Globalstar, Inc. 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Globalstar, Inc., a provider of mobile voice and data communications via satellite, for the period ended June 30, 2010. The company operates in over 120 countries, serving commercial, recreational, and government sectors. The reporting period covers the three and six months ended June 30, 2010, compared to the same periods in 2009. The company is currently in a capital-intensive phase, constructing and preparing to launch a second-generation satellite constellation to replace aging infrastructure.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2010 |
6 Months Ended June 30, 2010 |
|---|---|---|
| Total Revenue | $17,622 | $33,193 |
| Operating Loss | $(8,984) | $(17,645) |
| Net Loss | $(19,249) | $(54,891) |
| Loss Per Share (Basic/Diluted) | $(0.07) | $(0.20) |
| Cash and Cash Equivalents | $87,188 | $87,188 |
| Total Debt (Long-term + Current) | $620,787 | $620,787 |
| Net Cash from Operating Activities | N/A | $(6,232) |
| Net Cash from Investing Activities | N/A | $(130,777) |
| Net Cash from Financing Activities | N/A | $155,409 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12% for the quarter and 7% for the six-month period compared to 2009. This was driven by a 49% increase in subscriber equipment sales (primarily Simplex/SPOT products) and a 3% increase in service revenue.
- Subscriber Trends: Total subscribers increased 11% year-over-year to approximately 412,000. The Simplex subscriber base grew 31% (quarter) and 33% (six months), while the traditional duplex (two-way voice) subscriber base declined 6% and 5% respectively due to satellite performance issues.
- Operating Performance: Operating loss improved significantly, decreasing 29% for the quarter and 42% for the six-month period. This improvement was due to revenue growth and a 17% reduction in total operating expenses, driven by headcount reductions and lower stock-based compensation.
- Net Loss Deterioration: Despite improved operating results, Net Loss increased 40% for the quarter and 55% for the six-month period. This was primarily caused by a massive increase in Derivative Loss ($8.1M for the quarter vs. $0.8M in 2009; $33.0M for six months vs. $0.8M in 2009). These are non-cash losses resulting from fair value adjustments to embedded derivatives in debt instruments and warrants, driven by the company's rising stock price.
- Liquidity: Cash and cash equivalents increased from $67.9M at year-end 2009 to $87.2M at June 30, 2010, supported by $151M in borrowings under the Facility Agreement.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company is heavily investing in its second-generation constellation, with estimated total costs of approximately $1.3 billion through 2013. Significant cash outflows for investing activities ($130.8M in the first six months of 2010) reflect payments for satellite construction and launch services.
- Derivative Volatility: Management notes that derivative losses are non-cash and do not affect liquidity, but they significantly impact reported net income. The fair value of derivative liabilities increases as the stock price rises.
- Operational Risks: The current satellite constellation is aging, with degraded S-band amplifiers affecting two-way voice service availability. The company relies on the deployment of the second-generation constellation (first launch expected October 2010) to resolve these issues.
- Regulatory and Legal: The company is involved in FCC proceedings regarding Ancillary Terrestrial Component (ATC) authority and spectrum sharing. Several litigation matters (IPO securities, patent infringement) have been settled or are pending, with management believing outcomes will not be materially adverse.
- Executive Changes: Following the filing, Fuad Ahmad ceased to be CFO, and Dirk J. Wild was appointed as the new CFO. The company also announced plans to relocate its headquarters to Covington, Louisiana.
Key Facts for Investor Verification
- Derivative Impact: Verify the non-cash nature of the $33M derivative loss and its specific drivers (stock price appreciation vs. interest rate caps) to understand the divergence between operating cash flow and net loss.
- Debt Covenants: Confirm compliance with the Facility Agreement covenants, specifically the minimum adjusted consolidated EBITDA and debt service coverage ratios, given the company's current loss position.
- Capital Burn Rate: Assess the sufficiency of the remaining $64.1M available under the Facility Agreement and current cash balances to fund the projected $1.3B capital expenditure program through 2013.
- Simplex vs. Duplex Mix: Monitor the continued growth of the Simplex (SPOT) business versus the decline in the Duplex business to gauge the effectiveness of the transition strategy.
- Launch Schedule: Track the progress of the second-generation satellite launches (targeted for late 2010/2011) as this is critical for resolving network degradation issues and long-term profitability.