Globalstar, Inc. — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Dollar amounts are U.S. dollars unless noted.
Business context and reporting period
Globalstar provides global mobile satellite voice and data services, including two-way Duplex, consumer SPOT and commercial Simplex offerings. Its business serves remote areas and situations where terrestrial networks are unavailable or disrupted. The company reported approximately 583,000 subscribers at year-end.
All second-generation satellites were in service by August 2013, restoring Duplex capabilities. Management said improved service levels supported higher usage, new customer activations and stronger Duplex revenue. Services generated 78% of 2013 revenue; equipment sales generated 22%.
Financial results and key metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $82.7 million | $76.3 million |
| Service revenue | $64.6 million | $57.5 million |
| Equipment revenue | $18.1 million | $18.9 million |
| Operating loss | $87.4 million | $95.0 million |
| Net loss | $591.1 million | $112.2 million |
| Operating cash flow | $(6.5) million | $6.9 million |
| Cash used in investing activities | $37.1 million | $58.0 million |
| Cash and cash equivalents at year-end | $17.4 million | $11.8 million |
| Debt carrying value at year-end | $669.3 million | $751.0 million |
Fourth-quarter 2013 revenue was $21.0 million and net loss was $234.8 million. The filing does not provide a clear quarterly breakdown of the principal drivers of that quarter’s loss.
Duplex service revenue rose 24% to $22.8 million, SPOT service revenue rose 11% to $27.9 million, and Simplex service revenue rose 24% to $7.6 million. Monthly ARPU increased to $22.54 for Duplex and $10.04 for SPOT; Simplex ARPU was $3.03. Year-end subscriber totals included 84,163 Duplex, 221,895 SPOT and 231,353 Simplex subscribers.
Changes versus the prior comparable period
- Revenue increased 8%, led by service revenue growth as Duplex service recovered and SPOT and Simplex subscriber bases expanded. Equipment revenue declined 4%, reflecting lower SPOT and Simplex sales, partly offset by higher Duplex sales.
- Operating loss narrowed by $7.6 million. Depreciation, amortization and accretion rose $20.8 million to $90.6 million as more second-generation satellites entered service; 2012 included a $22.0 million Thales termination charge and a $7.2 million long-lived-asset write-down that did not recur.
- Net loss widened sharply, primarily because of a $306.0 million derivative loss, $109.1 million in debt-extinguishment losses, $16.7 million in equity-issuance losses and higher interest expense. The derivative remeasurement was noncash and heavily affected by the more than 400% increase in the company’s stock price during 2013.
- Cash from operations turned negative, from $6.9 million provided in 2012 to $6.5 million used in 2013. Financing included $65.0 million of equity funding from Thermo and $6.0 million from Terrapin.
- Debt presentation changed materially after the August 2013 facility amendment and restatement: 2012 debt was largely classified as current because of defaults and note put rights; the amended facility extended maturity and cured or waived existing defaults. Total debt principal was $745.3 million at year-end 2013.
Liquidity, debt and outlook
At December 31, 2013, Globalstar had $17.4 million of cash and $37.9 million of restricted cash reserved for facility debt service. The company also reported $24.0 million available under its Terrapin equity line, $5.0 million remaining under Thermo’s Consent Agreement commitment, and an option for up to $11.5 million of additional Thermo equity funding. Management said available liquidity sources were sufficient for existing contractual obligations over the next 12 months, while acknowledging reliance on these funding arrangements and uncertainty about future financing.
The $586.3 million senior secured facility matures in December 2022, with semiannual principal payments scheduled to begin in December 2014. Interest is floating-rate LIBOR plus a margin that rises over time, subject to an interest-rate cap. The facility is secured by substantially all company and domestic subsidiary assets, subject to stated exceptions. Globalstar was in compliance with facility covenants at year-end. It reported $937.0 million of scheduled debt obligations, including principal and payment-in-kind amounts, in its contractual-obligations table; this is not the same as the balance-sheet carrying value.
The company expected further ground-network capital spending. Facility covenants set maximum capital expenditures of $42.3 million for 2014 and $18.8 million for 2015; these are limits, not management’s spending guidance. The Hughes and Ericsson ground-network upgrades remained in progress. Sat-Fi, announced in January 2014, was expected to launch in the second quarter of 2014, allowing smartphones and other Wi-Fi devices to use Globalstar satellite connectivity.
Risks, contingencies and unusual items
- Funding and going-forward liquidity: Execution of the business plan depends on committed funding, operating cash flow, and access to further debt or equity financing. Additional financing was not arranged, and facility covenants restrict financing and other corporate actions.
- Satellite and network execution: Satellite failures, service interruptions, gateway upgrades, aging first-generation assets, and the need to fund replacement satellites could affect coverage, revenue and cash flow. The company did not insure satellites against in-orbit failures after the initial six-month period.
- Regulatory and spectrum uncertainty: The FCC had opened a rulemaking on proposed terrestrial broadband use of Globalstar spectrum. Outcomes and timing were uncertain; adverse spectrum-sharing or interference decisions could impair satellite service or planned terrestrial opportunities.
- Debt and derivative volatility: Convertible notes and the amended Thermo loan include conversion and put features measured using Level 3 models. Derivative liabilities totaled $462.5 million at year-end, and valuation changes can materially distort reported earnings. The 8.00% notes issued in 2013 include a holder put date in April 2018 and conversion provisions; the facility restricts cash payments in certain circumstances.
- Thales settlement: The company recorded a $24.1 million accrued contract termination charge. Payment is tied to a future satellite purchase contract and financing; timing is uncertain. Thales may refile its previously dismissed petition to confirm the arbitration award, which Globalstar said could materially harm financial condition and liquidity if successful.
- Vendor and ground-network commitments: Hughes had deferred payments and work restart conditions. Ericsson contract terms were being renegotiated; termination for convenience could require a $10.0 million payment, in cash or shares, and termination could also cause an impairment charge. Qualcomm cancelled its phone supply contract in March 2013; the parties were resolving termination issues.
- Audit and controls: The financial-statement audit opinion was unqualified, but the auditor and management identified a material weakness in review controls over an outsourced derivative valuation. A clerical error in one valuation model was corrected before issuance; remediation steps were underway.
- Other exposures: Approximately 32% of 2013 sales were denominated in foreign currencies. Canadian and Singapore tax audits were ongoing, and the Brazilian gateway had $2.2 million of potential pre-acquisition tax liabilities. Globalstar’s voting shares traded on the OTCQB after NASDAQ delisting; Thermo controlled approximately 52% of voting common stock at year-end.
Most important facts for investors to verify
- Whether operating cash flow and recurring service growth improve enough to fund operations, debt service and planned ground-network spending.
- Availability and terms of remaining Thermo and Terrapin funding, including the status of the $11.5 million Thermo option and Terrapin equity line.
- Actual satellite and Duplex service performance, subscriber growth and churn, and commercial adoption of Sat-Fi and other new products.
- Final FCC decisions on terrestrial spectrum use, interference protections and spectrum sharing, and any effect on the existing satellite business.
- Resolution of the Thales obligations and arbitration exposure, Hughes and Ericsson contract milestones, and phone supply arrangements following Qualcomm’s cancellation.
- Progress in remediating the material weakness and the assumptions used to value derivative liabilities, which materially affected the reported 2013 net loss.
- Debt maturities, covenant compliance and potential conversion or put obligations under convertible notes, particularly the April 2018 put date.