Globalstar, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; amounts below are in U.S. dollars unless stated otherwise. Globalstar provides mobile satellite voice and data services and subscriber equipment. Its second-generation satellite constellation was fully placed into service in August 2013.
Financial performance and position
- Revenue: Q2 revenue was $24.0 million, up 21% from $19.8 million; first-half revenue was $44.5 million, up 14% from $39.2 million. Q2 service revenue rose to $17.9 million and equipment sales to $6.1 million.
- Operating results: Q2 operating loss was $25.0 million versus $19.6 million; first-half operating loss was $45.6 million versus $38.0 million. Operating expenses included a $7.3 million inventory-value reduction related to the former Qualcomm arrangement.
- Net loss: Q2 net loss was $433.7 million ($0.48 per share), compared with $126.3 million ($0.25 per share). First-half net loss was $684.3 million ($0.78 per share), compared with $151.4 million ($0.31 per share). The 2014 losses were driven principally by noncash derivative losses: $376.3 million in Q2 and $585.7 million in the first half.
- Cash flow: First-half operating cash flow was positive $2.4 million, versus negative $1.8 million a year earlier. Investing used $4.8 million, versus $20.0 million; financing provided $8.8 million. Cash increased by $6.4 million to $23.8 million.
- Liquidity: Current assets were $78.4 million and current liabilities $87.3 million at June 30. A further $37.9 million was restricted for debt service and was not freely available. The company reported $24.0 million remaining on its Terrapin equity line.
- Debt and equity: Debt principal was $680.3 million and carrying value was $632.1 million, including $7.3 million current. Stockholders’ equity shifted from $116.8 million at year-end to a $204.5 million deficit. The balance sheet included $773.8 million of derivative liabilities.
- Margins and operating indicators: Service revenue growth reflected Duplex and Simplex gains; management cited greater Duplex usage and higher-rate plan conversions. At June 30, the company reported approximately 600,700 subscribers. It deactivated about 26,000 suspended or nonpaying Duplex subscribers in Q1; excluding those accounts, management said year-over-year total subscriber growth was 12%.
Material changes versus the prior comparable period
- Revenue grew, supported by Duplex service revenue and higher SPOT and Simplex equipment sales. First-half Duplex service revenue increased 26%; Simplex service revenue increased 19%.
- The $7.3 million Qualcomm-related inventory write-down contributed to higher operating expenses. The company said a July 2014 agreement settled the remaining inventory arrangement; approximately $2.0 million of inventory advances remained, primarily for finished goods.
- Derivative losses increased sharply as the company’s share price and other valuation inputs increased. These mark-to-market losses substantially inflated reported net losses and did not represent equivalent-period cash outflows.
- Debt conversions and warrant exercises reduced outstanding debt but issued substantial common shares. The 2009 8% notes automatically converted in April; outstanding 2009 warrants were exercised by their June expiry. In Q2, Globalstar received approximately $7.5 million from warrant exercises, and reported $8.986 million in first-half proceeds from stock issuance and exercises.
- First-half depreciation, amortization and accretion increased 7% to $45.3 million, primarily reflecting second-generation satellites placed into service during 2013.
Outlook, risks and unusual items
- Management expected continuing capital spending on gateway and ground-network upgrades and stated that operating cash flow was expected to be a source of long-term liquidity following full satellite deployment. No specific revenue or earnings forecast was provided.
- Management said the business plan assumed funding through the Terrapin equity line, while its timing and impact remained uncertain. Additional debt or equity financing had not been arranged, and the company could not assure that adequate financing would be available on acceptable terms.
- The senior secured facility matures in December 2022, with semiannual principal repayments beginning December 2014. The company was in compliance with its covenants at June 30, 2014; the filing describes minimum liquidity and EBITDA tests, capital expenditure limits and leverage requirements. A covenant breach without a waiver or equity cure could trigger acceleration.
- The $37.9 million debt-service reserve is restricted. Other financing obligations include Thermo’s loan, which accrues interest at 12% annually, and 8% convertible notes issued in 2013.
- A Thales arbitration award required approximately €53 million in termination charges and interest. The parties later entered into settlement and release arrangements, but the settlement agreement had not been terminated; Thales could seek to confirm the award. Management warned that successful confirmation could materially adversely affect financial condition and liquidity.
- Other notable items included a $16.5 million Q2 loss on extinguishment of debt, principally associated with note conversions, and a roughly $0.7 million noncash loss related to Hughes accepting stock for payment milestones. Globalstar reported a material weakness relating to an outsourced control over embedded-derivative valuation; remediation steps were underway.
Important facts for investors to verify
- Whether operating cash flow and available financing can fund operations, scheduled debt service and planned ground-network investment.
- Progress and costs under the Hughes and Ericsson ground-network programs, and the remaining obligations to Thales and Arianespace.
- The effect of future share-price movements and valuation assumptions on derivative liabilities and reported earnings.
- Debt-covenant compliance, scheduled repayments and access to the restricted reserve; verify that reported covenant calculations align with the facility definitions.
- The status and potential financial impact of the Thales arbitration and settlement arrangements.
- Whether subscriber and ARPU trends persist after the Duplex account deactivations, and whether equipment demand translates into recurring service revenue.