Globalstar(GSAT) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents Globalstar's unaudited interim consolidated financial statements, detailing operations, balance sheets, equity, cash flows, and key notes Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Consolidated Statements of Operations (Three Months Ended September 30) | Metric (in thousands) | 2022 | 2021 | YoY Change (%) | | :-------------------- | :--- | :--- | :------------- | | Service revenue | $33,301 | $27,848 | 19.6% | | Subscriber equipment sales | $4,325 | $4,766 | -9.3% | | Total revenue | $37,626 | $32,614 | 15.4% | | Total operating expenses | $224,267 | $47,328 | 373.9% | | Loss from operations | $(186,641) | $(14,714) | 1168.5% | | Net loss | $(204,361) | $(30,885) | 561.6% | | Basic Net loss per common share | $(0.11) | $(0.02) | 450.0% | Consolidated Statements of Operations (Nine Months Ended September 30) | Metric (in thousands) | 2022 | 2021 | YoY Change (%) | | :-------------------- | :--- | :--- | :------------- | | Service revenue | $95,693 | $76,551 | 25.0% | | Subscriber equipment sales | $11,505 | $13,271 | -13.3% | | Total revenue | $107,198 | $89,822 | 19.3% | | Total operating expenses | $318,907 | $139,804 | 128.1% | | Loss from operations | $(211,709) | $(49,982) | 323.6% | | Net loss | $(251,580) | $(88,667) | 183.7% | | Basic Net loss per common share | $(0.14) | $(0.05) | 180.0% | Consolidated Balance Sheets Consolidated Balance Sheet (as of September 30, 2022 vs. December 31, 2021) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total assets | $746,538 | $814,106 | $(67,568) | | Total current liabilities | $146,943 | $61,565 | $85,378 | | Long-term debt | $262,175 | $237,932 | $24,243 | | Total stockholders' equity | $135,580 | $365,431 | $(229,851) | - Prepaid satellite construction costs and related customer receivable increased significantly from $0 to $83.2 million, reflecting new satellite procurement activities[14] - Deferred revenue (current and non-current) increased substantially from $25.9 million to $53.1 million (current) and $112.1 million to $171.7 million (non-current), primarily due to advanced payments for wholesale capacity services under the Service Agreements[14] Condensed Consolidated Statements of Stockholders' Equity Changes in Stockholders' Equity (Nine Months Ended September 30, 2022) | Metric (in thousands) | January 1, 2022 | September 30, 2022 | Change | | :-------------------- | :-------------- | :----------------- | :----- | | Total Stockholders' Equity | $365,431 | $135,580 | $(229,851) | | Net loss | $(1,783,349) (Retained Deficit) | $(2,034,929) (Retained Deficit) | $(251,580) | | Additional Paid-In Capital | $2,146,710 | $2,155,117 | $8,407 | | Accumulated Other Comprehensive Income | $1,890 | $15,212 | $13,322 | - The significant decrease in total stockholders' equity is primarily driven by the net loss of $204.4 million for the three months ended September 30, 2022, and $251.6 million for the nine months ended September 30, 2022[16] Condensed Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Activity (in thousands) | 2022 | 2021 | Change | | :---------------------- | :--- | :--- | :----- | | Net cash provided by operating activities | $31,705 | $107,166 | $(75,461) | | Net cash used in investing activities | $(25,306) | $(30,033) | $4,727 | | Net cash used in financing activities | $(5,886) | $(82,725) | $76,839 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $445 | $(5,649) | $6,094 | - Operating cash flow decreased significantly due to unfavorable working capital changes, despite higher net income after non-cash adjustments. In 2021, working capital was favorably impacted by $95.5 million in prepayments from the Partner[180] - Investing activities saw lower cash usage in 2022 due to gateway upgrades nearing completion, while still funding network upgrades and the launch of the on-ground spare satellite[181] - Financing activities in 2022 primarily included a $6.3 million principal repayment of the 2019 Facility Agreement, a significant reduction compared to 2021 which included $126.7 million in 2009 Facility Agreement payments offset by $43.7 million from warrant exercises[182] Notes to Unaudited Interim Condensed Consolidated Financial Statements 1. Basis of Presentation - Globalstar provides Mobile Satellite Services (MSS) including voice, data, and wholesale capacity through its global satellite network, with Thermo Companies as the principal owner[25] - Apple Inc. (Partner) announced new satellite-enabled services in September 2022, for which Globalstar will be the satellite operator. The Services are expected to launch in Q4 2022[29][31] - Globalstar terminated second-generation Duplex services in early 2021, making it permanent after the Partner's announcement, leading to a $174.3 million reduction in value of related assets in Q3 2022[32][33] 2. Revenue Revenue Disaggregation by Type (Three Months Ended September 30) | Revenue Type (in thousands) | 2022 | 2021 | YoY Change (%) | | :-------------------------- | :--- | :--- | :------------- | | Duplex service | $9,021 | $9,632 | -6.3% | | SPOT service | $11,753 | $11,873 | -1.0% | | Commercial IoT service | $4,673 | $4,458 | 4.8% | | Wholesale capacity services | $6,972 | $1,301 | 435.9% | | Total service revenue | $33,301 | $27,848 | 19.6% | | Total subscriber equipment sales | $4,325 | $4,766 | -9.3% | | Total revenue | $37,626 | $32,614 | 15.4% | Revenue Disaggregation by Type (Nine Months Ended September 30) | Revenue Type (in thousands) | 2022 | 2021 | YoY Change (%) | | :-------------------------- | :--- | :--- | :------------- | | Duplex service | $22,103 | $23,530 | -6.0% | | SPOT service | $34,544 | $33,996 | 1.6% | | Commercial IoT service | $14,381 | $13,443 | 6.9% | | Wholesale capacity services | $22,640 | $3,999 | 466.1% | | Total service revenue | $95,693 | $76,551 | 25.0% | | Total subscriber equipment sales | $11,505 | $13,271 | -13.3% | | Total revenue | $107,198 | $89,822 | 19.3% | - Wholesale capacity services revenue saw a substantial increase, driven by satellite network access and related services under the Service Agreements with Apple Inc.[35][150] Accounts Receivable (as of September 30, 2022 vs. December 31, 2021) | Receivable Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :----------------------------- | :----------- | :----------- | :----- | | Subscriber accounts receivable | $13,954 | $12,825 | $1,129 | | Wholesale capacity accounts receivable | $12,727 | $1,861 | $10,866 | | Agency agreement accounts receivable | $2,913 | $6,496 | $(3,583) | | Long-term wholesale capacity accounts receivable | $69,646 | $0 | $69,646 | | Total accounts receivable | $99,240 | $21,182 | $78,058 | Contract Liabilities (as of September 30, 2022 vs. December 31, 2021) | Liability Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :---------------------------- | :----------- | :----------- | :----- | | Short-term contract liabilities | $53,121 | $25,927 | $27,194 | | Long-term contract liabilities | $171,651 | $112,054 | $59,597 | | Total contract liabilities | $224,772 | $137,981 | $86,791 | - Wholesale capacity contract liabilities, particularly advanced payments for services, significantly increased from $111.3 million to $199.9 million, reflecting ongoing work under the Service Agreements[46] 3. Leases Operating Lease Liabilities (as of September 30, 2022 vs. December 31, 2021) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Right-of-use asset, net | $28,396 | $32,041 | $(3,645) | | Total operating lease liabilities | $28,260 | $31,738 | $(3,478) | - The Company began capitalizing certain lease costs related to the Service Agreements in Q4 2021, which will be amortized over the related performance obligation term[49] - Additional operating leases for new gateway locations, with an expected impact of approximately $4.7 million in right-of-use assets and lease liabilities, were executed but not yet commenced as of September 30, 2022[55] 4. Property and Equipment Property and Equipment, Net (as of September 30, 2022 vs. December 31, 2021) | Component (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :----------------------- | :----------- | :----------- | :----- | | First and second-generation satellites in service | $1,262,254 | $1,195,509 | $66,745 | | Second-generation satellite, on-ground spare | $0 | $32,442 | $(32,442) | | Ground component | $79,848 | $282,268 | $(202,420) | | Construction in progress: Space component | $63,504 | $16,394 | $47,110 | | Construction in progress: Ground component | $16,303 | $33,998 | $(17,695) | | Total property and equipment, net | $532,680 | $672,156 | $(139,476) | - A second-generation on-ground spare satellite was successfully launched in June 2022 and placed into service, contributing $66.7 million in costs[56] - The Company recorded $161.2 million in reduction in value of long-lived assets (primarily ground component and construction in progress) during Q3 2022 due to the discontinuation of second-generation Duplex services[59][60] - New satellite construction costs totaled $13.5 million in prepaid costs and $56.4 million in construction in progress as of September 30, 2022, with 95% expected to be reimbursed by the Partner[57] 5. Long-Term Debt and Other Financing Arrangements Long-Term Debt and Vendor Financing (in thousands) | Debt Type | Sep 30, 2022 (Carrying Value) | Dec 31, 2021 (Carrying Value) | Change | | :-------------------------- | :---------------------------- | :---------------------------- | :----- | | 2019 Facility Agreement | $262,175 | $236,525 | $25,650 | | Vendor financing | $63,765 | $0 | $63,765 | | 8.00% Convertible Senior Notes Issued in 2013 | $0 | $1,407 | $(1,407) | | Total debt and vendor financing | $325,940 | $237,932 | $88,008 | - The 2019 Facility Agreement, maturing in November 2025, had a principal outstanding of $285.3 million as of September 30, 2022, and requires mandatory prepayments based on excess cash flow[62][184][185] - Vendor financing of $63.8 million was recorded for the new satellite procurement agreement with MDA, with an amendment in October 2022 extending payment deferrals and introducing 7% annual interest[65][66][188][189] - The remaining $1.4 million principal of the 2013 8.00% Convertible Senior Notes was converted into 2.3 million shares of common stock in Q1 2022, resulting in a net gain of less than $0.1 million on extinguishment[68][69] - The Company is actively pursuing new debt financing in Q4 2022 to fund the construction and launch costs for the new satellites, as required by the Service Agreements[67][190] 6. Derivatives Fair Values of Derivative Instruments (in thousands) | Derivative Instrument | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Compound embedded derivative with the 2019 Facility Agreement | $(798) | $484 | | Compound embedded derivative with the 2013 8.00% Notes | $0 | $(1,364) | Derivative Gain (Loss) (in thousands) | Period | 2022 (in thousands) | 2021 (in thousands) | | :----- | :------------------ | :------------------ | | Three Months Ended Sep 30 | $662 | $229 | | Nine Months Ended Sep 30 | $(1,066) | $(2,210) | - The 2013 8.00% Notes derivative is no longer outstanding after conversion in Q1 2022. The 2019 Facility Agreement derivative's fair value changed from an asset to a liability, driven by increased probability of refinancing[73][78][82] 7. Fair Value Measurements - The Company's derivatives are classified as Level 3 fair value measurements, requiring significant unobservable inputs[78] Reduction in the Value of Assets (in thousands) | Asset Type | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :----------------------------- | | Prepaid licenses and royalties (current) | $183 | $183 | | Prepaid licenses and royalties (non-current) | $4,514 | $4,514 | | Internally developed technology and software | $1,271 | $1,271 | | Spectrum intangible assets | $142 | $667 | | Property and equipment, net | $159,891 | $159,891 | | Grand Total | $166,001 | $166,526 | - A reduction in the value of inventory totaling $8.5 million was recorded in Q3 2022 due to the discontinuation of second-generation Duplex products and related prepayments[90] 8. Commitments and Contingencies - The Service Agreements with Apple Inc. require Globalstar to allocate 85% of its network capacity, provide and maintain required resources, prioritize services, and maintain quality standards[93] - Globalstar is required to refinance all outstanding loans under the 2019 Facility Agreement upon (Thermo's portion) and within 90 days (other lenders' portion) of the Services commencement[94] - The Partner may elect to receive warrants to purchase up to 2.64% of Globalstar's common stock, with an estimated 49.1 million shares and $49.8 million in proceeds[95][110] - The Satellite Procurement Agreement with MDA for 17 new satellites has a total contract price of $327.0 million, with 95% of capital expenditures and certain other costs to be reimbursed by the Partner[97] 9. Related Party Transactions - Payables to Thermo and other affiliates were $0.1 million as of September 30, 2022, down from $0.4 million at December 31, 2021[99] - Thermo's participation in the 2019 Facility Agreement was $95.1 million, with $9.7 million in paid-in-kind interest accrued during the nine months ended September 30, 2022[103] - A lock-up and right of first offer agreement between Partner and Thermo restricts Thermo from transferring Globalstar common stock if it would reduce their holding below 51% for 5 years from Service Launch[104] 10. Pensions and Other Employee Benefits - The Company's Retirement Plan was terminated and settled in August 2022, resulting in a $1.5 million pension settlement loss[106][173] 11. Loss Per Share Net Loss Per Common Share | Period | Basic & Diluted EPS (2022) | Basic & Diluted EPS (2021) | | :----- | :------------------------- | :------------------------- | | Three Months Ended Sep 30 | $(0.11) | $(0.02) | | Nine Months Ended Sep 30 | $(0.14) | $(0.05) | - Approximately 9.4 million and 8.8 million shares of potential common stock were excluded from diluted EPS calculations for the three and nine months ended September 30, 2022, respectively, due to their anti-dilutive effect[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Globalstar's financial condition, operations, and strategic shift towards IoT and wholesale capacity services Overview - Globalstar provides Mobile Satellite Services (MSS) including voice, data, and wholesale capacity through its global satellite network[115] - The Company entered a $327.0 million agreement to acquire 17 new satellites by 2025, with 95% of capital expenditures to be reimbursed by Apple Inc. (Partner) under the Service Agreements[116] - Apple Inc. announced new satellite-enabled services in September 2022, for which Globalstar will be the satellite operator, expected to launch in Q4 2022[118] Communications Products and Services - Globalstar offers Duplex (two-way voice/data), SPOT (one/two-way messaging/location), Commercial IoT (one-way data), Wholesale Capacity Services (satellite network access for Partner), and Engineering and Other services[119] - The Company terminated second-generation Duplex services in early 2021, permanently abandoning related assets in Q3 2022 due to a strategic shift towards IoT-enabled devices and the Service Agreements[121] - New Commercial IoT offerings include the Realm Enablement Suite, featuring Integrity 150 (solar-powered asset tracking) and ST150M (satellite modem module), expanding environmentally friendly initiatives[122] Globalstar System - The Globalstar System comprises a constellation of Low Earth Orbit (LEO) satellites (second-generation and first-generation) and active ground stations (gateways)[123][115] - Second-generation satellites are designed for longer lifespan, 40% greater capacity, and lower cost compared to first-generation satellites[123] - The system utilizes patented CDMA technology for ground network communication and proprietary technology for SPOT and Commercial IoT services, aiming for superior service levels compared to geostationary (GEO) satellites[124][125] Customers - As of September 30, 2022, Globalstar had approximately 762,000 subscribers across various markets, including recreation, government, oil and gas, and maritime[126] - Approximately 25,000 subscribers in Russia were removed from the count in Q1 2022 due to service disconnection following the invasion of Ukraine[126][146] - Wholesale capacity revenue is primarily derived from the Partner (Apple Inc.), with intentions to offer remaining satellite capacity to other commercial customers for IoT and other initiatives[127] Spectrum and Regulatory Structure - Globalstar benefits from a worldwide allocation of radio frequency spectrum, enabling cost-effective global deployment of products and services[128] - The FCC granted authority in 2017 for terrestrial broadband services over 11.5 MHz of licensed MSS spectrum, designated as Band 53 by 3GPP, with a 5G variant known as n53 approved in 2020[129][130] - Qualcomm Technologies' Snapdragon X65 modem-RF System includes support for Band n53, significantly expanding the potential device ecosystem, further enhanced by its inclusion in Partner's cellular-enabled devices[131] Performance Indicators - Key performance indicators include total revenue, subscriber growth and churn rate, average monthly revenue per user (ARPU), operating income, adjusted EBITDA, and capital expenditures[137] Average Number of Subscribers and ARPU (Monthly) | Metric | Sep 30, 2022 (Avg Subscribers) | Sep 30, 2021 (Avg Subscribers) | Sep 30, 2022 (ARPU) | Sep 30, 2021 (ARPU) | | :---------------- | :----------------------------- | :----------------------------- | :------------------ | :------------------ | | Duplex | 41,204 | 45,004 | $72.98 | $71.34 | | SPOT | 276,203 | 271,843 | $14.18 | $14.56 | | Commercial IoT | 444,397 | 410,630 | $3.51 | $3.62 | | Total | 762,232 | 754,325 | | | Revenue Analysis - Total revenue increased 15% to $37.6 million for the three months and 19% to $107.2 million for the nine months ended September 30, 2022, primarily driven by wholesale capacity services[135] - Duplex service revenue decreased 6% for both periods due to an 8-10% decrease in average subscribers, a trend expected to continue as investments shift to IoT[147] - Commercial IoT service revenue increased 5-7% due to an increase in average subscribers (8% for three months, 6% for nine months), despite production delays from component shortages[149] - Wholesale capacity service revenue surged by $5.7 million (three months) and $18.6 million (nine months), driven by performance obligations under the Service Agreements, including gateway expansion and Procurement Agreement work[150] - SPOT equipment sales decreased by $1.1 million (three months) and $2.1 million (nine months) due to lower sales volume and inventory shortages, with back orders for core products[153] Operating Expenses Analysis - Total operating expenses significantly increased to $224.3 million (three months) and $318.9 million (nine months) in 2022, primarily due to reductions in the value of inventory and long-lived assets[155] - Cost of services increased by $1.6 million (three months) and $4.9 million (nine months), driven by higher personnel costs, lease expenses for new teleport leases related to Service Agreements, and professional fees for ERP system implementation[157] - A reduction in the value of inventory of $8.5 million was recorded in Q3 2022 due to the strategic shift away from second-generation Duplex assets[159] - Marketing, General and Administrative (MG&A) expenses increased by $1.5 million (three months) and $0.8 million (nine months), mainly due to higher personnel costs (including stock-based compensation and bonuses) and professional/legal fees, partially offset by lower subscriber acquisition costs[161] - A $166.0 million reduction in the value of long-lived assets was recorded in Q3 2022, primarily for second-generation Duplex assets (gateways, related technology, prepaid licenses, and royalties) deemed no longer recoverable[164] Other (Expense) Income Analysis - In 2021, a $5.0 million gain on extinguishment of debt was recorded from the forgiveness of the Paycheck Protection Program (PPP) loan, with no similar activity in 2022[166] - Net interest income and expense decreased by $3.8 million (three months) and $9.5 million (nine months) in 2022, primarily due to higher capitalized interest[167] - Derivative gains of $0.7 million (three months) and losses of $1.1 million (nine months) were recorded in 2022, driven by changes in the valuation of embedded features in debt instruments, particularly the 2019 Facility Agreement[169] - Foreign currency losses increased by $4.6 million (three months) and $8.7 million (nine months) in 2022, due to the strengthening of the U.S. dollar[172] - A $1.5 million pension settlement loss was recorded in August 2022 upon the settlement of the Company's remaining pension liability[173] Liquidity and Capital Resources - Principal near-term liquidity requirements include operating costs, capital expenditures, and repayment of vendor financing for satellite procurement[174] - Primary liquidity sources are cash on hand, cash flows from operations, and vendor financing, with potential future sources including warrant exercises and new debt/equity financings[175] - Cash and cash equivalents were $14.7 million as of September 30, 2022, slightly up from $14.3 million at December 31, 2021[176] - Total debt and vendor financing increased by $88.0 million to $325.9 million as of September 30, 2022, mainly due to $63.8 million in vendor financing draws and a higher carrying value of the 2019 Facility Agreement[176][177] - The Company is required to maintain minimum liquidity of $10.0 million under the Service Agreements[175] Off-Balance Sheet Transactions - The Company has no material off-balance sheet transactions[192] Recently Issued Accounting Pronouncements - The Company has not identified any recently issued accounting standards that will have a material impact on its condensed consolidated financial statements[193] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses Globalstar's exposure to foreign currency and interest rate risks, and its management strategies - Globalstar's international sales are primarily denominated in Canadian dollars, Brazilian reais, and euros, exposing it to foreign currency exchange risk[195] - The Company reduces currency risk by requiring USD payments and purchasing foreign currencies on the spot market, but does not currently use hedging instruments[195] - Future refinancing of vendor financing may expose the Company to the risk of rising interest rates if borrowings bear floating rates[196] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures, confirming effectiveness despite ERP system changes - As of September 30, 2022, the Company's disclosure controls and procedures were deemed effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[199] - The implementation of a new ERP system in Q1 2022 led to changes in reporting processes and internal control over financial reporting, automating procedures and standardizing business processes, with no adverse effects[201] PART II - OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings to report - The Company has no legal proceedings to disclose[202] Item 1A. Risk Factors Outlines key risks from global macro-economic conditions, Apple Service Launch uncertainty, and financing challenges - Uncertain global macro-economic and political conditions, including inflation, interest rates, and the Russia-Ukraine conflict, could materially adversely affect the Company's operations and financial condition[203][204][205] - There is no assurance that the Service Launch with Apple Inc. will occur or that expected revenues will be received, as the agreements impose substantial obligations and are terminable[207] - Volatility in financial markets may impede the Company's ability to access capital markets for required financing (for Service Agreements and Procurement Agreement) during Q4 2022, potentially leading to higher borrowing costs and more stringent terms[208] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report - This item is not applicable[209] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report - The Company has no defaults upon senior securities to disclose[209] Item 4. Mine Safety Disclosures No mine safety disclosures to report - This item is not applicable[209] Item 5. Other Information Updates on vendor financing arrangement, including an October 2022 amendment for payment deferrals and interest - On October 28, 2022, the Company amended its satellite procurement agreement with MDA, extending payment deferral dates and introducing a 7% annual interest rate on outstanding amounts, with two $7.0 million payments due in October and November 2022, and remaining amounts due in December 2022[209] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL taxonomy - Exhibits include the Third Amended and Restated Certificate of Incorporation, Fourth Amended and Restated Bylaws, Section 302 and 906 Certifications, and XBRL Instance and Taxonomy documents[210] Signatures Contains signatures of the Principal Executive Officer and Principal Financial Officer, certifying the report - The report is signed by David B. Kagan, Chief Executive Officer, and Rebecca S. Clary, Chief Financial Officer, on November 3, 2022[215]