Globalstar, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; financial amounts below are in millions of U.S. dollars unless otherwise stated. Globalstar provides mobile satellite voice and data services and subscriber equipment. Its second-generation satellite constellation was fully in commercial service by August 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Service revenue | $17.1 | $15.4 | $47.9 | $42.1 |
| Equipment revenue | $5.5 | $5.2 | $13.9 | $15.1 |
| Total revenue | $22.5 | $20.5 | $61.7 | $57.3 |
| Operating loss | $(22.6) | $(17.7) | $(60.6) | $(76.0) |
| Net loss | $(205.0) | $(41.2) | $(356.3) | $(93.2) |
| Basic and diluted loss per share | $(0.30) | $(0.10) | $(0.64) | $(0.25) |
Revenue rose 10% in Q3 and about 8% for the first nine months. Service growth reflected higher Duplex revenue, growth in Simplex subscribers, and improved SPOT service revenue. Equipment revenue was mixed: Duplex sales increased, while Simplex sales declined; nine-month SPOT equipment sales also fell. Q3 operating expenses increased 18%, mainly from higher depreciation as satellites entered service and increased marketing, general and administrative costs. Nine-month operating expenses declined 8%, largely because 2012 included a $22.0 million Thales-related contract termination charge and a $7.2 million long-lived asset reduction that did not recur.
Profitability was heavily affected by financing and noncash accounting items. For the first nine months, other expense included $110.8 million of debt-extinguishment losses, $16.7 million of losses on equity issuance, and $126.9 million of derivative losses. Q3 derivative loss was $97.5 million. Interest expense, net of capitalized amounts, was $39.9 million for the nine months, versus $13.4 million in 2012. These items substantially increased net loss and should be distinguished from operating performance.
Cash, debt and liquidity
- Operating cash flow was $2.3 million for the first nine months, down from $10.9 million in 2012. Investing cash outflow was $30.6 million and financing cash inflow was $23.0 million. Cash and cash equivalents fell $5.1 million to $6.6 million.
- Restricted cash was $37.9 million, held for debt service and not freely available for general operations. Total assets were $1.39 billion; stockholders’ equity was $266.6 million.
- At September 30, carrying value of debt was $675.7 million (principal amount $767.3 million); no debt was classified as current. This followed the August restructuring of the senior facility and exchange of the defaulted 5.75% notes. The facility principal was $586.3 million, with maturity extended to December 2022 and scheduled semiannual principal payments beginning December 2014. Interest is floating-rate, with margins rising over time to a maximum of LIBOR plus 5.75%.
- The amended facility waived or cured prior defaults and Globalstar reported covenant compliance at September 30. It requires at least $4.0 million of liquidity and includes revised EBITDA, debt-service coverage, leverage and capital-expenditure covenants.
- Management reported $24.7 million remaining under Thermo’s financing commitments and a $30.0 million Terrapin equity line available at quarter-end, both subject to conditions. After quarter-end, Terrapin purchased $6.0 million of voting shares on October 3. Thermo financing involved substantial share issuance and dilution; Thermo had invested $51.5 million by September 30.
Material developments, outlook and risks
- Operating outlook: Management expected improved service and potential revenue growth from restored Duplex coverage, new pricing plans, product launches and sales initiatives. It also planned further gateway and ground-network upgrades. The filing provides no clear quantified revenue or earnings guidance; management cautioned that interim results are not necessarily indicative of full-year results.
- Going concern and funding: The statements use a going-concern basis, but management stated that substantial uncertainties remained. Continuing its plan depended on execution, cash generation and completion of financing arrangements with Thermo and Terrapin. Management could not assure additional financing on acceptable terms or completion of longer-term plans.
- Products and subscribers: The company reported approximately 569,000 subscribers at quarter-end, up 3% year over year. Duplex ARPU increased to $24.50 in Q3 from $18.95; Simplex subscribers grew 20% year over year. SPOT subscribers declined 7%, partly reflecting deactivation of about 36,000 suspended accounts earlier in 2013. The SPOT Global Phone and SPOT Gen3 were introduced in 2013.
- FCC opportunity: The company was seeking authority to use MSS spectrum for terrestrial wireless services. On November 1, 2013, after quarter-end, the FCC released proposed rules concerning Globalstar terrestrial broadband services over 22 MHz of spectrum; this was a proposal, not final authorization.
- Contractor obligations: Hughes payments were deferred under an amended schedule; unpaid amounts could accrue interest at 15% if not paid on time, and termination for convenience could require a $20.0 million payment, less specified prior payments. Ericsson payments were also deferred; termination for convenience could require $10.0 million. Qualcomm-related inventory advances were $9.2 million, and the contract had been cancelled while the parties sought to resolve termination issues.
- Contingencies: Thales had dismissed its proceeding to confirm an arbitration award without prejudice and could refile; successful confirmation could materially harm liquidity and financial condition. A separate settlement included a conditional €17.5 million payment obligation; no party had terminated that settlement as of September 30. The company also recorded a $1.3 million liability related to projected shortfalls in Louisiana payroll requirements.
- Unusual valuation and dilution risks: Derivative liabilities totaled $295.7 million and were largely Level 3 estimates sensitive to stock price, volatility, potential equity issuances and other assumptions. Debt instruments include conversion, put and reset features. The filing reported substantial increases in common shares and outstanding warrants, as well as conversion-related and committed equity issuances.
Investor verification priorities
- Confirm the timing, conditions and remaining availability of Thermo commitments and the Terrapin equity line, and assess cash runway against the going-concern disclosures.
- Review the amended facility’s covenants, repayment schedule, floating-rate exposure and restrictions; verify the company’s ability to meet future payments and maintain compliance.
- Separate recurring operating trends from debt-extinguishment charges, derivative remeasurement losses, equity issuance discounts and increased satellite depreciation.
- Track Hughes and Ericsson payment milestones, ground-infrastructure completion, and any resulting delay, impairment or termination costs.
- Monitor the Thales proceedings and settlement obligations, FCC rulemaking, subscriber and ARPU trends, and dilution from conversions, warrants and related-party equity financing.