Globalstar, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Globalstar provides mobile satellite voice and data services, equipment, and commercial IoT products. Financial figures below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $30.1 million | $28.7 million |
| Operating loss | $(18.3) million | $(13.0) million |
| Net income | $25.8 million | $87.9 million |
| Net interest expense | $12.9 million | $7.4 million |
| Derivative gain | $57.0 million | $108.9 million |
| Operating cash flow | $1.3 million | $9.8 million |
| Cash and cash equivalents at March 31 | $13.8 million | $15.2 million at December 31, 2018 |
| Restricted cash at March 31 | $60.6 million | $60.3 million at December 31, 2018 |
| Debt carrying value at March 31 | $470.3 million | $463.5 million at December 31, 2018 |
Revenue rose about 5%, primarily from higher subscriber equipment sales, especially Commercial IoT. Service revenue was nearly flat. Operating expenses increased 16% to $48.4 million, chiefly because depreciation, amortization and accretion rose $4.6 million as ground-network assets entered service. Operating margin was approximately negative 61%, compared with negative 45% a year earlier.
Reported net income was substantially influenced by the noncash $57.0 million derivative gain, which reduced the fair-value liability on embedded debt derivatives. The filing attributes the valuation decline principally to Globalstar’s share-price decrease. Net income therefore does not reflect operating cash generation: cash from operations fell to $1.3 million. Investing cash outflow was $2.3 million; cash, cash equivalents and restricted cash together declined $1.1 million during the quarter.
At March 31, total debt principal was $514.1 million, versus its $470.3 million carrying value after discounts and financing costs. Current debt was $96.2 million. The $60.6 million debt-service reserve is restricted for Facility Agreement payments and is not available for general operating needs. The filing does not provide a formal gross or net margin measure.
Material changes and operating trends
- Commercial IoT service revenue increased 20%; average subscribers increased to 384,673 from 332,813, and monthly ARPU rose to $3.20 from $3.09. Commercial IoT equipment revenue increased to $2.1 million from $0.8 million.
- Duplex service revenue declined 2%, as lower average subscribers more than offset higher ARPU. SPOT service revenue increased 1%; average SPOT subscribers declined 2%, while ARPU increased 3%.
- Subscriber equipment sales overall increased $1.2 million. Management cited stronger Commercial IoT sales, including SmartOne Solar; Sat-Fi2 sales were below expectations as the company continued to optimize the product.
- Average subscribers across categories were 761,461, up from 727,860. The filing separately reports approximately 766,000 subscribers as of March 31.
- Bad-debt impairment on customer receivables was $1.8 million versus $0.9 million, primarily due to a specific reserve for an independent gateway operator. The company also cited a $7.8 million increase in the credit-card processor reserve as a major factor in weaker operating cash flow.
- Globalstar adopted lease accounting ASC 842 on January 1, 2019, recognizing operating right-of-use assets of $14.6 million and operating lease liabilities of $14.9 million by March 31. The adoption did not affect the income statement.
Liquidity, outlook, risks and contingencies
Liquidity and debt risk: Management expects cash on hand and operating cash flow to be insufficient to meet debt-service obligations over the next 12 months. The company says June and December 2019 Facility Agreement principal payments are expected to exceed available cash while maintaining the required reserve. It intends to obtain additional funding or amend/refinance debt, but no source or terms had been arranged. Management anticipates needing equity-cure contributions to meet financial covenants for the June 30 and December 31, 2019 measurement periods; funding was not arranged as of the filing. A lender agent had raised an administrative-compliance issue, which the company believes it cured within the permitted period. Failure to secure funding or waivers could result in default and acceleration.
The Facility Agreement is fully drawn, secured by substantially all company and domestic-subsidiary assets, and bears floating-rate interest. A 1 percentage-point change in rates would change annual interest expense by approximately $3.9 million. The company is also transitioning credit-card processors and expects the related cash reserve to fall from $10.1 million to about $5.0 million by Q3 2019; it was discussing with senior lenders whether the reserve affects the credit agreement.
Business outlook: No numerical revenue, earnings or cash-flow guidance is provided. Management described ongoing product-development efforts, international spectrum-authorization work, and plans to pursue terrestrial broadband opportunities using its 2.4 GHz spectrum. FCC equipment certification and further international approvals remain relevant to realizing those opportunities. Management also noted regulatory delays affecting some government-contract revenue, which it expected to resolve in the near future.
Contingencies and related parties: A Delaware shareholder action settlement awaited court approval after an April 1, 2019 hearing. The company accrued $3.0 million for estimated plaintiffs’ legal fees and expenses and recorded a $3.1 million insurance receivable, which reduced SG&A expense. A separate business economic loss settlement is expected to provide a further $3.7 million in January 2020. The company leases its new headquarters from Thermo, its principal owner’s affiliate, under a 10-year agreement with annual rent of $1.4 million, increasing 2.5% annually. Thermo also holds subordinated debt with $123.3 million principal outstanding and 12% interest that accrues to principal.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change to the risk factors in the 2018 Form 10-K.
Investor verification priorities
- Confirm how Globalstar will fund 2019 debt service and required covenant cures, and whether lenders grant amendments or waivers.
- Track covenant compliance, any resolution of the lender’s administrative-provision concern, and the effect of the credit-card reserve on Facility Agreement terms.
- Assess cash available for general use separately from restricted cash, and monitor operating cash flow and processor-reserve releases.
- Separate recurring operating performance from noncash derivative gains; review the Level 3 derivative assumptions and potential changes in fair value.
- Verify progress in Commercial IoT growth, Duplex and SPOT subscriber trends, Sat-Fi2 commercialization, and resolution of government-contract regulatory delays.
- Monitor court approval and final costs of the shareholder settlement, insurance recovery, and the remaining settlement installment due in 2020.
- Review potential dilution from equity-cure funding or conversion of Thermo and convertible-note balances, as well as related-party lease and financing terms.