Globalstar, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "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 identify and realize opportunities and to generate the expected revenues and other benefits of the XCOM License Agreement, our ability to integrate the licensed technology into our current line of business, the ability of Dr. Jacobs and other new employees to drive innovation and growth, 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), our expectations for future increases in our revenue and profitability, our performance and financial results under the Service Agreements, 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, 2023, as filed with the Securities and Exchange Commission (the "SEC") on February 29, 2024 (the "2023 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 2023 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 as well as wholesale capacity services through its global satellite network. We offer these services over our network of in-orbit satellites and ground stations (“gateways”), pursuant to our spectrum licenses, which we refer to collectively as the Globalstar System. Globalstar System Our constellation of Low Earth Orbit ("LEO") satellites were designed to maximize the probability that at least one satellite is visible from any point on the Earth's surface between the latitudes 70° north and 70° south. 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. Our ground network includes our ground equipment, which uses technology permitting communication to multiple satellites. Our system architecture provides full frequency re-use. This maximizes satellite diversity (which maximizes quality) and network capacity as we can reuse the assigned spectrum in every satellite beam in every satellite. 13 In 2022, we entered into a satellite procurement agreement with Macdonald, Dettwiler and Associates Corporation ("MDA") pursuant to which we expect to acquire at least 17 and up to 26 satellites. We filed an application with the Federal Communications Commission (the "FCC") to replenish our HIBLEO-4 U.S.-licensed system with these satellites and operate them under an additional fifteen-year license term to provide long-term continuity of our MSS. The technical specifications and design of these replacement satellites are similar to our current satellites. The satellite procurement agreement requires delivery of the 17 new satellites by 2025. In 2023, we entered into a Launch Services Agreement with Space Exploration Technologies Corp. (“SpaceX”) and certain related ancillary agreements (the “Launch Services Agreements”), providing for the launch of the first set of these satellites during 2025. Under the Service Agreements, subject to certain terms and conditions, we will receive payments equal to 95% of the approved capital expenditures under the satellite procurement agreement and Launch Services Agreements (to be paid on a straight-line basis over the useful life of the satellites) beginning with the Phase 2 Service Period (the "Approved Capital Expenditure Payments"). Spectrum and Regulatory Structure We benefit from a worldwide 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. Business Strategy Our competitive advantages are leveraged through our ability to successfully deliver wholesale satellite capacity, communications products and services, and terrestrial spectrum and network solutions. Wholesale Satellite Capacity Wholesale satellite capacity services include satellite network access and related services using our satellite spectrum and network of satellites and gateways. For instance, we are the operator for certain satellite-enabled services offered by our Partner pursuant to the Service Agreements. The Service Agreements generally require us to allocate network capacity to support the Services and Partner to enable Band 53/n53 for use in cellular-enabled devices designated by Partner for use with the Services. As consideration for the Services provided by us, payments to us include a recurring service fee, payments relating to certain service-related operating expenses and capital expenditures, and potential bonus payments subject to satisfaction of certain licensing, service and related criteria. We also have an agreement with a government services company to utilize our satellite network for a mission critical service for government applications. For the three months ended March 31, 2024 and 2023, our wholesale capacity customers were responsible for 56% and 52%, respectively, of our revenue; except for our wholesale capacity customer under the Service Agreements, no other customer was responsible for more than 10% of our revenue. Communications Products and Services We provide wireless communications services across the globe in order to meet our customers' increasing desire for connectivity. 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. We currently provide the following communications products and services to our subscribers: • voice communication and data transmissions ("Duplex"); • communication and data transmissions using our SPOT family of mobile devices that transmit messages and the location of the device ("SPOT"); • 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 ("Commercial IoT"); 14 As of March 31, 2024, we had approximately 781,000 subscribers worldwide. For our subscriber driven revenue, the specialized needs of our global customers span many industries. The number of Commercial IoT devices on our network has increased 9% over the last twelve months. Satellite IoT connectivity has become more critical to a growing number of sectors and use cases, and we plan to continue to evolve and develop our IoT initiatives. We compete aggressively on price and strive for differentiation in the solutions that we offer to our customers. 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. Terrestrial Spectrum and Network Solutions We are authorized to provide terrestrial broadband services over 11.5 MHz of our licensed MSS spectrum at 2483.5 to 2495 MHz throughout the United States of American and its Territories. The Third Generation Partnership Project (“3GPP”) has designated the 11.5 MHz terrestrial band as Band 53 with 5G variant of our Band 53, known as n53. We have terrestrial licenses in 11 countries, resulting in approximately 10.3 billion MHz-POPs (megahertz of our spectrum authority in each country multiplied by a total population of approximately 819 million over the covered area). Prospective spectrum partners, including cable companies, wireless carriers, system integrators, utilities and other infrastructure operators, are able to benefit from access to uniform and increasingly “borderless” spectrum working across geographies. Our expanding portfolio of terrestrial spectrum represents a substantial opportunity for us. The Service Agreements significantly enhance the device ecosystem for Band 53/n53. We have an Intellectual Property License Agreement (the “License Agreement”) with XCOM Labs, Inc. (“Licensor” or “XCOM”). Under the License Agreement, we purchased an exclusive right and license (the “License”) as well as certain Intellectual Property Assets (as defined in the License Agreement) relating to the development and commercialization of XCOM’s key novel technologies for wireless spectrum innovations, including XCOM Radio Access Network ("XCOM RAN") systems, XCOM’s commercially available coordinated multi-point radio system. Bringing together Globalstar’s terrestrial spectrum and relationships with leading partners around the world with XCOM’s differentiated technology, which we believe is well suited for high-performance applications, creates a significant opportunity to deliver for private network customers with mission-critical needs. 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 three months ended March 31, 2024 and 2023 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. For the three months ended March 31, 2024, total revenue decreased to $56.5 million from $58.6 million for the same period in 2023. See below for further discussion of the main fluctuations in revenue. 15 The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands). Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Revenue % of Total Revenue Revenue % of Total Revenue Service revenue: Subscriber services Duplex $ 4,755 8 % $ 5,751 10 % SPOT 10,243 18 11,314 19 Commercial IoT 6,437 11 5,178 9 Wholesale capacity services 31,629 56 30,411 52 Engineering and other services 401 1 300 1 Total service revenue $ 53,465 94 % $ 52,954 91 % The following table sets forth our average number of subscribers and ARPU by type of revenue. Three Months Ended March 31, 2024 2023 Average number of subscribers for the period: Duplex 29,257 36,616 SPOT 249,640 266,067 Commercial IoT 502,915 462,077 Other 314 400 Total 782,126 765,160 ARPU (monthly): Duplex $ 54.18 $ 52.35 SPOT 13.68 14.17 Commercial IoT 4.27 3.74 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. Wholesale capacity service revenue includes revenue generated from satellite network access and related services. Engineering and other service revenue includes revenue generated primarily from terrestrial spectrum and network solutions as well as certain governmental and engineering service contracts; none of these service revenue items are subscriber driven. Accordingly, we do not present ARPU for wholesale capacity service revenue and engineering and other service revenue reflected in the table above. Service Revenue Duplex service revenue decreased $1.0 million, or 17%, for the three month period ended March 31, 2024, compared to the same period in 2023. This decrease was due to fewer average subscribers resulting from churn exceeding gross activations over the last twelve months as we no longer manufacture and sell Duplex devices in favor of other use cases for our network assets, including wholesale capacity services. SPOT service revenue decreased 9% for the three months ended March 31, 2024 compared to the same period in 2023. Average subscribers were impacted by lower equipment sales during 2022 and a portion of 2023, and therefore fewer subscriber activations, due to supply chain issues that reduced the number of devices available in the sales channel. Production has since fully resumed. 16 Commercial IoT service revenue increased 24% for the three months ended March 31, 2024 compared to the same period in 2023. This increase was due to higher average subscribers and ARPU. During 2023, we had an 8% increase in gross activations, contributing to the growth in average subscribers for the first quarter of 2024. Lower churn also favorably impacted our subscriber count. The increase in ARPU was due to higher usage on the network as well as the mix of subscribers on various rate plans. Wholesale capacity service revenue increased $1.2 million for the three months ended March 31, 2024 compared to the same period in 2023. The vast majority of wholesale capacity revenue includes recurring service fees under the Service Agreements. Additionally, we signed an agreement in the first quarter of 2024 with a government services company to utilize our satellite network for a mission critical service for government applications. The one-year $2.5 million proof of concept phase commenced in February 2024 and is progressing as planned. Revenue associated with this contract is currently included in "Wholesale capacity service revenue". This agreement has a five-year term and, if the project is implemented, contains annual minimum revenue commitments escalating to $20 million during the fifth year, with potential for further upside through the agreement's revenue share arrangement. Operating Expenses Total operating expenses increased 19% to $61.2 million for the three months ended March 31, 2024 from $51.5 million for the same period in 2023. The main contributors to the variance in operating expenses are explained in detail below. Cost of Services Cost of services increased $4.9 million for the three months ended March 31, 2024 compared to the same period in 2023. This increase is due to network expansion in connection with services provided under the Service Agreements; a substantial portion of network-related costs are reimbursed thereunder and this consideration is recognized as revenue in accordance with the terms of the contract. In line with our new and upgraded ground infrastructure, gateway and software maintenance costs increased $1.3 million and personnel costs increased $1.9 million during the first quarter of 2024. In connection with the License Agreement with XCOM, we entered into a Support Services Agreement (the “SSA”). During the first quarter of 2024, we recognized $1.2 million in expense associated with the SSA and other ancillary costs, of which the majority are noncash. Marketing, General and Administrative MG&A expenses increased $1.0 million for the three months ended March 31, 2024 compared to the same period in 2023. This increase was due primarily to higher legal and professional fees totaling $0.9 million for various efforts, including increased regulatory efforts and negotiations of new commercial arrangements. Additionally, MG&A costs associated with the SSA (described above) also contributed to this increase. Stock-Based Compensation Stock-based compensation expense increased $5.5 million for the three months ended March 31, 2024 compared to the same period in 2023. The increase was due primarily to restricted stock units ("RSUs") granted to certain executives in connection with the License Agreement in August 2023. We granted 44.5 million RSUs which are earned over a four-year performance period and vest upon Globalstar common stock trading at various price levels throughout the performance period. The total fair value of the RSUs was $39.5 million and is being recognized over the derived service period of 2.6 years. Other (Expense) Income Loss on Extinguishment of Debt We recorded a loss on extinguishment of debt of $10.4 million during the first quarter of 2023 following the full pay-off of the 2019 Facility Agreement in March 2023. The extinguishment loss was recognized due to the remaining deferred financing costs and debt discount associated with the instrument at the time of repayment. Similar activity did not occur in 2024. Interest Income and Expense Interest income and expense, net, increased $1.8 million during the three months ended March 31, 2024 compared to the same period in 2023. This increase was due primarily to higher gross interest costs offset partially by higher capitalized interest (which decreases interest expense) due to a higher construction in progress balance. Interest costs include cash and PIK interest associated with the 2023 13% Notes, which commenced in the second quarter of 2023, as well as interest and the accretion of debt discount associated with the 2023 and 2021 Funding Agreements (as defined below), which also commenced in the second quarter of 2023, In March 2023, we paid the remaining principal amount outstanding under the 2019 Facility Agreement, resulting in no further interest expense for this debt instrument following the paydown. 17 Foreign Currency (Loss) Gain Changes in foreign currency gains and losses are driven by the remeasurement of financial statement items, which are denominated in various currencies, at the end of each reporting period. We recorded net foreign currency losses of $3.8 million during the three months ended March 31, 2024 compared to net foreign currency gains of $1.9 million during the same period in 2023. Foreign currency gains result from other currencies strengthening relative to the U.S. dollar; inversely, foreign currency losses result from the U.S. dollar strengthening relative to other currencies. Liquidity and Capital Resources Overview Our principal sources of liquidity include cash on hand, cash flows from operations and proceeds from the Funding Agreements. These liquidity sources are expected to meet our short-term and long-term liquidity needs for funding our operating costs, capital expenditures and financing obligations, including scheduled recoupments under the 2021 Funding Agreement (defined below), interest on our 13% Notes (defined below), and dividends on our perpetual preferred stock. In addition, we have issued warrants under the Service Agreements and issued warrants to Thermo in connection with its guaranty of the 2023 Funding Agreement (defined below). These warrants could become a source of liquidity if exercised. As of March 31, 2024 and December 31, 2023, we held cash and cash equivalents of $59.3 million and $56.7 million, respectively. The principal amount of our debt outstanding was $434.5 million at March 31, 2024, compared to $398.7 million at December 31, 2023. This increase was due to the following: • PIK interest payment to the lenders of the 2023 13% Notes (as defined below) of $6.7 million; and • Issuance of debt under the 2023 Funding Agreement (as defined below) totaling $37.7 million; offset by • Recoupment under the 2021 Funding Agreement (as defined below) totaling $8.7 million. Cash Flows for the three months ended March 31, 2024 and 2023 The following table shows our cash flows from operating, investing and financing activities (in thousands): Three Months Ended March 31, 2024 March 31, 2023 Net cash provided by operating activities $ 29,818 $ 22,805 Net cash used in investing activities (54,249) (71,575) Net cash provided by financing activities 27,106 37,148 Effect of exchange rate changes on cash and cash equivalents (137) 27 Net increase (decrease) in cash and cash equivalents $ 2,538 $ (11,595) 18 Cash Flows Provided by Operating Activities Net cash provided by operations includes primarily cash received from the performance of wholesale capacity services as well as cash received from subscribers related to the purchase of equipment and satellite voice and data services. We use cash in operating activities primarily for network costs, personnel costs, inventory purchases and other general corporate expenditures. Net cash provided by operating activities during the three months ended March 31, 2024 was $29.8 million compared to $22.8 million during the same period in 2023. Favorable working capital changes were due primarily to the timing of recognition of accounts receivable and deferred revenue under the Service Agreements, specifically related to the timing of receipt of quarterly service fees. Lower net income after adjusting for noncash items was also impacted by higher operating expenses resulting from our network expansion in connection with the Service Agreements. Cash Flows Used in Investing Activities Net cash used in investing activities was $54.2 million for the three months ended March 31, 2024 compared to $71.6 million for the same period in 2023. Net cash used in investing activities during both periods included network upgrades associated with the Service Agreements and payments of capitalized interest. The decrease in payments made to MDA pursuant to our satellite procurement agreement of $14.9 million was the primary driver of the decrease in cash used during 2024. Cash Flows Provided by Financing Activities Net cash provided by financing activities was $27.1 million during the three month period ended March 31, 2024 compared to net cash provided by financing activities of $37.1 million for the same period in 2023. During 2024, we received proceeds from the 2023 Funding Agreement totaling $37.7 million, which were used to pay amounts owed to MDA. Pursuant to the terms of the 2021 Funding Agreement, a scheduled recoup payment totaling $8.7 million was made during the first quarter of 2024 (these payments began in the third quarter of 2023). During the first quarter of 2023, we received proceeds from the sale of the 2023 13% Notes, which were used to pay the remaining principal amount due under the 2019 Facility Agreement and financing costs. Finally, during both 2024 and 2023, we paid cash dividends to our preferred equity holders. Indebtedness For further discussion on all of our debt and other financing arrangements, see Note 4: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements. Funding Agreements The Service Agreements provide for, among other things, payment of up to $252 million to us (the “2023 Funding Agreement”) which we intend to use to fund 50% of amounts due under the satellite procurement agreement with MDA, as well as launch, insurance and ancillary costs incurred in connection with the construction and launch of these satellites. The remaining amount of the satellite costs is expected to be funded from our operating cash flows. During 2024, payments under the 2023 Funding Agreement totaled $37.7 million. The amount of the Funding Agreement and fees payable thereon are expected to be recouped from amounts payable for services provided by us under the Service Agreements in installments for a period of 16 quarters beginning no later than the third quarter of 2025. For as long as any portion of the 2023 Funding Agreement is outstanding, we will be subject to certain covenants. Our repayment obligations under the 2023 Funding Agreement are secured by a first-priority lien on substantially all of our assets. Thermo guaranteed certain of our obligations under the Funding Agreements. As consideration for Thermo's guarantee, we issued to Thermo warrants to purchase 10.0 million shares of our common stock. During 2021, we received payments totaling $94.2 million (the "2021 Funding Agreement"), which will be recouped as services are performed by us over the Phase 1 Service Period. During 2024, $8.7 million has been recouped. The outstanding balance under the 2021 Funding Agreement was $66.8 million as of March 31, 2024. 2023 13% Notes 19 In 2023, we completed the sale of $200.0 million in aggregate principal amount of non-convertible 13% Senior Notes due 2029 (the "2023 13% Notes"). The 2023 13% Notes are our senior, unsecured obligations and have a stated maturity of September 15, 2029. The 2023 13% Notes were sold at an issue price of 95% of the principal amount and bear interest at a rate of 13.00% per annum payable semi-annually in arrears. We have agreed under the Service Agreements to pay cash interest on the 2023 13% Notes at a rate of 6.5% per annum and paid-in-kind ("PIK") interest at a rate of 6.5% per annum. The Indenture includes customary terms and covenants, including restrictions on our ability to incur indebtedness, make guarantees, sell equity interests, and customary events of default. Series A Preferred Stock In 2022, we issued 149,425 shares of 7.0% Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) and a total fair value of $105.3 million. Holders of Series A Preferred Stock are entitled to receive, when, as and if declared by our Board of Directors, cumulative cash dividends based on the liquidation preference of the Series A Preferred Stock, at a fixed rate equal to 7.00% per annum, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. During the first quarter of 2024, we paid dividends totaling $2.6 million. Off-Balance Sheet Transactions We have no material off-balance sheet transactions. 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. Critical Accounting Policies and Estimates There have been no material changes in our Critical Accounting Policies and Estimates from the information provided in the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our market risk during the quarter ended March 31, 2024. For a discussion of our exposure to market risk, refer to our disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our 2023 Annual Report.