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GlobalStar (NYSE: GSAT) disclosed:
On September 7, 2022, Apple Inc. (“Partner”) announced new satellite-enabled services for certain of its products (the “Services”). Globalstar, Inc. (“Globalstar” or the “Company”) will be the satellite operator for the Services pursuant to the terms agreement (the “Terms Agreement”) first disclosed in the Company’s Form 10-K for the year ended December 31, 2019, and certain related ancillary agreements (such agreements, together with the Terms Agreement, the “Partnership Agreements”). The Services constitute the potential service described in the Company’s previous disclosure about the Terms Agreement.
Since execution of the Terms Agreement, the parties have completed several milestones including (i) a feasibility phase, (ii) material upgrades to Globalstar’s ground network to enhance redundancy and coverage, (iii) construction of 10 new gateways around the world, (iv) the successful launch of the ground spare satellite, and (v) rigorous in-field system testing.
The Partnership Agreements generally require Globalstar to allocate network capacity (as described below) to support the Services and provide for the inclusion of Globalstar’s Band 53/n53 in Partner’s cellular-enabled devices that use the Services, for use by third parties, subject to certain terms and conditions.
It is currently expected that Partner will make the Services available to customers during the fourth quarter of 2022 (the “Service Launch”). There is no assurance that the Service Launch will occur or, if it does occur, that the Services and the revenues and other consideration expected to be received under the Partnership Agreements will be fully realized or will continue.
Certain terms of the Partnership Agreements are further described below. The description of the Terms Agreement is qualified in its entirety by the text of such agreement, which the Company has filed as an exhibit to this Current Report on Form 8-K and is incorporated herein by reference.
In consideration for the services provided by Globalstar, Partner will pay fees to Globalstar under the Partnership Agreements, including 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.
In addition, as described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2022, Partner has agreed to make certain payments to the Company for (i) 95% of the approved capital expenditures Globalstar makes in connection with the new satellites described therein (to be paid on a straight-line basis over the useful life of the satellites); (ii) certain costs of the Company’s borrowings related to the new satellites; (iii) other approved costs; and (iv) termination costs, as described more fully below, should any arise.
Furthermore, under the terms of the Partnership Agreements, Globalstar is required to raise additional debt capital for the construction and launch of the new satellites. Globalstar has mandated Goldman Sachs & Co. LLC and is currently exploring capital markets opportunities and expects to complete a financing in the fourth quarter of 2022.
Certain Obligations of Globalstar
The Partnership Agreements generally provide for Globalstar to:
•Allocate 85% of its current and future network capacity to support the Services (see further discussion of capacity below);
•Provide and maintain all resources, including personnel, software, satellite, gateways, satellite spectrum and regulatory rights necessary to provide the Services (the “Required Resources”);
•Prioritize the Services and provide Partner with priority access to the Required Resources, including the Company’s licensed satellite spectrum;
•Maintain minimum quality and coverage standards and provide continuity of service;
•Allow Partner to recoup advance payments made to Globalstar from future service fees or, to the extent recoupment is not possible, to repay such amounts in cash; and,
•Provide the Resource Protections described below.
Under certain limited circumstances, in order to facilitate the continuity of services described above, Globalstar has agreed to protective provisions, subject to certain conditions (the “Resource Protections”) including:
•Maintenance of all U.S. spectrum licenses in a single subsidiary (the “Spectrum Subsidiary”) and granting Partner the right to approve actions that could substantially affect the Services, the Required Resources or Partner’s rights under the Partnership Agreements;
•Certain restrictions on encumbrances on the Spectrum Subsidiary’s equity and assets;
•The right to take or cause the Company to take protective actions on an interim basis to retain continuity of service if the Company fundamentally breaches the Partnership Agreements and is unable to operate the satellite constellation; and,
•Subordinated liens on the Company’s assets that are used in, may be needed in, or are useful for the Services, as well as an intercreditor agreement with senior lenders which includes the right to pay down Globalstar’s senior debt under certain events.
The Partnership Agreements require Globalstar (i) upon commencement of the Services, to convert all loans outstanding under the 2019 Facility Agreement that are held by affiliates of the Thermo Companies (collectively, “Thermo”) into non-convertible perpetual preferred stock with a cash pay interest rate of 7% per annum or lower, convertible preferred stock with cash pay interest rate of 4% per annum or lower, common stock, or another security acceptable to Partner (the “Thermo Debt Conversion”) and (ii) within 90 days of the commencement of the Services, to refinance or convert all loans outstanding under the 2019 Facility Agreement that are held by persons other than Thermo on terms that are no less favorable to the Company than the Thermo Debt Conversion.
Obligations of Thermo
On September 7, 2022, Partner and Thermo entered into a lock-up and right of first offer agreement that generally (i) requires Thermo to offer any shares of Globalstar common stock to Partner before transferring them to any other Person other than affiliates of Thermo and (ii) prohibits Thermo from transferring shares of Globalstar common stock if such transfer would cause Thermo to hold less than 51.00% of the outstanding common stock of the Company for a period of 5 years from the Service Launch (as defined below). This agreement does not prohibit the Company from entering into a change of control transaction at any time.
Warrants and Right to Participate in Equity Offerings
The Partnership Agreements also provide that Partner may elect to receive warrants (the “Warrants”) to purchase up to 2.64% of the Company’s outstanding common stock, to be calculated on a fully diluted basis on the date Partner begins providing the Services, at a blended exercise price of $1.01, which is based on the price of Globalstar common stock on the dates of certain past milestones provided under the Partnership Agreements. Partner is under no obligation to receive the Warrants or to exercise them.
In addition, Partner has the right, but not the obligation, to participate in certain issuances of the Company’s equity securities, in order to maintain its percentage interest in the Company (determined on a fully diluted basis, assuming exercise of all the Warrants).
The Terms Agreement has no expiration date but provides that each party may terminate it subject to certain notice requirements and, in some cases, other conditions.
In the event Partner terminates the agreements and subject to certain conditions, Partner would be required to reimburse Globalstar for certain capital expenditures, and other costs of materials purchased or manufactured.
Item 7.01 Regulation FD Disclosure.
The transactions described under Item 8.01 of this Current Report on Form 8-K are transformational for Globalstar. The Company plans to continue to leverage its competitive advantages through a strategy that relies primarily on four pillars to drive increasing shareholder value: wholesale satellite capacity, terrestrial spectrum, IoT and legacy services. The Company will continue to focus on these pillars and believe each pillar will be affected in the following ways:
Wholesale Satellite Capacity: Globalstar intends to continue to develop wholesale customer opportunities over the Company’s retained satellite capacity for IoT and other initiatives.
Terrestrial Spectrum: The Partnership Agreement materially enhances the device ecosystem for Band 53/n53. Globalstar expects that this will accelerate terrestrial deployments and monetization of the band. Globalstar has terrestrial licenses in ten countries covering approximately 750 million POPs and expects to exceed one billion in the near-term. Prospective Globalstar spectrum partners, including cable companies, legacy or upstart wireless carriers, system integrators, utilities and other infrastructure operators, all benefit from access to uniform and increasingly “borderless” spectrum working across geographies. The Company’s expanding portfolio of terrestrial spectrum represents a substantial opportunity for the Company. Based on recent comparable transactions, the Company believes that its U.S. terrestrial spectrum is its single most valuable asset, and that, collectively, its international terrestrial spectrum may ultimately have a value substantially in excess of its U.S. terrestrial spectrum.
IoT: The Company believes interest in satellite IoT connectivity has become more critical to a growing number of sectors and use cases and plans to continue to evolve and develop its IoT initiatives. Globalstar will retain 15% of network capacity to support its existing and future Duplex, SPOT and IoT subscribers. This capacity can support an approximately fifty-fold increase in its own subscriber base following recent and planned investments in the Company’s space and ground segments. The retained satellite capacity can be used by Globalstar directly or through additional wholesale arrangements. In 2023, Globalstar expects to deploy a two-way commercial IoT product which significantly expands the market opportunity.
Legacy Services: Globalstar remains committed to its legacy satellite business and serving its current subscriber base while offering future innovations in MSS. Globalstar’s existing Duplex and SPOT customers are expected to benefit from expanded capacity through additional ground infrastructure and satellites which improve service levels.
Globalstar expects that its business strategy will allow it to generate reliable cash flow with substantial growth potential and greater profitability. Including the Partnership Agreements and excluding terrestrial spectrum, the Company expects its total revenue for the year ended December 31, 2023 to range between $185 million to $230 million, depending in part upon the Company’s achievement of certain performance and other targets under the Partnership Agreements, generating an EBITDA margin of approximately 55%. The Company expects these financial metrics to continue to improve significantly by 2026, which is expected to be the first full year in which the new satellites are operational, with total revenue expected to increase by approximately 35% compared to the 2023 forecast driven primarily by revenue growth under the Partnership Agreements.
The assumptions and estimates of the Company’s future performance are necessarily subject to a significant degree of uncertainty and risk due to a variety of factors, including those described in the Company’s annual report on Form 10-K for the year ended December 31, 2021 and any additional reports filed with the Securities and Exchange Commission. These and other factors could cause the Company’s future performance to differ materially from assumptions and estimates included herein.
To date, the Company has recognized revenue and received payments under the Terms Agreement, including for initial feasibility services, reimbursement of network upgrade and operating costs, as well as other milestone work associated with the project. These amounts are described more fully in the Company’s annual and quarterly reports for the affected periods.
Globalstar intends to host an in-person investor day in mid-November to provide additional details and updates on its competitive strengths and four-pillar strategy and answer questions from investors and analysts.
Discontinuation of Second-Generation Duplex Services
As previously disclosed, Globalstar has been evaluating the continuation of second-generation Duplex services in light of other potential uses for the Company’s capacity, such as those within the Partnership Agreements. In early 2021, the Company terminated its second-generation Duplex services to support extended testing of the Services to Partner; however, such termination was considered temporary unless or until Partner announced its intent to proceed with launch of the Services. Due to this shift in strategy triggered by today’s announcement, the Company intends to abandon its second-generation Duplex assets, including gateway property, prepaid licenses and royalties, and inventory totaling approximately $175 million.