Globalstar, Inc. — Q1 2017 Form 10-Q
Business and period: Globalstar provides mobile satellite voice and data services and subscriber equipment. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $24.7 million | $21.8 million; up 13% |
| Operating loss | $15.2 million | $15.7 million |
| Net loss | $20.2 million; $0.02 per share | $26.9 million; $0.03 per share |
| Operating cash flow | $5.3 million | $2.6 million |
| Investing cash flow | $(4.1) million | $(4.9) million |
| Financing cash flow | $12.0 million | $6.5 million |
| Cash and cash equivalents | $23.5 million | $10.2 million at Dec. 31, 2016 |
| Restricted cash | $37.9 million | $38.0 million at Dec. 31, 2016 |
| Debt carrying value | $583.3 million | $576.3 million at Dec. 31, 2016 |
Service revenue rose to $21.5 million, primarily from higher average revenue per user (ARPU); equipment sales were $3.2 million. The filing reports total operating expenses of $39.9 million, up about 6%. Current assets were $50.1 million against current liabilities of $176.1 million. Restricted cash is pledged to debt service and is not generally available for operations.
Gross principal debt was $656.9 million, including $543.0 million under the secured Facility Agreement, $96.8 million under the subordinated Thermo loan, and $17.1 million of 2013 convertible notes. The balance sheet classifies $75.8 million of debt as current, in addition to $20.8 million of debt restructuring fees. Derivative liabilities were $277.9 million, largely embedded features in debt instruments; their fair-value movements are noncash and affected reported earnings.
Material changes and management commentary
- Service revenue increased about $2.7 million. Duplex service revenue benefited from a 26% increase in ARPU, partly offset by a 5% decline in average subscribers. SPOT service revenue grew 14%, supported by higher ARPU and 4% subscriber growth. Total average subscribers were nearly flat year over year.
- Operating expenses increased about $2.3 million, mainly from service costs, including research and development and ground-network support, and higher marketing, general and administrative costs.
- Net loss narrowed by about $6.8 million, helped in part by a $3.2 million derivative gain versus a $1.3 million derivative loss in Q1 2016. These fair-value changes can fluctuate with the stock price and other valuation assumptions.
- Operating cash flow improved, but cash generation was supplemented by $12.0 million of Terrapin equity proceeds. The Terrapin purchase agreement is fully used; no funds remain available under it.
- Management says it expects to need additional equity cure contributions to meet financial covenant tests for June and December 2017. Funding sources were not fully arranged at filing, and the company was discussing its 2017 business plan and possible Facility Agreement modifications with lenders. The company reported covenant compliance at March 31, 2017.
- The FCC’s December 2016 order enabling terrestrial broadband service over Globalstar’s licensed 2.4 GHz spectrum became effective March 2, 2017. Globalstar filed an application to modify its licenses in April and was seeking similar authority internationally. The filing gives no quantified revenue or earnings guidance for this opportunity.
Outlook, risks and contingencies
- Funding and debt: Management states scheduled debt obligations exceed expected operating cash flows and that funding to make payments is not fully arranged. The company anticipates additional equity cure contributions; failure to meet payments or covenants without a cure or waiver could trigger default and acceleration. The Facility Agreement matures in December 2022, has floating-rate interest, and is secured by substantially all company and domestic-subsidiary assets, excluding FCC licenses.
- Interest-rate exposure: A 1 percentage-point rate change would alter annual interest expense by approximately $5.4 million, according to the filing. Facility Agreement interest is LIBOR-based and steps up over time; an interest-rate cap provides partial protection subject to its terms.
- Legal and asset disputes: Thales may seek confirmation of an arbitration award for approximately €53 million plus interest; the company says success could materially harm its financial condition, results and liquidity. Separately, Thales disputes Globalstar’s ownership of prepaid satellite long-lead items, and the outcome is uncertain. A €17.5 million termination charge remains recorded; related settlement payment conditions had not been satisfied.
- Other exposures: Hughes downside protection on shares issued for contract payments runs through June 30, 2017; the recorded liability was $2.0 million. The company also has ongoing foreign-currency exposure and Level 3 derivative valuations sensitive to stock price, volatility and other assumptions.
- Network investment: Ground-network construction in progress was $212.5 million and is not depreciated until the upgraded gateways enter commercial service. Management says core Hughes and Ericsson contract deliverables were accepted in December 2016, with certain add-ons still to be completed.
- The filing provides no formal earnings, revenue or cash-flow forecast. Management cautions that first-quarter results are not necessarily indicative of full-year results. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Globalstar secures funding or lender modifications and equity cure contributions needed for upcoming covenant tests and debt payments.
- Debt repayment schedule, covenant calculations, restrictions on cash use, and the availability of any new financing after the Terrapin facility was exhausted.
- Progress and commercial prospects for terrestrial spectrum authorization, including FCC license modifications and international approvals.
- Subscriber, churn and ARPU trends—particularly Duplex subscriber declines, SPOT growth, and Simplex customer activity—and whether higher ARPU persists.
- Developments in the Thales arbitration and long-lead-item dispute, and the related potential financial exposure.
- Completion and deployment timing for ground-network upgrades, plus the impact of future depreciation and remaining network commitments.
- Changes in derivative liabilities and dilution, including the Hughes downside-protection settlement and Thermo-held warrants scheduled to expire in June 2017.