Globalstar, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also presents unaudited quarterly results. Globalstar provides global mobile satellite voice and data services, including Duplex, SPOT and Simplex products.
Business context and performance
The company reported 639,220 subscribers at year-end, up from 583,126 in 2013. Management attributed improving demand, particularly for Duplex, to restoration of the second-generation constellation in August 2013 and growth in SPOT and Simplex offerings.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $90.1 million | $82.7 million |
| Service revenue | $69.8 million | $64.6 million |
| Equipment revenue | $20.2 million | $18.1 million |
| Operating loss | $95.9 million | $87.4 million |
| Net loss | $462.9 million | $591.1 million |
| Net cash from operating activities | $4.0 million | $(6.5) million |
| Net cash used in investing activities | $19.3 million | $37.1 million |
Revenue increased 9%, led by Duplex service revenue, which rose 18%; SPOT and Simplex service revenue rose 4% and 10%, respectively. Operating loss widened primarily because the company recorded a $21.7 million inventory-value reduction, versus $5.8 million in 2013. Depreciation, amortization and accretion were $86.1 million.
The annual net loss included a $286.0 million non-cash derivative loss, $39.8 million loss on extinguishment of debt and $43.2 million net interest expense. Quarterly net income was reported in Q3 ($129.4 million) and Q4 ($92.0 million), substantially reflecting non-cash changes in derivative and debt-related accounting; it did not reverse the full-year loss.
At year-end, cash and cash equivalents were $7.1 million; an additional $37.9 million was restricted for debt service. Debt carrying value was $630.1 million, including $6.5 million current and $623.6 million long-term; total principal was $673.2 million. Stockholders’ equity was $78.9 million. The company reported no material off-balance-sheet transactions.
Material changes and unusual items
- During 2014, $76.5 million of principal indebtedness converted into common shares. Conversions and warrant exercises reduced debt but increased share count and potential dilution.
- The $21.7 million inventory write-down included $14.4 million for excess Duplex inventory and $7.3 million for Qualcomm-held materials considered unlikely to be used in future products.
- The company reported a $4.1 million foreign-currency transaction gain, compared with a $1.0 million loss in 2013.
- The stock price declined 25% from September 30 to December 31, 2014, which the filing associated with aggressive short selling; it also described the share price as volatile.
Outlook, financing and risks
Management expected to continue upgrading gateway and ground infrastructure, with initial North American installations in 2015 and rollout completion targeted for 2016. It described the FCC’s proposed rules for Terrestrial Low Power Service (TLPS) as a potential opportunity, but final FCC action remained pending; commercial deployment depends on regulatory approval and partners.
The company had $24.0 million available under its Terrapin equity line at year-end and drew $10.0 million in February 2015 as an equity cure contribution. Management anticipated further 2015 draws to support Facility Agreement covenant compliance. The facility is floating-rate debt, secured by substantially all domestic assets, with semiannual principal repayments underway and maturity in December 2022. The filing states that a 1 percentage-point interest-rate change would affect annual interest expense by approximately $5.8 million.
- Liquidity is constrained: cash is limited, restricted cash cannot be used for general purposes, and covenant compliance depends in part on equity-line funding and future operating performance.
- Satellite health, service quality and gateway upgrades are critical; satellites are not insured against in-orbit failure after the initial coverage period, and replacement satellites are not secured by a follow-on purchase agreement.
- TLPS revenue prospects depend on FCC action. Spectrum coordination, interference, licensing and regulatory changes could affect operations or planned services.
- The company remains exposed to substantial debt obligations and covenant restrictions. Holders of the 8% notes may require repurchase in 2018 and 2023, and a delisting or change of control may trigger repayment rights.
- A Thales settlement includes a €17.5 million payment contingent on a new satellite contract and financing. Thales may also seek confirmation of an arbitration award; the company says a successful confirmation could materially harm its financial condition and liquidity.
- Other risks include competition, foreign-currency exposure, equipment supply, inventory obsolescence and dilution. Thermo controlled approximately 57% of voting common stock at year-end.
The independent auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2014. Management likewise reported effective controls.
Most important facts for investors to verify
- Whether operating cash generation and subscriber growth improve enough to fund operations, ground upgrades and debt service.
- Availability and terms of remaining Terrapin funding, and compliance with Facility Agreement covenants without repeated equity cures.
- FCC decisions on TLPS, and the timing, cost and commercial viability of the proposed service.
- Actual demand for Duplex equipment and whether further inventory write-downs or product transition costs arise.
- Satellite and gateway reliability, completion of Hughes/Ericsson ground upgrades, and plans and financing for replacement satellites.
- Potential dilution and repayment exposure from convertible notes, Thermo-related instruments, noteholder put rights and the contingent Thales payment.