Globalstar, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Globalstar provides satellite-based mobile voice and data services, including Duplex, SPOT and Simplex products. Financial statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $28.1 million | $25.1 million | $52.8 million | $46.9 million |
| Operating income (loss) | ($12.5 million) | ($16.4 million) | ($27.7 million) | ($32.1 million) |
| Operating margin | (44.5%) | (65.4%) | (52.5%) | (68.4%) |
| Net income (loss) | ($98.7 million) | $14.1 million | ($118.9 million) | ($12.8 million) |
| Net loss per share, diluted | ($0.09) | $0.01 | ($0.11) | ($0.01) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.3 million | $1.0 million |
Q2 service revenue rose 16% to $24.3 million; equipment sales declined to $3.8 million from $4.1 million. For the first half, service revenue increased 15% to $45.8 million. Growth was driven mainly by higher Duplex and SPOT average revenue per user (ARPU), including rate plan changes. Duplex average subscribers fell 7% in Q2 year over year; SPOT subscribers grew 4%.
Six-month investing cash outflow was $10.7 million, including $6.5 million for second-generation network costs. Financing cash flow was $2.9 million, versus $15.1 million in the prior-year period. Cash, cash equivalents and restricted cash totaled $46.8 million at June 30, of which $37.9 million was restricted for debt service; unrestricted cash was $8.8 million.
Debt, liquidity and material changes
- Total debt carrying value was $568.7 million at June 30, 2017: $108.7 million current and $460.0 million long-term. The Facility Agreement principal was $521.3 million; the agreement matures in December 2022 and bears floating-rate interest.
- In June, the Facility Agreement was amended. The company raised $33 million from Thermo, following $12 million raised from Terrapin in January. The amended agreement requires at least $159 million of equity funding in total, including those amounts, by October 30, 2017; failure to raise the remaining amount would trigger a default. Thus, approximately $114 million remained to be raised at the filing date. The filing says 80% of equity proceeds through 2019 must be placed in a restricted account for Facility Agreement obligations.
- The first put date for the $17.3 million principal amount of 8.00% convertible notes is April 1, 2018; their full carrying amount is classified as current. Management stated that near-term debt obligations exceed expected operating cash flows and that funding sources were not fully arranged.
- The company reported a $77.1 million derivative loss in Q2 and a $73.9 million loss for the first half, primarily from fair-value changes in embedded debt derivatives as the share price changed. These noncash losses were the principal reason net results deteriorated despite improved operating results.
- Stockholders’ equity declined to $91.5 million from $161.8 million at year-end 2016. The June Thermo issuance comprised 17.8 million voting shares for $33 million; additional equity issuances increase dilution risk.
Outlook, risks and unusual items
- The FCC’s December 2016 order enables terrestrial broadband service over Globalstar’s licensed 2.4 GHz spectrum. The company applied to modify its licenses; the comment period closed July 11, 2017, and management expected a decision in the near future. The company was also seeking similar authority internationally. No financial guidance or quantified outlook was provided.
- The company was in compliance with Facility Agreement and convertible-note covenants as of June 30. However, failure to complete the required equity raise or meet debt obligations could result in default and possible acceleration of debt. Facility Agreement covenants were largely deferred until the measurement period ending December 31, 2018.
- Thales disputes Globalstar’s claimed ownership of satellite long-lead items. Separately, Thales may refile to confirm a prior arbitration award; the company says an adverse outcome could materially harm its financial condition, results and liquidity. The filing does not predict the outcomes.
- The balance sheet includes a $20.0 million accrued contract termination charge relating to the Thales settlement arrangements. The company also had $217.2 million of construction in progress for ground network upgrades, which will be depreciated when the gateways enter commercial service.
- Management reported no material changes to the risk factors in the 2016 Form 10-K and no material off-balance-sheet transactions. It noted exposure to foreign currency and floating-rate debt; a 1% interest-rate change would affect annual interest expense by approximately $5.2 million.
Key facts for investors to verify
- Progress toward the remaining approximately $114 million equity-funding requirement and the October 30, 2017 deadline, including restrictions on use of proceeds.
- Cash available for operations after excluding restricted cash, and the company’s ability to meet debt service and the April 2018 convertible-note put.
- Subscriber, churn and ARPU trends, particularly the decline in Duplex subscribers and whether higher pricing is sustainable.
- FCC license-modification decision, commercial prospects and required investment for terrestrial spectrum use.
- Developments in the Thales disputes and the valuation sensitivity of the embedded derivative liabilities.