Globalstar, Inc. — FY 2016 Form 10-K
Business context and reporting period. Globalstar provides global mobile satellite voice and data services, including Duplex, SPOT and Simplex, through its satellite constellation and gateway network. This annual filing covers the fiscal year ended December 31, 2016; quarterly results are also reported.
Financial performance and liquidity
- Revenue: $96.9 million, up 7.0% from $90.5 million in 2015. Service revenue rose to $83.1 million, while equipment revenue fell to $13.8 million. Growth reflected higher average subscribers and ARPU; equipment sales declined, particularly for Duplex and Simplex.
- Operating results: Operating loss was $63.7 million versus $66.6 million in 2015, an operating margin of approximately negative 65.7%. Net loss was $132.6 million, or $0.12 per share, compared with net income of $72.3 million in 2015. The 2016 result included a $41.5 million non-cash derivative loss, versus a $181.9 million derivative gain in 2015. Fourth-quarter 2016 net loss was $117.2 million.
- Cash flow: Operating cash flow was $8.8 million, compared with $2.2 million in 2015. Investing used $24.6 million, and financing provided $18.5 million, including $48.0 million from stock sales to Terrapin.
- Cash and debt: Year-end cash and equivalents were $10.2 million; another $38.0 million was restricted for debt service. Debt principal was $654.1 million and carrying value was $576.3 million; $75.8 million of debt was classified as current. Facility Agreement principal was $543.0 million and bears floating-rate interest.
- Other balance-sheet items: Total assets were $1.13 billion and stockholders’ equity was $161.8 million, down from $237.1 million at year-end 2015. Derivative liabilities were $281.2 million.
Changes versus 2015
- Average subscribers increased to approximately 688,819 from 663,775. Service revenue increased $9.0 million, led by SPOT and Duplex; service revenue rose from 82% to 86% of total revenue.
- Operating loss narrowed by $2.9 million, while net results swung from income to loss, principally because derivative valuation moved from a large gain to a loss.
- Operating cash flow improved by $6.7 million. Capital spending on the second-generation ground network declined as core Hughes and Ericsson deliverables reached acceptance in December 2016.
- Globalstar issued 49.1 million shares to Terrapin for $48.0 million during 2016, adding to shareholder dilution.
Outlook, risks and unusual items
- Management said losses were likely to continue and that existing liquidity was insufficient to meet obligations over the relevant agreement terms. The company expects to need additional financing and further equity-cure contributions; sources for the expected 2017 contributions had not been fully arranged.
- Globalstar drew the remaining $12.0 million available under the Terrapin stock purchase agreement in January 2017 to support compliance with Facility Agreement covenants for year-end 2016. It anticipated needing additional equity cures for the June and December 2017 measurement periods.
- The Facility Agreement matures in December 2022 and imposes financial and operating restrictions. Globalstar reported covenant compliance at December 31, 2016, using equity-cure contributions. Scheduled current debt, restructuring fees, interest and other obligations create substantial funding demands.
- The FCC adopted rules in December 2016 permitting low-power terrestrial use of 11.5 MHz of licensed spectrum; the rules were to become effective March 2, 2017. Globalstar planned to seek a license modification and international authority, but timing and the ability to monetize spectrum remained uncertain.
- Management cited satellite and ground-network reliability, demand and product acceptance, competition, foreign-exchange exposure, oil-and-gas weakness affecting Simplex, and access to capital as significant risks. A Thales dispute over satellite long-lead items remains unresolved. A contingent €17.5 million payment under a settlement is also listed among obligations, with timing dependent on a future satellite contract and financing.
- In October 2016, the company settled Brazilian litigation by issuing about 1.3 million shares, with additional share downside protection accrued. A $6.3 million tax benefit arose from expiration of a statute of limitations. The company recorded a $0.4 million impairment of costs tied to its revised spectrum proposal.
- The independent auditor gave an unmodified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Key facts for investors to verify
- Whether Globalstar can secure financing and equity cures sufficient to meet debt service and covenant requirements, especially during 2017.
- Cash available for operations after separating the $38.0 million restricted debt-service reserve, and the timing and amount of contractual obligations.
- Progress on the FCC license modification, terrestrial spectrum partnerships, and credible plans to generate revenue from spectrum.
- Satellite and gateway service performance, rollout of second-generation products and ground-network upgrades, and subscriber growth and churn.
- Resolution and potential financial impact of the Thales disputes, including the long-lead-items claim and contingent settlement payment.
- Future dilution from equity financing, convertible securities, warrants and stock-based awards, and the effects of Thermo’s control and related-party arrangements.