Globalstar, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with Q1 2012 unless noted. Globalstar provides mobile satellite voice and data services and related equipment. The filing reports substantial doubt about the company’s ability to continue as a going concern.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $19.3 million | $16.7 million |
| Operating loss | $18.4 million | $14.9 million |
| Net loss | $25.1 million; $0.05 per share | $24.5 million; $0.07 per share |
| Operating cash flow | $(0.5) million | $(2.6) million |
| Investing cash flow | $(9.2) million | $(23.3) million |
| Cash and cash equivalents at period end | $1.3 million | $11.8 million at December 31, 2012 |
| Debt carrying value | $755.2 million total; $657.5 million classified current | $751.0 million total at December 31, 2012 |
Amounts are in U.S. dollars; financial statement amounts are converted from thousands. Service revenue rose 22% to $15.4 million, while equipment revenue fell 4% to $3.9 million. Operating expenses increased 19% to $37.7 million, chiefly because depreciation, amortization and accretion rose 38% to $20.3 million as more second-generation satellites entered service. Net interest expense increased to $7.8 million, mainly because less interest qualified for capitalization. The derivative gain was $0.5 million versus a $6.5 million loss in Q1 2012.
Gross profit, calculated as revenue less cost of services and subscriber equipment sales, was approximately $8.9 million, or 45.9% of revenue, versus $6.5 million, or 38.9%, in Q1 2012. Restricted cash was $38.2 million and was not freely available for general use. Current liabilities totaled $770.1 million.
Business and year-over-year changes
Revenue increased 15%, led by SPOT service revenue (+33%), Simplex service revenue (+39%) and Duplex service revenue (+15%). Monthly ARPU increased in each reported service category: Duplex $19.24, SPOT $10.45, Simplex $3.20 and independent gateway operators $1.89. Ending subscribers were 532,277, up 7% from a year earlier; excluding suspended SPOT subscribers subsequently deactivated, management reported growth of approximately 15%. The company deactivated about 36,000 suspended SPOT accounts during Q1.
All four planned second-generation satellite launches had been completed, including the February 2013 launch. Management said service levels were improving and expected the expanded Duplex capability to support customer and revenue growth, but did not provide quantified guidance or a completion timetable for longer-term network and ground-infrastructure plans. Duplex subscribers remained below the prior-year level, and equipment sales were below the company’s substantial inventory position.
Outlook, financing, risks and unusual items
- Going concern and financing: Management said available cash, operating cash flows and the Terrapin equity line were insufficient to meet existing contractual obligations over the next 12 months. Continued operations depended on additional external financing, amendments or waivers to the senior Facility Agreement, and restructuring the 5.75% notes. The $30 million Terrapin equity line was conditional on an effective resale registration statement, which was not effective at March 31; no draws had been made.
- Defaults and near-term debt pressure: The company disclosed existing Facility Agreement defaults and expected possible further covenant noncompliance. Although lenders had not notified the company of an intention to accelerate the facility, it was classified as current. Semiannual principal repayments were scheduled to begin in June 2013. Lenders were not permitting access to the remaining $0.7 million facility availability.
- 5.75% notes: Holders tendered approximately $70.7 million of the $71.8 million outstanding for repurchase on April 1, 2013. The company lacked funds to repurchase the notes and pay approximately $2.1 million of interest due that date. A forbearance agreement with holders of approximately 78% of the notes was in effect through May 13, 2013, subject to early termination provisions; restructuring and senior-lender consent were not assured. Acceleration could trigger defaults across other debt.
- Contractors and capital commitments: Payment schedules with Hughes and Ericsson were deferred, with interest accruing; the company reported $17.6 million payable to Hughes and $2.4 million to Ericsson. Contract termination could require final payments of $20 million and $10 million, respectively, or could result in impairment charges. The Qualcomm equipment contract was cancelled in March, with termination issues still being resolved; related inventory advances were $9.2 million.
- Thales and other contingencies: The Thales settlement included a €17.53 million payment subject to financing and contract conditions; the company recorded a related contract termination charge. A court proceeding to confirm the arbitration award remained stayed through July 1, 2013, and a successful confirmation could materially harm liquidity. The filing also reported a $1.4 million estimated liability for potential shortfalls under the Louisiana relocation agreement.
- Cash use and unusual items: Q1 cash declined by $10.5 million. The company used $8.6 million released from its debt service reserve for launch costs. A Venezuelan currency devaluation generated an approximately $0.8 million foreign-exchange gain; management did not expect a material future impact. No material off-balance-sheet transactions were reported.
Most important facts for investors to verify
- Whether the company secured financing and obtained the lender waivers or amendments needed to address Facility Agreement defaults, covenant tests and scheduled repayments.
- Whether the 5.75% note restructuring was completed, the forbearance remained effective, and cross-default or acceleration risks were resolved.
- Unrestricted cash available for operations, access to restricted funds and the status and usable capacity of the Terrapin equity line.
- Contractor payment deferrals, potential Hughes and Ericsson termination costs, and any impairment exposure tied to delayed ground upgrades.
- Operational acceptance and service performance of the second-generation satellites, progress on ground infrastructure, and whether subscriber and revenue growth converted into improved cash flow.