You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed onFebruary 25, 2020 with theSecurities and Exchange Commission , or theSEC , as well as our condensed consolidated financial statements included in this Form 10-Q. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development or otherwise are not statements of historical fact. Without limiting the foregoing, the words "believe," "anticipate," "plan," "expect," "intend" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. These risks and uncertainties may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy. The important factors described under the caption "Risk Factors" in this report and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 filed onFebruary 25, 2020 could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview of Our Business
We are engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites. We are the only commercial provider of communications services offering true global coverage, connecting people, organizations and assets to and from anywhere, in real time. Our unique L-band satellite network provides reliable communications services to regions of the world where terrestrial wireless or wireline networks do not exist or are limited, including remote land areas, open ocean, airways, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters. We provide voice and data communications services to businesses, theU.S. and foreign governments, non-governmental organizations and consumers via our satellite network, which has an architecture of 66 operational satellites with in-orbit and ground spares and related ground infrastructure. We utilize an interlinked mesh architecture to route traffic across our satellite constellation using radio frequency crosslinks between satellites. This unique architecture minimizes the need for local ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence. In 2019, we completed the Iridium® NEXT program, which replaced our first-generation constellation of satellites with upgraded satellites that support new services and higher data speeds for new products. We deployed a total of 75 new satellites on eight Falcon 9 rockets launched bySpaceX , with 66 operational satellites, as well as in-orbit and ground spares, maintaining the same interlinked mesh architecture of our first-generation constellation. Our new constellation also hosts the Aireon® system, which provides a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast, or ADS-B, receivers on the upgraded satellites. We formedAireon LLC in 2011, with subsequent investments from the air navigation service providers, or ANSPs, ofCanada ,Italy ,Denmark ,Ireland and theUnited Kingdom , to develop and market this service. Aireon has contracted to provide the service to our co-investors in Aireon and to other ANSPs around the world, including theU.S. Federal Aviation Authority , orFAA . Aireon has also contracted to pay us a fee to host the ADS-B receivers on our constellation, as well as data service fees for the delivery of the air traffic surveillance data over the Iridium network. As ofJune 30, 2020 , Aireon has made payments of$54.1 million for a portion of its hosting fees. Aireon also pays us power and data services fees of up to approximately$23.5 million per year in the aggregate for the delivery of the air traffic surveillance data over the Iridium system. In addition, we have entered into an agreement with L3Harris Technologies, Inc., or L3Harris, the manufacturer of the Aireon hosted payload, pursuant to which L3Harris pays us fees to allocate the remaining hosted payload capacity to its customers and data service fees on behalf of these customers. We sell our products and services to commercial end-users through a wholesale distribution network, encompassing approximately 130 service providers, approximately 290 value-added resellers, or VARs, and approximately 95 value-added manufacturers, or VAMs, which create and sell technology that uses the Iridium network either directly to the end user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications using our products and services to target specific lines of business. 17 -------------------------------------------------------------------------------- AtJune 30, 2020 , we had approximately 1,362,100 billable subscribers worldwide, representing an increase of 12% from approximately 1,213,000 billable subscribers atJune 30, 2019 . We have a diverse customer base, with end users in the following lines of business: land mobile, maritime, aviation, Internet of Things, or IoT, hosted payloads and other data services and theU.S. government.
We recognize revenue from both the provision of services and the sale of equipment. Over the past several years, service revenue, including revenue from hosting and data services, has represented an increasing proportion of our revenue, and we expect that trend to continue.
Effects of COVID-10 on Our Business The COVID-19 pandemic and measures taken in response are currently affecting countries, communities and markets around the world. Like many other businesses, we started to see a slowdown in the final weeks of March as a result of this widespread economic shutdown. This slowdown continued during the second quarter. Our distributors are also experiencing business and operational restrictions, which limit their ability to visit customers, complete new installations, and close on new business opportunities. We normally experience higher subscriber additions and higher usage during the second and third quarters of our fiscal year, driving much of our growth for the typical year. Accordingly, following an analysis of the effects on our business to date, as well as expected future effects, including lower equipment sales, lower levels of subscriber growth, and the potential for increased customer use of lower-cost plans, we have substantially reduced our revenue and profitability outlook for 2020 from the levels that we previously forecast inFebruary 2020 . The ultimate effects of the COVID-19 pandemic are difficult to assess or predict with certainty at this time but may include additional risks. For further information on the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations, see "Risk Factors" in Part II, Item 1A of this Form 10-Q. 18 --------------------------------------------------------------------------------
Material Trends and Uncertainties
Our industry and customer base have historically grown as a result of: • demand for remote and reliable mobile communications services;
• a growing number of new products and services and related applications;
• a broad wholesale distribution network with access to
diverse and
geographically dispersed niche markets; • increased demand for communications services by disaster and relief agencies, and emergency first responders;
• improved data transmission speeds for mobile satellite service offerings;
• regulatory mandates requiring the use of mobile satellite services;
• a general reduction in prices of mobile satellite services and subscriber equipment; and • geographic market expansion through the ability to offer our services in additional countries. Nonetheless, we face a number of challenges and uncertainties in operating our business, including: • the effects of the COVID-19 pandemic on us and on Aireon, including on revenue, employee health and safety, employee productivity, and the financial health and effectiveness of our distributors and suppliers; • our ability to maintain the health, capacity, control and level of service of our satellites; • our ability to develop and launch new and innovative products and services; • changes in general economic, business and industry conditions, including the effects of currency exchange rates; • our reliance on a single primary commercial gateway and a primary satellite network operations center; • competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial-based cellular phone systems and related pricing pressures; • interference with our services caused by the repurposing of L-band satellite spectrum for terrestrial purposes;
• market acceptance of our products;
• regulatory requirements in existing and new geographic markets;
• rapid and significant technological changes in the telecommunications industry; • our ability to generate sufficient internal cash flows to repay our debt; • reliance on our wholesale distribution network to market and sell our products, services and applications effectively; • reliance on single-source suppliers for the manufacture of most of our subscriber equipment and for some of the components required in the manufacture of our end-user subscriber equipment and our ability to purchase parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events, potentially including the COVID-19 pandemic; and • reliance on a few significant customers, particularly agencies of theU.S. government, for a substantial portion of our revenue, as a result of which the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable. 19
-------------------------------------------------------------------------------- Comparison of Our Results of Operations for the Three Months EndedJune 30, 2020 and 2019 Three Months Ended June 30, % of Total % of Total Change ($ in thousands) 2020 Revenue 2019 Revenue Dollars Percent Revenue: Services$ 113,350 81 %$ 110,797 77 %$ 2,553 2 % Subscriber equipment 19,815 14 % 23,420 16 % (3,605 ) (15 )% Engineering and support services 7,008 5 % 8,883 7 % (1,875 ) (21 )% Total revenue 140,173 100 % 143,100 100 % (2,927 ) (2 )% Operating expenses: Cost of services (exclusive of depreciation and amortization) 23,134 17 % 25,607 18 % (2,473 ) (10 )% Cost of subscriber equipment 12,069 9 % 13,370 9 % (1,301 ) (10 )% Research and development 2,380 2 % 4,285 3 % (1,905 ) (44 )% Selling, general and administrative 21,100 15 % 20,969 15 % 131 1 % Depreciation and amortization 75,662 54 % 75,128 52 % 534 1 % Total operating expenses 134,345 96 % 139,359 97 % (5,014 ) (4 )% Operating income 5,828 4 % 3,741 3 % 2,087 56 % Other expense: Interest expense, net (22,506 ) (16 )% (28,986 ) (20 )% 6,480 (22 )% Other expense, net (320 ) - % (626 ) - % 306 (49 )% Total other expense, net (22,826 ) (16 )% (29,612 ) (20 )% 6,786 (23 )% Loss before income taxes (16,998 ) (12 )% (25,871 ) (17 )% 8,873 (34 )% Income tax benefit 4,576 3 % 7,765 4 % (3,189 ) (41 )% Net loss$ (12,422 ) (9 )%$ (18,106 ) (13 )%$ 5,684 (31 )% 20
-------------------------------------------------------------------------------- Revenue Commercial Service Revenue Three Months Ended June 30, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) ARPU (2) Revenue Subscribers (1) ARPU (2) Revenue Subscribers ARPU (Revenue in millions and subscribers in thousands) Commercial services: Voice and data$ 41.8 349$ 40 $ 43.0 358$ 41 $ (1.2 ) (9 )$ (1 ) Broadband (3) 8.5 11.1 258 7.4 10.2 245 1.1 0.9 13 IoT data 22.6 863 8.91 23.9 720 11.40 (1.3 ) 143 (2.49 ) Hosted payload and other data 15.5 N/A 12.0 N/A 3.5 N/A Total commercial services$ 88.4 1,223$ 86.3 1,088$ 2.1 135
(1) Billable subscriber numbers shown are at the end of the respective period.
(2) Average monthly revenue per unit, or ARPU, is calculated by dividing
revenue in the respective period by the average of the number of billable
subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period. Billable subscriber and ARPU data is not applicable for hosted payload and other data service revenue items.
(3) Commercial broadband consists of Iridium OpenPort® and Iridium Certus®
broadband services, which were previously reported in commercial voice and
data revenue. Prior year periods have been conformed to this presentation.
For the three months endedJune 30, 2020 , total commercial service revenue increased$2.1 million , or 2%, primarily as a result of the increase in hosted payload and other data revenue of$3.5 million , or 29%. This increase resulted from the increased Aireon data service fees related to a contractual step-up and increased Aireon power fees. During the quarter, we also recognized additional hosting data service revenue of$1.4 million given the updated estimate of data service usage based on trends experienced to date on our hosted payloads. Commercial broadband revenue increased$1.1 million , or 15%, from the prior year period. This increase was principally due to sales of Iridium Certus broadband services, which were commercially introduced inJanuary 2019 . These increases in revenue were partially offset by declines in commercial IoT data revenue and commercial voice and data revenue of$1.3 million , or 5%, and$1.2 million , or 3%, respectively, from the prior year period. IoT data revenue and voice and data revenue collectively declined due to a decrease in usage based on mobility restrictions associated with the COVID-19 pandemic. The decrease in IoT data revenue was due to a decrease in ARPU which was driven by the aforementioned decrease in usage revenue, particularly with aviation customers, and an increase in the proportion of consumer personal communications devices comprising IoT subscribers, which utilize lower ARPU plans. The decline in IoT ARPU was partially offset by a 20% increase in commercial IoT data billable subscribers, primarily from continued strength in consumer personal communications devices. Government Service Revenue Three Months Ended June 30, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) Revenue Subscribers (1) Revenue Subscribers (Revenue in millions and subscribers in thousands) Government services$ 25.0 139$ 24.5 125$ 0.5 14
(1) Billable subscriber numbers shown are at the end of the respective period.
We provide airtime and airtime support toU.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services contract, or the EMSS Contract. Under the terms of this agreement, authorized customers utilize specified Iridium airtime services provided through theU.S. government's dedicated gateway. The fee is not based on subscribers or usage, allowing an unlimited number of users access to these services. For the three months endedJune 30, 2020 , government service revenue increased$0.5 million from the prior year period as a result of the higher pricing in the new EMSS Contract. 21 -------------------------------------------------------------------------------- Subscriber Equipment Revenue Subscriber equipment revenue decreased by$3.6 million , or 15%, for the three months endedJune 30, 2020 compared to the prior year period, primarily due to a decrease in the volume of handset and IoT device sales, due to the impact of the COVID-19 pandemic. Engineering and Support Service Revenue Three Months Ended June 30, 2020 2019 Change (Revenue in millions)
Commercial engineering and support services $ 1.1
5.9 8.1 (2.2 ) Total engineering and support services $ 7.0 $
8.9
Engineering and support service revenue decreased$1.9 million , or 21%, for the three months endedJune 30, 2020 compared to the prior year period primarily as a result of a decrease in the volume of contracted work to enable services for theU.S. government, offset by an increase in the volume of work for commercial customers, primarily related to the Aireon hosted payload operations center. Operating Expenses Cost of Services (exclusive of depreciation and amortization) Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services and cost of services for government and commercial engineering and support service revenue. Cost of services (exclusive of depreciation and amortization) decreased by$2.5 million , or 10%, for the three months endedJune 30, 2020 from the prior year period, primarily as a result of a decrease in in-orbit insurance costs, which were amortized over a one-year period from the in-service date, as we completed the placement of upgraded satellites in-orbit inFebruary 2019 . Cost of services also decreased due to the lower volume of contracted engineering work to enable services for theU.S. government. This decrease was offset in part by higher costs to support the new EMSS contract and an increase in the volume of contracted commercial engineering and support services. Cost of Subscriber Equipment Cost of subscriber equipment includes the direct costs of equipment sold, which consist of manufacturing costs, allocation of overhead, and warranty costs. Cost of subscriber equipment decreased by$1.3 million , or 10%, for the three months endedJune 30, 2020 compared to the prior year period primarily due to the decrease in handset and IoT device sales, as described above. Research and Development Research and development expenses decreased by$1.9 million , or 44%, for the three months endedJune 30, 2020 compared to the prior year period due to decreased spend on devices for our upgraded network. Selling, General and Administrative Selling, general and administrative expenses that are not directly attributable to the sale of services or products include sales and marketing costs as well as employee-related expenses (such as salaries, wages, and benefits), legal, finance, information technology, facilities, billing and customer care expenses. Selling, general and administrative expenses remained relatively flat, for the three months endedJune 30, 2020 compared to the prior year period. The overall increase of$0.1 million , or 1%, was primarily due to an increase in legal fees and stock appreciation rights expense resulting from changes in our stock valuation between the respective reporting periods, partially offset by a decrease in management incentive compensation and decreased spend on travel associated with COVID-19 restrictions. Depreciation and Amortization Depreciation and amortization expense remained relatively flat as we completed the replacement of our first-generation satellites inFebruary 2019 . As the upgraded satellites are the largest proportion of our asset base, we anticipate depreciation and amortization expense to remain relatively consistent from quarter to quarter based on our anticipated capital expenditures. 22 -------------------------------------------------------------------------------- Other Expense Interest Expense, Net Interest expense, net decreased$6.5 million for the three months endedJune 30, 2020 compared to the prior year period. The decrease in interest expense is primarily related to the impacts of the refinancing of our debt including a decrease in the weighted average effective interest rate and lower average outstanding borrowings under our total debt obligations. Income Tax Benefit For the three months endedJune 30, 2020 , our income tax benefit was$4.6 million , compared to income tax benefit of$7.8 million for the prior year period. The decrease in income tax benefit is primarily related to a decrease in loss before income taxes compared to the prior year. The decrease also resulted from a reduced stock compensation benefit compared to the prior year and prior year nonrecurring adjustments to our deferred tax assets and liabilities related to state law changes. Net Loss Net loss was$12.4 million for the three months endedJune 30, 2020 , compared to a net loss of$18.1 million for the prior year period. The change primarily resulted from the$6.5 million decrease in interest expense and the$5.0 million decrease in operating expenses, partially offset by the$2.9 million decrease in total revenues and the$3.2 million decrease in income tax benefit, as described above. Comparison of Our Results of Operations for the Six Months EndedJune 30, 2020 and 2019 Six Months Ended June 30, % of % of Change Total Total ($ in thousands) 2020 Revenue 2019 Revenue Dollars Percent Revenue: Services$ 229,325 80 %$ 217,748 79 %$ 11,577 5 % Subscriber equipment 42,078 15 % 44,428 16 % (2,350 ) (5 )% Engineering and support services 14,057 5 % 14,609 5 % (552 ) (4 )% Total revenue 285,460 100 % 276,785 100 % 8,675 3 % Operating expenses: Cost of services (exclusive of depreciation and amortization) 45,112 16 % 48,128 17 % (3,016 ) (6 )% Cost of subscriber equipment 24,343 8 % 25,801 9 % (1,458 ) (6 )% Research and development 4,824 2 % 7,896 3 % (3,072 ) (39 )% Selling, general and administrative 41,925 15 % 44,810 16 % (2,885 ) (6 )% Depreciation and amortization 151,606 53 % 148,042 54 % 3,564 2 % Total operating expenses 267,810 94 % 274,677 99 % (6,867 ) (3 )% Operating income 17,650 6 % 2,108
1 % 15,542 737 %
Other expense: Interest expense, net (48,950 ) (17 )% (54,583 ) (20 )% 5,633 (10 )% Loss on extinguishment of debt (30,209 ) (11 )% (207 ) - % (30,002 ) 14,494 % Other income (expense), net 127 - % (952 ) - % 1,079 (113 )% Total other expense, net (79,032 ) (28 )% (55,742 ) (20 )% (23,290 ) 42 % Loss before income taxes (61,382 ) (22 )% (53,634 ) (19 )% (7,748 ) 14 % Income tax benefit 17,258 6 % 17,504 6 % (246 ) (1 )% Net loss$ (44,124 ) (16 )%$ (36,130 ) (13 )%$ (7,994 ) 22 % 23
-------------------------------------------------------------------------------- Revenue Commercial Service Revenue Six Months Ended June 30, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) ARPU (2) Revenue Subscribers (1) ARPU (2) Revenue Subscribers ARPU (Revenue in millions and subscribers in thousands) Commercial services: Voice and data$ 84.0 349$ 40 $ 84.8 358$ 39 $ (0.8 ) (9 )$ 1 Broadband (3) 17.2 11.1 262 14.2 10.2 238 3.0 0.9 24 IoT data 46.4 863 9.29 46.4 720 11.31 - 143 (2.02 ) Hosted payload and other data 31.7 N/A 25.8 N/A 5.9 N/A Total commercial services$ 179.3 1,223$ 171.2 1,088$ 8.1 135
(1) Billable subscriber numbers shown are at the end of the respective period.
(2) Average monthly revenue per unit, or ARPU, is calculated by dividing
revenue in the respective period by the average of the number of billable
subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period. Billable subscriber and ARPU data is not applicable for hosted payload and other data service revenue items. (3) Commercial broadband consists of Iridium OpenPort and Iridium Certus
broadband services, which were previously reported in commercial voice and
data revenue. Prior year periods have been conformed to this presentation.
For the six months endedJune 30, 2020 , total commercial service revenue increased from the prior year period by$8.1 million , or 5%, primarily due to increased hosted payload and other data services revenue and increased commercial broadband revenue. Hosted payload and other data service revenue increased$5.9 million , or 23%, primarily due to increased Aireon data service fees related to a contractual step-up and increased Aireon power fees. Commercial broadband revenue increased$3.0 million , or 21%, from the prior year period, principally due to sales of Iridium Certus broadband services, which were commercially introduced inJanuary 2019 . These increases were partially offset by a$0.8 million , or 1%, decline in commercial voice and data revenue from the prior year period resulting from a decrease in usage based on mobility restrictions associated with the COVID-19 pandemic. Commercial IoT data revenue remained flat for the six months endedJune 30, 2020 , at$46.4 million , primarily as a result of a decline in usage, also associated with the COVID-19 pandemic. Government Service Revenue Six Months Ended June 30, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) Revenue Subscribers (1) Revenue Subscribers (Revenue in millions and subscribers in thousands) Government services$ 50.0 139$ 46.5 125$ 3.5 14
(1) Billable subscriber numbers shown are at the end of the respective period.
We provide airtime and airtime support toU.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services contract, or the EMSS Contract. Under the terms of this agreement, authorized customers utilize specified Iridium airtime services provided through theU.S. government's dedicated gateway. The fee is not based on subscribers or usage, allowing an unlimited number of users access to these services. For the six months endedJune 30, 2020 , government service revenue increased$3.5 million from the prior year period as a result of the higher pricing in the new EMSS Contract. 24 -------------------------------------------------------------------------------- Subscriber Equipment Revenue Subscriber equipment revenue decreased by$2.4 million , or 5%, for the six months endedJune 30, 2020 compared to the prior year period, primarily due to a decrease in the volume of handset and IoT device sales, due to the impact of the COVID-19 pandemic, partially offset by the higher average selling price on our L-band transceivers. Engineering and Support Service Revenue Six Months Ended June 30, 2020 2019 Change (Revenue in millions)
Commercial engineering and support services $ 2.1
11.9 13.6 (1.7 ) Total engineering and support services $ 14.0 $
14.6
Engineering and support service revenue decreased$0.6 million , or 4%, for the six months endedJune 30, 2020 compared to the prior year period primarily as a result of a decrease in the volume of contracted work to enable services for theU.S. government, offset by an increase in the volume of work for commercial customers, primarily related to the Aireon hosted payload operations center. Operating Expenses Cost of Services (exclusive of depreciation and amortization) Cost of services (exclusive of depreciation and amortization) decreased by$3.0 million , or 6%, for the six months endedJune 30, 2020 from the prior year period, primarily as a result of a decrease in in-orbit insurance costs, which are amortized over a one-year period from the in-service date, as we completed the placement of upgraded satellites in-orbit inFebruary 2019 . This decrease was offset in part by a higher costs to support the new EMSS contract and higher satellite operations support associated with higher levels of activity directed towards operating the completed system. Cost of Subscriber Equipment Cost of subscriber equipment decreased by$1.5 million , or 6%, for the six months endedJune 30, 2020 compared to the prior year period primarily due to the decrease in the volume of handset and IoT device sales, as described above. Research and Development Research and development expenses decreased by$3.1 million , or 39%, for the six months endedJune 30, 2020 compared to the prior year period due to decreased spend on devices for our upgraded network. Selling, General and Administrative Selling, general and administrative expenses decreased by$2.9 million , or 6%, for the six months endedJune 30, 2020 compared to the prior year period, primarily due to a decrease in management incentive compensation and decreased spend on travel associated with COVID-19 restrictions. The decrease was also related to a decrease in stock appreciation rights expense resulting from changes in our stock valuation between the respective reporting periods. These decreases were offset by an increase in wages associated with an increase in headcount in our general and administrative functions as well as higher legal fees. Depreciation and Amortization Depreciation and amortization expense increased by$3.6 million , or 2%, for the six months endedJune 30, 2020 compared to the prior year period, primarily due to the increased number of upgraded satellites in service during the current period as we completed the replacement of our first-generation satellites inFebruary 2019 . As the upgraded satellites are the largest proportion of our asset base, we anticipate depreciation and amortization to remain relatively consistent from period to period for the next several years. Other Expense Interest Expense, Net Interest expense, net decreased$5.6 million for the six months endedJune 30, 2020 compared to the prior year period. The decrease in interest expense is primarily related to the impacts of the refinancing of our debt including a decrease in the weighted average effective interest rate and lower average outstanding borrowings under our total debt obligations. 25 -------------------------------------------------------------------------------- Loss on Extinguishment of Debt Loss on extinguishment of debt was$30.2 million for the six months endedJune 30, 2020 , compared to$0.2 million for the prior year period. DuringFebruary 2020 , we closed on an additional$200.0 million under our Term Loan and used these proceeds, together with cash on hand, to prepay all of the indebtedness outstanding under the Notes, including premiums for early prepayment. In conjunction with the prepayment of the Notes, we wrote off the remaining unamortized debt issuance costs, resulting in the$30.2 million loss on extinguishment of debt. In the prior year period, we used hosting fees received from Aireon to extinguish debt. Income Tax Benefit For the six months endedJune 30, 2020 , our income tax benefit was$17.3 million , compared to income tax benefit of$17.5 million for the prior year period. The decrease in income tax benefit is primarily related to a reduced stock compensation benefit compared to the prior year. This decrease was partially offset by a decrease in loss before income taxes compared to the prior year, as well as prior year nonrecurring adjustments to our deferred tax assets and liabilities related to state law changes. Net Loss Net loss was$44.1 million for the six months endedJune 30, 2020 , compared to net loss of$36.1 million for the prior year period. The change primarily resulted from the$30.0 million increase in loss on extinguishment of debt and the$3.6 million increase in depreciation and amortization expense, partially offset by the$8.7 million increase in total revenues, the$10.4 million decrease in other operating expenses and the$5.6 million decrease in interest expense, as described above.
Liquidity and Capital Resources
InNovember 2019 , we borrowed$1,450.0 million under our Term Loan, with an accompanying$100.0 million revolving loan, or the Revolving Facility. We used the proceeds of the Term Loan, cash in our debt service reserve account and cash on hand to repay in full all of the indebtedness outstanding under our previous loan facility with Bpifrance Assurance Export S.A.S., including premiums for early prepayment. InFebruary 2020 , we borrowed an additional$200.0 million under our Term Loan and used the proceeds and cash on hand to repay in full and retire all of the indebtedness outstanding under our Notes, including premiums for early repayment. As ofJune 30, 2020 , we reported an aggregate balance of$1,645.9 million in borrowings under the Term Loan, before$25.8 million of net deferred financing costs, for a net principal balance of$1,620.1 million outstanding in our condensed consolidated balance sheet. We have not drawn on our Revolving Facility. Our Term Loan contains no financial maintenance covenants. With respect to the Revolving Facility, we are required to maintain a consolidated first lien net leverage ratio of no greater than 6.25 to 1 if more than 35% of the Revolving Facility has been drawn. The Credit Agreement contains other customary representations and warranties, affirmative and negative covenants, and events of default. As ofJune 30, 2020 , our total cash and cash equivalents balance was$119.1 million , and we had$100.0 million of borrowing availability under our Revolving Facility. In addition to the Revolving Facility, our principal sources of liquidity are cash, cash equivalents and internally generated cash flows. Our principal liquidity requirements over the next twelve months are principal and interest on the Term Loan.
We believe our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.
Cash Flows The following table summarizes our cash flows: Six Months EndedJune 30, 2020 2019
Change
(in thousands)
Cash provided by operating activities
40,444
Cash used in investing activities
83,926
Cash used in financing activities
26 --------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities
Net cash provided by operating activities for the six months endedJune 30, 2020 increased by$40.4 million from the prior year period principally due to an increase in cash from working capital changes of approximately$22.2 million . This increase was primarily the result of an improvement in accounts receivable collections related to the timing of the extensions under the EMSS contract, as well as lower purchases of inventory in 2020, compared to the prior year. These improvements were offset in part by a decrease in interest payable compared to the prior year. InNovember 2019 andFebruary 2020 , we replaced our Credit Facility and Notes, respectively, with the Term Loan, resulting in monthly interest payments and an increase in cash used compared to previous semi-annual interest payments. As a result, there is minimal interest payable in the 2020 working capital balance for the new Term Loan. Additionally, net loss adjusted for non-cash activities increased$18.2 million over the prior year, primarily attributable to the non-cash$30.0 million increase in the loss on extinguishment of debt.
Cash Flows Used in Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2020 decreased by$83.9 million compared to the prior year period primarily due to a decrease in capital expenditures as we completed payments for the construction of our upgraded constellation in the prior year. We continue to estimate our long-term capital expenditures at approximately$35.0 million per year. Cash Flows Used in Financing Activities Net cash used in financing activities for the six months endedJune 30, 2020 increased by$131.6 million compared to the prior year period primarily due to utilizing our cash to pay down additional debt in the current year. This resulted in net principal payments and related costs of$185.6 million for the first half of 2020, compared to a$54.0 million principal payment on the Credit Facility in the first half of 2019. See Note 5 to our condensed consolidated financial statements included in this report for further discussion of our indebtedness.
Off-Balance Sheet Arrangements
We do not currently have, nor have we had in the last three years, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Seasonality
Our results of operations have been subject to seasonal usage changes for commercial customers, and our results will be affected by similar seasonality going forward. March through October are typically the peak months for commercial voice services revenue and related subscriber equipment sales.U.S. government revenue and commercial IoT revenue have been less subject to seasonal usage changes. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, useful lives of property and equipment, long-lived assets and other intangible assets, deferred financing costs, income taxes, stock-based compensation, and other estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onFebruary 25, 2020 . Recent Accounting Pronouncements Refer to Note 2 to our condensed consolidated financial statements for a full description of recent accounting pronouncements and recently adopted pronouncements. 27
--------------------------------------------------------------------------------
© Edgar Online, source