Globalstar, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Globalstar provides mobile satellite voice and data services, including Duplex, SPOT and Simplex, through its satellite network. This unaudited filing covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Total revenue | $21.8 million | $21.0 million |
| Service revenue | $18.7 million | $17.1 million |
| Subscriber equipment revenue | $3.1 million | $3.9 million |
| Operating expenses | $37.5 million | $38.2 million |
| Loss from operations | $(15.7) million | $(17.2) million |
| Net loss | $(26.9) million | $(129.7) million |
| Basic and diluted loss per share | $(0.03) | $(0.13) |
| Net cash provided by operating activities | $2.6 million | $2.5 million |
| Net cash used in investing activities | $(4.9) million | $(5.8) million |
| Cash and cash equivalents | $11.9 million at March 31, 2016 | $7.5 million at December 31, 2015 |
| Restricted cash | $37.9 million at March 31, 2016 | $37.9 million at December 31, 2015 |
| Total debt carrying value | $587.9 million | $581.1 million at December 31, 2015 |
Gross margin is not presented as a standalone measure in the filing. Depreciation, amortization and accretion expense was $19.2 million, versus $19.0 million. Interest expense, net of capitalized amounts, was $9.1 million, compared with $8.5 million. The company reported derivative liabilities of $241.0 million at quarter-end.
Material changes versus the prior comparable period
- Revenue rose 4%, mainly from higher service revenue, partly offset by lower equipment sales. Service revenue growth reflected 6% overall subscriber growth; SPOT service revenue rose 21%, while equipment revenue fell 21%.
- Operating expenses declined 2%, primarily because cost of subscriber equipment sales decreased by $0.9 million. The operating loss narrowed by about $1.5 million.
- Net loss improved substantially, principally because the Q1 2015 period included a $107.9 million derivative loss. Q1 2016 derivative loss was $1.3 million; management attributed the prior-period loss to significant stock-price fluctuations. Derivative fair-value changes are noncash.
- Cash from operations was broadly stable. Financing proceeds were lower year over year, with $6.5 million raised from Terrapin in Q1 2016 versus $10.0 million in Q1 2015.
- Quarter-end subscriber count was 686,905, up 6% from 648,902 a year earlier. SPOT growth and higher SPOT ARPU supported service revenue; Duplex ARPU declined to $27.29 from $30.00.
Outlook, risks, contingencies and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said it expects further subscriber expansion, supported by the second-generation constellation and new products, and described SPOT Gen3 growth and international activations as positive contributors. The second-generation satellite launches were complete, excluding an on-ground spare; ground-network work remained in progress.
- Liquidity depends on operating cash flow and equity funding. The $575.8 million principal balance under the fully drawn Facility Agreement matures in December 2022, bears floating-rate interest, and requires semiannual principal repayments. The company was in compliance with its covenants at March 31, 2016. A 1 percentage-point interest-rate change was estimated to affect annual interest expense by approximately $5.8 million.
- At quarter-end, $53.5 million remained available under the Terrapin stock purchase agreement; Thermo’s remaining equity commitment was $8.5 million. Equity funding may dilute shareholders. The $37.9 million debt-service reserve is restricted to Facility Agreement payments and is not available for general use.
- The subordinated Thermo loan had $85.8 million principal outstanding and accrues interest at 12%, capitalized rather than paid currently. Related embedded derivatives had a $215.2 million fair value liability. These arrangements involve significant related-party exposure; Thermo is the principal owner, and the CEO controls Thermo.
- Legal and contractual uncertainty includes Thales disputes over certain satellite-contract deliverables and the company’s claimed ownership of prepaid long-lead items. Thales previously obtained an arbitration award for approximately €53 million in termination charges; a settlement and release arrangement followed, but Thales may refile to confirm the award. The company stated that an adverse confirmation outcome could materially harm its financial condition, results and liquidity.
- The company recorded a $5.3 million liability for potential additional shares owed to Hughes under downside protection expiring June 30, 2016. Ericsson ground-network work had $6.1 million remaining, with completion estimated for Q2 2016. The filing reported no significant change in contractual commitments since year-end.
- Foreign-exchange movements, including Venezuela’s DICOM exchange rate, contributed to a Q1 2016 foreign-currency loss. The company does not currently hedge foreign currencies. The oil and gas downturn negatively affected Simplex equipment sales.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to the risk factors disclosed in the 2015 Form 10-K were reported.
Most important facts for investors to verify
- Whether subscriber growth, especially SPOT growth, converts into durable recurring revenue and cash generation, and how ARPU and churn develop.
- Cash needs, covenant headroom and access to Terrapin and Thermo funding; confirm the remaining availability, terms and potential dilution of those commitments.
- Debt service capacity, floating-rate exposure and the effect of capitalized interest on the Thermo loan and total debt.
- The outcome and potential financial exposure from the Thales arbitration, settlement and long-lead-item ownership dispute.
- The June 30, 2016 Hughes downside-protection settlement and remaining Ericsson and ground-network obligations.
- The assumptions behind the substantial derivative valuations, which are sensitive to Globalstar’s share price, volatility and change-of-control probabilities.