Globalstar, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Globalstar provides global mobile satellite voice and data services, equipment, and commercial IoT connectivity. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Service revenue | $27.1 | $26.7 | $56.0 | $52.8 |
| Subscriber equipment sales | $3.3 | $4.5 | $6.5 | $8.5 |
| Total revenue | $30.4 | $31.2 | $62.6 | $61.3 |
| Operating expenses | $45.7 | $47.8 | $92.0 | $96.3 |
| Operating loss | $(15.4) | $(16.7) | $(29.5) | $(35.0) |
| Net income (loss) | $(24.7) | $6.2 | $(63.0) | $32.0 |
| Operating cash flow | Not presented separately | Not presented separately | $8.9 | $1.8 |
Q2 operating margin was approximately negative 50.6%, compared with negative 53.4% a year earlier. First-half operating margin improved to approximately negative 47.1% from negative 57.1%. Interest expense, foreign currency movements, and derivative revaluations materially affected net results. Q2 derivative gain was $1.2 million versus $35.1 million in 2019; first-half gain was $0.3 million versus $92.1 million. First-half 2020 included a $7.6 million foreign currency loss, compared with a $1.0 million gain in 2019. These non-operating items make net income comparisons less indicative of operating trends.
Cash and liquidity at June 30: Cash and cash equivalents were $12.1 million and restricted cash was $54.9 million, versus $7.6 million and $51.5 million, respectively, at December 31, 2019. Of restricted cash, $51.2 million was held in a debt-service reserve for the December 2022 facility maturity and is not ordinary operating cash. First-half investing cash outflow was $4.9 million; financing cash inflow was $4.0 million. Cash, cash equivalents, and restricted cash together increased $7.8 million.
Debt and balance sheet: Debt carrying value was $369.2 million at June 30, 2020, down from $464.2 million at year-end; $45.0 million was classified as current. Principal debt was $411.9 million before unamortized discounts and financing costs. The facility agreement had $190.1 million principal outstanding, floating-rate interest at LIBOR plus 4.75%, and a December 2022 maturity. The second-lien facility had $215.5 million principal outstanding and 13.5% paid-in-kind interest. Total assets were $923.6 million and stockholders’ equity was $470.5 million.
Material changes and business trends
- Q2 total revenue declined 3% year over year, while first-half revenue rose 2%. Service revenue increased, but equipment sales fell 27% in Q2 and 23% in the first half.
- Engineering and other service revenue rose to $2.5 million in Q2 and $7.3 million in the first half, including $2.0 million and $6.0 million, respectively, recognized on milestones under an engineering agreement.
- Average subscribers were 757,232 in Q2, down from 772,807. Commercial IoT subscribers grew, while Duplex and SPOT averages declined. Management cited lower activations, churn, and COVID-related weakness.
- Thermo converted its entire loan balance, $137.4 million including accrued interest, into 200.1 million common shares on February 19, 2020. The conversion reduced reported debt but increased dilution; common shares outstanding rose from 1.465 billion at year-end to 1.670 billion at June 30.
- The company received a $5.0 million Paycheck Protection Program loan in April and expects to seek forgiveness; forgiveness is not assured. If not forgiven, the loan bears 1% interest and lenders require accelerated repayment of any unforgiven amount.
Outlook, risks, and contingencies
- Management reported lower equipment demand, customer requests for pricing concessions, and collection concerns, particularly among retail and oil-and-gas customers. It expects weaker demand to persist at least until those industries recover; the pandemic’s duration and financial impact remain uncertain.
- Management stated that liquidity was expected to cover obligations for the next 12 months, conditional on continued covenant compliance. The company was compliant with its disclosed debt covenants at June 30 but was monitoring the effects of COVID-19 and warned that future noncompliance could require an equity cure or lender waiver; absent a remedy, lenders could accelerate debt.
- The facility agreement requires at least $45.0 million of equity to be raised before March 31, 2021, with proceeds applied to scheduled principal payments. Globalstar expected to meet this through exercise of remaining lender warrants, but the warrants’ $0.38 exercise price creates a risk if the share price is insufficient; alternative equity funding may be needed.
- COVID-19 also presents supply-chain risk, with significant sourcing in China, and could affect workforce operations, international regulatory processes, customer payments, and demand. Management identified no impairment indicators based on its updated projections at June 30.
- U.S. tariffs on certain China-imported products added $0.2 million of cost in Q2 and $0.4 million in the first half. The company disclosed no material off-balance-sheet transactions and no legal proceedings.
- No formal revenue or earnings guidance was provided. The company continued pursuing international terrestrial spectrum approvals; 3GPP approval of the 5G variant of Band 53, n53, was announced in March 2020.
Important facts for investors to verify
- Whether Globalstar can satisfy the $45.0 million equity-raising requirement by March 31, 2021, and fund the June 2021 principal payment.
- Future covenant headroom, availability of equity cures or waivers, and the consequences of any breach under the first-lien facility.
- Whether the PPP loan is forgiven and whether COVID-related customer demand, pricing concessions, receivable collections, and supply-chain disruptions worsen.
- How much of operating cash is practically available given the substantial restricted-cash balance and upcoming debt service.
- The sustainability of revenue growth, particularly excluding milestone-based engineering revenue, and trends in equipment sales, subscribers, churn, and ARPU.
- The continuing effects of high-cost second-lien debt, foreign-exchange losses, derivative revaluations, and share dilution from debt conversions or warrant exercises.