Globalstar, Inc. annual report, FY2012

Globalstar, Inc. — FY 2012 Form 10-K

Business context and period. Globalstar provides global mobile satellite voice and data services, including two-way Duplex, consumer SPOT messaging/tracking and commercial Simplex asset monitoring. This annual filing covers the year ended December 31, 2012; Q4 ended on that date. The final second-generation satellite launch occurred after year-end, on February 6, 2013.

Financial and operating performance

Metric	FY 2012	FY 2011
Revenue	$76.3 million	$72.8 million
Operating loss	$95.0 million	$73.2 million
Net loss	$112.2 million	$54.9 million
Operating cash flow	$6.9 million	$(5.5) million
Cash and cash equivalents at year-end	$11.8 million	$10.0 million

Revenue grew approximately 5% year over year (8% excluding $2.0 million of nonrecurring Open Range revenue recognized in 2011). Derived operating and net margins were approximately negative 124% and negative 147%, respectively. The filing does not provide a clear EBITDA figure in the supplied text.

Service revenue was $57.5 million, up from $55.4 million; equipment revenue was $18.9 million, up from $17.4 million.
SPOT service revenue increased 28% to $25.2 million and Simplex service revenue increased 12% to $6.1 million. Duplex service revenue declined 7% to $18.4 million.
Year-end subscribers rose 16% to approximately 562,000, led by SPOT and Simplex growth. Duplex subscribers declined about 8%; SPOT subscriber counts include suspended accounts that generated no recognized service revenue.
Operating expenses increased to $171.3 million. Major items included a $22.0 million Thales settlement charge, a $7.1 million reduction in the carrying value of the first-generation constellation, and higher depreciation of $69.8 million. Net interest expense rose to $21.5 million as less construction interest qualified for capitalization.
Cash used in investing was $58.0 million, principally for satellites and ground infrastructure; financing provided $52.4 million. Management attributed positive operating cash flow partly to a $6.0 million vendor refund and favorable working-capital movements.

Debt, liquidity and material changes

Debt principal totaled approximately $800.1 million at December 31, 2012; carrying value was $751.0 million. The balance sheet classified $655.9 million as current, largely because of covenant noncompliance and the 5.75% Notes’ April 1, 2013 holder put option.
Current assets were $154.5 million and current liabilities were $761.2 million. Current assets included $46.8 million of restricted cash. Cash alone was $11.8 million.
The company disclosed substantial doubt about its ability to continue as a going concern: available liquidity was insufficient for contractual obligations over the next 12 months. The auditor issued an unmodified opinion but included a going-concern emphasis.
Globalstar acknowledged events of default under its senior secured Facility Agreement related to the Thales settlement. Lenders had not notified the company of acceleration as of the filing date, but waivers or amendments were being pursued. The company also anticipated possible further covenant noncompliance.
Holders could require repurchase of approximately $71.8 million principal amount of 5.75% Notes on April 1, 2013; the company stated it lacked funds to pay all notes tendered. It was seeking financing or alternatives. A $30 million Terrapin equity line was entered into in December 2012, subject to conditions; no shares had been drawn as of year-end.
The 2012 net loss worsened despite revenue growth, driven by higher operating costs, settlement and impairment charges, lower derivative gains, and increased interest expense. Cash flow from operations improved from the prior-year use of cash, but remained small relative to obligations and investment needs.

Outlook, commentary and risks

Management expected improved Duplex service as second-generation satellites entered service and anticipated growth in Duplex sales, subscribers and revenue. It also planned new SPOT products and completion of next-generation ground-network upgrades. The filing provides no conventional quantified revenue or earnings guidance.
Continuation of operations depended on additional external financing, amendments to the Facility Agreement and other obligations, and restructuring the 5.75% Notes. Management cautioned it could not estimate when, or whether, longer-term plans would be completed.
Key risks include debt acceleration and cross-defaults; inability to refinance or meet the 5.75% Notes put; satellite or ground-network outages and launch/operational issues; dependence on FCC approvals for proposed terrestrial spectrum use; and competition, customer churn and execution risk.
The Thales settlement included an accrued €17.53 million payment, approximately $23.2 million at the reported exchange rate, conditional on a new satellite contract and its financing. The contemplated follow-on contract had terminated after financing conditions were not met by December 31, 2012; no replacement satellite contract was in place as of March 1, 2013.
Globalstar’s voting common stock was delisted from Nasdaq in December 2012 and traded on the OTCBB. The company also faced dilution risk from equity financing, warrants and convertible securities. Thermo controlled approximately 66% of voting common stock at year-end.

Most important facts for investors to verify

Whether Globalstar obtained lender waivers or amendments, avoided acceleration, and cured or remained in default under the Facility Agreement.
How the April 1, 2013 5.75% Notes put was resolved, including any refinancing, tender results or default consequences.
Whether the Terrapin equity line or other financing became available in practice, and the resulting cash proceeds and dilution.
Whether the second-generation constellation and ground upgrades delivered the expected Duplex service quality, subscriber growth and cash generation.
The status and payment conditions of the Thales settlement, and whether a new satellite procurement contract and financing were secured.