Globalstar, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Globalstar provides global mobile satellite voice and data services, including Duplex, SPOT and Simplex products. This unaudited report covers the three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. The second-generation satellite constellation was fully deployed and in service by August 2013.
Financial and operating results
| Metric | Q3 2014 | Nine months 2014 |
|---|---|---|
| Total revenue | $23.4 million, up 4% year over year | $68.0 million, up 10% |
| Service revenue | $18.5 million, up 9% | $52.6 million, up 10% |
| Operating loss | $18.1 million | $63.7 million |
| Net income (loss) | $129.4 million; diluted EPS $0.11 | $(554.9) million; EPS $(0.61) |
| Operating cash flow | Not separately stated for the quarter | $6.9 million, versus $2.3 million |
- Q3 net income was principally affected by a $167.0 million noncash derivative gain. For the first nine months, the company recorded a $418.7 million derivative loss and a $39.6 million loss on extinguishment of debt. These fair-value and debt-conversion effects materially distort period-to-period net earnings.
- Nine-month operating expenses rose 8% to $131.7 million, mainly due to a $7.3 million noncash inventory write-down associated with the former Qualcomm supply contract. Q3 operating expenses fell 8% to $41.5 million, mainly on lower depreciation.
- At September 30, cash and equivalents were $27.2 million, compared with $17.4 million at year-end 2013. An additional $37.9 million was restricted for debt service and was not generally available for operations. Current assets were $80.4 million versus current liabilities of $90.2 million.
- Debt principal was $675.5 million and carrying value was $631.0 million; $7.3 million of carrying value was current. The $586.3 million senior secured Facility Agreement matures in December 2022, with semiannual principal repayments scheduled to begin in December 2014. Its rate is floating, currently LIBOR plus 2.75%, subject to scheduled increases.
- Stockholders’ equity was a deficit of $14.5 million. Noncurrent derivative liabilities totaled $575.8 million, based on Level 3 valuations sensitive to Globalstar’s share price and other assumptions.
Changes versus the prior comparable period
- Revenue growth reflected higher Duplex service revenue as customers activated devices and moved to higher-priced plans, plus stronger SPOT equipment demand. Q3 equipment sales declined to $4.9 million from $5.5 million, partly offsetting service growth.
- Reported subscribers reached approximately 619,900, up 9% from September 2013. The company deactivated about 26,000 suspended or nonpaying Duplex subscribers in Q1; excluding those customers from the prior-year base, subscriber growth was approximately 14% overall and 12% for Duplex.
- Q3 Duplex service revenue increased 23% and SPOT service revenue increased 7%; Simplex service revenue declined 7%. Monthly ARPU was $40.18 for Duplex, $10.73 for SPOT and $2.46 for Simplex.
- Nine-month investing cash outflow fell to $6.1 million from $30.6 million, mainly because satellite deployment spending had substantially ended. Financing cash flow was $9.1 million, largely from warrant and stock-option exercises.
- Voting common shares outstanding increased to 855.8 million from 535.9 million at year-end; nonvoting shares decreased to 134.0 million from 309.0 million, reflecting conversions and issuances. Debt conversions and warrant exercises contributed to share-count changes.
Outlook, risks and unusual items
- Management expects to continue gateway and ground-infrastructure upgrades and identifies cash on hand, operating cash flow and the Terrapin equity line as liquidity sources. It states that its plan assumes funding under the Terrapin arrangement, whose timing is uncertain, and that additional long-term debt or equity financing has not been arranged. Management cautions that sufficient financing may not be available on acceptable terms.
- At September 30, $24.0 million remained available under the Terrapin equity line, subject to contractual conditions. The company had drawn $6.0 million of the $30.0 million commitment. Thermo had completed its $65.0 million equity commitment.
- The Facility Agreement requires minimum liquidity of $4.0 million, imposes capital-expenditure limits and sets minimum adjusted EBITDA tests, including $14.1 million for July–December 2014. The company reported compliance with all covenants at September 30; financial-covenant noncompliance may be cured with equity contributions through June 2017.
- Contractual estimates include $139.7 million of ground-network and related capital expenditures, including $23.4 million estimated for 2015; the filing also reports unresolved amounts with Thales and additional launch-delay costs owed to Arianespace. The company said 2014 capital expenditures were subject to a $42.3 million facility limit.
- Thales may refile to confirm an arbitration award; the filing warns that a successful confirmation could materially harm financial condition and liquidity. A settlement contemplates a €17.5 million payment subject to specified conditions; the release of the larger award amount became effective in 2012.
- Management noted that the stock-price decline after September 30 could materially reduce the fair value of embedded derivative liabilities and produce a fourth-quarter derivative gain if the share price did not recover by year-end. Such a gain would be noncash and valuation-driven.
- The company reported disclosure controls were effective. It also disclosed a previously identified material weakness concerning an outsourced valuation control for embedded derivatives and described remediation steps, including model corrections and added review procedures.
Important facts for investors to verify
- Whether operating cash generation and available financing can cover operating needs, scheduled debt payments and planned ground-network spending; distinguish unrestricted cash from the $37.9 million restricted reserve.
- Facility covenant performance and the start and amount of scheduled principal repayments, as well as the floating-rate exposure on $586.3 million of facility principal.
- The terms, conditions and actual availability of the remaining Terrapin equity-line commitment, and the company’s ability to secure additional financing.
- Underlying service growth, subscriber retention and ARPU by product, particularly given Duplex deactivations and weaker Simplex revenue.
- The assumptions and controls behind the $575.8 million derivative liability and the effect of share-price movements on reported earnings and equity.
- Resolution and potential cash consequences of the Thales and other contractor matters, and whether the reported inventory write-down fully addresses the former Qualcomm inventory exposure.