Globalstar, Inc. 10-Q Summary: Quarter Ended March 31, 2011
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2011. Globalstar, Inc. is a provider of mobile voice and data communications services via satellite. The company is currently transitioning from a deteriorating first-generation satellite constellation to a new second-generation constellation. As of the reporting date, the company had successfully launched the first six of 24 planned second-generation satellites and was awaiting regulatory approvals to fully utilize them for U.S. traffic.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $18.3 million | $15.6 million |
| Net Loss | $(6.5) million | $(35.6) million |
| Operating Loss | $(12.8) million | $(8.7) million |
| Cash and Equivalents | $8.3 million | $33.0 million (Dec 31, 2010) |
| Long-Term Debt | $678.9 million | $664.5 million (Dec 31, 2010) |
| Operating Cash Flow | $(3.6) million | $(20.2) million |
| Capital Expenditures | $(33.4) million | $(76.8) million |
Note: Revenue includes a nonrecurring $2.0 million recognition from the termination of the Open Range contract. Net loss was significantly improved by a $6.4 million derivative gain compared to a $25.0 million derivative loss in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17% year-over-year, driven by a 28% increase in SPOT service revenue and a 17% increase in Simplex service revenue. This offset a 15% decline in Duplex service revenue due to ongoing two-way communication issues with the first-generation constellation.
- Profitability Improvement: Net loss narrowed significantly from $35.6 million to $6.5 million. This improvement was primarily due to a reversal in derivative fair value adjustments (a $6.4 million gain in 2011 vs. a $25.0 million loss in 2010) rather than operational profitability.
- Expense Increases: Operating expenses rose 28% to $31.0 million. Depreciation, amortization, and accretion expenses jumped 80% to $10.6 million due to the placement of six new second-generation satellites into service.
- Liquidity Decline: Cash and cash equivalents decreased by approximately $24.8 million during the quarter, driven by significant capital expenditures for satellite construction and launch costs.
Outlook, Risks, and Management Commentary
- Satellite Deployment: Management expects to launch the next six satellites in July 2011 and complete the remaining two launches before the end of 2011. The goal is to form a 32-satellite constellation to restore reliable Duplex service.
- Regulatory Risks: The company received a conditional permanent U.S. license in March 2011 but must register the satellites in France under the Outer Space Treaty to activate U.S. service. Failure to secure this registration by August 31, 2011, constitutes an event of default under the Facility Agreement.
- Financing Needs: The company faces significant capital requirements to complete the constellation and upgrade ground facilities. It plans to fund these through remaining Facility Agreement funds, a $60 million contingent equity account, and potential future financing. There is no assurance that additional financing will be available.
- Contractual Commitments: The company has deferred certain payments to vendors (Hughes and Oceus) to preserve cash, with deadlines extended to July 2011 and February 2012, respectively. Failure to pay may result in contract termination fees.
Investor Verification Checklist
- Regulatory Status: Verify the status of the French satellite registration required to activate U.S. service and avoid default on the Facility Agreement.
- Liquidity Runway: Assess the sufficiency of the $8.3 million cash on hand plus $14.6 million available under the Facility Agreement against upcoming capital expenditure obligations.
- Derivative Volatility: Understand that the reported net loss is heavily influenced by non-cash derivative fair value adjustments, which are sensitive to stock price volatility.
- Duplex Service Recovery: Monitor subscriber churn and ARPU trends for Duplex services, which remain impacted by the aging first-generation constellation.
- Vendor Agreements: Review the terms of deferred payments to Hughes and Oceus, including potential termination costs if financing is not secured by the extended deadlines.