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, 2020, as filed with the Securities and Exchange Commission (the "SEC") on March 4, 2021 (the "2020 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 2020 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. 19 We currently provide the following communications services: • two-way voice communication and data transmissions using mobile or fixed devices, including our GSP-1600 and GSP-1700 phones 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"); • 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 and ST100 ("Commercial IoT"); and • engineering services to assist certain customers in developing new applications to operate on our network, enhancements to our ground network and other communication services using our MSS and terrestrial spectrum licenses ("Engineering and Other"). Our constellation of Low Earth Orbit ("LEO") satellites includes second-generation satellites and certain first-generation satellites, which are currently being used as in-orbit spares. We also have one on-ground spare second-generation satellite that we may include in a future launch. We designed our satellite network to maximize the probability that at least one satellite is visible from any point on the Earth's surface between the latitudes 70° north and 70° south. 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. 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 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. Our ground network includes our ground equipment, which uses patented CDMA technology to permit communication to multiple satellites. Patented receivers in our handsets track the pilot channel and signaling channel as well as three additional communications channels simultaneously. Compared to other satellite and network architectures, we offer superior call clarity with virtually no discernible delay. In 2019, we began the process to expand and enhance our gateway coverage and performance, including the deployment of new gateway antennas to our gateways around the world. In connection with these efforts, during 2021, we purchased gateway assets, including operating licenses, from two former Independent Gateway Operators ("IGOs") in Australia and South Korea. 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 and to more effectively utilize the capacity of our network assets. These initiatives include evaluating our product and service offerings in light of the shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices. To align our business model with this evolution, we have temporarily ceased sales of and services to subscribers for certain Duplex devices, such as Sat-Fi2®. We are currently evaluating the profitability of these devices relative to other product and service offerings as well as the capacity required to support these devices relative to other possible uses for the capacity. Integrated with this assessment is the development of a two-way reference design module to expand our Commercial IoT offerings, which is among our other current initiatives. Our Commercial IoT use cases continue to expand, including deployments that support environmentally friendly initiatives. Recent deployments include remote monitoring of fluid levels and tanks, which replaces the need for motor vehicles to access these assets, as well as asset monitoring solutions for solar lighting and other renewable energy sources. 20 Customers The specialized needs of our global customers span many industries. As of September 30, 2021, we had approximately 760,000 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 worldwide 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. Terrestrial Authority for Globalstar's Licensed 2.4GHz Spectrum In August 2017, the FCC modified Globalstar's MSS licenses, granting us authority to provide terrestrial broadband services over 11.5 MHz of our licensed Mobile Satellite Services spectrum, subject to compliance with certain conditions, at 2483.5 to 2495 MHz throughout the United States of America and its Territories. In December 2018, we successfully completed the Third Generation Partnership Project (“3GPP”) standardization process for the 11.5 MHz of spectrum terrestrially authorized by the FCC. The 3GPP designated the band as Band 53. Additionally, in March 2020, we announced that the 3GPP approved the 5G variant of our Band 53, which is known as n53. This new 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. During 2019, we executed a spectrum managers lease with Nokia in order to permit Nokia to utilize Band 53 within its equipment domestically and have such equipment type-certified for sale and deployment. In February 2021, Qualcomm Technologies announced its new Snapdragon X65 modem-RF System, which includes support for Band n53. By having global 5G band support for n53 in Qualcomm Technologies’ 5G solutions, our potential device ecosystem expands significantly to include the most popular smartphones, laptops, tablets, automated equipment and other IoT modules. 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, including Brazil, Canada, and South Africa, among others. 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. COVID-19 As a result of COVID-19, we experienced an initial reduction in the volume of sales of our subscriber equipment, received requests for service pricing concessions from certain customers, and were impacted by certain of our customers not being able to pay outstanding balances. Our results of operations for the three and nine months ended September 30, 2021 partially reflect this impact; however, we expect that this trend may continue and the full extent of the impact is unknown. 21 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 subscriber-driven revenue, including Duplex, Commercial IoT and SPOT; • 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, 2021 and 2020 Revenue Our revenue is categorized as service revenue and equipment revenue. We provide services to customers using technology from our satellite and ground network. Equipment revenue is generated from the sale of devices that work over our network. Total revenue decreased less than 1% to $32.6 million for the three months ended September 30, 2021 from $32.8 million for the same period in 2020 and decreased 6% to $89.8 million for the nine months ended September 30, 2021 from $95.3 million for the same period in 2020. See below for a further discussion of the fluctuations in revenue. The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands). Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Service revenue: Duplex $ 9,632 30 % $ 9,956 30 % $ 23,530 26 % $ 26,175 27 % SPOT 11,873 35 11,396 35 33,996 38 35,098 37 Commercial IoT 4,458 14 4,420 13 13,443 15 13,028 14 Engineering and other 1,885 6 2,613 8 5,582 6 10,109 10 Total $ 27,848 85 % $ 28,385 86 % $ 76,551 85 % $ 84,410 88 % The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands). Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Subscriber equipment sales: Duplex $ 265 1 % $ 510 2 % $ 889 1 % $ 1,539 2 % SPOT 2,619 8 2,602 8 6,764 8 5,704 6 Commercial IoT 1,841 6 1,256 4 5,452 6 3,608 4 Other 41 — 4 — 166 — 54 — Total $ 4,766 15 % $ 4,372 14 % $ 13,271 15 % $ 10,905 12 % 22 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, 2021 2020 2021 2020 Average number of subscribers for the period: Duplex 45,004 49,533 46,531 51,096 SPOT 271,843 260,153 268,506 267,035 Commercial IoT 410,630 414,049 410,374 417,469 IGO and Other 26,848 27,361 26,732 27,158 Total 754,325 751,096 752,143 762,758 ARPU (monthly): Duplex $ 71.34 $ 67.00 $ 56.19 $ 56.92 SPOT 14.56 14.60 14.07 14.60 Commercial IoT 3.62 3.56 3.64 3.47 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. Service Revenue Duplex service revenue decreased 3% and 10%, respectively, for the three and nine months ended September 30, 2021 due to a decrease in average subscribers of 9% for both periods. The decrease in average subscribers was driven by churn in the subscriber base exceeding gross activations over the last twelve months, including the deactivation of all Sat-Fi2® subscribers in the first quarter of 2021. As previously disclosed, we continue to see a shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices; accordingly, we expect the decline in our Duplex subscriber base to continue as we focus our investments on IoT-enabled devices and services. Additionally, the increase in ARPU during the third quarter of 2021 was due primarily to a one-time reclassification of foreign sales tax related to our Brazilian subsidiary, which increased Duplex service revenue and decreased Commercial IoT service revenue by $0.4 million each. SPOT service revenue increased 4% and decreased 3%, respectively, for the three and nine months ended September 30, 2021. For the three-month period, the increase in SPOT service revenue was due to higher average subscribers of 4%, resulting from higher gross subscriber activations of 17% over the last twelve months. For the nine-month period ended September 30, 2021, the decrease in SPOT service revenue was due primarily to lower ARPU of 4% offset partially by a 1% increase in average subscribers. ARPU decreased during the year-to-date period due to the introduction of lower-priced service plans in mid-2019. The portion of our subscriber base on these lower-priced plans has increased over the past two years. Consistent with the three-month period, average subscribers for the nine-month period increased slightly, reflecting higher gross activations as well as a recent stabilization of churn in our SPOT subscriber base after elevated levels of churn following the COVID-19 pandemic in 2020. Commercial IoT service revenue increased 1% and 3%, respectively, for the three and nine months ended September 30, 2021. For both the three and nine periods, Commercial IoT service revenue increased due to a 2% and 5% increase in ARPU, respectively, partially offset by fewer average subscribers of 1% and 2%, respectively. The increase in ARPU was due to higher usage and the mix of our subscribers on higher rate plans compared to the prior year periods. The decrease in average subscribers is due to higher churn and fewer activations during most of 2020 resulting from the impact of COVID-19. This customer behavior has changed in 2021, indicating a recovery in Commercial IoT demand. Gross activations have continued to increase since the fourth quarter of 2020 and churn was 11% lower over the last twelve months compared to the prior year period. Importantly, Commercial IoT equipment sales increased approximately 50% compared to both prior year periods (discussed further below) which we believe is another indication that Commercial IoT service revenue is likely to grow in the 23 future. As discussed above in Duplex Service Revenue, Commercial IoT ARPU was negatively impacted by a $0.4 million reclassification of foreign sales tax from Duplex to Commercial IoT during the third quarter 2021. Engineering and other service revenue decreased $0.7 million and $4.5 million, respectively, for the three and nine months ended September 30, 2021 compared to the same periods in 2020. These fluctuations in engineering and other service revenue are due primarily to the timing and amount of revenue recognized associated with the completion of certain milestones for a specific ongoing contract. Subscriber Equipment Sales Revenue from Duplex equipment sales decreased $0.2 million and $0.7 million, respectively, for the three and nine months ended September 30, 2021 compared to the same periods in 2020. This decrease was driven primarily by a lower volume of Sat-Fi2® device sales. Revenue from SPOT equipment sales was flat and increased $1.1 million, respectively, for the three and nine months ended September 30, 2021 compared to the same periods in 2020. For the three month period, the fluctuation in revenue from SPOT equipment sales was driven by a higher volume of component parts sold to our equipment manufacturer during the third quarter of 2021 compared to the same period in 2020. 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. Offsetting the increase in component parts sold during the quarter was lower volume of SPOT X ® and SPOT Gen4 TM due in part to inventory shortages, which delayed the fulfillment of certain orders into the fourth quarter of 2021. We have generally been successful in managing supply chain disruptions caused by component part shortages; however, demand exceeded supply at times during the third quarter of 2021 and, while difficult to forecast, we expect the component chip shortage to extend into 2022. For the nine month period, the increase in revenue from SPOT equipment sales was driven by higher volume of SPOT Trace, improved pricing for SPOT Trace and SPOT X ® , which increased revenue year over year, and an increase in component parts (discussed above). Revenue from Commercial IoT equipment sales increased $0.6 million and $1.8 million, respectively, for the three and nine months ended September 30, 2021 compared to the same periods in 2020. This increase resulted from a higher sales volume of almost all of our IoT devices, primarily driven by our SmartOne devices and modules. Sales were higher than the prior year despite the same component part shortage issues discussed above, which resulted in sales orders exceeding available inventory supply during the third quarter of 2021. We continue to believe that the increase in demand during 2021 is an indication of a recovery in Commercial IoT after the oil and gas industry and COVID-related downturns experienced in 2020. Operating Expenses Total operating expenses decreased slightly to $47.3 million from $47.4 million and increased slightly to $139.8 million from $139.4 million, respectively, for the three and nine months ended September 30, 2021 compared to the same periods in 2020. Reductions in the value of inventory, an increase in cost of services and higher cost of subscriber equipment sales drove the increase in operating expenses during 2021; these increases were offset by lower management, general and administrative ("MG&A") costs. The main contributors to the variance in operating expenses are explained in further detail below. Cost of Services Cost of services increased $1.1 million and $1.9 million, respectively, for the three and nine months ended September 30, 2021 compared to the same periods in 2020. The increase in cost of services for both periods was driven primarily by higher professional fees and licensing costs related to our implementation of a new enterprise resource planning ("ERP") system, which is expected to go-live in the first quarter of 2022 as well as lease expense associated with new gateway teleport leases that started in the second quarter of 2021. For the nine-month period, these increases were offset primarily by lower maintenance costs resulting from revisions to contract terms with certain vendors for gateway and software maintenance that was completed during the first half of 2021. 24 Cost of Subscriber Equipment Sales Cost of subscriber equipment sales increased $0.1 million and $0.2 million, respectively, for the three and nine months ended September 30, 2021 from the same periods in 2020. Cost of subscriber equipment sales increased for both periods, which is generally consistent with the increase in total revenue from subscriber equipment sales. Offsetting the increase in expense for the nine-month period was the reversal of an accrual for potential tariffs. During the second quarter of 2021, pursuant to regulatory developments, we reversed an accrual for potential tariffs owed on imports from China made prior to a ruling by the U.S Customs and Border Protection in September 2019 that we no longer believe will be due, resulting in an expense reduction of $0.9 million recognized during the second quarter of 2021. The improved margin during the three and nine months ended September 30, 2021 was impacted by the mix of equipment sold during the respective periods, particularly higher sales of Commercial IoT devices. During 2021, our primary manufacturer's labor costs were reduced, offsetting the impact from higher component part prices; therefore, there was minimal net impact on the margin generated from SPOT and Commercial IoT product sales. Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory During the second quarter of 2021, we recorded a reduction in the value of inventory totaling $0.8 million. We wrote off certain Sat-Fi2 materials that are not likely to be used in production as well as defective inventory units that are not saleable. Similar activity did not occur in 2020. Marketing, General and Administrative MG&A expenses decreased $0.9 million and $2.4 million, respectively, for the three and nine months ended September 30, 2021, compared to the same periods in 2020. For both the three- and nine-month periods, lower dealer commissions as well as stock-based compensation contributed to the decrease in expenses. For the nine-month period, decreased credit losses also contributed to the decrease in MG&A during 2021. During 2020, we recorded credit loss reserves related to certain customer receivable balances that were not expected to be collectible due to financial difficulties resulting from the impact of COVID-19. During the first and second quarters of 2021, we recovered a portion of these previously reserved customer balances. Offsetting the favorable fluctuations in credit losses were higher subscriber acquisition costs for the nine months ended September 30, 2021, including increases in customer appeasement credits that are not expected to recur at this level. Other (Expense) Income Gain (Loss) on Extinguishment of Debt We recorded gain on extinguishment of debt during the second quarter of 2021 totaling $5.0 million. In June 2021, the Small Business Administration ("SBA") approved our request for forgiveness of amounts outstanding under the Paycheck Protection Program ("PPP") loan. Offsetting this gain during the nine-month period were the write-offs of a portion of remaining deferred financing costs totaling $2.3 million and $0.8 million during the second and third quarters of 2021, respectively, resulting from unscheduled principal repayments of the First Lien Facility Agreement in those quarters. Similar activity did not occur in 2020. Interest Income and Expense Interest income and expense, net, was generally flat and decreased $3.2 million, respectively, during the three and nine months ended September 30, 2021, compared to the same periods in 2020. For the three-month period, there were no significant items impacting the increase in expense. For the nine-month period, the decrease in interest income and expense, net, was due to lower gross interest costs and higher capitalized interest. Gross interest costs decreased $2.7 million and capitalized interest increased $0.6 million, which decreased interest expense. Gross interest costs were impacted by lower interest associated with the First Lien Facility Agreement and the Loan Agreement with Thermo; these items were offset by higher interest on the Second Lien Facility Agreement. Interest costs for the First Lien Facility Agreement were favorably impacted by reductions in the principal balance over the last twelve months as well as a decrease in the interest rate driven by a reduction in LIBOR. As previously discussed, we have made principal payments of the First Lien Facility Agreement totaling $126.7 million in the last twelve months, which reduced the principal amount outstanding and lowered interest costs. Lower interest costs for the Loan Agreement with Thermo were driven by Thermo's conversion of the entire principal balance outstanding under the Loan Agreement in February 2020. 25 Derivative (Loss) Gain We recorded derivative gains of $0.2 million and of $1.2 million for the three months ended September 30, 2021 and 2020, respectively, and losses of $2.2 million and gains of $1.6 million for the nine months ended September 30, 2021 and 2020, 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 months ended September 30, 2021 were primarily impacted by a decrease in our stock price, which is a significant input used in the valuation of the embedded derivative associated with our 2013 8.00% Notes. Conversely, the loss recorded during the nine months ended September 30, 2021 was primarily impacted by increases in our stock price and stock price volatility. The gains recorded during the three and nine months ended September 30, 2020 were impacted by fluctuations in a lower discount yield used in the valuation of the embedded derivative associated with our Second Lien Term Loan Facility Agreement. For the first quarter of 2020, the assumed high probability of conversion of the Loan Agreement with Thermo, which occurred in February 2020, also decreased the value of our derivative liabilities. See Note 7: 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 $5.1 million to a loss of $4.8 million for the three months ended September 30, 2021 from a gain of $0.3 million for the same period in 2020. Foreign currency gain (loss) fluctuated by $2.8 million to a loss of $4.6 million for the nine months ended September 30, 2021 from a loss of $7.4 million for the same period in 2020. Changes in foreign currency gains and losses are driven by the remeasurement of financial statement items, which are denominated in various currencies, at the end of each reporting period. For the three months ended September 30, 2021, the foreign currency loss was due to the weakening of the Euro, Canadian dollar and Brazilian real relative to the U.S. dollar. For the nine months ended September 30, 2021, the foreign currency loss was due to the weakening of the Euro and Brazilian real relative to the U.S. dollar. For the same periods in 2020, the strengthening of the Canadian dollar was offset by the weakening of the Brazilian real, both relative to the U.S. dollar, which contributed to the foreign currency gain for the three months ended September 30, 2020 and the weakening of the Canadian dollar and Brazilian real relative to the U.S. dollar contributed to the foreign currency losses for the nine months ended September 30, 2020. Liquidity and Capital Resources Overview Our principal near-term liquidity requirements include funding our operating costs and capital expenditures. Our principal sources of liquidity include cash on hand and cash flows from operations. Beyond the next twelve months, our liquidity requirements also include paying our debt service obligations. We also have a source of liquidity in our debt service reserve account, which is classified as non-current restricted cash consistent with the associated principal balance of our First Lien Facility Agreement. We currently expect that sources of liquidity over the next twelve months will be sufficient for us to cover our obligations. We may also access equity and debt capital markets from time to time or refinance our debt obligations to improve the terms of our debt instruments and lower principal and interest payments. During the first quarter of 2021, we received proceeds totaling $43.7 million from the exercise of the remaining outstanding warrants issued to the lenders of our Second Lien Facility Agreement in 2019. As of March 31, 2021, all of the warrants issued to our lenders have been exercised resulting in total proceeds since issuance of $47.3 million. These proceeds were used to meet our obligation to raise no less than $45.0 million of equity prior to March 30, 2021. In April 2021, these proceeds were used to pay principal due under the Facility Agreement. In June and September 2021, we received two advance payments of $37.5 million each from a customer pursuant to an agreement related to the Terms Agreement described in our 2020 Annual Report. The advance payments are expected to be repaid primarily from services provided by us under the Terms Agreement. Any portion of the advance payment not repaid in services will be repaid in cash over time. We used the proceeds from these advance payments to repay a portion of the amount outstanding under our First Lien Facility Agreement. As of September 30, 2021, we held cash and cash equivalents of $11.3 million and restricted cash of $51.1 million on our condensed consolidated balance sheet. Restricted cash will be used towards the final payment due under the First Lien Facility Agreement in December 2022. As of December 31, 2020, we held cash and cash equivalents of $13.3 million and restricted cash of $54.7 million. The total carrying amount of our debt outstanding was $286.9 million at September 30, 2021, compared to $385.4 million at December 31, 2020. At September 30, 2021, there was no current portion of debt outstanding. At December 31, 2020, the 26 current portion of our debt outstanding was $58.8 million, which represented the scheduled payments under the First Lien Facility Agreement and the PPP Loan. The $98.5 million decrease in carrying value of our debt was due primarily to principal payments of the First Lien Facility Agreement totaling $126.7 million during the first nine months of 2021 (discussed below) as well as the forgiveness of the PPP Loan, totaling $4.9 million (net of less than $0.1 million of deferred financing costs prior to forgiveness). Offsetting these debt reductions was a higher carrying value of the Second Lien Facility Agreement of $27.9 million due to the accrual of PIK interest and the accretion of debt discount as well as $5.1 million related to the amortization of deferred financing costs and write-off of deferred financing costs for the First Lien Facility Agreement. Cash Flows for the nine months ended September 30, 2021 and 2020 The following table shows our cash flows from operating, investing and financing activities (in thousands): Nine Months Ended September 30, 2021 September 30, 2020 Net cash provided by operating activities $ 107,166 $ 23,687 Net cash used in investing activities (30,033) (9,295) Net cash (used in) provided by financing activities (82,725) 872 Effect of exchange rate changes on cash, cash equivalents and restricted cash (57) (56) Net (decrease) increase in cash, cash equivalents and restricted cash $ (5,649) $ 15,208 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, 2021 was $107.2 million compared to $23.7 million during the same period in 2020. The primary driver for the increase was prepayments made during 2021 by a customer totaling $95.9 million, which were recorded as deferred revenue and recoupment liability (see Note 2: Revenue to our condensed consolidated financial statements for further discussion). Cash Flows Used in Investing Activities Net cash used in investing activities was $30.0 million for the nine months ended September 30, 2021 compared to $9.3 million for the same period in 2020. During both 2021 and 2020, the nature of our capital expenditures was related to network upgrades. Specific projects during 2021 include costs associated with the procurement and deployment of new antennas for our gateways, the preparation and launch of our on-ground spare satellite, as well as the purchase of intangible assets related to our MSS and terrestrial spectrum licensing initiatives. Cash Flows (Used in) Provided by Financing Activities Net cash used in financing activities was $82.7 million and net cash provided by financing activities was $0.9 million, respectively, during each of the nine month periods ended September 30, 2021 and 2020. As previously disclosed, during the first nine months of 2021, we made principal payments of the First Lien Facility Agreement totaling $126.7 million (see further discussion below). In March 2021, we received $43.7 million in proceeds from the exercise of the warrants issued with our Second Lien Facility Agreement. During 2020, we received proceeds from the Paycheck Protection Program totaling $5.0 million, which was offset by mandatory prepayments of principal on our First Lien Facility Agreement totaling $3.4 million as well as payments for debt financing costs of $1.1 million. Indebtedness and Available Credit 27 First Lien Facility Agreement In 2009, we entered into the First Lien Facility Agreement, which was amended and restated in July 2013, August 2015, June 2017 and November 2019. The First Lien Facility Agreement is scheduled to mature in December 2022. As of September 30, 2021, the principal amount outstanding under the Facility Agreement was $60.3 million. The First Lien 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 First Lien 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 obtain a waiver, we would be in default under the First Lien Facility Agreement, and the lenders could accelerate payment of the indebtedness. In anticipation of projected capital expenditures, in August 2021, we received a waiver from our senior lenders, increasing permitted capital expenditure limits under the First Lien Facility Agreement. As of September 30, 2021, we were in compliance with the covenants of the First Lien Facility Agreement. The First Lien 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 2021, we were required to pay $4.4 million to our first lien lenders resulting from our Excess Cash Flow calculation as of December 31, 2020. This payment reduced future principal payment obligations. The amended and restated First Lien Facility Agreement includes a requirement that we raise no less than $45.0 million from the sale of equity prior to March 31, 2021. We fulfilled this requirement with proceeds from the exercise of all the warrants issued to the Second Lien Facility Agreement lenders in November 2019. We received proceeds totaling $47.3 million, of which $3.6 million was received in December 2019 and the remaining $43.7 million was received during the first quarter of 2021. In April 2021, the proceeds were used towards the principal payment due in June 2021 and then the remaining proceeds were applied to the principal payment due in December 2021. Additionally, as previously disclosed, in June and September 2021, we received two advance payments of $37.5 million each from a customer. We used these proceeds to pay a portion of the remaining amount due under the First Lien Facility Agreement. This payment was applied to the scheduled principal payments due in December 2021 and June 2022 and then the remaining proceeds were applied to the December 2022 principal payment. The First Lien Facility Agreement requires that we maintain a debt service reserve account, which is pledged to secure our obligations under the First Lien Facility Agreement. As of September 30, 2021, the balance in the debt service reserve account was $51.1 million and is classified as non-current restricted cash on our condensed consolidated balance sheet consistent with the remaining principal outstanding due December 2022. We currently intend to pay off the remaining principal balance during the fourth quarter of 2021. In connection with the anticipated early pay off, we expect to receive a partial refund of premiums previously paid. See Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the First Lien Facility Agreement. Second Lien Facility Agreement In 2019, we entered into a $199.0 million Second Lien Facility Agreement with Thermo, an affiliate of EchoStar Corporation and certain other unaffiliated lenders. The Second Lien Facility Agreement is scheduled to mature in November 2025. The loans under the Second Lien Facility Agreement 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, 2021, the principal amount outstanding under the Second Lien Facility Agreement was $255.0 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. All of these warrants were exercised prior to their expiration on March 31, 2021, resulting in proceeds of $47.3 million. The Second Lien Facility Agreement contains customary events of default and requires us to satisfy various financial and non-financial covenants. As of September 30, 2021, we were in compliance with all the covenants of the Second Lien Facility Agreement. 28 See Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the Second Lien Facility Agreement. 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, 2021, 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, 2021, we were in compliance with the terms of the 2013 8.00% Notes and the Indenture. See Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the 2013 8.00% Notes. Paycheck Protection Program Loan As previously discussed, we sought relief under the CARES Act, including receiving a $5.0 million loan under the PPP in April 2020 (the "PPP Loan"). In June 2021, the SBA approved our request for forgiveness of all amounts outstanding, including accrued interest. As of September 30, 2021, there was no principal amount or interest outstanding under the PPP Loan. See Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the PPP Loan. 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.