Globalstar, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements. Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (the "Report"), other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements, such as the statements regarding our ability to develop and expand our business (including our ability to monetize our spectrum rights), our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes (including regulation related to the use of our spectrum), the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis, business interruptions due to natural disasters, unexpected events or public health crises, including viral pandemics such as the COVID-19 coronavirus, and other statements contained in this Report regarding matters that are not historical facts, involve predictions. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission (the "SEC") on February 28, 2020 (the "2019 Annual Report"). We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances. New risk factors emerge from time to time, and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. This "Management's Discussion and Analysis of Financial Condition" should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition" and information included in our 2019 Annual Report. Overview Mobile Satellite Services Business Globalstar, Inc. ("we", "us" or the "Company") provides Mobile Satellite Services (“MSS”) including voice and data communications services globally via satellite. We offer these services over our network of in-orbit satellites and our active ground stations (“gateways”), which we refer to collectively as the Globalstar System. In addition to supporting Internet of Things ("IoT") data transmissions in a variety of applications, we provide reliable connectivity in areas not served or underserved by terrestrial wireless and wireline networks and in circumstances where terrestrial networks are not operational due to natural or man-made disasters. By providing wireless communications services across the globe, we meet our customers' increasing desire for connectivity. We currently provide the following communications services, which are available only with equipment designed to work on our network: • two-way voice communication and data transmissions using mobile or fixed devices, including our GSP-1700 phone, two generations of our Sat-Fi ® , the Sat-Fi ® Remote Antenna Station, and other fixed and data-only devices ("Duplex"); • one-way or two-way communication and data transmissions using mobile devices, including our SPOT family of products, such as SPOT X ® , SPOT Gen4 ™ and SPOT Trace ® , that transmit messages and the location of the device ("SPOT"); and 19 • one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station, including our commercial IoT products, such as our battery- and solar-powered SmartOne, STX-3, STINGR and ST100 ("Commercial IoT"). Our constellation of Low Earth Orbit ("LEO") satellites includes second-generation satellites, which were launched and placed into service during the years 2010 through 2013 after a $1.1 billion investment, and certain first-generation satellites, which are currently being used as in-orbit spares. We designed our second-generation satellites to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost compared to our first-generation satellites. We achieved this longer life by increasing the solar array and battery capacity, using a larger fuel tank, adding redundancy for key satellite equipment, and improving radiation specifications and additional lot level testing for all susceptible electronic components, in order to account for the accumulated dosage of radiation encountered during a 15-year mission at the operational altitude of the satellites. The second-generation satellites use passive S-band antennas on the body of the spacecraft providing additional shielding for the active amplifiers which are located inside the spacecraft, unlike the first-generation amplifiers that were located on the outside as part of the active antenna array. Each satellite has a high degree of on-board subsystem redundancy, an on-board fault detection system and isolation and recovery for safe and quick risk mitigation. We believe that we provide the best voice quality among our peer group (which is backed by customer input) due to the specific design of the Globalstar System. We define a successful level of service for our customers by their ability to make uninterrupted calls of average duration for a system-wide average number of minutes per month. Our goal is to provide service levels and call or message success rates equal to or better than our MSS competitors so our products and services are attractive to potential customers. We define voice quality as the ability to easily hear, recognize and understand callers with imperceptible delay in the transmission. By this measure, we believe that our system outperforms geostationary (“GEO”) satellites used by some of our competitors. GEO satellite signals must travel approximately 42,000 additional miles on average, which introduces considerable delay and signal degradation to GEO calls. For our competitors using cross-linked satellite architectures, which require multiple inter-satellite connections to complete a call, signal degradation and delay can result in lower call quality as compared to that experienced over the Globalstar System. We designed our second-generation ground network to provide our customers with enhanced services featuring speeds up to 72 kbps as well as increased capacity, when combined with our next-generation products. The second-generation ground network is an Internet protocol multimedia subsystem ("IMS") based solution providing such industry standard services as voice, internet, email and short message services ("SMS"). We compete aggressively on price. We offer a range of price-competitive products to the industrial, governmental and consumer markets. We expect to retain our position as a cost-effective, high quality leader in the MSS industry. As technological advancements are made, we continue to explore opportunities to develop new products and provide new services over our network to meet the needs of our existing and prospective customers. We are currently pursuing initiatives that we expect to expand our satellite communications business by effectively leveraging our network capabilities and distribution relationships. Among our current initiatives is the development of a two-way module to expand our Commercial IoT offerings. Customers The specialized needs of our global customers span many industries. As of September 30, 2020, we had approximately 751,000 subscribers worldwide, principally within the following markets: recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; and transportation. Our system is able to offer our customers cost-effective communications solutions completely independent of cellular coverage. Although traditional users of wireless telephony and broadband data services have access to these services in developed locations, our customers often operate, travel or live in remote regions or regions with under-developed telecommunications infrastructure where these services are not readily available or are not provided on a reliable basis. Spectrum and Regulatory Structure We benefit from a world-wide allocation of radio frequency spectrum in the international radio frequency tables administered by the International Telecommunications Union ("ITU"). Access to this globally harmonized spectrum enables us to design satellites, networks and terrestrial infrastructure enhancements more cost effectively because the products and services can be deployed and sold worldwide. In addition, this broad spectrum assignment enhances our ability to capitalize on existing and emerging wireless and broadband applications. 20 In the United States, the Federal Communications Commission ("FCC") has authorized us to operate our first-generation satellites in 25.225 MHz of radio spectrum comprising two blocks of non-contiguous radio frequencies in the 1.6/2.4 GHz band commonly referred to as the "Big LEO" Spectrum Band. We licensed and registered our second-generation satellites in France. We also obtained all authorizations necessary from the FCC to operate our domestic gateways with our second-generation satellites. Terrestrial Authority for Globalstar's Licensed 2.4GHz Spectrum In December 2016, the FCC unanimously adopted a Report and Order permitting us to seek modification of our existing MSS licenses to provide terrestrial broadband services over 11.5 MHz of our licensed Mobile Satellite Services spectrum at 2483.5 to 2495 MHz, throughout the United States of America and its Territories. In August 2017, the FCC modified Globalstar's MSS licenses, granting us authority to provide terrestrial broadband services over a portion of our satellite spectrum. Specifically, the FCC modified Globalstar's space station authorization and our blanket mobile earth station license to permit a network using 11.5 MHz of our authorized Big LEO mobile-satellite service spectrum. We will need to comply with certain conditions in order to provide terrestrial broadband service, including obtaining FCC certifications for our equipment that will utilize this spectrum authority. We believe our MSS spectrum position provides potential for harmonized terrestrial authority across many international regulatory domains and have been seeking approvals in various international jurisdictions. To date, we have received terrestrial authorizations in various countries. We expect this global effort to continue for the foreseeable future while we seek additional terrestrial approvals to internationally harmonize our S-band spectrum across the entire 16.5 MHz authority for terrestrial mobile broadband services. We expect our terrestrial authority will allow future partners to develop high-density dedicated networks using the TD-LTE protocol for private LTE networks as well as the densification of cellular networks. We believe that our offering has competitive advantages over other conventional commercial spectrum allocations. Such other allocations must meet minimum population coverage requirements, which effectively prohibit the exclusive use of most carrier spectrum for dedicated small cell deployments. In addition, low frequency carrier spectrum is not physically well suited to high-density small cell topologies, and mmWave spectrum is subject to range and attenuation limitations. We believe that our licensed 2.4 GHz band holds physical, regulatory, and ecosystem qualities that distinguishes it from other current and anticipated allocations, and that it is well positioned to balance favorable range, capacity and attenuation characteristics. In December 2018, we were successful in obtaining approval to create a new defined band class, Band 53, from the Third Generation Partnership Project (3GPP) for our 2.4 GHz terrestrial spectrum. Additionally, in March 2020, we announced that the 3GPP approved the 5G variant of our Band 53, which is known as n53. This band class provides a pathway for our terrestrial spectrum to be integrated into handset and infrastructure ecosystems. Additional follow-on 3GPP specifications and approvals are expected in the future. Recent Developments: COVID-19 In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic. Various levels of governmental agencies and authorities have taken measures to reduce the spread of COVID-19, including “stay at home” orders, social distancing and closures of non-essential businesses. The success of our business depends on our global operations, including the performance of our satellites and ground stations as well as our supply chain and consumer demand, among other things. As a result of COVID-19, we have experienced a reduction in the volume of sales of our subscriber equipment, received requests for service pricing concessions from certain customers, and expect an impact on the ability of certain of our customers to pay outstanding balances. Our results of operations for the three and nine months ended September 30, 2020 partially reflect this impact; however, we expect that this trend may continue and the full extent of the impact is unknown. In recent months, some governmental agencies have lifted certain restrictions. However, if customer demand continues to be low, our future equipment sales, subscriber activations and sales margin will be impacted. We have implemented several measures to minimize the impact on our operations and sustain our liquidity position, including: • Receiving economic relief and support under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, including a $5.0 million forgivable payroll protection program loan and the deferral of certain payroll taxes, • Refocusing internal resources on high-value opportunities, such as working with federal agencies that may require our equipment and services in times of crisis, • Working with our product manufacturers to ensure we will continue to have sufficient inventory levels on hand to meet consumer demand, and 21 • Supporting both consumer and commercial customers, particularly those that operate in the retail and oil and gas industries, to adjust pricing where necessary, whether under e-commerce promotions or temporary service pricing concessions. Performance Indicators Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our earnings and cash flows. These key performance indicators include: • total revenue, which is an indicator of our overall business growth; • subscriber growth and churn rate, which are both indicators of the satisfaction of our customers; • average monthly revenue per user, or ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-value customers. We calculate ARPU separately for each type of our Duplex, Commercial IoT, SPOT and IGO revenue; • operating income and adjusted EBITDA, both of which are indicators of our financial performance; and • capital expenditures, which are an indicator of future revenue growth potential and cash requirements. Comparison of the Results of Operations for the three and nine months ended September 30, 2020 and 2019 Overall, our results of operations for the three and nine months ended September 30, 2020 were impacted by COVID-19; however, we cannot predict the full extent or duration of the future impact of COVID-19. Certain trends or uncertainties related to COVID-19 that impact revenue or expense items are discussed below. Revenue Total revenue decreased 15%, to $32.8 million for the three months ended September 30, 2020 from $38.6 million for the same period in 2019 and decreased 5%, to $95.3 million for the nine months ended September 30, 2020 from $99.9 million for the same period in 2019. See below for a discussion of these fluctuations. These variances were impacted by an out-of-period adjustment which increased Duplex service revenue by $3.9 million during the third quarter of 2019 related to a change in the calculation of the estimated impact from the initial adoption of ASC 606. The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands). Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Service revenue: Duplex (1) $ 9,956 30 % $ 12,704 37 % $ 26,175 27 % $ 30,380 32 % SPOT 11,396 35 12,482 36 35,098 37 38,196 40 Commercial IoT 4,420 13 4,526 13 13,028 14 12,577 13 IGO 95 — 139 — 295 — 484 — Engineering and other 2,518 8 416 1 9,814 10 1,449 2 Total $ 28,385 86 % $ 30,267 87 % $ 84,410 88 % $ 83,086 87 % 22 The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands). Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Subscriber equipment sales: Duplex $ 510 2 % $ 349 1 % $ 1,539 2 % $ 906 1 % SPOT 2,602 8 1,880 6 5,704 6 5,657 6 Commercial IoT 1,256 4 2,182 6 3,608 4 6,226 6 Other 4 — 51 — 54 — 123 — Total $ 4,372 14 % $ 4,462 13 % $ 10,905 12 % $ 12,912 13 % (1) As previously disclosed, we recorded an out-of-period adjustment of $3.9 million during the third quarter of 2019 as a result of a change in the estimated impact of ASC 606. This adjustment, which increased Duplex service revenue, is excluded from Duplex service revenue in the table above. The percentages of total revenue calculations also exclude this adjustment. The following table sets forth our average number of subscribers and ARPU by type of revenue. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Average number of subscribers for the period: Duplex 49,533 57,091 51,096 58,415 SPOT 260,153 280,632 267,035 283,371 Commercial IoT 414,049 412,180 417,469 396,660 IGO 26,491 26,378 26,284 26,464 Other 870 912 874 936 Total 751,096 777,193 762,758 765,846 ARPU (monthly): Duplex (1) $ 67.00 $ 74.17 $ 56.92 $ 57.79 SPOT 14.60 14.83 14.60 14.98 Commercial IoT 3.56 3.66 3.47 3.52 IGO 1.20 1.76 1.25 2.03 (1) As previously disclosed, we recorded an out-of-period adjustment of $3.9 million during the third quarter of 2019 as a result of a change in the estimated impact of ASC 606. This adjustment, which increased Duplex service revenue, is excluded from Duplex ARPU in the table above. When the out-of-period adjustment is included in the calculation, ARPU for the three and nine month periods ended September 30, 2019 is $96.86 and $65.18, respectively. The numbers reported in the above table are subject to immaterial rounding inherent in calculating averages. We count "subscribers" based on the number of devices that are subject to agreements that entitle them to use our voice or data communications services rather than the number of persons or entities who own or lease those devices. Engineering and other service revenue includes revenue generated primarily from certain governmental and engineering service contracts which are not subscriber driven. Accordingly, we do not present ARPU for engineering and other service revenue in the table above. 23 Service Revenue Excluding the out-of-period adjustment discussed above, Duplex service revenue decreased 22% and 14%, respectively, for the three and nine months ended September 30, 2020 due primarily to a decrease in average subscribers of 13% for both periods as well as a decrease in ARPU of 9% and 1%, respectively. The decrease in average subscribers was due to normal churn in the subscriber base exceeding gross activations over the last twelve months. Notably, gross activations during the third quarter of 2020 were up nearly 10% from the prior year's quarter following a higher volume of Duplex handset and hotspot sales during 2020. The decrease in ARPU was driven by the timing of revenue recognition for our usage-based subscribers as well as the impact of unfavorable exchange rate movements. SPOT service revenue decreased 9% and 8%, respectively, for the three and nine months ended September 30, 2020 due primarily to lower ARPU after adjusting for non-revenue-producing subscribers, which were included in our subscriber count during most of 2019 and were subsequently involuntarily deactivated. During 2019, we deactivated approximately 12,000 non-revenue-generating customers, particularly in Latin America, resulting from a cleanup of our subscriber base. Excluding this involuntary churn, average subscribers would have decreased 4% and 3%, respectively, for the three and nine month periods due to higher churn in our subscriber base during these periods. The decrease in ARPU was due primarily to lower service plans rolled out to new subscribers in mid-2019 as well as revenue recorded for an event sponsorship in the first quarter of 2019 that did not recur in the first quarter of 2020. Commercial IoT service revenue decreased 2% and increased 4%, respectively, for the three and nine months ended September 30, 2020. For the three month period, the decrease in revenue was due to a 3% decline in ARPU driven by service pricing adjustments related to COVID-19 made for certain of our customers and unfavorable exchange rate movements. For the nine month period, the increase in revenue was due to a 5% increase in average subscribers offset by a 1% decrease in ARPU. Average subscribers were higher during the three and nine month periods in 2020 compared to 2019 despite end of period subscribers declining from 421,000 at December 31, 2019 to 414,000 at September 30, 2020 following higher churn in recent months resulting from the impact of COVID-19. Engineering and other service revenue increased $2.1 million and $8.4 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. These increases were driven by a higher volume of engineering services contracts during 2020, including the completion of certain milestones as discussed in Note 2: Revenue to our condensed consolidated financial statements. Subscriber Equipment Sales Revenue from Duplex equipment sales increased $0.2 million and $0.6 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. For both the three and nine month periods, the increase in revenue was driven primarily by sales of our Sat-Fi2® Remote Antenna Station ("RAS") device that launched in October 2019 and Sat-Fi2® device that launched in September 2019. Higher pricing compared to our first generation devices also contributed to the increase in revenue. Revenue from SPOT equipment sales increased $0.7 million for the three months ended September 30, 2020 and was flat for the nine months ended September 30, 2020 compared to the same periods in 2019. For both the three and nine month periods, an increase in revenue was driven by a higher sales volume of SPOT X® and our refreshed SPOT Satellite GPS Messenger, SPOT Gen4 TM , which was launched in August 2020. For the nine month period, the increase in volume was offset by lower component part sales of $0.6 million. We occasionally sell component parts to our equipment manufacturer to use in final products; these sales fluctuate based on the volume and price of parts that we directly source for the production of our equipment. Compared to the corresponding prior year period, we sold fewer component parts to our equipment manufacturer during the first nine of months of 2020. Revenue from Commercial IoT equipment sales decreased $0.9 million and $2.6 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. A decrease in demand for our Commercial IoT products resulting from the impact of COVID-19, particularly from our customers operating in the oil and gas industry, drove the variance in revenue. 24 Operating Expenses Total operating expenses decreased 6% and 5%, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. Lower cost of services, cost of subscriber equipment sales and management, general and administrative costs contributed to the decrease in total operating expenses during the respective periods. The main contributors to the variance in operating expenses are explained in further detail below. Cost of Services Cost of services decreased $0.6 million and $2.5 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. For both the three and nine month periods, lower maintenance costs of $0.6 million and $0.8 million, respectively, resulting from revisions to contract terms with certain vendors for gateway and software maintenance, contributed to the decrease in expense. For the nine month period, lower research and development costs of $1.3 million, driven by the timing of new product development, contributed to the decrease in expense. Other smaller items, such as lower travel and labor costs also contributed to the remaining variance. Cost of Subscriber Equipment Sales Cost of subscriber equipment sales decreased $0.5 million and $1.6 million, respectively, for the three and nine months ended September 30, 2020 from the same periods in 2019. As previously disclosed in Note 10: Contingencies of our 2019 Annual Report, in September 2019, U.S Customs and Border Protection ("CBP") issued a ruling related to the classification of certain of our core products imported from China, resulting in 25% tariffs upon import. As a result of this CPB ruling, during the third quarter of 2019, we expensed $0.9 million in tariffs for products sold from July 2018 through September 2019. During the three and nine months ended September 30, 2020, we recorded $0.3 million and $0.6 million, respectively, for tariffs related to sales in the current period, which increased our cost of subscriber equipment during 2020. The decrease in cost of subscriber equipment sales during 2020 was also impacted by the product mix of equipment sold during the respective periods and was generally in line with margin percentages from the prior year. Marketing, General and Administrative Marketing, general and administrative expenses ("MG&A") decreased $2.8 million and $4.1 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. During the third quarter of 2019, we wrote off $2.1 million of financing costs associated with our efforts to refinance our debt obligations through the issuance of new first-lien debt. This write-off was recorded following our decision to pursue an amendment to our existing Facility Agreement instead of issuing new first lien debt. We also experienced lower MG&A costs during 2020 due in part to the impact of COVID-19. During the three and nine month periods, these reductions were driven primarily by lower subscriber acquisition costs (including advertising and trade shows) of $0.5 million and $1.5 million, respectively, and lower travel costs of $0.3 million and $0.7 million, respectively. For the nine month period, lower performance-based compensation costs were impacted by COVID-19 and reduced MG&A costs by $0.8 million. Higher professional and legal fees related to strategic opportunities totaling $0.9 million partially offset the year-to-date variances. Other Income (Expense) Interest Income and Expense Interest income and expense, net, decreased $3.1 million and $3.2 million, respectively, during the three and nine months ended September 30, 2020, compared to the same periods in 2019. For each of the three and nine month periods, the decrease was driven by lower gross interest costs of $3.5 million and $3.6 million, respectively offset by lower interest income of $0.4 million and $1.2 million, respectively. For the nine month period, higher capitalized interest of $0.8 million also decreased interest expense. 25 Gross interest costs were impacted by lower interest associated with the Facility Agreement, the Loan Agreement with Thermo, and the June 2019 Subordinated Loan Agreement; these items were offset by higher interest on the Second Lien Term Loan Facility that we entered into in November 2019. Lower interest costs for the Facility Agreement were due to the modification of the Facility Agreement in November 2019, which reduced the principal balance outstanding (resulting in lower interest expense) and the balance of deferred financing costs (resulting in lower amortization of deferred financing costs), as well as a decrease in the interest rate driven by a reduction in LIBOR. Lower interest costs for the Loan Agreement with Thermo was driven by Thermo's conversion of the entire principal balance outstanding under the Loan Agreement in February 2020. Lower interest costs for the Subordinated Loan Agreement are due to the full repayment of this loan in November 2019. For the three and nine month periods, interest costs associated with the Facility Agreement decreased $4.3 million (including $1.1 million of amortization of deferred financing costs) and $14.0 million (including $3.7 million of deferred financing costs), respectively, interest costs associated with the Loan Agreement with Thermo decreased $5.0 million (including $1.0 million of accretion of debt discount) and $11.5 million (including $2.3 million of accretion of debt discount), respectively and for both the three and nine month periods, interest costs associated with the Subordinated Loan Agreement decreased $2.7 million (including $0.4 million of amortization of deferred financing costs). These decreases were offset by $8.5 million of interest (including $1.1 million of accretion of debt discount and amortization of deferred financing costs) and $24.6 million of interest (including $3.2 million of accretion of debt discount and amortization of deferred financing costs) for the three and nine month periods, respectively, associated with the Second Lien Term Loan Facility. Derivative Gain Derivative gains were $1.2 million and $50.2 million for the three months ended September 30, 2020 and September 30, 2019, respectively. Derivative gains were $1.6 million and $142.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. We recognize gains or losses due to the change in the value of certain embedded features within our debt instruments that require standalone derivative accounting. The gains recorded during the three and nine months ended September 30, 2020 were primarily impacted by fluctuations in the discount yield used in the valuation of the embedded derivative associated with our Second Lien Term Loan Facility Agreement. The gains recorded during the three and nine months ended September 30, 2019 were impacted primarily by the assumed probability of conversion of the Loan Agreement with Thermo, which occurred in February 2020, and decreased the value of our derivative liabilities. See Note 6: Fair Value Measurements to our condensed consolidated financial statements for further discussion of the computation of the fair value of our derivatives. Foreign Currency Gain (Loss) Foreign currency gain (loss) fluctuated by $2.5 million to a gain of $0.3 million for the three months ended September 30, 2020 from a loss of $2.2 million for the same period in 2019. Foreign currency gain (loss) fluctuated by $6.2 million to a loss of $7.4 million for the nine months ended September 30, 2020 from a loss of $1.2 million for the same period in 2019. Changes in foreign currency gains and losses are driven by the significant financial statement items we have denominated in various currencies. For the three months ended September 30, 2020, the Canadian dollar strengthened relative to the U.S. dollar favorably impacting the condensed consolidated statement of operations by $0.7 million. This favorable variance was offset partially by the strengthening of the U.S. dollar relative to the Brazilian real unfavorably impacting the condensed consolidated statement of operations by $0.7 million. Other smaller items contributed to the remaining fluctuation during the three-month period. For the nine months ended September 30, 2020, the strengthening of the U.S. dollar relative to the Brazilian real and the Canadian dollar unfavorably impacted our condensed consolidated statement of operations $5.4 million and $1.1 million, respectively. For both periods, the foreign currency gains and losses are due primarily to the remeasurement of certain balances at the end of each reporting period. 26 Liquidity and Capital Resources Overview Our principal liquidity requirements include paying our debt service obligations and funding our operating costs. Our principal sources of liquidity include cash on hand, cash flows from operations and anticipated proceeds from the exercise of warrants held by our Second Lien Term Loan Facility lenders. Our operating cash flows are likely to continue to be negatively impacted by COVID-19, as previously discussed. The uncertainties due to COVID-19 continue to evolve and we are monitoring our financial position as circumstances develop. We expect to use proceeds from the exercise of warrants to pay the next scheduled principal payment due under the Facility Agreement in June 2021 and to meet our obligations to raise no less than $45.0 million of equity prior to March 31, 2021; however, to the extent that our stock price remains under the strike price of these warrants, we may be required to raise other funds to meet our loan agreement obligations. A longer-term source of liquidity also includes restricted cash held in our debt service reserve account. Although there are uncertainties related to the future impact from COVID-19 and our ability to maintain compliance with financial covenants, we currently expect that sources of liquidity over the next twelve months will be sufficient to cover our obligations. If we are unable to remain in compliance over the next twelve months, we may need to raise Equity Cure Contributions in future periods. As of September 30, 2020, we held cash and cash equivalents of $19.5 million and restricted cash of $54.9 million. As of December 31, 2019, we held cash and cash equivalents of $7.6 million and restricted cash of $51.5 million. The noncurrent portion of restricted cash on our condensed consolidated balance sheet will generally be used towards the final scheduled payment due upon maturity of the Facility Agreement in December 2022. The carrying amount of our long-term debt outstanding was $330.1 million at September 30, 2020, compared to $464.2 million at December 31, 2019. At September 30, 2020, the current portion of our debt outstanding was $45.5 million and represents the scheduled principal repayments under the Facility Agreement and the PPP Loan due within one year of the balance sheet date. We had no current debt outstanding at December 31, 2019. The $88.6 million decrease in the carrying amount of our total debt balance was due primarily to the conversion of the Loan Agreement with Thermo in February 2020 into shares of common stock, resulting in a $116.5 million reduction in net debt. Also contributing to the decrease in the carrying amount of our total debt balance were unscheduled mandatory principal payments for the First Lien Facility Agreement totaling $3.4 million during 2020. This decrease was offset by 1) a higher carrying value of the Second Lien Term Loan Facility of $23.6 million due to the accrual of PIK interest and the accretion of debt discount, 2) a higher carrying value of the Facility Agreement of $2.9 million due to amortization of deferred financing costs, and 3) the issuance of the PPP Loan (defined below) in April 2020 of $4.9 million (net of debt issuance costs). Indebtedness and Available Credit First Lien Facility Agreement In 2009, we entered into the Facility Agreement, which was amended and restated in July 2013, August 2015, June 2017 and November 2019. The Facility Agreement is scheduled to mature in December 2022. As of September 30, 2020, the principal amount outstanding under the Facility Agreement was $187.0 million, of which $45.0 million was recorded as current debt based on the contractual terms of the loan. The Facility Agreement contains customary events of default and requires that we satisfy various financial and non-financial covenants. The compliance calculations of the financial covenants of the Facility Agreement permit us to include certain cash funds we receive from the issuance of our common stock and/or subordinated indebtedness. We refer to these funds as "Equity Cure Contributions". If we violate any covenants and are unable to obtain a sufficient Equity Cure Contribution or a waiver, or are unable to make payments to satisfy our debt obligations under the Facility Agreement and are unable to obtain a waiver, we would be in default under the Facility Agreement, and the lenders could accelerate payment of the indebtedness. As of September 30, 2020, we were in compliance with respect to the covenants of the Facility Agreement. We continue to monitor the impact of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants, as previously discussed. The Facility Agreement requires mandatory prepayments of principal with any Excess Cash Flow (as defined and calculated in the Facility Agreement) on a semi-annual basis. During 2020, we were required to pay $0.3 million and $3.1 million to our first lien lenders resulting from our Excess Cash Flow calculations as of December 31, 2019 and June 30, 2020, respectively. These payments reduce future principal payment obligations. 27 The Facility Agreement requires that we maintain a debt service reserve account that is pledged to secure our obligations under the Facility Agreement. The required balance in the debt service reserve account must equal at least $50.9 million. As of September 30, 2020, the balance in the debt service reserve account was $51.2 million and is classified as non-current on our condensed consolidated balance sheet as it is expected to be used towards the final scheduled payment due upon maturity of the Facility Agreement in December 2022. The amended and restated Facility Agreement includes a requirement that we raise no less than $45.0 million of equity prior to March 31, 2021 via the cash exercise of outstanding warrants or other equity to be applied towards the principal payment due on June 30, 2021 and then, if applicable, to the next scheduled principal payments. We currently expect to fulfill this requirement with proceeds from the remaining warrants issued to the Second Lien Term Loan Facility lenders in November 2019; in December 2019, we received proceeds of $3.6 million from the exercise of a portion of warrants issued to the Second Lien Term Loan Facility Agreement lenders, which is retained in the equity proceeds account under the Facility Agreement and is recorded in current restricted cash on our condensed consolidated balance sheet as of September 30, 2020 and is expected to be used to fulfill a portion of the $45.0 million requirement discussed above. See Note 4: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the Facility Agreement. Second Lien Facility Agreement In 2019, we entered into a $199.0 million Second Lien Term Loan Facility with Thermo, EchoStar Corporation and certain other unaffiliated lenders. The Second Lien Term Loan Facility is scheduled to mature in November 2025. The loans under the Second Lien Term Loan Facility bear interest at a blended rate of 13.5% per annum to be paid-in-kind (or in cash at our option, subject to restrictions in the Facility Agreement). The cash proceeds from this loan were net of a 3% original issue discount. As of September 30, 2020, the principal amount outstanding under the Second Lien Term Loan Facility was $222.9 million. As additional consideration for the loan, we issued the lenders warrants to purchase 124.5 million shares of common stock at an exercise price of $0.38 per share. These warrants expire on March 31, 2021. As of September 30, 2020, approximately 115.0 million warrants remain outstanding. The Second Lien Term Loan Facility contains customary events of default and requires us to satisfy various financial and non-financial covenants. As of September 30, 2020, we were in compliance with all the covenants of the Second Lien Term Loan Facility. See Note 4: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the Second Lien Term Loan Facility. Thermo Agreement We had an amended and restated loan agreement with Thermo (the “Loan Agreement”). Our obligations to Thermo under the Loan Agreement were subordinated to all of our obligations under the Facility Agreement and the Second Lien Term Loan Facility. The Loan Agreement was convertible into shares of common stock at a conversion price of $0.69 (as adjusted) per share of common stock and accrued interest at 12% per annum, which we capitalized and added to the outstanding principal in lieu of cash payments. On February 19, 2020, Thermo converted the entire principal balance outstanding under the Loan Agreement, which totaled $137.4 million and included accrued interest since inception of $93.9 million. This conversion resulted in the issuance of 200.1 million shares of common stock. See Note 4: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the Thermo Agreements. 28 8.00% Convertible Senior Notes Issued in 2013 Our 2013 8.00% Notes are convertible into shares of our common stock at a conversion price of $0.69 (as adjusted) per share of common stock. As of September 30, 2020, the principal amount outstanding of the 2013 8.00% Notes was $1.4 million. The 2013 8.00% Notes will mature on April 1, 2028, subject to various call and put features. Interest on the 2013 8.00% Notes is payable semi-annually in arrears on April 1 and October 1 of each year. We pay interest in cash at a rate of 5.75% per annum and by issuing additional 2013 8.00% Notes at a rate of 2.25% per annum. The indenture governing the 2013 8.00% Notes provides for customary events of default. As of September 30, 2020, we were in compliance under the terms of the 2013 8.00% Notes and the Indenture. See Note 4: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the 2013 8.00% Notes. Payroll Protection Program Loan As previously discussed, we sought relief under the CARES Act, including receiving a $5.0 million loan under the payroll protection program (the "PPP") in April 2020 (the "PPP Loan"). As of September 30, 2020, the principal amount outstanding under the PPP Loan was $5.0 million, of which $0.5 million is classified as current based on the contractual terms of the loan (as modified). The Company expects to apply for loan forgiveness, in accordance with the terms of the CARES Act, based on payroll and other allowable costs incurred since the date of the loan. Any amount not forgiven by the Small Business Administration (the "SBA") is subject to an interest rate of 1.00% per annum commencing on the date of the loan with principal and interest payments beginning after the SBA has concluded on forgiveness, subject to the PPP rules. Our first and second lien lenders will require us to accelerate the repayment of any portion of the loan amount that is not forgiven. See Note 4: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the PPP Loan. Cash Flows for the nine months ended September 30, 2020 and 2019 The following table shows our cash flows from operating, investing and financing activities (in thousands): Nine Months Ended September 30, 2020 September 30, 2019 Net cash provided by operating activities $ 23,687 $ 6,044 Net cash used in investing activities (9,295) (7,625) Net cash provided by financing activities 872 13,566 Effect of exchange rate changes on cash, cash equivalents and restricted cash (56) (26) Net increase in cash, cash equivalents and restricted cash $ 15,208 $ 11,959 Cash Flows Provided by Operating Activities Net cash provided by operations includes primarily cash receipts from subscribers related to the purchase of equipment and satellite voice and data services as well as cash received from the performance of engineering and other service contracts. We use cash in operating activities primarily for personnel costs, inventory purchases and other general corporate expenditures. Net cash provided by operating activities during the nine months ended September 30, 2020 was $23.7 million compared to $6.0 million during the same period in 2019. The increase was due primarily to higher net income after adjusting for non-cash items due to an increase in revenue and a reduction in operating expenses. Favorable working capital changes also contributed to the increase in net cash provided by operating activities. These favorable changes were due to lower inventory purchases and favorable changes in prepaid and other current assets, driven in part by the final installment of $3.7 million received in January 2020 from the 2018 settlement of a business economic loss claim. Offsetting these items were lower accrued interest and a decrease in our deferred revenue balance during the first nine months of 2020. 29 Cash Flows Used in Investing Activities Net cash used in investing activities was $9.3 million for the nine months ended September 30, 2020 compared to $7.6 million for the same period in 2019. During 2020, the nature of our capital expenditures was related to the procurement and deployment of new antennas for our gateways, which will continue for the near future, as well as other initiatives, such as the completion of our new billing system. During 2019, the nature of our capital expenditures was related to costs to bring our newly developed products into production, including software and other back-office efforts. Cash Flows Provided by Financing Activities Net cash provided by financing activities was $0.9 million and $13.6 million, respectively, during each of the nine month periods ended September 30, 2020 and 2019. In April 2020, we received proceeds of $5.0 million from the PPP Loan (discussed above); these proceeds were offset by mandatory prepayments of principal on our First Lien Facility Agreement totaling $3.4 million (discussed above) as well as the timing of payments for debt financing costs from our refinancing in 2019 totaling $1.1 million. During the first nine months of 2019, the Company raised $62.0 million from our Subordinated Loan Agreement (as discussed in our 2019 Annual Report), which was used predominantly to fund the June 2019 principal and interest payment under our First Lien Facility Agreement. Other smaller items contributed to the remaining items in each period. Contractual Obligations and Commitments There have been no significant changes to our contractual obligations and commitments since December 31, 2019. Off-Balance Sheet Transactions We have no material off-balance sheet transactions. Recently Issued Accounting Pronouncements For a discussion of recently issued accounting guidance and the expected impact that the guidance could have on our condensed consolidated financial statements, see Recently Issued Accounting Pronouncements in Note 1: Basis of Presentation to our condensed consolidated financial statements in Part 1, Item 1 of this Report.