Globalstar, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise stated. Globalstar provides global mobile satellite voice and data services, including Duplex, SPOT and Simplex. Its second-generation satellite constellation was fully placed into service in August 2013.
Financial results and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Service revenue | $16.2 | $15.4 |
| Subscriber equipment revenue | $4.3 | $3.9 |
| Total revenue | $20.5 | $19.3 |
| Operating loss | $(20.6) | $(18.4) |
| Net loss | $(250.5) | $(25.1) |
| Basic and diluted loss per share | $(0.29) | $(0.05) |
| Operating cash flow | $3.8 | $(0.5) |
| Cash and cash equivalents at March 31 | $19.6 | $1.3 at March 31, 2013 |
| Long-term debt carrying value, including current portion | $664.3 | $669.3 at December 31, 2013 |
- Revenue grew approximately 6%. Using reported service and equipment costs, gross profit was approximately $10.5 million, or 51% of revenue, versus $8.9 million, or 46%, in Q1 2013. Operating expenses rose 9% to $41.1 million, chiefly reflecting higher depreciation and amortization.
- The $250.5 million net loss was dominated by a $209.4 million derivative loss and included a $10.2 million loss on extinguishment of debt. Derivative remeasurement was noncash; the filing attributes the increase largely to the sharp rise in Globalstar’s share price and valuation assumptions. Interest expense, net, increased to $10.9 million from $7.8 million.
- Cash increased $2.2 million during the quarter. Investing cash outflow was $1.8 million, including $1.4 million for second-generation satellite, ground and related launch costs. The company reported $37.9 million of restricted cash, unavailable for general operating needs and reserved for facility debt service.
- At March 31, total debt principal was $731.3 million, compared with carrying value of $664.3 million, reflecting debt discounts. The $586.3 million senior secured facility matures in December 2022; semiannual principal payments begin in December 2014. The first scheduled payment is $4.0 million. The company reported covenant compliance at quarter-end.
- Current assets were $81.8 million and current liabilities $179.1 million; stockholders’ equity was negative $74.3 million. Current liabilities included $92.8 million of derivative liabilities.
Material changes and operating trends
- Duplex service revenue increased 21%, to $5.9 million, supported by higher service levels, subscriber activations and customer migrations to higher-rate plans. Reported ending Duplex subscribers fell to 58,603 from 83,525, partly because approximately 26,000 suspended or non-paying subscribers were deactivated in Q1 2014. Excluding those deactivations from the prior-year comparison, the filing reports Duplex subscriber growth of approximately 3%.
- SPOT service revenue was nearly flat; Simplex revenue increased approximately 3%. Total subscribers were approximately 578,500, up 9% year over year; management says growth would be 14% excluding the Duplex deactivations.
- Equipment revenue increased 9%, with higher Duplex and SPOT sales partly offset by lower Simplex sales. Cost of services declined 8%, partly because the company transitioned customers from third-party satellite services to its own restored network. Marketing, general and administrative expense rose 12%.
- Depreciation, amortization and accretion increased 15% to $23.3 million as more second-generation satellites entered service. Capital spending on the completed satellite deployment fell sharply from the prior-year period, while ground-network upgrades remain planned.
Outlook, liquidity, risks and unusual items
- The filing gives no revenue or earnings guidance. Management expects operating cash flow to contribute to long-term liquidity following full deployment of the second-generation constellation, but says future liquidity depends on executing its business plan, maintaining service levels, upgrading ground infrastructure and securing additional financing. Additional financing may not be available on acceptable terms, or at all.
- Available stated funding sources included $24.0 million remaining under the Terrapin equity line and $4.7 million remaining under Thermo’s commitment. The company had received no additional Thermo contribution in Q1. These sources are conditional and should not be treated as cash on hand.
- The facility requires minimum liquidity of $4.0 million and sets minimum adjusted EBITDA tests, capital expenditure limits and other financial covenants. Financial covenant noncompliance may be cured with equity contributions through June 2017; otherwise, default could permit acceleration. The company stated it complied with covenants at March 31.
- Derivative liabilities totaled $631.9 million at March 31, up from $462.5 million at year-end. Valuations rely on significant unobservable inputs, including share-price volatility and future equity-issuance assumptions, creating potentially large noncash earnings swings.
- After quarter-end, on April 15, 2014, approximately $37.8 million principal amount of the 8.00% notes issued in 2009 automatically converted into approximately 34.5 million voting shares. This followed satisfaction of the indenture’s share-price conversion condition.
- Thales-related satellite contract matters remain significant: the filing describes a prior arbitration award, releases effective in 2012, and a settlement payment obligation of €17.53 million subject to stated conditions. Thales may seek confirmation of the arbitration award; a successful confirmation could materially harm financial condition and liquidity. As of March 31, no party had terminated the settlement agreement.
- Ericsson ground-network milestones were deferred and the parties were negotiating revised terms. Termination for convenience could require a $10.0 million final payment; termination under the described technical/pricing provision could still entail an impairment charge.
- Management disclosed a previously identified material weakness relating to an outsourced valuation control for embedded derivatives. The company updated the valuation model and added review procedures, but said it would continue evaluating controls. Management concluded disclosure controls were effective as of March 31. No material changes to the previously reported risk factors were identified.
Important facts for investors to verify
- Whether operating cash generation and the remaining Thermo and Terrapin funding are sufficient for operating needs, debt service and planned ground-network investment.
- The facility’s covenant headroom and upcoming December 2014 principal payment, including the restricted nature of the $37.9 million reserve.
- The dilution and future financing implications of convertible debt, warrants, equity-line draws and the post-quarter conversion of the 2009 notes.
- How derivative fair-value changes affect reported earnings and whether the embedded-derivative valuation control weakness is fully remediated.
- The status and potential cash or impairment consequences of the Thales settlement/arbitration matters and Ericsson contract negotiations.
- Subscriber and revenue quality, particularly the effect of deactivations, suspended SPOT accounts and customer migration to higher-rate plans.