Globalstar, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Globalstar provides mobile satellite voice and data services, satellite-connected devices, and commercial IoT services. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $31.2m | $33.7m | $61.3m | $62.5m |
| Operating income (loss) | $(16.7)m | $1.9m | $(35.0)m | $(11.0)m |
| Net income (loss) | $6.2m | $(7.0)m | $32.0m | $80.9m |
| Operating cash flow | Not presented separately | Not presented separately | $1.8m | $7.8m |
| Cash used in investing | Not presented separately | Not presented separately | $(5.1)m | $(8.9)m |
- Q2 revenue declined 8%; service revenue fell $1.3m and equipment sales fell $1.2m. For the first half, revenue declined 2%, primarily due to lower service revenue.
- Q2 operating loss included $23.9m of depreciation, amortization and accretion. The prior-year comparison is affected by a $20.5m reduction in operating expenses in 2018 after Globalstar reversed a contract termination liability.
- Net income included a noncash derivative gain of $35.1m in Q2 and $92.1m for the first half. These gains reflected fair-value changes in embedded debt derivatives and are not a measure of operating cash generation. First-half 2019 net income also benefited from these gains; first-half 2018 included a $6.8m legal-settlement gain.
- Q2 diluted earnings per share was $0.01; basic earnings per share rounded to $0.00. First-half diluted earnings per share was $0.03, versus $0.06 in 2018.
- Commercial IoT service revenue grew 35% in Q2 and 28% in the first half. Duplex and SPOT service revenue declined, reflecting fewer average subscribers and, for SPOT, lower ARPU. Total average subscribers increased to 772,807 in Q2 from 733,964 a year earlier, primarily due to Commercial IoT growth.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $25.1m; restricted cash was $60.9m and was designated for debt-service obligations. Current assets were $143.6m and current liabilities $171.0m, a working-capital deficit of $27.4m.
- Total debt carrying value was $491.5m, against stated principal of $532.5m. Current debt was $98.8m and long-term debt $392.7m. The debt includes a $342.0m Facility Agreement, $62.1m subordinated loan and $127.1m Thermo loan, partly offset in carrying value by discounts and financing costs.
- First-half operating cash flow fell to $1.8m from $7.8m. Financing provided $13.7m, including $62.0m borrowed under the subordinated loan, while $47.4m was paid toward Facility Agreement principal. Cash, cash equivalents and restricted cash totaled $86.0m at period-end.
- Management said scheduled Facility Agreement payments in December 2019 and June 2020 would exceed available cash sources while maintaining the required debt-service reserve. The $62.0m subordinated loan, effective June 28 and entered into July 2, funded primarily the June debt payment and qualified as an equity cure contribution. It carries 15% annual interest, capitalized rather than paid in cash.
Material changes and management outlook
- Management attributed the revenue decline to lower average Duplex and SPOT subscribers and lower SPOT ARPU. Duplex equipment sales were constrained by low inventory and slower-than-expected Sat-Fi2 performance; the company expected to relaunch an improved Sat-Fi2 in the second half of 2019. Commercial IoT service growth was supported by more subscribers and higher usage.
- Management was pursuing either a full refinancing or an amendment to the existing Facility Agreement, and aimed to complete one alternative in Q3 2019. The proposed refinancing was expected to include $200m of first-lien debt and $150m of second-lien debt; these were proposals, not completed financings. Alternatively, an amendment in principle would use a new second-lien facility to prepay scheduled installments, reduce near-term principal payments, reset covenants and potentially extend equity-cure availability.
- The company needed an equity cure contribution to meet Facility Agreement financial covenants for the June 2019 measurement period and anticipated needing one for December 2019; funding for the latter had not been arranged. Management also warned it might not comply with covenants for June 2020, when the agreement would not permit an equity cure absent amendment. Failure to meet payment or covenant obligations without a waiver could trigger default and acceleration.
- The 2018 comparison includes the one-time $20.5m reversal of the Thales contract termination charge after management concluded enforcement was time-barred. A shareholder lawsuit settlement remained subject to court approval; the company accrued $3.0m for plaintiffs’ legal fees and costs and recorded a $3.5m insurance receivable.
- Other notable risks include floating-rate debt (a 1 percentage-point rate change was estimated to affect annual interest expense by about $3.4m), foreign-currency exposure, dependence on satellite and ground-network performance, and the need to secure regulatory approvals and commercial adoption for terrestrial spectrum opportunities. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Confirm whether the proposed refinancing or Facility Agreement amendment was finalized, on what terms, and whether near-term principal payments and covenant requirements were addressed.
- Verify funding for the anticipated December 2019 equity cure and the company’s ability to meet debt service while restricted cash remains unavailable for general operations.
- Assess operating cash generation excluding noncash derivative gains, and track whether revenue declines in Duplex and SPOT are offset by Commercial IoT growth.
- Check Sat-Fi2 availability and performance, subscriber activation trends, and whether management’s expected second-half 2019 relaunch occurred.
- Monitor the shareholder settlement approval and resolution of the recorded legal reserve and insurance recovery.