Globalstar, Inc. quarterly report, Q3 FY2017

Globalstar, Inc. — Q3 2017 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. Globalstar provides mobile satellite voice and data services, including Duplex, SPOT and Simplex, and is developing terrestrial broadband use of its licensed spectrum. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless stated otherwise.

Financial performance and liquidity

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Total revenue	$30.5m	$25.5m	$83.2m	$72.5m
Operating loss	$(10.8)m	$(14.8)m	$(38.5)m	$(46.9)m
Net income (loss)	$52.4m	$(2.6)m	$(66.5)m	$(15.4)m
Operating margin	-35.4%	-57.8%	-46.3%	-64.7%
Operating cash flow	Not separately presented	Not separately presented	$16.6m	$7.7m

Q3 service revenue was $26.1m, up from $22.0m; equipment sales were $4.4m, versus $3.6m. For the nine-month period, service revenue rose to $71.9m from $61.7m.
Q3 net income included a $78.8m noncash derivative gain and a $6.3m loss on extinguishment of debt. The derivative gain was $4.9m for the nine-month period, versus $50.1m in 2016; it is a mark-to-market item and makes reported net results volatile.
Nine-month investing cash outflow was $13.6m, and financing cash inflow was $2.7m. Cash, cash equivalents and restricted cash totaled $54.2m at September 30, including $38.0m restricted for debt service; unrestricted cash was $16.2m.
At September 30, total debt principal was $625.5m; carrying value was approximately $561.0m. Current debt carrying value was $94.3m and long-term debt carrying value was $466.7m. The Thermo loan accrues interest at 12% and is subordinated to the Facility Agreement.
Current assets were $48.0m against current liabilities of $184.6m. Restricted cash is not generally available for operations.

Changes and operating trends

Revenue increased 19% in Q3 and 15% year to date. Growth reflected higher Duplex and SPOT ARPU, more SPOT and Simplex subscribers, engineering and government contract revenue, and Q3 Simplex equipment demand associated with hurricane recovery.
Duplex average subscribers declined 6% in Q3, while Duplex ARPU rose 22%; management attributed the subscriber decrease to slower activations and more prompt deactivation of non-paying customers. SPOT average subscribers rose 5% and ARPU rose 11%.
Operating expenses rose 2% in both comparable periods. Higher service costs—including ground network support and, year to date, personnel and product development—were partly offset by lower marketing, general and administrative costs.
Nine-month operating cash flow more than doubled year over year, helped by higher cash receipts from service contracts and working-capital changes. Investing outflow declined from the prior year, while financing cash flow was lower, reflecting debt service payments.
Total debt carrying value fell from approximately $576.3m at year-end 2016 to $561.0m, mainly after a $21.7m Facility Agreement principal payment and conversion of $16.0m principal of 2013 notes; accrued interest and debt discount amortization partly offset the decline.

Outlook, risks and unusual items

Management stated that, following the October 2017 equity offering, existing cash and expected operating cash flows were expected to fund requirements for at least the next 12 months under the current operating plan. This is subject to execution and the restrictions on use of much of the offering proceeds.
In October, Globalstar received approximately $114.8m net from a public offering of 73.4m shares at $1.65 per share; an underwriter option for 11.0m additional shares had not been exercised as of November 1. Thermo bought 27.6m shares for approximately $43.3m. Eighty percent of the net proceeds was deposited in a restricted account, primarily for Facility Agreement payments due in December 2017 and June 2018.
The June 2017 debt amendment required $159.0m of equity financing, deferred most financial covenant measurements until the period ending December 31, 2018, and allowed equity cure contributions through 2019. The company reported covenant compliance at September 30. Failure to meet covenants or debt payments could permit acceleration; significant financing and use-of-proceeds restrictions remain.
The FCC granted authority in August 2017 to provide terrestrial broadband over 11.5 MHz of spectrum. Commercialization still depends on equipment certification, partners, and additional foreign approvals; management gave no assurance that the spectrum can be monetized.
Key risks include satellite and gateway outages or shortened satellite lives, the cost and availability of replacement satellites, competition, execution of new products and terrestrial services, foreign currency and regulatory exposure, and substantial debt service needs.
Thales disputes Globalstar’s ownership of prepaid long-lead satellite items. A prior arbitration award could be refiled for confirmation; the company says the result is uncertain and a successful confirmation could materially harm its financial condition and liquidity. A related settlement obligation of approximately €17.5m remains accrued, subject to conditions that had not been met.
Q3 results also reflect conversion of $16.0m of 2013 convertible notes into 26.4m shares, producing a $6.3m debt extinguishment loss. Thermo is the controlling stockholder and a lender; related-party financing and equity transactions are material considerations.
The company planned to adopt the new revenue recognition standard on January 1, 2018, expecting changes to revenue allocation and timing and contract acquisition cost recognition. The filing does not quantify the eventual financial impact.

Important facts for investors to verify

Whether revenue and subscriber growth continue, particularly given the decline in Duplex subscribers and reliance on higher ARPU.
How much of the October offering remains restricted, the timing of permitted draws, and cash available for operations after scheduled debt service.
Debt covenant compliance, required payments, floating-rate exposure, and the effect of the 2017 amendment; a 1% rate change was estimated to alter annual interest expense by about $5.2m.
Progress toward FCC equipment certification, partner selection and foreign spectrum approvals, and any concrete commercialization plans.
Developments in the Thales arbitration, settlement and disputed long-lead items, including potential financial or operational consequences.
The effect of the October offering, Thermo participation and share conversions on ownership, dilution and related-party governance.