GLOBALSTAR, INC. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and applicable notes to our Consolidated Financial Statements and other information included elsewhere in this Report, including risk factors disclosed in Part I, Item IA. Risk Factors. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See "Forward-Looking Statements" at the beginning of this Report. 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 years ended
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.
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. During the twelve months endedDecember 31, 2021 , total revenue decreased$4.2 million to$124.3 million from$128.5 million in 2020. See below for a further discussion of the fluctuation in revenue. 28 --------------------------------------------------------------------------------
The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands).
Year Ended Year Ended
December 31, 2021 December 31, 2020
% of Total % of Total
Revenue Revenue Revenue Revenue
Service Revenue:
Duplex $ 31,197 25 % $ 33,878 27 %
SPOT 46,040 37 % 46,417 36 %
Commercial IoT 17,951 14 % 17,174 13 %
Engineering and Other 11,276 9 % 15,722 12 %
Total Service Revenue $ 106,464 85 % $ 113,191 88 %
The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands).
Year Ended Year Ended
December 31, 2021 December 31, 2020
% of Total % of Total
Revenue Revenue Revenue Revenue
Equipment Revenue:
Duplex $ 1,011 1 % $ 1,883 1 %
SPOT 9,427 8 % 8,176 7 %
Commercial IoT 7,169 6 % 5,140 4 %
Other 226 - % 97 - %
Total Equipment Revenue $ 17,833 15 % $ 15,296 12 %
The following table sets forth our average number of subscribers and ARPU by
type of revenue.
December 31,
2021 2020
Average number of subscribers for the year ended:
Duplex 45,789 50,116
SPOT 268,735 267,816
Commercial IoT 414,689 414,452
Other 26,864 27,264
Total 756,077 759,648
ARPU (monthly):
Duplex $ 56.78 $ 56.33
SPOT 14.28 14.44
Commercial IoT 3.61 3.45
The numbers reported in the above table are subject to immaterial rounding inherent in calculating averages.
During the twelve months endedDecember 31, 2021 , gross Duplex subscriber additions decreased 21% and SPOT subscriber additions increased 12%. The decrease in Duplex gross subscriber additions from 2020 to 2021 was impacted by a limited inventory of phones as well as the discontinuation of Sat-Fi2® device sales (discussed further below). The limited phone inventory restricts the volume of units that can be sold, activated and/or re-activated in a year. SPOT gross subscriber 29 -------------------------------------------------------------------------------- activations increased as we continue to see high demand for all of our SPOT devices, partially impacted by changes in consumer behavior resulting from COVID-19, driving more customers to purchase our SPOT products for outdoor recreational activities. All of our SPOT device types experienced an increase in gross additions during 2021. Because our Commercial IoT subscribers are able to activate and deactivate their units several times during the year, gross Commercial IoT subscriber additions are not considered to be a meaningful metric.
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 8% in 2021 due primarily to a decline in average subscribers of 9% offset by an increase in ARPU of 1%. 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 (approximately 2,000) 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. SPOT service revenue decreased 1% in 2021 due primarily to lower ARPU. ARPU has decreased since the introduction of lower priced service plans in mid-2019. The portion of our subscriber base on these lower-priced plans has increased over this period and are now fully absorbed into the subscriber base. Although average subscribers were generally flat year over year, we experienced higher gross activations, lower churn and higher ending subscribers during 2021 compared to 2020. Commercial IoT service revenue increased 5% in 2021 due to higher ARPU. The increase in ARPU was due to higher usage and the mix of our subscribers on higher rate plans compared to the prior year period. Although average subscribers were flat year over year, we experienced higher gross activations and lower churn during 2021. We replenished our subscriber base during 2021 after the negative impact from COVID-19 in 2020. Customer behavior has changed, indicating a recovery in demand. Gross activations have increased 5% and churn was 18% lower since 2020. Importantly, Commercial IoT equipment device sales increased approximately 40% compared to 2020 (discussed further below), which we believe is another indication that Commercial IoT service revenue is likely to grow in the future. Engineering and other service revenue decreased$4.4 million in 2021. This decrease was due primarily to the recognition of$2.9 million of revenue during the fourth quarter of 2020 associated with a contract that was executed in 2007 for the construction of a gateway inNigeria , upon its termination due to lack of performance by the partner, and our performance of all obligations in accordance with the terms of the contract. These remaining contract proceeds were previously held in non-current deferred revenue. The remaining decrease was due to the timing and amount of revenue recognized associated with the completion of certain milestones under the Terms Agreement. Among other items, the revenue recognized during 2021 included the reimbursement of costs associated with the gateway expansion project previously discussed.
Subscriber Equipment Sales
Revenue from Duplex equipment sales decreased$0.9 million , or 46%, in 2021. This decrease was driven primarily by lower volume of Sat-Fi2® device sales. As previously discussed, we have temporarily ceased sales of and services to subscribers for certain Duplex devices, including Sat-Fi2®, as we continue to evaluate opportunities for these devices relative to other product and service offerings. Revenue from SPOT equipment sales increased$1.3 million , or 15%, in 2021. We occasionally sell component parts to our equipment manufacturer to use in final products; these sales fluctuate based on the volume and price of parts that we directly source for the production of our equipment. Compared to 2020, we sold more component parts to our equipment manufacturer during 2021. Higher volume of SPOT Trace as well as improved pricing for all products, specifically driven by the amount and timing of promotions, also favorably impacted revenue from SPOT equipment sales. SPOT equipment sales were impacted by inventory shortages, which delayed the fulfillment of certain orders during the second half of 2021 and has continued into 2022. Revenue from Commercial IoT equipment sales increased$2.0 million , or 39%, in 2021. This increase resulted from a higher sales volume of all IoT devices, primarily driven by our SmartOne devices and modules. Sales were higher than the prior 30 -------------------------------------------------------------------------------- year despite the same component part shortage issues discussed above, which has resulted in sales orders exceeding available inventory supply. We 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 increased 1% to$189.8 million in 2021 from$187.7 million in 2020. Higher cost of services, cost of subscriber equipment sales as well as reductions in the value of inventory contributed to the increase in total operating expenses. Lower marketing, general and administrative costs and depreciation, amortization and accretion partially offset these increases. The main contributors to the variance in operating expenses are explained in further detail below. Cost of Services Cost of services increased$2.6 million , or 8%, to$37.4 million in 2021 from$34.8 million in 2020. The increase in cost of services was driven primarily by lease expense associated with new teleport leases which commenced throughout the second half of 2021. These leases were executed in connection with the gateway expansion project associated with the Terms Agreement, and the associated cost is being reimbursed to us beginning inDecember 2021 (as further discussed above in Engineering and other service revenue). Higher professional fees and licensing costs related to the implementation of a new Enterprise Resource Planning ("ERP") system, which went live inJanuary 2022 , also contributed to the increase in expense during 2021. These increases were offset slightly by lower maintenance costs resulting from revisions to contract terms with certain vendors for gateway and software maintenance.
Cost of Subscriber Equipment Sales
Cost of subscriber equipment sales increased by$0.3 million , or 2%, to$13.6 million in 2021 from$13.3 million in 2020. Cost of subscriber equipment sales increased due to higher subscriber equipment sales, offset partially by the reversal of a prior year accrual for potential tariffs. Pursuant to regulatory developments, we reversed this accrual for potential tariffs owed on imports fromChina made prior to a ruling by theU.S Customs and Border Protection inSeptember 2019 that we no longer believe will be due, resulting in an expense reduction of$1.0 million recognized during 2021. The improved equipment margin during 2021 was impacted by the mix of devices 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. This trend of lower labor costs was fully absorbed into our product costs during 2021 and is not expected to decrease costs in 2022.
Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory
During 2021, we recorded a reduction in the value of inventory totaling$1.0 million , including the write-off of certain Sat-Fi2® materials that are not likely to be used in production as well as defective inventory units that are not saleable. During 2020, we wrote down the value of inventory by$0.7 million following our decision to discontinue production of a second-generation Duplex device, as well as an evaluation of excess or obsolete inventory related to end of life products and technology.
Marketing, General and Administrative
Marketing, general and administrative expenses ("MG&A") decreased $0.3 million ,
or 1%, to $41.4 million in 2021 from $41.7 million in 2020. This decrease is due
primarily to lower credit losses, due in part to higher reserves recorded in
2020 related to specific customer receivable balances that were not expected to
be collectible due to financial difficulties resulting from the impact of
COVID-19; during 2021, we successfully recovered a portion of these previously
reserved customer balances. Lower dealer commissions and advertising expense
also contributed to the decrease in MG&A expenses. Offsetting the favorable
fluctuations in expenses were higher subscriber acquisition costs, including
certain customer appeasement credits that are not expected to recur, as well as
higher professional and legal fees for strategic opportunities.
31
--------------------------------------------------------------------------------Depreciation, Amortization and Accretion
Depreciation, amortization, and accretion expense decreased$0.6 million to$96.2 million in 2021 compared to$96.8 million in 2020. During 2018, we placed into service software-related assets associated with our second-generation ground system; a portion of these assets had a three year life and were fully depreciated in early 2021. Other (Expense) Income:
Gain on Extinguishment of Debt
We recorded a net gain on extinguishment of debt totaling$3.1 million during 2021 related to the following items: (i) gain on extinguishment of debt of$5.0 million resulting from theSmall Business Administration's ("SBA") forgiveness of amounts outstanding under our Paycheck Protection Program ("PPP") loan and (ii) net losses on extinguishment of debt of$1.9 million resulting from the write off of deferred financing costs following unscheduled principal repayments of the 2009 Facility Agreement during 2021. Similar activity did not occur in 2020.
Interest Income and Expense
Interest income and expense, net, decreased$4.9 million to expense of$43.5 million for 2021 compared to expense of$48.4 million for 2020. This decrease was driven by lower gross interest costs totaling$3.5 million as well as an increase to capitalized interest of$1.6 million (which decreases interest expense). Interest income and expense, net, was also impacted by a decrease in interest income totaling$0.2 million . Gross interest costs were impacted by lower interest associated with the 2009 Facility Agreement ($7.1 million ) and the Loan Agreement with Thermo ($2.9 million ); these items were offset partially by higher interest on the 2019 Facility Agreement ($4.7 million ) and imputed interest associated with the significant financing component related to advance payments from a customer ($1.9 million ). Interest costs for the 2009 Facility Agreement were favorably impacted by reductions in the principal balance over the last twelve months, including the final paydown inNovember 2021 , as well as a decrease in the interest rate driven by a reduction in LIBOR. As previously discussed, we made principal payments of the 2009 Facility Agreement totaling$187.0 million over the last twelve months, which reduced the principal amount outstanding to zero 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 inFebruary 2020 . Higher costs associated with the 2019 Facility Agreement are due to the rate of PIK interest accrued on the loan. Derivative (Loss) Gain We recorded derivative losses of$1.0 million and gains of$2.9 million in 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 losses recorded during 2021 were due primarily to an increase in our stock price and stock price volatility, which are significant inputs used in the valuation of the embedded derivative associated with our 2013 8.00% Notes. The gains recorded during 2020 were due primarily to a lower discount yield used in the valuation of the embedded derivative associated with our 2019 Facility Agreement. See Note 8: Fair Value Measurements to our 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$5.6 million to a loss of$6.3 million in 2021 from a loss of$0.7 million 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 each reporting period. During 2021, the foreign currency loss was due primarily to the weakening of the Euro and Brazilian real relative to theU.S. dollar. During 2020, the weakening of the Brazilian real relative to theU.S. dollar contributed to the foreign currency losses; these losses were partially offset by the strengthening of the Canadian dollar and the Euro. 32 --------------------------------------------------------------------------------
Other
Other income (expense) fluctuated to income of$0.4 million in 2021 compared to expense of$3.6 million in 2020. The primary expense in this line item are the non-operating components of net periodic benefit cost, including activity related to settlement of our pension liability. InDecember 2020 , we settled a portion of our pension liability due to certain participants; this settlement resulted in a loss of$2.1 million . We also recorded legal and other adviser costs incurred related to the modification of our 2009 Facility Agreement to non-operating expense under applicable accounting guidance. These costs decreased$0.9 million from 2020 to 2021.
Income Tax (Benefit) Expense
Income tax (benefit) expense fluctuated by$1.0 million to a benefit of$0.3 million in 2021 from expense of$0.7 million in 2020. The primary income tax (benefit) expense is related to deferred state tax liabilities associated with net operating loss limitations.
Comparison of the Results of Operations for the years ended
Discussion of the results of operations for the years endedDecember 31, 2020 and 2019 can be found in the Globalstar Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onMarch 4, 2021 . 33 --------------------------------------------------------------------------------
Liquidity and Capital Resources
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 expect that our current 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 indebtedness.
Overview
As ofDecember 31, 2021 , we held cash and cash equivalents of$14.3 million . As ofDecember 31, 2020 , we held cash and cash equivalents of$13.3 million and restricted cash of$54.7 million . We used the funds received under the Terms Agreement together with cash on hand and in our restricted cash account to pay down the remaining outstanding balance of the 2009 Facility Agreement during 2021. The total carrying amount of our long-term debt outstanding was$237.9 million atDecember 31, 2021 , compared to$385.4 atDecember 31, 2020 . AtDecember 31, 2021 , there was no current portion of debt outstanding. AtDecember 31, 2020 , the current portion of our debt outstanding was$58.8 million and represented the scheduled payments under the 2009 Facility Agreement and the Paycheck Protection Program PPP Loan due within one year of the balance sheet date. The$147.5 million decrease in the carrying amount of our total debt balance was due primarily to principal payments of the 2009 Facility Agreement totaling$187.0 million during 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 2019 Facility Agreement of$38.1 million due to the accrual of PIK interest and the accretion of debt discount as well as$6.4 million related to the amortization of deferred financing costs and write-off of deferred financing costs for the 2009 Facility Agreement.
Cash Flows for the years ended
The following table shows our cash flows from operating, investing and financing
activities (in thousands):
Year Ended December 31,
Statements of Cash Flows 2021 2020 2019
Net cash provided by operating activities $ 131,881 $ 22,215 $ 3,048
Net cash used in investing activities (45,186) (14,536) (11,491)
Net cash (used in) provided by financing activities (140,282) 1,164 (7,923)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(132) 52 4
Net (decrease) increase in cash, cash equivalents and restricted
cash $ (53,719) $ 8,895 $ (16,362) 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 services. We use cash in operating activities primarily for personnel costs, inventory purchases and other general corporate expenditures. Net cash provided by operating activities was$131.9 million during 2021 compared to$22.2 million during 2020. During 2021, the primarily driver for the increase in cash flows provided by operating activities was advance payments received under the Terms Agreement by a customer totaling$111.4 million , which were recorded as deferred revenue (see Note 2: Revenue in our Consolidated Financial Statements for further discussion). 34 -------------------------------------------------------------------------------- During 2020, the primarily drivers for the increase in cash flows provided by operating activities were higher net income after adjusting for non-cash items due to lower interest payments and operating expenses. Partially offsetting higher net income were unfavorable working capital changes due primarily to an increase in accounts receivable and a decrease in deferred revenue, which were both driven by the timing of services delivered under our subscriber and engineering service contracts relative to the timing of cash receipts. Offsetting these unfavorable items were higher inventory sales as well as fewer inventory purchases and 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$45.2 million during 2021 compared to$14.5 million during 2020. The nature of our capital expenditures for both 2021 and 2020 primarily relates to network upgrades. The increase in net cash used in investing activities during 2021 was related primarily to network upgrades associated with the Terms Agreement, including higher costs associated with the procurement and deployment of new antennas for our gateways and the preparation and launch of our on-ground spare satellite. Net cash used in investing activities was$14.5 million during 2020 compared to$11.5 million during 2019. During both 2020 and 2019, our capital expenditures were related to the procurement and deployment of new antennas for our gateways. Additionally, in both years, we incurred costs for other initiatives, including our new billing system, which was placed into service inApril 2020 , as well as product development, including software and other back-office efforts.
Cash Flows Provided by (Used in) Financing Activities
Net cash used in financing activities was$140.3 million in 2021 compared to net cash provided by financing activities of$1.2 million in 2020. During 2021, we paid off the remaining principal balance due under the 2009 Facility Agreement of$187.0 million (see further discussion below). InMarch 2021 , we received$43.7 million in proceeds from the exercise of the warrants issued with our 2019 Facility Agreement and, inDecember 2021 , we received a partial refund of premiums previously paid for the 2009 Facility Agreement of$2.6 million . Net cash provided by financing activities was$1.2 million in 2020 compared to net cash used in financing activities of$7.9 million in 2019. InApril 2020 , we received proceeds of$5.0 million from the PPP Loan (discussed below); these proceeds were offset by mandatory prepayments of principal on our 2009 Facility Agreement totaling$3.4 million as well as the timing of payments for debt financing costs from our refinancing in 2019 totaling$1.1 million .
Indebtedness
2019 Facility Agreement
In
During 2021, we fully paid down the remaining balance of the 2009 Facility Agreement. As a result of this pay off, the lenders of the 2019 Facility Agreement are now senior lenders. Our obligations under the 2019 Facility Agreement are guaranteed on a senior secured basis by all of our domestic subsidiaries' assets and are secured by a first priority lien on substantially all of our assets and our domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of our domestic subsidiaries and 65% of the equity of certain foreign subsidiaries. In anticipation of business strategies related to projected capital expenditures, potential future vendor financing, termination of theGlobalstar pension plan, and expected redemption of the 2013 8.00% Notes, we received waivers from our senior lenders inAugust 2021 andJanuary 2022 to permit such transactions. As additional consideration for the loan, we issued the lenders warrants to purchase 124.5 million shares of voting common stock at an exercise price of$0.38 per share. All of these warrants have been exercised resulting in proceeds of$47.3 million . 35 -------------------------------------------------------------------------------- The 2019 Facility Agreement contains customary events of default and requires us to satisfy various financial and non-financial covenants. The compliance calculations of the financial covenants of the 2019 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 2019 Facility Agreement, and the lenders could accelerate payment of the indebtedness. As ofDecember 31, 2021 , we were in compliance with all the covenants of the 2019 Facility Agreement. The 2019 Facility Agreement requires mandatory prepayments of principal with any Excess Cash Flow (as defined and calculated in the 2019 Facility Agreement) on a semi-annual basis. If we generate Excess Cash Flow in 2022, we will be required to make such prepayments. These payments would reduce future principal payment obligations.
See Note 6: Long-Term Debt and Other Financing Arrangements in our Consolidated Financial Statements for further discussion of the 2019 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 ofDecember 31, 2021 , 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 to require us to purchase some or all
of the 2013 8.00% Notes on
The indenture governing the 2013 8.00% Notes provides for customary events of default. As ofDecember 31, 2021 , we were in compliance with the terms of the 2013 8.00% Notes and the Indenture.
See Note 6: Long-Term Debt and Other Financing Arrangements in our Consolidated Financial Statements for further discussion of the 2013 8.00% Notes.
InFebruary 2022 , we notified the holders of the 8.00% Notes of our intention to redeem all of the outstanding amount of principal and accrued interest, totaling$1.5 million . This redemption is expected to occur inMarch 2022 and be paid in cash if the holders do not convert their 8.00% Notes prior to the redemption date. 2009 Facility Agreement In 2009, we entered into a 2009 facility agreement (the "2009 Facility Agreement"), which was amended and restated inJuly 2013 ,August 2015 ,June 2017 andNovember 2019 . The 2009 Facility Agreement was fully repaid inNovember 2021 prior to its scheduled maturity inDecember 2022 . As ofDecember 31, 2021 , there was no principal amount outstanding under the 2009 Facility Agreement. The 2009 Facility Agreement required mandatory prepayments of principal with any Excess Cash Flow (as defined and calculated in the 2009 Facility Agreement) on a semi-annual basis. During 2021, we were required to pay$4.4 million to our lenders resulting from our Excess Cash Flow calculation as ofDecember 31, 2020 . This payment reduced future principal payment obligations. The amended and restated 2009 Facility Agreement included a requirement that we raise no less than$45.0 million from the sale of equity prior toMarch 30, 2021 . We fulfilled this requirement with proceeds from the exercise of all the warrants issued to the 2019 Facility Agreement lenders inNovember 2019 . We received proceeds totaling$47.3 million , of which$3.6 million was received inDecember 2019 and the remaining$43.7 million was received during 2021. InApril 2021 , the proceeds were used towards the principal balance outstanding. Additionally, in 2021, we received two advance payments of$37.5 million each from a customer under the Terms Agreement. We used these proceeds to pay a portion of the remaining amount due under the 2009 Facility Agreement. InNovember 2021 , we repaid the final outstanding amount totaling$60.3 million using cash on hand and restricted cash. The 2009 Facility Agreement required us to maintain a debt service reserve account, which was pledged to secure all of our obligations under the 2009 Facility Agreement, and was previously classified as restricted cash on our consolidated balance 36 --------------------------------------------------------------------------------
sheet. As a result of the early pay off of the 2009 Facility Agreement, in
See Note 6: Long-Term Debt and Other Financing Arrangements to our Consolidated Financial Statements for further discussion of the 2009 Facility Agreement.
Paycheck Protection Program Loan
As previously discussed, we sought relief under the CARES Act, including receiving a$5.0 million loan under the PPP inApril 2020 (the "PPP Loan"). InJune 2021 , the SBA approved our request for forgiveness of all amounts outstanding, including accrued interest. As ofDecember 31, 2021 , there was no principal amount or interest outstanding under the PPP Loan.
See Note 6: Long-Term Debt and Other Financing Arrangements to our Consolidated Financial Statements for further discussion of the PPP Loan.
Subsequent Event
InFebruary 2022 , we entered into the satellite Procurement Agreement (see below in Contractual Obligations and Commitments for further discussion). This agreement provides for payment deferrals of milestone payments fromFebruary 2022 throughAugust 2022 , at a 0% interest rate. InAugust 2022 , all deferred payments are expected to become due by which time we intend to complete a senior secured financing. This financing is intended to provide sufficient proceeds for the construction and launch of the satellites and we expect to refinance our current 2019 Facility Agreement concurrent with or after the financing.
Contractual Obligations and Commitments
Contractual obligations arising in the normal course of business consist primarily of debt obligations (as discussed above), purchase commitments with vendors related to the procurement, deployment and maintenance of our network (totaling$6.8 million over the next two years), obligations for non-cancellable purchase orders for inventory ($17.3 million which we expect to be fulfilled in the next fifteen months based on current forecasted equipment sales), operating lease obligations (see Note 3: Leases to our Consolidated Financial Statements for further discussion) and pension obligations (see Note 12: Pensions and Other Employee Benefits to our Consolidated Financial Statements for further discussion). InFebruary 2022 , we entered into the satellite Procurement Agreement withMacdonald, Dettwiler and Associates Corporation pursuant to which we will acquire 17 new satellites that will replenish our existing constellation of satellites and ensure long-term continuity of our mobile satellite services.Globalstar is acquiring the satellites to provide continuous satellite services to the potential customer under the Terms Agreement, as well as services to our current and future customers. The initial contract price is$327.0 million and we have the option of purchasing additional satellites at a lower cost per unit, subject to certain conditions. We expect the satellites to be manufactured during the next three years. Under the Terms Agreement, the counterparty is required to reimburse 95% of the capital expenditures and certain other costs incurred for this contract. We plan to enter into additional agreements for launch services and launch insurance for these satellites.
See Note 9: Commitments and Contingencies to our Consolidated Financial Statements for discussion on our contractual commitments.
Recently Issued Accounting Pronouncements
For a discussion of recent accounting guidance and the expected impact that the guidance could have on our Consolidated Financial Statements, see Note 1: Summary of Significant Accounting Policies in our Consolidated Financial Statements.
37
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. Note 1: Summary of Significant Accounting Policies in our Consolidated Financial Statements contains a description of the accounting policies used in the preparation of our financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will have on our financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition; property and equipment; income taxes; and derivative instruments. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different assumptions and conditions. We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting policies and estimates used in the preparation of our Consolidated Financial Statements. In addition, there are other items within our Consolidated Financial Statements that require estimates but are not deemed critical as defined in this paragraph. 38 --------------------------------------------------------------------------------
Revenue Recognition
Our primary types of revenue include (i) service revenue from two-way voice communication, and one-way and two-way data transmissions between a mobile or fixed device, (ii) subscriber equipment revenue from the sale of fixed and mobile devices as well as other products and accessories, and (iii) service revenue from providing engineering and support services to certain customers. The complexities or judgements involved in revenue recognition are discussed in detail below by type of revenue. Unless otherwise disclosed, service revenue is recognized over a period of time (consistent with the customer's receipt and consumption of the benefits of our performance) and revenue from the sale of subscriber equipment is recognized at a point in time (consistent with the transfer of risks and rewards of ownership of the hardware). We record customer payments received in advance of the corresponding service period as deferred revenue. We provide Duplex, SPOT and Commercial IoT services directly to customers and indirectly through resellers. Credits granted to customers are expensed or charged against revenue or accounts receivable over the remaining term of the customer contract. Subscriber acquisition costs primarily include dealer and internal sales commissions and certain other costs, including but not limited to, promotional costs, cooperative marketing credits and shipping and fulfillment costs. We capitalize incremental costs to obtain a contract to the extent we expect to recover them; for our subscriber-driven contracts, these costs include internal and external initial activation commissions. We also capitalize costs to fulfill a contract to the extent we expect to recover them; for engineering and support service contracts, these costs may include certain expenses incurred by us prior to the customer benefiting from the service, such as personnel and contractor costs and other operating expenses. All other subscriber acquisitions costs are expensed at the time of the related sale. For Duplex service revenue, we recognize revenue for monthly access fees in the period services are rendered. Under certain annual plans whereby a customer prepays for a predetermined amount of minutes and data, revenue is recognized consistent with the customer's expected pattern of usage, based on historical experience because we believe that this method most accurately depicts the satisfaction of our obligation to the customer. For annual plans where the customer is charged an annual fee to access our system, we recognize revenue on a straight-line basis over the term of the plan. We provide certain engineering services to assist customers in developing new applications to operate on our network. We generally recognize the revenues associated with these services when the performance obligations are performed, the timing of which may involve complex judgements by management. We assess the timing of the transfer of products or services to a customer as compared to the timing of payments made to us to determine whether a significant financing component exists. In general, our subscriber-driven contracts are paid monthly or annually and the time between cash collection and performance is less than one year. For certain engineering services provided pursuant to our previously described Terms Agreement, the length of time between receipt of payment by the customer and the transfer of services by us is greater than twelve months. Accordingly, the payments made by the customer include a significant financing component. At times, we sell subscriber equipment through multiple-element arrangement contracts with services. When we sell subscriber equipment and services in bundled arrangements and determine that we have separate performance obligations, we allocate the bundled contract price among the various performance obligations based on relative stand-alone selling prices at contract inception of the distinct goods or services underlying each performance obligation and recognizes them when, or as, each performance obligation is satisfied. Determination of the relative stand-alone selling prices is complex and involves judgement, as prices may vary based on many factors, such as promotions, customer, volume and/or type of equipment sold.
Property and Equipment
The vast majority of our property and equipment is costs incurred related to the
construction of our second-generation constellation and ground station upgrades.
Accounting for these assets requires us to make complex judgments and estimates.
We capitalize costs associated with the design, manufacture, test and launch of
our low earth orbit satellites. For assets that are sold or retired, including
satellites that are de-orbited and no longer providing services, we remove the
estimated cost and accumulated depreciation. We recognize a loss from an
in-orbit failure of a satellite equal to its net book value, if any, in the
period it is determined that the satellite is not recoverable.
Estimating the useful life of our assets is complex and involves judgement; to
the extent the useful life of our significant assets changes, this could impact
our operating results. The estimated useful lives of our assets is based on many
factors, including estimated design life, information from our engineering
department and our overall strategy for the use of the assets. A one year
reduction in the estimated useful life of our second-generation satellites and
ground network would result in an
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annual increase to depreciation expense of $5.2 million and $1.1 million ,
respectively. We capitalize costs associated with the design, manufacture and
test of our ground stations and other capital assets. We track capitalized costs
associated with our ground stations and other capital assets by fixed asset
category and allocate them to each asset as it comes into service.
We evaluate the appropriateness of estimated depreciable lives assigned to our
property and equipment and revise such lives to the extent warranted by changing
facts and circumstances.
We review the carrying value of our assets for impairment whenever events or
changes in circumstances indicate that the recorded value may not be
recoverable. If indicators of impairment exist, we compare future undiscounted
cash flows to the carrying value of the asset group. If an asset is not
recoverable, its carrying value would be adjusted down to fair value and an
impairment loss would be recorded. Key assumptions in our impairment tests
include projected future cash flows, the timing of network upgrades and current
discount rates. Additionally, from time to time, we perform profitability
analyses to determine if investments in certain products and/or services remain
viable. In the event we determine to no longer support a product or service, or
that an asset is not expected to generate future benefit, the asset may be
abandoned and an impairment loss may be recorded.
Income Taxes
We use the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. We recognize the effect of a change in tax rates as income or expense in the period that the rate is enacted; however, as we have a full valuation allowance on our deferred tax assets, there is no impact to the consolidated statements of operations and balance sheets. GAAP requires us to assess whether it is more likely than not that we will be able to realize some or all of our deferred tax assets. If we cannot determine that deferred tax assets are more likely than not to be recoverable, GAAP requires us to provide a valuation allowance against those assets. This assessment takes into account factors including: (a) the nature, frequency, and severity of current and cumulative financial reporting losses; (b) sources of estimated future taxable income; and (c) tax planning strategies. We must weigh heavily a pattern of recent financial reporting losses as a source of negative evidence when determining our ability to realize deferred tax assets. Projections of estimated future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profitable operations and can be reasonably estimated. Otherwise, GAAP requires that we consider projections inherently subjective and generally insufficient to overcome negative evidence that includes cumulative losses in recent years. If necessary and available, we would implement tax planning strategies to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence supporting the realization of deferred tax assets.
Derivative Instruments
We recognize all derivative instruments as either assets or liabilities on the
balance sheet at their respective fair values. We record recognized gains or
losses on derivative instruments in the consolidated statements of operations.
We estimate the fair values of our derivative financial instruments using
various techniques that are considered to be consistent with the objective of
measuring fair values. In selecting the appropriate technique, we consider,
among other factors, the nature of the instrument, the market risks that embody
it and the expected means of settlement. There are various features embedded in
our debt instruments that require bifurcation from the debt host. For the
conversion options and the contingent put features in the 2013 8.00% Notes, we
use a Monte Carlo simulation model to determine fair value. For the mandatory
prepayments in the 2019 Facility Agreement, we use a probability weighted
discounted cash flow model to determine fair value. The timing and amount of
these cash flows involve significant judgement. Valuations derived from these
models are subject to ongoing internal and external verification and review.
Estimating fair values of derivative financial instruments requires the
development of significant and subjective estimates that may, and are likely to,
change over the duration of the instrument with related changes in internal and
external market factors.
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