Globalstar, Inc. quarterly report, Q3 FY2020

Globalstar, Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Globalstar provides global mobile satellite voice and data services, equipment, and related engineering services.

Financial performance

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Revenue	$32.8 million	$38.6 million	$95.3 million	$99.9 million
Operating loss	$14.6 million	$12.0 million	$44.1 million	$47.0 million
Net income (loss)	$(24.9) million	$21.1 million	$(87.9) million	$53.1 million
Operating cash flow	Not provided for the quarter	$23.7 million	$6.0 million

Q3 revenue fell 15%; nine-month revenue fell 5%. Q3 service revenue was $28.4 million and equipment sales were $4.4 million.
Operating expenses declined 6% in Q3 and 5% year to date. Cost of services, equipment costs, and marketing, general and administrative costs were lower. Depreciation, amortization and accretion remained substantial: $24.7 million in Q3 and $72.4 million year to date.
Gross margin, calculated as revenue less cost of services and equipment sales, was approximately 61.5% in Q3 and 62.7% for the first nine months. These are derived figures, not company-reported metrics.
Net results were materially affected by noncash derivative gains: $1.2 million in Q3 2020 and $1.6 million year to date, versus $50.2 million and $142.3 million in the comparable 2019 periods. The 2019 gains were principally related to embedded derivatives in debt, including the Thermo loan.
At September 30, cash and cash equivalents were $19.5 million; restricted cash was $54.9 million. Total assets were $910.5 million and stockholders’ equity was $446.6 million.
Total debt carrying value was $375.6 million, including $45.5 million classified as current and $330.1 million long term. Principal outstanding was $416.2 million; the second-lien facility carried a 13.5% blended rate, generally paid in kind.
Nine-month investing cash use was $9.3 million; financing cash provided was $0.9 million. Cash, cash equivalents and restricted cash increased $15.2 million to $74.3 million.

Changes versus prior comparable periods

Revenue declines reflected lower Duplex and SPOT service revenue, weaker Commercial IoT equipment demand, and COVID-19-related pricing concessions and customer pressures. Engineering and other service revenue increased to $2.5 million in Q3 and $9.8 million year to date, including milestone revenue under a non-recurring engineering agreement.
Average subscribers were approximately 751,000 in Q3, versus 777,000 a year earlier. Duplex and SPOT subscriber counts declined; Commercial IoT subscribers increased on a nine-month average basis, although recent churn was attributed partly to COVID-19.
Thermo converted its $137.4 million loan balance, including accrued interest, into 200.1 million common shares in February 2020. This reduced debt but increased shares outstanding; common shares issued and outstanding rose to 1.670 billion at September 30 from 1.465 billion at year-end 2019.
Operating cash flow increased from $6.0 million to $23.7 million year to date, supported by noncash adjustments and working-capital movements. Cash generation should be viewed alongside the reported net loss and significant noncash expenses.
Comparisons are affected by a $3.9 million out-of-period ASC 606 adjustment that increased Q3 2019 Duplex service revenue. The company excludes this item in certain MD&A comparisons.

Outlook, risks and unusual items

Management provided no quantified revenue or earnings guidance. It expects COVID-19-related lower demand, particularly from oil and gas customers, to persist at least until that industry recovers; the duration and total impact remain uncertain. Retail demand had recovered as stores reopened.
Management said liquidity sources were expected to cover obligations over the next 12 months if the company remains compliant with financial covenants. It was compliant with the disclosed debt covenants at September 30 but continued monitoring future compliance in light of COVID-19.
The first-lien facility requires at least $45.0 million of equity to be raised by March 31, 2021, principally intended for scheduled principal payments. Globalstar expected to meet this through exercise of lender warrants at $0.38 per share; if the share price does not support exercise, alternative equity funding may be needed. Approximately 115 million such warrants remained outstanding.
The first-lien facility matures in December 2022; the second-lien facility matures in November 2025. The company’s $51.2 million debt-service reserve is restricted for the first-lien maturity payment. Failure to satisfy covenants or payment obligations without a cure or waiver could permit acceleration of debt.
The $5.0 million PPP loan was recorded as debt. The company expected to apply for forgiveness but could not assure approval; any unforgiven amount may be subject to accelerated repayment under lender requirements.
COVID-19 risks include weaker equipment sales and service demand, customer collection issues, supply-chain disruption (with significant sourcing in China), and possible covenant pressure. No long-lived asset or inventory impairment was identified in the company’s assessment.
Globalstar is pursuing terrestrial use of licensed spectrum and international authorizations. U.S. terrestrial authority is subject to conditions, including equipment certification; additional international approvals and regulatory steps remain outstanding.
After quarter-end, the company took steps to terminate a 2007 Nigeria gateway construction contract due to partner nonperformance. If terminated under the agreement, approximately $2.9 million of noncurrent deferred revenue may be recognized as revenue.

Most important facts for investors to verify

Progress toward the $45.0 million equity-raising requirement and the June 2021 debt payment, including warrant exercise capacity and potential dilution.
Future covenant compliance, debt service, and whether restricted cash or additional equity cures are needed.
PPP loan forgiveness status and any resulting repayment or accounting impact.
Whether COVID-19-related demand, pricing, collections, and supply-chain pressures worsen or persist, especially in oil and gas and retail markets.
Underlying subscriber and service trends, distinguishing recurring revenue from engineering milestones and the prior-year $3.9 million ASC 606 adjustment.
Regulatory progress and commercial adoption prospects for terrestrial spectrum, and the outcome of the Nigeria contract termination process.