Globalstar, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request identifies 2018 Q4, this is an annual filing; quarterly information is included where relevant. Globalstar provides global mobile satellite voice and data services, including Duplex, SPOT and Simplex, and is pursuing terrestrial use of its spectrum.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $130.1 million | $112.7 million |
| Operating loss | $47.4 million | $68.4 million |
| Net loss | $6.5 million | $89.1 million |
| Cash from operations | $5.9 million | $13.9 million |
| Cash used in investing | $17.4 million | $20.8 million |
| Cash and cash equivalents | $15.2 million | $41.6 million |
| Restricted cash | $60.3 million | $63.6 million |
- Revenue rose 15.5%, including service revenue of $111.1 million, up from $98.5 million, and equipment revenue of $19.0 million, up from $14.2 million. Service revenue was 85% of total revenue.
- Average subscribers increased to 744,145 from 710,322. Simplex and SPOT subscriber averages grew, while Duplex subscribers declined. Monthly ARPU increased across each reported core line: Duplex $52.45, SPOT $14.98 and Simplex $3.16.
- Operating expenses were $177.5 million. Depreciation, amortization and accretion rose to $90.4 million from $77.5 million, including depreciation on approximately $208 million of ground-network assets placed in service.
- Net loss improved substantially, but included an $81.1 million noncash derivative gain, a $20.5 million operating-expense reduction from reversal of the Thales termination-charge liability, and $6.8 million of legal-settlement income. These items make reported earnings less representative of underlying operations.
- Cash flow from operations fell despite revenue growth. Cash, cash equivalents and restricted cash totaled $75.5 million, but $60.3 million was restricted for Facility Agreement debt service.
- Debt principal was $510.5 million ($389.4 million under the Facility Agreement, $119.7 million owed to Thermo and $1.4 million of convertible notes). Debt carrying value, net of discounts and financing costs, was $463.5 million. Stockholders’ equity was $358.9 million.
Material changes and notable items
- Revenue growth reflected higher ARPU across core services and growth in the total average subscriber base. Simplex service revenue increased 23%, SPOT service revenue 15%, and Duplex service revenue 10%.
- Equipment sales benefited from SPOT X and SmartOne Solar launches. Sat-Fi2 sales were slower than expected amid usability and mass-production issues; SPOT X also faced production issues that the company said were substantially resolved.
- Marketing, general and administrative expense increased $16.6 million to $55.4 million, principally reflecting merger, litigation, spectrum-monetization and other advisory costs. The proposed related-party merger was terminated in July 2018; the company reported approximately $11.2 million in 2018 costs associated with the merger and related litigation.
- The Thales arbitration award’s enforcement period expired in May 2018. Globalstar reversed the accrued $20.5 million charge, but disclosed that it could not rule out alternative efforts by Thales to pursue payment.
- Globalstar raised approximately $59.1 million net in a December stock offering of 171.4 million shares at $0.35 per share. Eighty percent of net proceeds went to the debt-service reserve; the offering also served as an equity cure for debt-covenant compliance.
- In December, the company obtained 3GPP approval for Band 53 for its 2.4 GHz terrestrial spectrum. It continues to seek regulatory approvals and a strategic partner; successful commercialization and resulting revenue are not assured.
Outlook, risks and contingencies
- Management stated that existing liquidity was expected to be insufficient for obligations over the next 12 months and that operating cash flows may also be insufficient for longer-term obligations. Financing, restructuring or refinancing had not been arranged, and the company said scheduled 2019 Facility Agreement payments would exceed available cash sources while maintaining the required reserve.
- Globalstar needed an equity cure to comply with Facility Agreement financial covenants for the period ended December 31, 2018, and anticipated needing further cures. Funding sources were not arranged. A separate administrative covenant issue identified in February 2019 was remedied within the applicable grace period.
- The Facility Agreement is secured by substantially all company and domestic-subsidiary assets, carries floating-rate interest and restricts additional financing, capital expenditures and dividends. Thermo’s subordinated loan accrues interest at 12% annually, added to principal.
- Key business risks include satellite or gateway outages, aging first-generation equipment, the need for future satellite replacement capital, intense competition, limited Duplex handset supply, international currency and regulatory exposure, and inability to monetize spectrum or secure financing. The company reported a $3.1 million foreign-currency transaction loss in 2018.
- A shareholder-action settlement required a public offering and governance changes; court approval was scheduled for April 1, 2019. The company accrued an estimated loss up to its $1.5 million insurance retention for plaintiffs’ legal fees; additional coverage was not guaranteed.
- The company expects to receive $7.4 million net from a business economic-loss settlement: $3.7 million was received in January 2019 and the remaining installment was expected in January 2020. The Argentina gateway asset purchase was expected to close in 2019, subject to conditions.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of year-end. No formal revenue, earnings or cash-flow guidance is provided in the filing.
Investor facts to verify
- Near-term liquidity plan, 2019 debt payments and reserve requirements, and the availability and terms of new financing or refinancing.
- Ability to meet future Facility Agreement covenants and fund required equity cure contributions without further dilution.
- Recurring operating performance excluding the derivative gain, Thales liability reversal and legal-settlement income; also review the sharply negative $96.5 million Q4 net result.
- Progress toward a terrestrial spectrum partner, further regulatory approvals and commercial deployment of Band 53.
- Satellite and gateway operating condition, remaining handset inventory, and production and customer acceptance of Sat-Fi2, SPOT X and SmartOne Solar.
- Final court approval and costs of the shareholder settlement, any remaining Thales claim, and execution of the Argentina gateway purchase.