Globalstar, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Globalstar provides mobile satellite voice and data services, equipment, and related products. This unaudited filing covers the three and six months ended June 30, 2018; amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $33.7 million, up 20% | $62.5 million, up 18% |
| Operating income (loss) | $1.9 million | $(11.0) million |
| Net income (loss) | $(7.0) million | $80.9 million |
| Operating cash flow | Not provided separately | $7.8 million |
- Service revenue was $28.0 million in Q2 and $54.0 million for the half-year. Equipment revenue was $5.7 million and $8.5 million, respectively.
- Q2 operating margin was approximately 5.8%, but included a $20.5 million reduction in operating expense from reversing the Thales contract termination liability. Excluding that reversal, the quarter would have had an operating loss of approximately $18.5 million. The six-month operating loss similarly includes the reversal.
- Six-month net income was substantially affected by a $106.9 million noncash gain from changes in derivative fair value and a $6.8 million legal-settlement gain. Q2 included a $2.1 million derivative loss. Net income therefore does not represent operating cash generation.
- Cash and cash equivalents were $12.8 million at June 30, down from $41.6 million at year-end; an additional $52.7 million was restricted for debt service. Current assets were $102.0 million versus current liabilities of $151.9 million.
- Debt carrying value was $488.5 million, including $87.7 million current and $400.7 million long-term. Principal outstanding was $542.3 million. The company paid $38.9 million of Facility Agreement principal during the half-year.
- Six-month investing cash use was $8.9 million; financing cash use was $38.6 million. Cash, cash equivalents and restricted cash together declined $39.8 million.
Material changes versus prior comparable periods
- Revenue growth was driven by higher service revenue, including SPOT and Simplex, and increased equipment sales, particularly Simplex products. Average subscriber counts rose overall, though Duplex subscribers declined.
- Q2 marketing, general and administrative expense rose $6.4 million, primarily due to advisers and consultants for strategic opportunities, including the proposed merger and spectrum monetization efforts. The proposed merger accounted for most of these costs.
- Globalstar adopted ASC 606 on January 1, 2018 using the modified retrospective method. The company recorded a $3.1 million opening retained-deficit adjustment; prior-period results were not restated, limiting direct comparability.
- Derivative fair-value results reversed sharply year over year: a $106.9 million gain for the first half of 2018 versus a $73.9 million loss in 2017, reflecting sensitive Level 3 valuations tied principally to the stock price and other assumptions.
Outlook, risks, contingencies and unusual items
- No numerical revenue or earnings guidance is provided. Management describes continued development of next-generation products and network services, and ongoing efforts to monetize spectrum and obtain international regulatory approvals.
- Management says scheduled Facility Agreement payments in December 2018 and June 2019 are expected to exceed available cash while maintaining the required debt-service reserve. Funding sources have not been fully arranged. The company also expects to need an equity cure contribution to meet the December 2018 covenant test; its funding source is not fully arranged. It was covenant-compliant at June 30.
- The Facility Agreement is secured by substantially all company and domestic-subsidiary assets, bears floating-rate interest, and has a December 2022 maturity. Management estimates a 1 percentage-point rate change would affect annual interest expense by about $4.3 million. The subordinated Thermo loan carries 12% interest, accrued rather than paid in cash.
- The $20.5 million Thales liability reversal followed expiration of the period for enforcing the arbitration award. Globalstar says payment is not probable, but acknowledges Thales might pursue an alternative claim; the company would defend it. A separate settlement obligation remains conditional.
- A business-loss legal settlement is expected to pay $7.4 million net in installments in January 2019 and January 2020; $6.8 million present value was recognized as income in Q2.
- The April 2018 merger agreement involving Thermo-controlled parties was terminated by mutual agreement on July 31, 2018; no termination fee is payable. The filing reports no material changes to previously disclosed risk factors and no material off-balance-sheet transactions.
Important facts for investors to verify
- Whether Globalstar secures funding for the upcoming debt payments and any required equity cure, and maintains covenant compliance.
- Underlying operating performance after separating the Thales reversal, derivative remeasurement gains and losses, and legal-settlement gain from recurring results.
- Subscriber trends, churn, ARPU, and commercial uptake of Sat-Fi2, SPOT X and SmartOne Solar.
- Progress and costs in spectrum monetization, terrestrial broadband approvals, and completion of ground-network upgrades.
- Any further developments concerning the Thales matter, the conditional settlement obligation, and related-party financing and transactions.