Globalstar, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Globalstar provides mobile satellite voice and data services and subscriber equipment. This unaudited filing covers the three and six months ended June 30, 2013; financial figures below are in millions of U.S. dollars unless noted. At quarter-end, the company reported approximately 562,000 subscribers. Its second-generation satellite constellation was largely launched, with one satellite from the February 2013 launch not yet in commercial service; completion was expected in August 2013.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $19.8 | $20.0 | $39.2 | $36.7 |
| Operating loss | $(19.6) | $(43.4) | $(38.0) | $(58.3) |
| Net loss | $(126.3) | $(27.5) | $(151.4) | $(52.1) |
| Loss per share, basic and diluted | $(0.25) | $(0.07) | $(0.31) | $(0.14) |
- Q2 service revenue rose 9% to $15.4 million while equipment revenue fell 24% to $4.4 million. First-half service revenue increased 15% to $30.8 million; equipment revenue declined 16% to $8.4 million. Management attributed service growth to subscriber additions, higher-rate plans, and SPOT and Simplex activity.
- For the first half, operating cash flow was negative $1.8 million versus positive $1.8 million a year earlier. Investing cash outflow was $20.0 million, primarily satellite and ground-system spending; financing provided $16.4 million. Cash and cash equivalents declined to $6.2 million from $11.8 million at year-end. Restricted cash was $38.2 million.
- At June 30, carrying-value debt totaled approximately $712.8 million, including $585.7 million classified as current because of facility defaults. Principal debt was approximately $779.9 million. Stockholders’ equity was $421.3 million.
- Depreciation, amortization and accretion were $22.1 million in Q2 and $42.4 million for the first half, up 39% and 38%, respectively, largely as satellites entered service. A gross margin is not explicitly reported in the filing.
Material changes versus prior comparable period
- Q2 revenue was nearly flat, while first-half revenue grew approximately 7%. Service growth was offset by lower equipment sales, including reduced SPOT and Simplex equipment sales.
- Operating losses narrowed, but the comparison benefited from 2012 charges that did not recur: a $22.0 million Thales-related contract termination charge and a $7.1 million long-lived-asset impairment. Excluding those items, management said operating expenses increased 15% in Q2 and 17% for the first half, mainly from higher depreciation.
- Net losses widened sharply due to financing and valuation items: Q2 included a $47.2 million loss on extinguishing the 5.75% notes, a $14.0 million loss on Thermo’s equity purchases recorded at fair value, and a $29.9 million derivative loss. Net interest expense also increased.
- In May, Globalstar exchanged approximately 91.5% of its defaulted 5.75% notes for cash, common shares and $54.6 million principal amount of new 8.00% convertible notes; it redeemed the remaining notes. The new notes mature in 2028 and have an initial conversion price of $0.80 per share, subsequently adjusted to $0.75 by quarter-end.
Outlook, risks, contingencies and unusual items
- Going concern and refinancing: Management stated that continued operations depend on satisfying conditions for the July 31, 2013 Global Deed of Amendment and Restatement (GARA), executing the business plan, and obtaining committed funding. The GARA was not yet effective as of the filing; conditions were due by August 16, 2013 or a later agreed date. Management cautioned that it could not assure when or whether all conditions would be met.
- If effective, the GARA would waive existing facility defaults, extend the facility by two and a half years, postpone $235.3 million of principal payments through 2019, and revise covenants. It would also increase the interest margin from LIBOR plus 2.25% to 2.75% initially, with further scheduled increases up to LIBOR plus 5.75%. The agreement required, among other things, a $13.9 million initial restructuring/underwriting fee and evidence of Thermo funding and vendor restructuring.
- Globalstar had defaults under its existing senior secured facility, including nonpayment of a June 2013 principal installment and covenant issues. Lenders could accelerate the debt absent waivers or amendments, potentially triggering cross-acceleration of other obligations. A temporary waiver of the missed installment was obtained after quarter-end.
- Thermo had funded $39.0 million by June 30 under related equity commitments; the filing reports further funding in July. The company also had a $30.0 million Terrapin equity line, but had drawn none by June 30. Future financing and equity issuance may dilute shareholders.
- Management expected improved Duplex service as the final satellite entered service, with potential subscriber and revenue growth; it also cited new SPOT products, ground upgrades, gateway expansion and aviation opportunities. These plans depend on financing, infrastructure completion, commercial demand and regulatory approvals. Globalstar was seeking FCC authority for additional mobile broadband use of its spectrum.
- Vendor payment deferrals highlight liquidity pressure. Hughes had approximately $15.8 million deferred, with scheduled payments in August, October and December 2013, plus approximately $4.9 million interest due in January 2014; Hughes could elect stock payment. Ericsson deferred approximately $2.4 million of milestones, with interest accruing. Termination of either contract could require substantial payments and could impair assets.
- Thales could refile its petition to confirm an arbitration award; a successful confirmation could materially harm financial condition and liquidity. The filing also describes a settlement and release, with certain settlement obligations still conditional. Management reported no other pending litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the GARA became effective, all conditions were satisfied, and existing facility defaults were waived.
- Actual unrestricted liquidity, required debt-service reserve funding, Thermo contributions and any use of the Terrapin equity line.
- Compliance with revised debt covenants, the facility’s stepped-up interest costs and the timing of principal repayments.
- Whether the final satellite and ground upgrades entered service on schedule and translated into subscriber, ARPU and service-revenue growth.
- Cash payment or stock-settlement outcomes for Hughes and Ericsson, and the status and potential impact of the Thales proceeding and settlement obligations.
- The effect of convertible-note conversions, derivative revaluations and future equity issuance on reported losses, debt balances and shareholder dilution.