investment in Convertible Note to eliminate complexities of applying certain accounting models.

The fair value of the Investment in Convertible Note is measured using Level 3 (unobservable) inputs. The Company, with the assistance of a third-party valuation specialist, determined the fair value using a binomial lattice model. The significant assumptions used in the model include the yield, equity volatility, outstanding principal, remaining term, stated interest rate, risk-free interest rate and the current publicly available stock price. The yield is estimated using similar security yields for companies with similar credit ratings. Equity volatility is estimated based on observed equity volatility for similar companies. The outstanding principal, remaining term and stated interest rate are all determined based on contractually defined terms and the risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of measurement for time periods approximately equal to the remaining time to maturity.

The reconciliation of beginning and ending balances of the Investment in Convertible Note as of June 30, 2024 were as follows (in thousands):

 

 

For the Three Months
Ended June 30,

 

 

For the Six Months
Ended June 30,

 

 

 

2024

 

 

2024

 

Balance at beginning of period

 

$

18,132

 

 

$

—

 

Investment

 

 

—

 

 

 

5,000

 

Change in fair value

 

 

(14,694

)

 

 

(1,562

)

Balance at end of period

 

$

3,438

 

 

$

3,438

 

Long-Term Debt:

As of June 30, 2024 and December 31, 2023, our only financial asset and liability disclosed but not measured at fair value is the Term Loan Facility, which is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. The fair value measurement is classified as Level 2 within the fair value hierarchy since it is based on quoted market prices of our instrument in markets that are not active. We estimated the fair value of the Term Loan Facility by calculating the upfront cash payment a market participant would require to assume this obligation. The upfront cash payment used in the calculation of fair value on our June 30, 2024 Unaudited Condensed Consolidated Balance Sheets, excluding any issuance costs, is the amount that a market participant would be willing to lend at such date 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.

The fair value and carrying value of long-term debt as of June 30, 2024 and December 31, 2023 were as follows (in thousands):

 

 

June 30, 2024

 

 

December 31, 2023

 

 

 

Fair Value (1)

 

Carrying
Value

 

 

Fair Value (1)

 

Carrying
Value

 

Term Loan Facility

 

$

602,000

 

$

601,375

(2)

 

$

610,000

 

$

604,797

(2)

 

(1)
Fair value amounts are rounded to the nearest million.
(2)
Carrying value of the Term Loan Facility reflects the unaccreted debt discount of $1.9 million and $2.1 million as of June 30, 2024 and December 31, 2023, respectively. See Note 8, “Long-Term Debt and Other Liabilities,” for further information.