GLOBALSTAR, INC. 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 endedDecember 31, 2019 , as filed with theSecurities and Exchange Commission (the "SEC") onFebruary 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 ®
("Duplex");
• one-way or two-way communication and data transmissions using mobile
devices, including our SPOT family of products, such as SPOT X®, SPOT
Gen3® and SPOT Trace®, that transmit messages and the location of the
device ("SPOT"); and
• 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 STINGR ("Commercial IoT").
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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 are the following: the development of a two-way module to
expand our Commercial IoT offerings; various connectivity solutions for the
automotive market; additional derivatives of our Sat-Fi2® device; and a
miniaturized satellite-based animal tracking device.
Customers
The specialized needs of our global customers span many industries. As of
March 31, 2020 , we had approximately 763,000 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.
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In
InDecember 2016 , theFCC 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, throughoutthe United States of America and its Territories. InAugust 2017 , theFCC modifiedGlobalstar's MSS licenses, granting us authority to provide terrestrial broadband services over a portion of our satellite spectrum. Specifically, theFCC modifiedGlobalstar'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 obtainingFCC 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 certain 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. InDecember 2018 , we were successful in obtaining approval to create a new defined band class, Band 53, from theThird Generation Partnership Project (3GPP) for our 2.4 GHz terrestrial spectrum. Additionally, inMarch 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
InMarch 2020 , theWorld 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 months endedMarch 31, 2020 partially reflect this impact; however, we expect that this trend may continue and the full extent of the impact is unknown. If consumer 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
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
• Supporting our 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.
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--------------------------------------------------------------------------------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 months ended
Overall, our results of operations for the three months endedMarch 31, 2020 were not materially 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 increased$2.1 million , or approximately 7%, to$32.2 million for the three months endedMarch 31, 2020 from$30.1 million for the same period in 2019. This increase was due to higher service revenue primarily driven by engineering services revenue as well as an increase in Commercial IoT subscribers and ARPU, partially offset by fewer Duplex and SPOT subscribers, as well as lower subscriber equipment sales revenue, mainly attributed to lower Commercial IoT subscriber equipment sales.
The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands).
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019
% of Total % of Total
Revenue Revenue Revenue Revenue
Service revenue:
Duplex $ 7,663 24 % $ 8,645 29 %
SPOT 12,123 38 13,095 44
Commercial IoT 4,310 13 3,698 12
IGO 91 - 166 1
Engineering and other 4,748 15 515 1
Total $ 28,935 90 % $ 26,119 87 %
The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands).
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019
% of Total % of Total
Revenue Revenue Revenue Revenue
Subscriber equipment sales:
Duplex $ 404 1 % $ 251 1 %
SPOT 1,407 4 1,591 5
Commercial IoT 1,413 5 2,072 7
Other 35 - 45 -
Total $ 3,259 10 % $ 3,959 13 %
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The following table sets forth our average number of subscribers and ARPU by
type of revenue.
Three Months Ended March 31,
2020 2019
Average number of subscribers for the period:
Duplex 52,054 59,978
SPOT 271,276 288,840
Commercial IoT 418,424 384,673
IGO 26,256 27,017
Engineering and other 883 953
Total 768,893 761,461
ARPU (monthly):
Duplex $ 49.07 $ 48.05
SPOT 14.90 15.11
Commercial IoT 3.43 3.20
IGO 1.16 2.05
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 11% due primarily to a 13% decrease in average subscribers as ARPU was generally flat quarter over quarter. The decrease in average subscribers was due to lower gross activations resulting from fewer equipment sales over the last twelve months as well as normal churn in the subscriber base. We have various initiatives underway to drive higher Duplex equipment sales, which will in turn increase activations. Refer to our discussion of Duplex equipment sales below for further discussion. SPOT service revenue decreased 7% due primarily to lower ARPU after adjusting for non-revenue-producing subscribers, which were included in our subscriber count during the first quarter of 2019 and were subsequently deactivated. Over the last twelve months, we deactivated approximately 12,000 nonpaying customers, particularly inLatin America , and approximately 5,000 customers due to inadvertent credit card processing issues resulting from a change in merchant service processors. Excluding this involuntary churn, average subscribers would have decreased 1% quarter over quarter. The decrease in ARPU was due 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 increased 17% due to increases in both average subscribers and ARPU. The increase in average subscribers of 9% was driven by Commercial IoT equipment sales during the last twelve months. The additional subscribers particularly resulted from the success of our SmartOne SolarTM device. Higher volume of other Commercial IoT products also contributed to an increase in subscriber activations, increasing the average subscribers during the quarter. The 7% increase in ARPU was driven in part by higher usage and a more favorable blend of rate plans in place for certain Commercial IoT subscribers. We expect that ARPU may be impacted in the future by expected COVID-19-related reductions in service pricing for certain of our customers that operate predominantly in the oil and gas market. 23 -------------------------------------------------------------------------------- Engineering and other service revenue increased$4.2 million for the three months endedMarch 31, 2020 compared to the same period in 2019. This increase was 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 for the three months endedMarch 31, 2020 compared to the same period in 2019. The increase in revenue was driven by sales of our Sat-Fi2®Remote Antenna Station ("RAS") device launched inOctober 2019 , and sales of our improved Sat-Fi2® device launched inSeptember 2019 , which expand the use cases for the Sat-Fi2® device. Higher volume and pricing contributed to the increase in revenue from these devices; Sat-Fi2® RAS is sold at a higher selling price than our original version of Sat-Fi2®. Higher volume of our GSP-1700 phone also contributed to the increase in revenue. Offsetting these increases was a decline in the volume of Duplex accessories as well as fixed devices and data modems due to the availability of these first-generation products. Revenue from SPOT equipment sales decreased$0.2 million for the three months endedMarch 31, 2020 compared to the same period in 2019. We sell component parts to our manufacturer to use in final products. During the three months endedMarch 31, 2020 production of certain devices (and related volume of component part sales to our primary product manufacturer) decreased as compared to the prior year period due to sufficient inventory on hand to meet expected demand as well as supply chain delays caused by COVID-19, contributing$0.4 million to the revenue decrease. Excluding this decrease, revenue from SPOT equipment sales increased$0.2 million due to higher volume of all of our core SPOT products, but primarily SPOT Gen3® and SPOT X®. The impact on revenue due to pricing was not a meaningful variance during the quarter. Revenue from Commercial IoT equipment sales decreased$0.7 million for the three months endedMarch 31, 2020 compared to the same period in 2019. A decrease in demand for our Commercial IoT products resulting from the impact of COVID-19 drove the variance in revenue quarter over quarter.
Operating Expenses
Total operating expenses decreased$2.1 million , or 4%, to$46.3 million for the three months endedMarch 31, 2020 compared to the same period 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 quarter. Cost of Services Cost of services decreased$1.1 million for the three months endedMarch 31, 2020 compared to the same period in 2019. This decrease was due primarily to lower research and development costs of$0.5 million associated with new product development as well as lower personnel and contractor costs of$0.5 million due to fewer engineers and capital projects.
Cost of Subscriber Equipment Sales
Cost of subscriber equipment sales decreased$0.5 million for the three months endedMarch 31, 2020 from the same period in 2019. This decrease is generally consistent with the decline in revenue generated from subscriber equipment sales during the period, particularly driven by the decrease in Commercial IoT equipment. Offsetting the decrease in cost of subscriber equipment sales for the quarter was the recognition of tariffs. As previously disclosed in Note 10: Contingencies of our 2019 Annual Report, inSeptember 2019 ,U.S Customs and Border Protection ("CBP") issued a ruling related to the classification of certain of our core products imported fromChina , resulting in 25% tariffs upon import. During the first quarter of 2020, we recorded$0.2 million for tariffs, which increased on our cost of subscriber equipment during the period (and was not incurred during the first quarter of 2019).
Marketing, General and Administrative
Marketing, general and administrative expenses decreased$0.5 million for the three months endedMarch 31, 2020 compared to the same period in 2019. This decrease was due primarily to nonrecurring subscriber acquisition costs of$0.5 million due to the timing of event sponsorships and market research in the first quarter of 2019; these costs did not recur in 2020. Although not a driver of the change in total MG&A expense, bad debt expense was elevated in both periods. During the first quarter of 2020, we recorded reserves related to certain customer receivable balances that we do not believe are collectible due to the impact of COVID-19. During the first quarter of 2019, we reserved an aged receivable from an IGO that was deemed to be uncollectible. 24 --------------------------------------------------------------------------------
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion expense remained flat at
Other Income (Expense) Interest Income and Expense Interest income and expense, net, increased$1.1 million during the three months endedMarch 31, 2020 , compared to the same period in 2019. This increase was driven by higher gross interest costs of$1.5 million and lower interest income of$0.3 million ; these items were offset by higher capitalized interest of$0.7 million (which decreases interest expense). The increase in gross interest costs was due to$7.9 million of interest (including$1.0 million of accretion of debt discount and amortization of deferred financing costs) associated with the Second Lien Term Loan Facility that we entered into inNovember 2019 ; this increase was offset by lower interest costs of$4.7 million associated with the Facility Agreement (including$1.3 million of amortization of deferred financing costs) and$1.7 million associated with the Loan Agreement with Thermo (including$0.3 million of accretion of debt discount). Lower interest costs for the Facility Agreement were due to the modification of the Facility Agreement inNovember 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). 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 inFebruary 2020 (which resulted in no interest expense or accretion of debt discount after the date of conversion as the balances were written off upon conversion). Remaining items contributing to the remaining variance were not material.
Derivative (Loss) Gain
Derivative (loss) gain was a loss of
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 loss recorded during the first quarter of 2020 was impacted by an increase in the discount yield used in the valuation of the embedded derivative associated with our Second Lien Term Loan Facility Agreement. The gain recorded during the first quarter of 2019 was impacted primarily by a lower stock price and stock price volatility, primarily associated with the valuation of the embedded derivative with the Loan Agreement with Thermo. 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 (Loss) Gain
Foreign currency (loss) gain fluctuated by$9.1 million to a loss of$9.0 million for the three months endedMarch 31, 2020 from a gain of$0.1 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 foreign currencies, including primarily the Brazilian real, euro and Canadian dollar. The strengthening of theU.S. dollar relative to the Brazilian real and the Canadian dollar during the first quarter of 2020 unfavorably impacted our condensed consolidated statement of operations$4.1 million and$3.2 million , respectively. 25
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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, loan proceeds from the payroll protection program under the CARES Act, and proceeds from the exercise of warrants held by our Second Lien Term Loan Facility lenders. Our operating cash flows could 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 inJune 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, the Company currently expects that its sources of liquidity over the next twelve months will be sufficient to cover its obligations. As ofMarch 31, 2020 , we held cash and cash equivalents of$10.5 million and restricted cash of$51.1 million . As ofDecember 31, 2019 , we held cash and cash equivalents of$7.6 million and restricted cash of$51.5 million . Restricted cash will generally be used towards the final scheduled payment due upon maturity of the Facility Agreement inDecember 2022 . The carrying amount of our long-term debt outstanding was$356.0 million atMarch 31, 2020 , compared to$464.2 million atDecember 31, 2019 . We had no current debt outstanding atMarch 31, 2020 orDecember 31, 2019 following the amendment to the principal amortization schedule in our Facility Agreement inNovember 2019 . The$108.1 million decrease in the carrying amount of our total debt balance was due to the following: 1) the conversion of the Loan Agreement with Thermo inFebruary 2020 into shares of common stock, resulting in a$116.5 million reduction in net debt and 2) payments of$0.3 million towards the Facility Agreement resulting from certain conditions subsequent resulting from the amendment inNovember 2019 . These decreases were offset by 1) a higher carrying value of the Second Lien Term Loan Facility of$7.7 million due to the accrual of PIK interest and the accretion of debt discount and 2) a higher carrying value of the Facility Agreement of$1.0 million due to amortization of deferred financing costs.
Indebtedness and Available Credit
First Lien Facility Agreement
In 2009, we entered into the Facility Agreement, which was amended and restated inJuly 2013 ,August 2015 ,June 2017 andNovember 2019 . The Facility Agreement is scheduled to mature inDecember 2022 . As ofMarch 31, 2020 , the principal amount outstanding under the Facility Agreement was$190.1 million . 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 ofMarch 31, 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; at this time, we expect we will remain in compliance with such covenants over the next twelve months as calculated under the terms of the Facility Agreement. 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 ofMarch 31, 2020 , the balance in the debt service reserve account was$51.1 million and is classified as non-current on our consolidated balance sheet as it is expected to be used towards the final scheduled payment due upon maturity of the Facility Agreement inDecember 2022 . The amended and restated Facility Agreement includes a requirement that we raise no less than$45.0 million of equity prior toMarch 31, 2021 via the cash exercise of outstanding warrants or other equity to be applied towards the principal payment due onJune 30, 2021 and then, if applicable, to the next scheduled principal payments. We currently expect to fulfill this requirement with proceeds from the warrants issued to the Second Lien Term Loan Facility lenders inNovember 2019 . 26
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See Note 5: 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 inNovember 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 ofMarch 31, 2020 , the principal amount outstanding under the Second Lien Term Loan Facility was$208.4 million .
As additional consideration for the loan, we issued the lenders warrants to
purchase 124.5 million shares of common stock an exercise price of
The Second Lien Term Loan Facility contains customary events of default and requires us to satisfy various financial and non-financial covenants. As ofMarch 31, 2020 , we were in compliance with all the covenants of the Second Lien Term Loan Facility. We continue to monitor the impact of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants; at this time, we expect we will remain in compliance with such covenants over the next twelve months as calculated under the terms of the Second Lien Term Loan Facility. See Note 5: 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 have 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
See Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements for further discussion of the Thermo Agreements.
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 ofMarch 31, 2020 , the principal amount outstanding of the 2013 8.00% Notes was$1.4 million . The 2013 8.00% Notes will mature onApril 1, 2028 , subject to various call and put features. Interest on the 2013 8.00% Notes is payable semi-annually in arrears onApril 1 andOctober 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. A holder of 2013 8.00% Notes has the right, at the holder's option, to require us to purchase some or all of the 2013 8.00% Notes onApril 1, 2023 at a price equal to the principal amount of the 2013 8.00% Notes to be purchased plus accrued and unpaid interest. The indenture governing the 2013 8.00% Notes provides for customary events of default. As ofMarch 31, 2020 , we were in compliance under 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.
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--------------------------------------------------------------------------------Loan under Payroll Protection Program
As previously discussed, we sought relief under the CARES Act, including receiving a$5.0 million loan under the payroll protection program inApril 2020 . The Company expects to apply for loan forgiveness, in accordance with the terms of the CARES Act, based on estimated payroll and other allowable costs expected to be incurred during the eight-week period following the date of the loan. Any amount not forgiven by theSmall Business Administration (the "SBA") is subject to an interest rate of 1.00% per annum commencing on the date of the loan with principal payments beginning inNovember 2020 and ending on the maturity date inApril 2022 . Our first and second lien lenders will require us to accelerate the repayment of any portion of the loan amount that is not forgiven.
Cash Flows for the three months ended
The following table shows our cash flows from operating, investing and financing
activities (in thousands):
Three Months Ended
March 31, March 31,
2020 2019
Net cash provided by operating activities $ 4,605 $ 1,325
Net cash used in investing activities (1,578 ) (2,261 ) Net cash used in financing activities (421 ) (193 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash (155 ) (14 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ 2,451 $ (1,143 )
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. 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 three months endedMarch 31, 2020 was$4.6 million compared to$1.3 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 as well as a reduction in operating expenses. Offsetting the increase due to higher net income after adjusting for non-cash items were unfavorable working capital changes were due primarily to the timing of vendor payments as well as a higher interest accrual during the first quarter of 2019 as our cash interest-bearing debt balance was greater during the prior year period. A decrease in our deferred revenue balance during the first quarter of 2020 also resulted in an unfavorable impact to cash flows from operations. These items were offset partially by favorable changes in prepaid and other current assets, driven in part by the final installment of$3.7 million received inJanuary 2020 from the 2018 settlement of a business economic loss claim.
Cash Flows Used in Investing Activities
Net cash used in investing activities was
Cash Flows Used in Financing Activities
There were no significant cash flows from financing activities during each of
the three month periods ending
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations and
commitments since
Off-Balance Sheet Transactions
We have no material off-balance sheet transactions.
28
--------------------------------------------------------------------------------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.
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