NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Globalstar, Inc. (“Globalstar” or the “Company”) provides Mobile Satellite Services (“MSS”) including voice and data communications services through its global satellite network. Thermo Companies, through commonly controlled affiliates, (collectively, “Thermo”) is the principal owner and largest stockholder of Globalstar. The Company’s Executive Chairman of the Board controls Thermo. Two other members of the Company's Board of Directors are also directors, officers or minority equity owners of various Thermo entities.
The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”); however, management believes the disclosures made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Globalstar Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 28, 2020 (the “2019 Annual Report”).
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. The Company evaluates estimates on an ongoing basis. Significant estimates include the value of derivative instruments, the allowance for doubtful accounts, the net realizable value of inventory, the useful life and value of property and equipment, the value of stock-based compensation and income taxes. The Company has made certain reclassifications to prior period condensed consolidated financial statements to conform to current period presentation.
These unaudited interim condensed consolidated financial statements include the accounts of Globalstar and all its subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, the information included herein includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s condensed consolidated statements of operations, condensed consolidated balance sheets, condensed consolidated statements of stockholders' equity and condensed consolidated statements of cash flows for the periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year or any future period.
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. These measures, as well as the pandemic itself, have significantly impacted economic conditions around the world and created uncertainties in the economy.
The Company performed a detailed analysis of its financial statements, liquidity position and business operations to assess the impact caused by COVID-19 for the period ended March 31, 2020 and through the release date of these condensed consolidated financial statements. Among other effects, the Company has accommodated certain pricing concessions requested by customers and experienced lower demand for its products and services, particularly from its retail customers and those that operate in the oil and gas market. While the full extent and duration of the impact is unknown, the Company expects a continuation of this lower demand at least until these industries recover. Additionally, the Company began and expects to continue to operate with a remote workforce, manage a supply chain sourcing predominantly from China, and engage with international regulators remotely to advance the terrestrial spectrum authorization process. There are a number of uncertainties that could impact the Company's future results of operations, including the effectiveness of COVID-19 mitigation measures; the duration of the pandemic; global economic conditions; changes to the Company's operations; changes in consumer confidence, behaviors and spending; work from home trends; and the sustainability of supply chains.
In accordance with the Company's accounting policies disclosed in its 2019 Annual Report, the Company reviews the carrying value of long-lived assets, intangible assets and inventory when circumstances warrant an assessment in order to evaluate whether indicators of impairment exist. The Company updated its internal projections as part of this assessment to reflect the reduction in cash flows from operations that it currently expects will result from COVID-19. The Company expects these reductions to be
temporary; therefore, no indicator of impairment was identified. For inventory, the carrying value of inventory on hand was lower than its expected net realizable value; accordingly, no impairment was necessary. For accounts receivable, the Company increased its loss rate for certain receivables as discussed in more detail in Note 3: Credit Losses.
Revised internal projections have also been evaluated in light of financial covenant requirements in the Company's facility agreements. While there are many estimates and uncertainties inherent in these projections, the Company currently expects that it will remain in compliance with these covenants over the next twelve months. Additionally, the Company currently expects that its sources of liquidity will be sufficient to cover its obligations over the next twelve months.
This liquidity assessment considers relief granted to the Company under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act), including a $5.0 million loan the Company received in April 2020 under the payroll protection program and the deferral of the payment of certain payroll taxes. Additionally, the Company evaluated tax law changes pursuant to the CARES Act and revised its net operating loss carryforwards and other estimates, as necessary.
As previously stated, the full impact of COVID-19 on the Company's condensed consolidated financial statements is uncertain at this time and the Company will continue to reassess the impact at each reporting period.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. As part of the FASB's disclosure framework project, it has changed the disclosure requirements for defined pension and other post-retirement benefit plans. The FASB eliminated disclosure requirements related to the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, if any, information related to Japanese Welfare Pension Insurance Law, information about the amount of future annual benefits covered by insurance contracts and significant transactions between the employer or related parties and the plan, and the disclosure of the effects of a one-percentage-point change in the assumed health care cost trend rates on the (1) aggregate of the service and interest cost components of net periodic benefit costs and the (2) benefit obligation for postretirement health care benefits. Entities will be required to disclose the weighted-average interest crediting rate for cash balance plans and other plans with promised interest crediting rates as well as an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for public entities for annual periods beginning after December 15, 2020. Early adoption is permitted as of the beginning of any annual reporting period. This ASU will have an impact on the Company's disclosures.
In December 2019, the FASB issued ASU No. 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU No. 2019-12 amends the accounting treatment for income taxes by simplifying and clarifying certain aspects of the existing guidance. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2020. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company has not yet determined the impact this standard will have on its condensed consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13, as amended, significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the incurred loss approach with an expected loss model for instruments measured at amortized cost. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2019. The Company adopted this standard when it became effective on January 1, 2020. See Note 3: Credit Losses for a discussion of the impact to the Company's condensed consolidated financial statements and required disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. As part of the FASB's disclosure framework project, it has eliminated, amended and added disclosure requirements for fair value measurements. Entities are no longer required to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements. Public companies are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. The Company adopted
this standard when it became effective on January 1, 2020. The adoption of this standard impacted certain of the Company's disclosures included in Note 7: Fair Value Measurements.
2. REVENUE
Disaggregation of Revenue
The following table discloses revenue disaggregated by type of product and service (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Service revenue:
|
|
|
|
Duplex
|
$
|
7,663
|
|
|
$
|
8,645
|
|
SPOT
|
12,123
|
|
|
13,095
|
|
Commercial IoT
|
4,310
|
|
|
3,698
|
|
IGO
|
91
|
|
|
166
|
|
Engineering and other
|
4,748
|
|
|
515
|
|
Total service revenue
|
28,935
|
|
|
26,119
|
|
|
|
|
|
Subscriber equipment sales:
|
|
|
|
Duplex
|
$
|
404
|
|
|
$
|
251
|
|
SPOT
|
1,407
|
|
|
1,591
|
|
Commercial IoT
|
1,413
|
|
|
2,072
|
|
Other
|
35
|
|
|
45
|
|
Total subscriber equipment sales
|
3,259
|
|
|
3,959
|
|
|
|
|
|
Total revenue
|
$
|
32,194
|
|
|
$
|
30,078
|
|
Engineering and other service revenue includes revenue generated primarily from certain governmental and engineering service contracts. During the first quarter of 2020, the Company recognized $4.0 million in revenue related to the completion of certain milestones for non-recurring engineering services under the Terms Agreement described in its 2019 Annual Report.
The Company attributes equipment revenue to various countries based on the location where equipment is sold. Service revenue is generally attributed to the various countries based on the Globalstar entity that holds the customer contract. The following table discloses revenue disaggregated by geographical market (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Service revenue:
|
|
|
|
United States
|
$
|
22,689
|
|
|
$
|
19,252
|
|
Canada
|
3,971
|
|
|
3,811
|
|
Europe
|
1,361
|
|
|
2,122
|
|
Central and South America
|
710
|
|
|
564
|
|
Others
|
204
|
|
|
370
|
|
Total service revenue
|
28,935
|
|
|
26,119
|
|
|
|
|
|
Subscriber equipment sales:
|
|
|
|
United States
|
$
|
1,443
|
|
|
$
|
2,211
|
|
Canada
|
1,083
|
|
|
812
|
|
Europe
|
494
|
|
|
577
|
|
Central and South America
|
266
|
|
|
312
|
|
Others
|
(27
|
)
|
|
47
|
|
Total subscriber equipment sales
|
3,259
|
|
|
3,959
|
|
|
|
|
|
Total revenue
|
$
|
32,194
|
|
|
$
|
30,078
|
|
Contract Balances
The following table discloses information about accounts receivable, costs to obtain a contract (as recorded in intangible and other assets, net on the Company's condensed consolidated balance sheet), and contract liabilities (as recorded in both current and long-term deferred revenue on the Company's condensed consolidated balance sheet) from contracts with customers (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Accounts receivable
|
$
|
21,544
|
|
|
$
|
21,760
|
|
Capitalized costs to obtain a contract
|
1,919
|
|
|
1,976
|
|
Contract liabilities
|
32,408
|
|
|
35,183
|
|
Accounts Receivable
Included in the accounts receivable balance in the table above are contract assets, which represent primarily unbilled amounts related to performance obligations satisfied by the Company of $2.5 million and $2.2 million as of March 31, 2020 and December 31, 2019, respectively.
The Company has agreements with certain of its independent gateway operators ("IGOs") whereby the parties net settle outstanding payables and receivables between the respective entities on a periodic basis. As of March 31, 2020 and December 31, 2019, $6.1 million and $6.5 million, respectively, related to these agreements was included in accounts receivable on the Company’s condensed consolidated balance sheet.
Costs to Obtain a Contract
The Company also capitalizes costs to obtain a contract, which include certain deferred subscriber acquisition costs that are amortized consistently with the pattern of transfer of the good or delivery of the service to which the asset relates. The Company’s subscriber acquisition costs primarily include dealer and internal sales commissions and certain other costs, including but not limited to, promotional costs, cooperative marketing credits and shipping and fulfillment costs. The Company capitalizes incremental costs to obtain a contract to the extent it expects to recover them. These capitalized contract costs include only internal and external initial activation commissions as they are considered incremental and would not have been incurred if the contract had not been obtained. These capitalized costs are included in other assets on the Company’s condensed consolidated balance sheet and are amortized to marketing, general and administrative expenses on the Company’s condensed consolidated statement of operations on a straight-line basis over the estimated customer life of three years, which considers anticipated contract renewals. For the three months ended March 31, 2020 and 2019, the amount of amortization related to previously capitalized costs to obtain a contract was $0.3 million and $0.4 million, respectively.
Contract Liabilities
Contract liabilities, which are included in deferred revenue on the Company’s condensed consolidated balance sheet, represent the Company’s obligation to transfer service or equipment to a customer from whom it has previously received consideration. The amount of revenue recognized during the three months ended March 31, 2020 and 2019 from performance obligations included in the contract liability balance at the beginning of each of the periods was $13.3 million and $13.7 million, respectively.
In general, the duration of the Company’s contracts is one year or less; however, from time to time, the Company offers multi-year contracts. As of March 31, 2020, the Company expects to recognize $27.2 million, or approximately 84%, of its remaining performance obligations during the next twelve months and $2.3 million, or approximately 7%, between two to six years from the balance sheet date. The remaining $2.9 million, or approximately 9%, is related to a single contract and will be recognized as work is performed by the Company, the timing of which is currently unknown.
3. CREDIT LOSSES
Adoption of ASU No. 2016-13 "Credit Losses"
On January 1, 2020, the Company adopted the provisions of ASU No. 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments, and recognized the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained deficit. As a result of adopting ASU No. 2016-13, the Company recorded a net decrease to stockholders' equity of $1.7 million, which resulted in an increase to the opening retained deficit balance as of January 1, 2020. The most significant driver of this adjustment was the Company’s change in accounting policy related to expected losses (rather than incurred losses) from trade receivables applied to its portfolio based on historical and future performance.
Receivables are recorded when the right to consideration from the customer becomes unconditional, which is generally upon billing or upon satisfaction of a performance obligation, whichever is earlier. Accounts receivable are uncollateralized, without interest, and consist primarily of receivables from the sale of Globalstar services and equipment. For service customers, payment is generally due within thirty days of the invoice date and for equipment customers, payment is generally due within thirty to sixty days of the invoice date, or, for some customers, may be made in advance of shipment.
Credit Losses
The Company performs ongoing credit evaluations of its customers and impairs receivable balances by recording specific allowances for bad debts based on factors such as supportable and reasonable current trends, the length of time the receivables are past due and historical collection experience. The Company believes that historical collection experience is the most reasonable basis for predicting future performance. The Company’s major portfolio of contract assets are customer receivables and, as such, historical delinquency percentages are generally consistent over time. The estimate of the allowance for credit losses is computed using aging schedules by type of revenue (service and subscriber equipment), by product (Duplex, SPOT and Commercial IoT) and by country. As discussed above, accounts receivable are considered past due in accordance with the contractual terms of the arrangements. The Company applies a loss rate to its portfolio of trade receivables based on past-due status and records an allowance for doubtful accounts, which represents the expected losses of those trade receivables over their estimated contractual life. The estimated life may vary by service and product type, but is generally less than one year. Allowances are generally recorded for all aging categories of outstanding receivables, including those in the current category (which is a change from legacy GAAP). Accounts receivable balances that are determined likely to be uncollectible are included in the allowance for doubtful accounts. After attempts to collect a receivable have failed, the receivable is written off against the allowance.
In March 2020, after the Company adopted ASU No. 2016-13, the World Health Organization declared the outbreak COVID-19 a global pandemic. COVID-19 has resulted in some disruption to the Company, primarily as it relates to the volume of equipment sales and uncertainties impacting the collection of certain outstanding receivables. Although the Company expects this disruption to be temporary, it has considered the potential impact of COVID-19 on its portfolio of trade receivables and has increased its loss rate for such receivables for the period ending March 31, 2020, where necessary. The Company will continue to reassess its sales and collections of receivables each reporting period to support its allowance across its portfolio.
The following is a summary of the activity in the allowance for doubtful accounts as of March 31, 2020 (in thousands):
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,952
|
|
Impact of adoption of ASU 2016-13
|
|
1,684
|
|
Provision, net of recoveries
|
|
721
|
|
Write-offs and other adjustments
|
|
(710
|
)
|
Balance at end of period
|
|
$
|
4,647
|
|
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Globalstar System:
|
|
|
|
|
|
Space component
|
|
|
|
|
|
First and second-generation satellites in service
|
$
|
1,195,509
|
|
|
$
|
1,195,509
|
|
Second-generation satellite, on-ground spare
|
32,443
|
|
|
32,443
|
|
Ground component
|
265,661
|
|
|
269,547
|
|
Construction in progress:
|
|
|
|
|
|
Ground component
|
16,665
|
|
|
16,040
|
|
Next-generation software upgrades
|
4,293
|
|
|
3,699
|
|
Other
|
1,716
|
|
|
1,433
|
|
Total Globalstar System
|
1,516,287
|
|
|
1,518,671
|
|
Internally developed and purchased software
|
18,680
|
|
|
18,922
|
|
Equipment
|
8,673
|
|
|
8,731
|
|
Land and buildings
|
3,095
|
|
|
3,287
|
|
Leasehold improvements
|
1,636
|
|
|
1,633
|
|
Total property and equipment
|
1,548,371
|
|
|
1,551,244
|
|
Accumulated depreciation
|
(773,369
|
)
|
|
(751,330
|
)
|
Total property and equipment, net
|
$
|
775,002
|
|
|
$
|
799,914
|
|
Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation and ground upgrades. The remaining ground component of construction in progress includes costs (including capitalized interest) incurred for assets to upgrade the Company's ground infrastructure in certain regions around the world. These gateway assets will be deployed based on coverage optimization. The ground component of construction in progress also includes costs (including capitalized interest) associated with the Company's contract for the procurement and production of new antennas for substantially all of the Company's gateways. The Company plans to deploy these antennas on a rolling basis over the next few years.
Amounts included in the Company’s second-generation satellite, on-ground spare balance as of March 31, 2020 and December 31, 2019, consist primarily of costs related to a spare second-generation satellite that has not been placed in orbit, but is capable of being included in a future launch. As of March 31, 2020, this satellite has not been placed into service; therefore, the Company has not started to record depreciation expense.
5. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Principal
Amount
|
|
Unamortized Discount and Deferred Financing Costs
|
|
Carrying
Value
|
|
Principal
Amount
|
|
Unamortized Discount and Deferred Financing Costs
|
|
Carrying
Value
|
Facility Agreement
|
$
|
190,084
|
|
|
$
|
9,237
|
|
|
$
|
180,847
|
|
|
$
|
190,361
|
|
|
$
|
10,185
|
|
|
$
|
180,176
|
|
Second Lien Term Loan Facility
|
208,368
|
|
|
34,585
|
|
|
173,783
|
|
|
201,495
|
|
|
35,448
|
|
|
166,047
|
|
Loan Agreement with Thermo
|
—
|
|
|
—
|
|
|
—
|
|
|
135,105
|
|
|
18,562
|
|
|
116,543
|
|
8.00% Convertible Senior Notes Issued in 2013
|
1,410
|
|
|
—
|
|
|
1,410
|
|
|
1,410
|
|
|
—
|
|
|
1,410
|
|
Total Debt
|
399,862
|
|
|
43,822
|
|
|
356,040
|
|
|
528,371
|
|
|
64,195
|
|
|
464,176
|
|
Less: Current Portion
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-Term Debt
|
$
|
399,862
|
|
|
$
|
43,822
|
|
|
$
|
356,040
|
|
|
$
|
528,371
|
|
|
$
|
64,195
|
|
|
$
|
464,176
|
|
The principal amounts shown above include payment of in-kind interest, as applicable. The carrying value is net of deferred financing costs and any discounts to the loan amounts at issuance, including accretion, as further described below. As of March 31, 2020, there is no current portion of long-term debt since there are no scheduled principal repayments due within one year of the balance sheet date.
As previously discussed, the Company sought relief under the CARES Act, including receiving a $5.0 million loan under the payroll protection program in April 2020. Due to restrictions in the First Lien Facility Agreement and Second Lien Term Loan Facility limiting the Company's ability to incur indebtedness, the execution of this loan required a waiver under these facility agreements, which was approved by the Company's first and second lien lenders. 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. The Company's first and second lien lenders would require the Company to accelerate the repayment of any portion of the loan amount that is not forgiven.
First Lien Facility Agreement
In 2009, the Company entered into the Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Société Générale, Natixis, Crédit Agricole Corporate and Investment Bank and Crédit Industriel et Commercial, as arrangers, and BNP Paribas, as the security agent. The Facility Agreement was amended and restated in July 2013, August 2015, June 2017 and November 2019.
The Facility Agreement is scheduled to mature in December 2022. Indebtedness under the Facility Agreement bears interest at a floating rate of LIBOR plus a margin that increases by 0.5% each year to a maximum rate of LIBOR plus 5.75%. The current interest rate is LIBOR plus 4.25%. Interest on the Facility Agreement is payable semi-annually in arrears on June 30 and December 31 of each calendar year. Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by Bpifrance Assurance Export S.A.S. (“BPIFAE”), the French export credit agency. The Company’s obligations under the Facility Agreement are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.
The Facility Agreement contains customary events of default and requires that the Company satisfy various financial and non-financial covenants. The covenants in the Facility Agreement limit the Company's ability to, among other things, incur or guarantee additional indebtedness; make certain investments, acquisitions or capital expenditures above certain agreed levels; pay dividends or repurchase or redeem capital stock or subordinated indebtedness; grant liens on its assets; incur restrictions on the ability of its subsidiaries to pay dividends or to make other payments to the Company; enter into transactions with its affiliates; merge or consolidate with other entities or transfer all or substantially all of its assets; and transfer or sell assets. As previously discussed, the Company received a loan under the CARES Act in April 2020. Due to restrictions limiting the Company's ability to incur
indebtedness, the execution of this loan required a waiver under the Facility Agreement, which was approved by the Company's senior lenders.
In calculating compliance with the financial covenants of the Facility Agreement, the Company may include certain cash funds contributed to the Company from the issuance of the Company's common stock and/or subordinated indebtedness. These funds are referred to as “Equity Cure Contributions” and may be used to achieve compliance with financial covenants through maturity. If the Company violates any covenants and is unable to obtain a sufficient Equity Cure Contribution or obtain a waiver, it would be in default under the Facility Agreement and payment of the indebtedness could be accelerated. The acceleration of the Company's indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-acceleration provisions. As of March 31, 2020, the Company was in compliance with respect to the covenants of the Facility Agreement. The Company continues to monitor the impact of COVID-19 on its results of operations and liquidity relative to compliance with financial covenants; at this time, the Company expects it will remain in compliance with such covenants over the next twelve months as calculated under the terms of the Facility Agreement.
The Facility Agreement also requires the Company to maintain a debt service reserve account, which is pledged to secure all of the Company's obligations under the Facility Agreement. The required balance in the debt service reserve account is fixed and 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 restricted cash on the Company's condensed consolidated balance sheet as it will 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 the Company 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. The Company currently expects to fulfill this requirement with proceeds from the exercise of warrants issued to the Second Lien Term Loan Facility lenders in November 2019.
Second Lien Facility Agreement
In November 2019, the Company 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 the option of the Company, subject to restrictions in the Facility Agreement).
The cash proceeds from this loan were net of a 3%, or $6.0 million, original issue discount (the "OID"). The portion of this OID that was not included in the reacquisition price of the Subordinated Loan Agreement (see previous section) was recorded as a debt discount of $4.0 million. This debt discount was netted against the principal amount of the loan and is being accreted using an effective interest method to interest expense over the term of the loan.
As additional consideration for the loan, the Company issued the lenders warrants to purchase 124.5 million shares of voting common stock at 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 Company determined that the warrants were equity instruments and recorded them as a part of stockholders’ equity. A portion of the warrants' fair value was recorded as a debt discount of $15.8 million. This debt discount was netted against the principal amount of the loan and is being accreted using an effective interest method to interest expense over the term of the loan.
The Second Lien Term Loan Facility contains customary events of default and requires that the Company satisfy various financial and non-financial covenants and are generally consistent with the covenants under the Company's Facility Agreement (discussed above). As previously discussed, the Company received a loan under the CARES Act in April 2020. Due to restrictions limiting the Company's ability to incur indebtedness, the execution of this loan required a waiver under the Second Lien Term Loan Facility, which was approved by the Company's second lien lenders. As of March 31, 2020, the Company was in compliance with the covenants of the Second Lien Term Loan Facility. The Company continues to monitor the impact of COVID-19 on its results of operations and liquidity relative to compliance with financial covenants; at this time the Company expects it will remain in compliance with such covenants over the next twelve months as calculated under the terms of the Second Lien Term Loan Facility.
The Company evaluated the various embedded derivatives within the Second Lien Term Loan Facility related to certain contingently exercisable put options. Due to the substantial discount upon issuance, as calculated under applicable accounting guidance, these prepayment features within the Second Lien Term Loan Facility were required to be bifurcated and separately
valued. The Company recorded the compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount, which is netted against the face value of the Second Lien Term Loan Facility.
The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the maturity of the Second Lien Term Loan Facility using an effective interest rate method. The fair value of the compound embedded derivative liability is marked-to-market at the end of each reporting period, with any changes in value reported in the condensed consolidated statements of operations. The Company determines the fair value of the compound embedded derivative using a probability weighted discounted cash flow model.
Thermo Loan Agreement
In connection with the amendment and restatement of the Facility Agreement in July 2013, the Company amended and restated its loan agreement with Thermo (the “Loan Agreement”). All obligations of the Company to Thermo under the Loan Agreement were subordinated to the Company’s 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 was 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. In accordance with applicable accounting guidance for debt extinguishment with related parties, upon conversion, the remaining debt discount was written off and recorded as a contribution to capital though equity and the associated derivative liability (discussed below) was marked to market at the conversion date and then extinguished through equity as a contribution to capital.
The Company evaluated the various embedded derivatives within the Loan Agreement (See Note 7: Fair Value Measurements for additional information about the embedded derivative in the Loan Agreement). The Company determined that the conversion option and the contingent put feature upon a fundamental change required bifurcation from the Loan Agreement. The conversion option and the contingent put feature were not deemed clearly and closely related to the Loan Agreement and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount, which was netted against the face value of the Loan Agreement.
Prior to conversion of the Loan Agreement, the Company was accreting the debt discount associated with the compound embedded derivative liability to interest expense through the maturity of the Loan Agreement using an effective interest rate method. The fair value of the compound embedded derivative liability was marked-to-market at the end of each reporting period (and upon conversion), with any changes in value reported in the condensed consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.
8.00% Convertible Senior Notes Issued in 2013
In May 2013, the Company issued $54.6 million aggregate principal amount of its 2013 8.00% Notes. The 2013 8.00% Notes are convertible into shares of common stock at a conversion price of $0.69 per share of common stock, as adjusted pursuant to the terms of the Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as Trustee (the “Indenture”). The 2013 8.00% Notes are senior unsecured debt obligations that will mature on April 1, 2028, subject to various call and put features, and bear interest at a rate of 8.00% per annum. Interest is paid in cash at a rate of 5.75% and in additional notes at a rate of 2.25%. Since issuance, $55.4 million of principal amount of the 2013 8.00% Notes have been converted; no amount was converted or redeemed during the three months ended March 31, 2020.
The Company may redeem the 2013 8.00% Notes, with the prior approval of the majority lenders under the Facility Agreement and the Second Lien Term Loan Facility, in whole or in part at a price equal to the principal amount of the 2013 8.00% Notes to be redeemed plus all accrued and unpaid interest thereon. A holder of the 2013 8.00% Notes has the right to require the Company to purchase some or all of the 2013 8.00% Notes held by it on April 1, 2023, or at any time if there is a Fundamental Change (as defined in the Indenture), at a price equal to the principal amount of the 2013 8.00% Notes to be purchased plus accrued and unpaid interest. A holder may convert its 2013 8.00% Notes at its option at any time prior to April 1, 2028, into shares of common stock (or cash, at the option of the Company and subject to the consent of its lenders under the Facility Agreement and Second Lien Term Loan Facility).
The Indenture provides for customary events of default. As of March 31, 2020, the Company was in compliance with respect to the terms of the 2013 8.00% Notes and the Indenture.
The Company evaluated the various embedded derivatives within the Indenture for the 2013 8.00% Notes and determined that the conversion option and the contingent put feature required bifurcation. The Company recorded this compound embedded derivative liability with a corresponding debt discount which was netted against the face value of the 2013 8.00% Notes. The debt discount has been fully accreted. At the end of each reporting period, the Company marks to market the fair value of the compound embedded derivative liability, which is determined using a Monte Carlo simulation model.
6. DERIVATIVES
In connection with certain existing borrowing arrangements, the Company was required to record derivative instruments on its condensed consolidated balance sheets. None of these derivative instruments are designated as a hedge. The following table discloses the fair values of the derivative instruments on the Company’s condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Derivative liabilities:
|
|
|
|
|
|
Compound embedded derivative with the 2013 8.00% Notes
|
$
|
(275
|
)
|
|
$
|
(522
|
)
|
Compound embedded derivative with the Loan Agreement with Thermo
|
—
|
|
|
(1,270
|
)
|
Compound embedded derivative with the Second Lien Term Loan Facility
|
(3,280
|
)
|
|
(2,000
|
)
|
Total derivative liabilities
|
$
|
(3,555
|
)
|
|
$
|
(3,792
|
)
|
The following table discloses the changes in value recorded as derivative gain (loss) in the Company’s condensed consolidated statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Compound embedded derivative with the 2013 8.00% Notes
|
$
|
247
|
|
|
$
|
215
|
|
Compound embedded derivative with the Loan Agreement with Thermo
|
212
|
|
|
56,793
|
|
Compound embedded derivative with the Second Lien Term Loan Facility
|
(1,280
|
)
|
|
—
|
|
Total derivative gain (loss)
|
$
|
(821
|
)
|
|
$
|
57,008
|
|
The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments, including the conversion option and the contingent put feature within both the 2013 8.00% Notes and the Loan Agreement with Thermo as well as certain contingent put features within the Second Term Loan Facility. The fair value of each embedded derivative liability is marked-to-market at the end of each reporting period, or more frequently as deemed necessary, with any changes in value reported in its condensed consolidated statements of operations and its condensed consolidated statements of cash flows as an operating activity. The Company classifies its derivative liabilities consistent with the classification of the underlying debt on the Company's condensed consolidated balance sheet. See Note 7: Fair Value Measurements for further discussion.
7. FAIR VALUE MEASUREMENTS
The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities, including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Recurring Fair Value Measurements
The following tables provide a summary of the liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
Balance
|
Compound embedded derivative with the 2013 8.00% Notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(275
|
)
|
|
$
|
(275
|
)
|
Compound embedded derivative with the Second Lien Term Loan Facility
|
—
|
|
|
—
|
|
|
(3,280
|
)
|
|
(3,280
|
)
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,555
|
)
|
|
$
|
(3,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
Balance
|
Compound embedded derivative with the 2013 8.00% Notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(522
|
)
|
|
$
|
(522
|
)
|
Compound embedded derivative with the Loan Agreement with Thermo
|
—
|
|
|
—
|
|
|
(1,270
|
)
|
|
(1,270
|
)
|
Compound embedded derivative with the Second Lien Term Loan Facility
|
—
|
|
|
—
|
|
|
(2,000
|
)
|
|
(2,000
|
)
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,792
|
)
|
|
$
|
(3,792
|
)
|
Derivative Liabilities
All of the Company's derivative liabilities are classified as Level 3. The Company marks-to-market these liabilities at each reporting date, or more frequently as deemed necessary, with the changes in fair value recognized in the Company’s condensed consolidated statements of operations. During the first quarter of 2020, the compound embedded derivative with the Loan Agreement with Thermo was extinguished and, therefore, as of March 31, 2020, the value was zero and there were no significant qualitative Level 3 inputs utilized in a March 31, 2020 valuation. See Note 5: Long-Term Debt and Other Financing Arrangements and Note 6: Derivatives for further discussion.
2013 8.00% Notes and Loan Agreement with Thermo
The significant quantitative Level 3 inputs utilized in the valuation models are shown in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Stock Price
Volatility
|
|
Risk-Free
Interest
Rate
|
|
Note
Conversion
Price
|
|
Discount Rate
|
|
Market Price of Common Stock
|
Compound embedded derivative with the 2013 8.00% Notes
|
80% - 118%
|
|
0.3
|
%
|
|
$0.69
|
|
33
|
%
|
|
$0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Stock Price
Volatility
|
|
Risk-Free
Interest
Rate
|
|
Note
Conversion
Price
|
|
Discount Rate
|
|
Market Price of Common Stock
|
Compound embedded derivative with the 2013 8.00% Notes
|
70% - 130%
|
|
1.6
|
%
|
|
$0.69
|
|
27
|
%
|
|
$0.52
|
Compound embedded derivative with the Loan Agreement with Thermo
|
70% - 130%
|
|
1.6
|
%
|
|
$0.69
|
|
27
|
%
|
|
$0.52
|
Fluctuation in the Company’s stock price is a significant driver of the changes in the derivative valuations during each reporting period. As the stock price decreases, the value to the holder of the instrument generally decreases, thereby decreasing the liability on the Company’s condensed consolidated balance sheet. Stock price volatility is a significant unobservable input used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the expected volatility of the Company's stock price. Decreases in expected volatility would generally result in a lower fair value measurement. In addition to these inputs, the valuation model also included the following inputs and features: payment-in-kind interest payments, make-whole premiums, expected term and the principal balance of each loan at the balance sheet date. There are also certain put and call features within the 2013 8.00% Notes that impact the valuation model.
Second Lien Term Loan Facility
The compound embedded derivative with the Second Lien Term Loan Facility is valued using a probability weighted discounted cash flow model. The most significant observable input used in the fair value measurement is the discount yield, which was 23% and 18% at March 31, 2020 and December 31, 2019, respectively. Increases in the discount yield generally will result in a higher fair value measurement in the model. The significant unobservable inputs used in the fair value measurement include probability of change of control and the estimated timing and amounts of cash flows associated with certain mandatory prepayments within the debt agreement. Increases in the assumed probability of a change of control in the short-term would generally result in a lower fair value measurement, while increases in the assumed probability of a change in control in the long-term would generally result in a higher fair value measurement.
Rollforward of Recurring Level 3 Liabilities
The following table presents a rollforward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
Balance at beginning of period, January 1, 2020 and 2019, respectively
|
$
|
(3,792
|
)
|
|
$
|
(146,865
|
)
|
Issuance of compound embedded derivative with the Second Lien Term Loan Facility
|
—
|
|
|
(2,000
|
)
|
Derivative adjustment related to conversions and exercises
|
1,058
|
|
|
—
|
|
Unrealized (loss) gain, included in derivative (loss) gain
|
(821
|
)
|
|
145,073
|
|
Balance at end of period, March 31, 2020 and December 31, 2019, respectively
|
$
|
(3,555
|
)
|
|
$
|
(3,792
|
)
|
Fair Value of Debt Instruments
The Company believes it is not practicable to determine the fair value of the Facility Agreement and the Second Lien Term Loan Facility without incurring significant additional costs. Unlike typical long-term debt, interest rates and other terms for these instruments are not readily available and generally involve a variety of factors, including due diligence by the debt holders. The following table sets forth the carrying values and estimated fair values of the Company's other debt instruments, which are classified as Level 3 financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
Loan Agreement with Thermo
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
116,543
|
|
|
$
|
88,886
|
|
2013 8.00% Notes
|
1,410
|
|
|
796
|
|
|
1,410
|
|
|
875
|
|
Nonrecurring Fair Value Measurements
The Company follows the authoritative guidance regarding non-financial assets and non-financial liabilities that are remeasured at fair value on a nonrecurring basis. On February 19, 2020, Thermo converted the entire principal balance outstanding under the Loan Agreement with Thermo into shares of common stock. See further discussion in Note 5: Long-Term Debt and Other Financing Arrangements. As a result of the conversion, the Company wrote off the total fair value of the compound embedded derivative liability with the Loan Agreement with Thermo based on the value of the derivative on the conversion date. As of the date of conversion, the fair value of the compound embedded derivative liability with the Loan Agreement with Thermo was $1.1 million. The significant quantitative Level 3 inputs utilized in the valuation models as of the conversion date are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 19, 2020
|
|
Stock Price
Volatility
|
|
Risk-Free Interest Rate
|
|
Note Conversion Price
|
|
Discount Rate
|
|
Market Price of Common Stock
|
Compound embedded derivative with the Loan Agreement with Thermo
|
70% - 130%
|
|
1.4
|
%
|
|
$0.69
|
|
27
|
%
|
|
$0.42
|
8. RELATED PARTY TRANSACTIONS
Payables to Thermo and other affiliates related to normal purchase transactions were $0.4 million and $0.3 million as of March 31, 2020 and December 31, 2019, respectively.
Transactions with Thermo
Certain general and administrative expenses are incurred by Thermo on behalf of the Company. These expenses, which include non-cash expenses that the Company accounts for as a contribution to capital, related to services provided by certain executive officers of Thermo and expenses incurred by Thermo on behalf of the Company which are charged to the Company. The expenses charged are based on actual amounts (with no mark-up) incurred by Thermo or upon allocated employee time. The expenses charged to the Company were $0.2 million and $0.1 million during the three months ended March 31, 2020 and 2019, respectively.
In February 2019, the Company entered into a lease agreement with Thermo Covington, LLC for the Company's headquarters office. Annual lease payments started at $1.4 million per year, increasing at a rate of 2.5% per year, for a lease term of ten years. During the three months ended March 31, 2020 and 2019, the Company incurred lease expense of $0.4 million and $0.3 million, respectively, due to Thermo under this lease agreement.
On February 19, 2020, Thermo converted the entire principal balance outstanding under the Loan Agreement resulting in the issuance of 200.1 million shares of common stock.
In November 2019, the Company entered into the Second Lien Term Loan Facility. Thermo's participation in the Second Lien Term Loan Facility was $95.1 million. This principal balance earns paid-in-kind interest at a rate of 13% per annum. Interest accrued since inception with respect to Thermo's portion of the debt outstanding on the Second Lien Term Loan Facility was approximately $4.3 million, of which $3.2 million was accrued during the three months ended March 31, 2020. In connection
with the issuance of the Second Lien Term Loan Facility, the holders received warrants to purchase shares of voting common stock, of which Thermo received 59.5 million warrants with an exercise price of $0.38 per share. As of March 31, 2020, approximately 50.0 million warrants remain outstanding.
Additionally, the Facility Agreement requires Thermo to maintain minimum and maximum ownership levels in the Company's common stock.
The Company has a Strategic Review Committee that is required to remain in existence for as long as Thermo and its affiliates beneficially own forty-five percent (45%) or more of Globalstar’s outstanding common stock. To the extent permitted by applicable law, the Strategic Review Committee has exclusive responsibility for the oversight, review and approval of, among other things and subject to certain exceptions, any acquisition by Thermo and its affiliates of additional newly-issued securities of the Company and any transaction between the Company and Thermo and its affiliates with a value in excess of $250,000.
See Note 5: Long-Term Debt and Other Financing Arrangements for further discussion of the Company's debt and financing transactions with Thermo.
9. (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share is computed by dividing (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The numerator used to calculate diluted EPS includes the effect of dilutive securities, including interest expense, net, and derivative gains or losses reflected in net (loss) income. During the third quarter of 2019, the Company identified a misapplication of GAAP in the previously reported calculation of net (loss) income attributable to common stockholders in the numerator of diluted EPS for certain prior periods. The correction of this calculation had no impact on net (loss) income, retained deficit or any other financial statement line items. For comparative purposes, the prior period calculation of diluted EPS has been adjusted to conform to current period presentation throughout this filing. Common stock equivalents are included in the calculation of diluted earnings per share only when the effect of their inclusion would be dilutive. Potentially dilutive securities primarily include outstanding stock-based awards, convertible notes, warrants and shares issuable pursuant to the Company's Employee Stock Purchase Plan.
The following table sets forth the calculation of basic and diluted (loss) earnings per share and reconciles basic weighted average shares to diluted weighted average shares of common stock outstanding for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Net (loss) income
|
$
|
(38,223
|
)
|
|
$
|
25,771
|
|
Effect of dilutive securities:
|
|
|
|
2013 8.00% Notes
|
—
|
|
|
(188
|
)
|
Loan Agreement with Thermo
|
—
|
|
|
(52,296
|
)
|
Loss to common stockholders plus assumed conversions
|
$
|
(38,223
|
)
|
|
$
|
(26,713
|
)
|
Weighted average common shares outstanding:
|
|
|
|
Basic shares outstanding
|
1,557,960
|
|
|
1,448,318
|
|
Incremental shares from assumed exercises, conversions and other issuance of:
|
|
|
|
Stock options, restricted stock, restricted stock units and ESPP
|
—
|
|
|
3,204
|
|
2013 8.00% Notes
|
—
|
|
|
1,998
|
|
Loan Agreement with Thermo
|
—
|
|
|
178,737
|
|
Diluted shares outstanding
|
1,557,960
|
|
|
1,632,257
|
|
Net (loss) income per common share:
|
|
|
|
Basic
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
Diluted
|
(0.02
|
)
|
|
(0.02
|
)
|
For the three months ended March 31, 2020, 21.1 million shares of potential common stock were excluded from diluted shares outstanding because the effects of potentially dilutive securities would be anti-dilutive.