Globalstar, Inc. — Q3 2019 Form 10-Q
Business context and period. Globalstar provides mobile satellite voice and data services, including Duplex, SPOT and Commercial IoT, through its satellite network and gateways. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. The company reported approximately 775,000 subscribers at September 30, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $38.6 million | $35.7 million | $99.9 million | $98.2 million |
| Operating loss | $12.0 million | $18.0 million | $47.0 million | $29.0 million |
| Net income | $21.1 million | $9.0 million | $53.1 million | $89.9 million |
| Net cash from operations | Not separately provided for quarter | Not separately provided for quarter | $6.0 million | $19.8 million |
Q3 service revenue was $34.2 million and equipment sales were $4.5 million. Nine-month service revenue was $87.0 million and equipment sales were $12.9 million. No gross-margin figure is clearly provided in the filing text.
- Q3 revenue increased 8% as reported, but included a one-time $3.9 million out-of-period ASC 606 adjustment to Duplex service revenue. Excluding it, revenue was lower year over year; management cited a $0.4 million increase in service revenue offset by lower equipment sales.
- Nine-month reported revenue rose 2%; excluding the adjustment, service revenue declined $0.8 million and equipment sales declined $1.4 million year over year.
- Commercial IoT service revenue grew 28% in both comparison periods, supported by subscriber and ARPU growth. SPOT service revenue fell 4% in both periods, primarily from subscriber declines. Duplex subscriber averages declined, though ARPU increased.
- Net income substantially reflects noncash derivative gains: $50.2 million in Q3 and $142.3 million in the first nine months of 2019. These gains largely reflected changes in valuation assumptions, including expected debt refinancing; they do not represent operating cash generation. Operating losses continued.
- Basic earnings per share were $0.01 for Q3 and $0.04 for the nine months; diluted loss per share was $0.01 and $0.05, respectively, reflecting the filing’s diluted-EPS treatment of convertible instruments.
Liquidity, cash flow and debt
At September 30, 2019, cash and cash equivalents were $26.2 million, while restricted cash was $61.2 million and principally reserved for Facility Agreement debt service. Operating cash flow for the first nine months was $6.0 million, down from $19.8 million. Cash used in investing was $7.6 million; financing provided $13.6 million, including a $62.0 million subordinated loan and $47.4 million of Facility Agreement principal payments. The $62.0 million loan largely funded the June debt payment.
Total debt carrying value was $501.3 million, compared with $463.5 million at December 31, 2018; principal outstanding was $538.8 million. Current debt carrying value was $98.8 million. The $342.0 million Facility Agreement bears floating-rate interest, with its margin rising to LIBOR plus 4.25% on July 1, 2019. A 1% rate change would affect annual interest expense by approximately $3.4 million, according to the company. The $64.4 million subordinated loan accrues interest at 15% and the $131.0 million Thermo loan accrues interest at 12%, both capitalized rather than paid currently.
Material changes, outlook and risks
- Financing and covenant pressure: The company said scheduled Facility Agreement payments in December 2019 and June 2020 would exceed available cash while maintaining the required debt-service reserve. It anticipated needing another equity cure for the December 2019 covenant test; the source had not been arranged. It also warned of possible noncompliance in June 2020, when an equity cure would not be permitted under the existing terms. A Facility Agreement amendment was being negotiated but was not finalized, and the proposed second-lien financing was not assured. The company reported compliance with financial covenants at September 30, apart from a disputed administrative-covenant matter it believed had been remedied within the cure period.
- China import tariffs: A CBP classification ruling imposed a 25% tariff on certain products. Globalstar accrued approximately $1.8 million, including $0.9 million charged to Q3 equipment cost of sales. It planned to protest the ruling, but gave no assurance of success; potential duty drawback recovery was also subject to uncertainty.
- Accounting and unusual items: The $3.9 million ASC 606 adjustment was recorded in Q3 after a revised estimate of the 2018 adoption impact; the company said the adjustment was immaterial to each prior period. The Q3 operating expense comparison also benefited from lower merger-related costs than in 2018, while nine-month 2018 results included a $20.5 million reversal of a contract termination charge.
- Contingencies: The company accrued a $4.5 million securities-settlement attorneys’ fee and recorded a $4.8 million insurance receivable, which it expected to collect in November 2019. A further insurance recovery remained contingent. A $3.7 million final installment from an earlier business-loss settlement was expected in January 2020. Management said other pending litigation was not expected to have a material adverse effect.
- Operating plans and outlook: No numerical revenue, earnings or cash-flow guidance is provided. Management discussed product development, including an improved Sat-Fi2 device and planned derivatives, and continued efforts to pursue terrestrial use of licensed spectrum. Forward-looking results remain subject to financing, satellite and ground-network operations, regulatory, currency, customer-demand and product-commercialization risks.
Important facts for investors to verify
- Whether the Facility Agreement amendment and any associated financing were completed, and the final repayment schedule, covenant terms and required equity-cure funding.
- Whether Globalstar met subsequent debt payments and covenant tests, given the limited unrestricted cash and restricted nature of most reported cash balances.
- Whether underlying revenue trends improved after excluding the $3.9 million ASC 606 adjustment, particularly subscriber losses in Duplex and SPOT and growth in Commercial IoT.
- The outcome of the CBP tariff protest, related duty payments and any duty-drawback recovery.
- Whether the insurance receivable was collected and whether the remaining securities-claim costs were reimbursed.
- The effect of derivative remeasurement and dilution from convertible and related-party debt on reported earnings per share and shareholder ownership.