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MarketScreener Homepage  >  Equities  >  Nyse MKT  >  Globalstar, Inc.    GSAT

GLOBALSTAR, INC.

(GSAT)
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GLOBALSTAR : Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements. (form 10-Q)

05/07/2020 | 04:51pm EST
Certain statements contained in or incorporated by reference into this Quarterly
Report on Form 10-Q (the "Report"), other than purely historical information,
including, but not limited to, estimates, projections, statements relating to
our business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements generally are identified by the words
"believe," "project," "expect," "anticipate," "estimate," "intend," "strategy,"
"plan," "may," "should," "will," "would," "will be," "will continue," "will
likely result," and similar expressions, although not all forward-looking
statements contain these identifying words. These forward-looking statements are
based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. Forward-looking statements, such as the statements
regarding our ability to develop and expand our business (including our ability
to monetize our spectrum rights), our anticipated capital spending, our ability
to manage costs, our ability to exploit and respond to technological innovation,
the effects of laws and regulations (including tax laws and regulations) and
legal and regulatory changes (including regulation related to the use of our
spectrum), the opportunities for strategic business combinations and the effects
of consolidation in our industry on us and our competitors, our anticipated
future revenues, our anticipated financial resources, our expectations about the
future operational performance of our satellites (including their projected
operational lives), the expected strength of and growth prospects for our
existing customers and the markets that we serve, commercial acceptance of new
products, problems relating to the ground-based facilities operated by us or by
independent gateway operators, worldwide economic, geopolitical and business
conditions and risks associated with doing business on a global basis, business
interruptions due to natural disasters, unexpected events or public health
crises, including viral pandemics such as the COVID-19 coronavirus, and other
statements contained in this Report regarding matters that are not historical
facts, involve predictions. Risks and uncertainties that could cause or
contribute to such differences include, without limitation, those in Item 1A.
Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019, as filed with the Securities and Exchange Commission (the
"SEC") on February 28, 2020 (the "2019 Annual Report"). We do not intend, and
undertake no obligation, to update any of our forward-looking statements after
the date of this Report to reflect actual results or future events or
circumstances.

New risk factors emerge from time to time, and it is not possible for us to
predict all risk factors, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements. We undertake no obligation to update publicly or revise any
forward-looking statements. You should not rely upon forward-looking statements
as predictions of future events or performance. We cannot assure you that the
events and circumstances reflected in the forward-looking statements will be
achieved or occur. These cautionary statements qualify all forward-looking
statements attributable to us or persons acting on our behalf.

This "Management's Discussion and Analysis of Financial Condition" should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition" and information included in our 2019 Annual Report.

Overview

Mobile Satellite Services Business


Globalstar, Inc. ("we", "us" or the "Company") provides Mobile Satellite
Services ("MSS") including voice and data communications services globally via
satellite. We offer these services over our network of in-orbit satellites and
our active ground stations ("gateways"), which we refer to collectively as the
Globalstar System. In addition to supporting Internet of Things ("IoT") data
transmissions in a variety of applications, we provide reliable connectivity in
areas not served or underserved by terrestrial wireless and wireline networks
and in circumstances where terrestrial networks are not operational due to
natural or man-made disasters. By providing wireless communications services
across the globe, we meet our customers' increasing desire for connectivity.

We currently provide the following communications services, which are available only with equipment designed to work on our network:

• two-way voice communication and data transmissions using mobile or fixed

devices, including our GSP-1700 phone, two generations of our Sat-Fi®, the

Sat-Fi ® Remote Antenna Station, and other fixed and data-only devices

("Duplex");

• one-way or two-way communication and data transmissions using mobile

       devices, including our SPOT family of products, such as SPOT X®, SPOT
       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 the United States, the Federal Communications Commission ("FCC") has authorized us to operate our first-generation satellites in 25.225 MHz of radio spectrum comprising two blocks of non-contiguous radio frequencies in the 1.6/2.4 GHz band commonly referred to as the "Big LEO" Spectrum Band. We licensed and registered our second-generation satellites in France. We also obtained all authorizations necessary from the FCC to operate our domestic gateways with our second-generation satellites.

Terrestrial Authority for Globalstar's Licensed 2.4GHz Spectrum


In December 2016, the FCC unanimously adopted a Report and Order permitting us
to seek modification of our existing MSS licenses to provide terrestrial
broadband services over 11.5 MHz of our licensed Mobile Satellite Services
spectrum at 2483.5 to 2495 MHz, throughout the United States of America and its
Territories. In August 2017, the FCC modified Globalstar's MSS licenses,
granting us authority to provide terrestrial broadband services over a portion
of our satellite spectrum. Specifically, the FCC modified Globalstar's space
station authorization and our blanket mobile earth station license to permit a
network using 11.5 MHz of our authorized Big LEO mobile-satellite service
spectrum. We will need to comply with certain conditions in order to provide
terrestrial broadband service, including obtaining FCC certifications for our
equipment that will utilize this spectrum authority.

We believe our MSS spectrum position provides potential for harmonized
terrestrial authority across many international regulatory domains and have been
seeking approvals in various international jurisdictions. To date, we have
received terrestrial authorizations in 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.

In December 2018, we were successful in obtaining approval to create a new
defined band class, Band 53, from the Third Generation Partnership Project
(3GPP) for our 2.4 GHz terrestrial spectrum. Additionally, in March 2020, we
announced that the 3GPP approved the 5G variant of our Band 53, which is known
as n53. This band class provides a pathway for our terrestrial spectrum to be
integrated into handset and infrastructure ecosystems. Additional follow-on 3GPP
specifications and approvals are expected in the future.

Recent Developments: COVID-19


In March 2020, the World Health Organization declared the outbreak of a novel
coronavirus ("COVID-19") a global pandemic. Various levels of governmental
agencies and authorities have taken measures to reduce the spread of COVID-19,
including "stay at home" orders, social distancing and closures of non-essential
businesses. The success of our business depends on our global operations,
including the performance of our satellites and ground stations as well as our
supply chain and consumer demand, among other things. As a result of COVID-19,
we have experienced a reduction in the volume of sales of our subscriber
equipment, received requests for service pricing concessions from certain
customers, and expect an impact on the ability of certain of our customers to
pay outstanding balances. Our results of operations for the three months ended
March 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 $5.0 million forgivable

       payroll protection program loan and the deferral of certain payroll taxes,


•      Refocusing internal resources on high-value opportunities, such as working
       with federal agencies that may require our equipment and services in times
       of crisis,

• Working with our product manufacturers to ensure we will continue to have

sufficient inventory levels on hand to meet consumer demand, and

• 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 March 31, 2020 and 2019


Overall, our results of operations for the three months ended March 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 ended March 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 in Latin 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
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Engineering and other service revenue increased $4.2 million for the three
months ended March 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
ended March 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 in October 2019, and sales of our improved Sat-Fi2® device
launched in September 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
ended March 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
ended March 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 ended March 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 ended March 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 ended March 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
ended March 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, in September 2019, U.S Customs and
Border Protection ("CBP") issued a ruling related to the classification of
certain of our core products imported from China, resulting in 25% tariffs upon
import. 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 ended March 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.

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Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expense remained flat at $23.8 million for each of the three month periods ended March 31, 2020 and 2019, respectively.


Other Income (Expense)

Interest Income and Expense

Interest income and expense, net, increased $1.1 million during the three months
ended March 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 in November 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 in November 2019, which
reduced the principal balance outstanding (resulting in lower interest expense)
and the balance of deferred financing costs (resulting in lower amortization of
deferred financing costs). Lower interest costs for the Loan Agreement with
Thermo was driven by Thermo's conversion of the entire principal balance
outstanding under the Loan Agreement in February 2020 (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 $0.8 million and a gain of $57.0 million for the three months ended March 31, 2020 and March 31, 2019, respectively.


We recognize gains or losses due to the change in the value of certain embedded
features within our debt instruments that require standalone derivative
accounting. The 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 ended March 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 the U.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.


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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 in June 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 of March 31, 2020, we held cash and cash equivalents of $10.5 million and
restricted cash of $51.1 million. As of December 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 in December 2022.

The carrying amount of our long-term debt outstanding was $356.0 million at
March 31, 2020, compared to $464.2 million at December 31, 2019. We had no
current debt outstanding at March 31, 2020 or December 31, 2019 following the
amendment to the principal amortization schedule in our Facility Agreement in
November 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 in
February 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 in November 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
in July 2013, August 2015, June 2017 and November 2019. The Facility Agreement
is scheduled to mature in December 2022. As of March 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 of March 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 of March 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 in December 2022.

The amended and restated Facility Agreement includes a requirement that we raise
no less than $45.0 million of equity prior to March 31, 2021 via the cash
exercise of outstanding warrants or other equity to be applied towards the
principal payment due on June 30, 2021 and then, if applicable, to the next
scheduled principal payments. We currently expect to fulfill this requirement
with proceeds from the warrants issued to the Second Lien Term Loan Facility
lenders in November 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 in November 2025. The loans under
the Second Lien Term Loan Facility bear interest at a blended rate of 13.5% per
annum to be paid-in-kind (or in cash at our option, subject to restrictions in
the Facility Agreement). The cash proceeds from this loan were net of a 3%
original issue discount. As of March 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 $0.38 per share. These warrants expire on March 31, 2021. As of March 31, 2020, approximately 115.0 million warrants remain outstanding.


The Second Lien Term Loan Facility contains customary events of default and
requires us to satisfy various financial and non-financial covenants. As of
March 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 February 19, 2020, Thermo converted the entire principal balance outstanding under the Loan Agreement, which totaled $137.4 million and included accrued interest since inception of $93.9 million. This conversion resulted in the issuance of 200.1 million shares of common stock.

See Note 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 of
March 31, 2020, the principal amount outstanding of the 2013 8.00% Notes was
$1.4 million. The 2013 8.00% Notes will mature on April 1, 2028, subject to
various call and put features. Interest on the 2013 8.00% Notes is payable
semi-annually in arrears on April 1 and October 1 of each year. We pay interest
in cash at a rate of 5.75% per annum and by issuing additional 2013 8.00% Notes
at a rate of 2.25% per annum.

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 on April 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 of March 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.

                                       27
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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 in April
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 the Small Business Administration (the "SBA")
is subject to an interest rate of 1.00% per annum commencing on the date of the
loan with principal payments beginning in November 2020 and ending on the
maturity date in April 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 March 31, 2020 and 2019


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 ended March 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 in
January 2020 from the 2018 settlement of a business economic loss claim.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $1.6 million for the three months ended March 31, 2020 compared to $2.3 million for the same period in 2019 primarily due to the timing of capital expenditures incurred for the rollout of new antennas for our gateways.

Cash Flows Used in Financing Activities

There were no significant cash flows from financing activities during each of the three month periods ending March 31, 2020 and 2019.

Contractual Obligations and Commitments

There have been no significant changes to our contractual obligations and commitments since December 31, 2019.

Off-Balance Sheet Transactions

We have no material off-balance sheet transactions.

                                       28
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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.

© Edgar Online, source Glimpses

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