Globalstar, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 8, 2011. Globalstar provides mobile satellite voice and data services, including Duplex two-way communications, SPOT and Simplex services. Results are unaudited.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $18.2 million | $18.2 million | $55.4 million | $51.4 million |
| Operating loss | $(21.4) million | $(13.3) million | $(51.0) million | $(31.0) million |
| Net loss | $(0.7) million | $(24.5) million | $(21.2) million | $(79.4) million |
| Derivative gain (loss) | $23.8 million | $(9.2) million | $34.1 million | $(42.2) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(10.9) million | $(7.7) million |
- Revenue mix and trends: Q3 service revenue rose 6% to $14.2 million, while equipment revenue fell 17% to $4.0 million. For nine months, revenue increased 8%; this included about $2.0 million of nonrecurring revenue recognized when the Open Range contract ended. Duplex service revenue weakened, while SPOT and Simplex service revenue grew.
- Margins and expenses: Operating expenses increased 25% in Q3 and 29% for nine months, driven mainly by higher depreciation and impairment charges. The filing does not report a defined operating-margin measure; operating losses widened despite largely flat Q3 revenue. Q3 net loss was substantially smaller than the prior year primarily because the fair-value derivative result swung to a gain, not because operating performance improved.
- Cash, working capital and debt: September 30 cash and equivalents were $6.1 million, with $8.0 million remaining under the Facility Agreement, restricted to satellite-manufacturer payments. Current assets were $85.7 million versus current liabilities of $100.2 million. Total debt was $717.9 million, including $16.7 million classified as current; total debt had been $664.5 million at year-end 2010. Cash used in investing was $84.5 million, including $71.2 million for satellites, ground systems and launches.
- Financing and interest: Nine-month financing cash flow was $68.8 million, including $38.0 million from 5% convertible notes, $18.7 million of Facility Agreement borrowings and $12.5 million of subordinated-loan funding. Cash interest paid was $19.1 million. The filing estimates $62 million of debt principal and interest payments through 2012, excluding principal payable in stock and payment-in-kind interest.
Material changes, outlook and key risks
- Satellite rollout and service risk: Twelve of the first 24 second-generation satellites had launched by the reporting date. Some experienced momentum-wheel anomalies; one was in safe-hold mode and not providing communications service. A technical solution was under development, with no assurance of success. The remaining two six-satellite launches were scheduled to resume in December 2011, subject to change. The eight 2007 first-generation satellites are expected to lose reliable Duplex capability beyond 2013.
- Liquidity warning: Management stated that available cash and financing commitments were insufficient to meet contractual obligations and funding needs over the following 12 months and that additional financing was required. The company expected no significant operating cash flow to support the business until the end of 2012, assuming the launch schedule held. It had no additional debt or equity financing arranged and warned that financing might not be available on acceptable terms, or at all.
- Contingent funding: A $60 million Thermo contingent equity account was available subject to facility conditions and use restrictions; using it for specified satellite capital expenditures required matching equity or subordinated-loan proceeds. On November 3, after quarter-end, Globalstar drew $5.4 million and agreed to issue Thermo 11.4 million shares. A default could limit access to these funds.
- Capital commitments and supplier terms: Estimated remaining payments for the first 24 satellites and launches totaled about $41 million after September 30, largely due through the first nine months of 2012. Ground-system contract payments were estimated at $75 million after September 30 through 2012. Hughes deferred certain payments to December 31, 2011, with 10% interest; Ericsson deferred specified milestone payments to February 23, 2012, with 6.5% interest. Failure to renegotiate or fund obligations could impair or terminate projects.
- Debt covenants: Globalstar was in compliance with Facility Agreement covenants at September 30, but expected to fall out of compliance with certain covenants within 12 months without additional financing. Facility milestones require in-orbit acceptance of 18 satellites by August 1, 2012 and all 24 by September 1, 2012; default could restrict funding or accelerate debt. The company also reported that it was not in default under its convertible-note indentures.
- Contingencies and unusual items: Q3 included $3.0 million of asset reductions and $1.0 million of equipment reductions tied to discontinued products and a strategic focus on core offerings. Nine-month reductions were $3.5 million and $1.4 million, respectively. Management recorded a $1.9 million provision for potential Louisiana relocation-payroll reimbursements. A Thales arbitration concerns rights and pricing for additional satellites; Thales sought €51.5 million in termination costs, which Globalstar disputed, and the company recorded no reserve. A hearing was scheduled for January 2012.
- Other investor risks: NASDAQ notified the company that its bid price had remained below $1.00 for 30 consecutive business days; the compliance period ran to March 12, 2012. Failure to regain compliance could put the listing at risk and could trigger noteholder repurchase rights. The company also cited headcount reductions and potential loss of key personnel.
- Management’s plan: Complete launches, address satellite anomalies, activate next-generation ground upgrades, grow SPOT/Simplex and Duplex revenues, reduce costs and obtain additional financing. These are plans and expectations, not assured outcomes; no quantified revenue or earnings guidance was provided.
Most important facts for investors to verify
- Progress and reliability of the momentum-wheel fix, satellite acceptance milestones and remaining launches.
- Availability, terms and dilution effects of new financing and Thermo contingent-equity draws.
- Cash runway, upcoming supplier payments, covenant compliance and any required waivers.
- Outcome and potential financial consequences of the Thales arbitration, including disputed termination claims.
- Whether the company regains NASDAQ’s $1.00 minimum bid-price compliance by the stated deadline.
- Underlying service trends—especially Duplex churn and ARPU, and SPOT subscriber quality, including suspended accounts.