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GSAT > SEC Filings for GSAT > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for GLOBALSTAR, INC.

Form 10-Q for GLOBALSTAR, INC.


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

Certain statements contained in or incorporated by reference into this Report, other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements, such as the statements regarding our ability to develop and expand our business, our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes, the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis and other statements contained in this Report regarding matters that are not historical facts, involve predictions. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

New risk factors emerge from time to time, and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

This "Management's Discussion and Analysis of Financial Condition" should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition" and information included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

Globalstar, Inc. ("we," "us" or "the Company") provides Mobile Satellite Services ("MSS") including voice and data communications services globally via satellite. By providing wireless communications services in areas not served or underserved by terrestrial wireless and wireline networks and in circumstances where terrestrial networks are not operational due to natural or man-made disasters, we seek to meet our customers' increasing desire for connectivity. We offer voice and data communication services over our network of in-orbit satellites and our active ground stations (or "gateways"), which we refer to collectively as the Globalstar System.

In 2006 we began a process of designing, manufacturing and deploying a second-generation constellation of Low Earth Orbit ("LEO") satellites to replace our first-generation constellation. Our second-generation constellation is designed to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost compared to our first-generation satellites. We have integrated all of the new second-generation satellites with certain of our first-generation satellites to form our second-generation constellation. The restoration of our constellation's Duplex capabilities was complete after the final second-generation satellite was placed into service in August 2013. The restoration of Duplex capabilities has resulted in a substantial increase in service levels, making our products and services more desirable to existing and potential customers. Existing subscribers continue to utilize our services more, measured by minutes of use on the Globalstar System year over year, a trend that we expect to continue. We are gaining new customers and winning back former customers, which continues to contribute to increases in Duplex revenue. We offer a range of price-competitive products to the industrial, governmental and consumer markets. Due to the unique design of the Globalstar System (and based on customer input), we believe that we offer the best voice quality among our peer group.

We define a successful level of service for our customers as measured by their ability to make uninterrupted calls of average duration for a system-wide average number of minutes per month. Our goal is to provide service levels and call success rates equal to or better than our MSS competitors so our products and services are attractive to potential customers. We define voice quality as the ability to easily hear, recognize and understand callers with imperceptible delay in the transmission. Due to the unique design of the Globalstar System, by this measure our system outperforms geostationary ("GEO") satellites used by some of our competitors. Due to the difference in signal travel distance, GEO satellite signals must travel approximately 42,000 additional nautical miles, which introduces considerable delay and signal degradation to GEO calls. For our competitors using cross-linked satellite architectures, which require multiple inter-satellite connections to complete a call, signal degradation and delay can result in compromised call quality as compared to that experienced over the Globalstar System.

We also compete aggressively on price. In 2004 we were the first MSS company to offer bundled pricing plans that we adapted from the terrestrial wireless industry. We expect to continue to innovate and retain our position as the low cost, high quality leader in the MSS industry.

Our satellite communications business, by providing critical mobile communications to our subscribers, serves principally the following markets:
recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; and transportation.

At March 31, 2014, we served approximately 579,000 subscribers. We increased our net subscribers by 9% from March 31, 2013 to March 31, 2014. Beginning in 2014, we initiated a process to deactivate certain subscribers in our Duplex subscriber base who were either suspended or non-paying. We deactivated approximately 26,000 subscribers during the first quarter of 2014. Excluding these deactivated subscribers from our March 31, 2013 subscriber count, total subscribers would have increased 14% from March 31, 2013 to March 31, 2014. We count "subscribers" based on the number of devices that are subject to agreements which entitle them to use our voice or data communications services rather than the number of persons or entities who own or lease those devices.

We currently provide the following communications services via satellite which are available only with equipment designed to work on our network:

two-way voice communication and data transmissions, which we call "Duplex," using mobile or fixed devices; and

one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station, which includes certain SPOT and Simplex products.

We designed our second-generation constellation to support our current lineup of Duplex, SPOT and Simplex products. With the improvement in both coverage and service quality for our Duplex product offerings resulting from the deployment of our second-generation constellation, we anticipate further expansion of our subscriber base and increases in our average revenue per user, or "ARPU."

Our products and services are sold through a variety of independent agents, dealers and resellers, and independent gateway operators ("IGOs"). Our success in marketing these products and services is enhanced through diversification of our distribution channels, consumer and commercial markets, and product offerings.

Performance Indicators

Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of and potential variability of our earnings and cash flows. These key performance indicators include:

total revenue, which is an indicator of our overall business growth;

subscriber growth and churn rate, which are both indicators of the satisfaction of our customers;

average monthly revenue per user, or ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-value customers. We calculate ARPU separately for each type of our Duplex, Simplex, SPOT and IGO revenue;

operating income and adjusted EBITDA, which are both indicators of our financial performance; and

capital expenditures, which are an indicator of future revenue growth potential and cash requirements.

Comparison of the Results of Operations for the three months ended March 31, 2014 and 2013

Revenue:

Total revenue increased by $1.2 million, or approximately 6%, to $20.5 million for the three months ended March 31, 2014 from $19.3 million for the three months ended March 31, 2013. This increase was due primarily to a $0.9 million increase in service revenue and a $0.3 million increase in subscriber equipment sales. The primary driver for the increase in service revenue was Duplex service revenue as we continue to see increases in new subscriber activations as a result of equipment sales over the past 12 months and subscribers moving to higher rate plans. Demand for our Duplex products and services has increased as we successfully completed the restoration of our second-generation constellation in August 2013 by placing our last second-generation satellite into commercial service. The increase in equipment sales revenue was due primarily to increased demand for our Duplex and SPOT products.

The following table sets forth amounts and percentages of our revenue by type of service for the three months ended March 31, 2014 and 2013 (dollars in thousands):

                         Three months ended                  Three months ended
                           March 31, 2014                      March 31, 2013
                                       % of Total                          % of Total
                     Revenue            Revenue          Revenue            Revenue
Service Revenue:
Duplex             $      5,874                 28 %   $      4,845                 25 %
SPOT                      7,039                 35            7,086                 37
Simplex                   1,865                  9            1,815                  9
IGO                         274                  1              232                  1
Other                     1,197                  6            1,412                  7
Total              $     16,249                 79 %   $     15,390                 79 %

The following table sets forth amounts and percentages of our revenue for equipment sales for the three months ended March 31, 2014 and 2013 (dollars in thousands):

                           Three months ended                  Three months ended
                             March 31, 2014                      March 31, 2013
                                         % of Total                          % of Total
                       Revenue            Revenue          Revenue            Revenue
Equipment Revenue:
Duplex               $      1,356                  7 %   $      1,109                  6 %
SPOT                        1,428                  7              926                  5
Simplex                     1,239                  6            1,549                  8
IGO                           180                  1              297                  2
Other                          84                  -               62                  -
Total                $      4,287                 21 %   $      3,943                 21 %

The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for the three months ended March 31, 2014 and 2013. The following numbers are subject to immaterial rounding inherent to calculating averages.

                                                                            March 31,
                                                                       2014          2013
Average number of subscribers for the period (three months ended):
Duplex (1)                                                              71,383        83,928
SPOT (2)                                                               222,990       226,094
Simplex                                                                241,038       189,050
IGO                                                                     39,309        40,854

ARPU (monthly):
Duplex (1)                                                           $   27.43     $   19.24
SPOT (2)                                                                 10.52         10.45
Simplex                                                                   2.58          3.20
IGO                                                                       2.32          1.89

Number of subscribers (end of period):
Duplex                                                                  58,603        83,525
SPOT                                                                   224,084       211,106
Simplex                                                                250,723       189,942
IGO                                                                     39,267        40,561
Other                                                                    5,819         7,143
Total                                                                  578,496       532,277

(1) Beginning in 2014, we initiated a process to deactivate certain subscribers in our Duplex subscriber base who were either suspended or non-paying. We deactivated approximately 26,000 subscribers during the first quarter of 2014. For the three months ended March 31, 2014 and 2013, excluding these 26,000 deactivated subscribers from prior period metrics, average subscribers would be 58,053 and 57,268, respectively, and ARPU would be $33.73 and $28.20, respectively.

(2) Beginning in 2013, we initiated a process to deactivate certain suspended subscribers in our SPOT subscriber base. We deactivated approximately 36,000 subscribers during the first quarter of 2013. For the three months ended March 31, 2013, excluding these 36,000 deactivated subscribers from prior period metrics, average subscribers would be 208,044 and ARPU would be $11.35.

Other service revenue includes revenue generated from engineering services and third party sources, which are not subscriber driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts.

Service Revenue

Duplex service revenue increased approximately 21% for the three months ended March 31, 2014 compared to the same period in 2013. The increase in Duplex service revenue was due primarily to growth in our revenue-generating Duplex subscriber base and the continued transition of certain of our Duplex customers to higher rate plans commensurate with our improved service levels. Total reported Duplex subscribers decreased 30% from March 31, 2013 to March 31, 2014. As previously stated, we deactivated approximately 26,000 Duplex subscribers from our network in the first quarter of 2014. Excluding these deactivated subscribers from our March 31, 2013 subscriber count, Duplex subscribers would have increased approximately 3% from March 31, 2013 to March 31, 2014. We have experienced increases in Duplex equipment units sold in the past 12 months, which result in new subscribers activating units on our network; these new subscribers contribute to increases in both service revenue and ARPU. We also continue to convert our Duplex customers to higher rate plans, which has resulted in higher churn among lower rate paying subscribers.

SPOT service revenue decreased less than 1% for the three months ended March 31, 2014 compared to the same period in 2013. SPOT subscribers increased 6% from March 31, 2013 to March 31, 2014. The growth in our SPOT subscriber base is due to new subscriber activations resulting from equipment sales over the past 12 months. Our subscriber count includes certain suspended subscribers, which are subscribers who have activated their devices, have access to our network, but no service revenue is being recognized for their fees while we are in the process of collecting payment. These suspended accounts represented 8% and 5% of our total SPOT subscribers as of March 31, 2014 and 2013, respectively. As suspended subscribers increase, the amount of revenue we can recognize in our SPOT service revenue from these subscribers decrease.

Simplex revenue increased approximately 3% for the three months ended March 31, 2014 compared to the same period in 2013. We generated increased Simplex service revenue due to a 32% increase in our Simplex subscribers from March 31, 2013 to March 31, 2014. Revenue growth for our Simplex customers is not necessarily commensurate with subscriber growth due to the various competitive pricing plans we offer as well as usage.

Other revenue decreased approximately 15% for the three months ended March 31, 2014 compared to the same period in 2013. The decrease in other service revenue was driven by a decrease in third party revenue. While we were manufacturing and deploying our second-generation constellation, we purchased service from other satellite providers, which we re-sold to some of our loyal subscribers. We record this revenue in other service revenue as third party revenue. As our coverage is now fully restored, we have begun to transition these subscribers to our network, which has contributed partially to the increase in our Duplex service revenue. As third party revenue decreases, other service revenue will also decrease and Duplex revenue will increase. The decrease in third party revenue represented 84% of the total decrease in other service revenue.

Equipment Revenue

Revenue from Duplex equipment sales increased by approximately 22% for the three months ended March 31, 2014 compared to the same period in 2013. As a result of launching and placing into service our second-generation satellites, we are experiencing increased demand for our Duplex two-way voice and data products. We introduced SPOT Global Phone in the second quarter of 2013; this product contributed to the majority of the increase in equipment units sold during the first quarter of 2014.

Revenue from SPOT equipment sales increased 54% for the three months ended March 31, 2014 compared to the same period in 2013. We introduced SPOT Gen3 in the third quarter of 2013 and SPOT Trace in the fourth quarter of 2013. Both of these products have contributed to the increase in our SPOT equipment sales during the first quarter of 2014 as these products were not included in our product mix during the first quarter of 2013.

Revenue from Simplex equipment sales decreased approximately 20% for the three months ended March 31, 2014 compared to the same period in 2013. Higher demand for certain of our commercial applications for M2M asset monitoring and tracking devices in 2013 attributed to the overall decrease in equipment revenue during the first quarter of 2014. Lower equipment revenue was also attributable to only a partial quarter of sales of our STX3 product, which we introduced in February 2014.

Operating Expenses:

Total operating expenses increased $3.4 million, or approximately 9%, to $41.1 million for the three months ended March 31, 2014 from $37.7 million for the same period in 2013. We attribute this increase primarily to higher non-cash depreciation expense as a result of additional second-generation satellites coming into service throughout 2013.

Cost of Services

Cost of services decreased $0.6 million, or approximately 8%, to $6.9 million for the three months ended March 31, 2014 from $7.5 million for the same period in 2013. Cost of services comprises primarily network operating costs, which are generally fixed in nature. As stated above, while we were manufacturing and deploying our second-generation constellation, we purchased service from other satellite providers, which we re-sold to some of our loyal subscribers. The expense related to this service is recorded in cost of services. As we continue to transition these subscribers to our network, this cost will decrease. The decrease in cost of services for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was due in large part to a reduction in this expense. Over the past 12 months, we have experienced cost savings as a result of our increased focus on monitoring telecommunication service expenses. These decreases were offset partially by increases in multiple expense categories as we expand and repair our gateway infrastructure.

Cost of Subscriber Equipment Sales

Cost of subscriber equipment sales increased $0.2 million, or approximately 5%, to $3.1 million for the three months ended March 31, 2014 from $2.9 million for the same period in 2013. The fluctuations in cost of subscriber equipment sales are due primarily to the mix and volume of products sold during the respective periods.

Marketing, General and Administrative

Marketing, general and administrative expenses increased $0.9 million, or approximately 12%, to $7.8 million for the three months ended March 31, 2014 from $6.9 million for the same period in 2013. The increase was due primarily to strategic investments made for our sales and marketing initiatives. Other items that contributed to the increase in expense included an increase in the fair value of stock compensation recognized for new stock options and stock awards granted in the previous 12 months as well as the write-off of approximately $0.2 million of deferred financing costs in the first quarter of 2014.

Depreciation, Amortization and Accretion

Depreciation, amortization, and accretion expense increased $3.0 million, or approximately 15%, to $23.3 million for the three months ended March 31, 2014 from $20.3 million for the same period in 2013. This increase relates primarily to additional depreciation expense for the second-generation satellites placed into service during the first eight months of 2013, with our last second-generation satellite placed into service in August 2013.

Other Income (Expense):

Loss on Extinguishment of Debt

Loss on extinguishment of debt recorded during the first quarter of 2014 of $10.2 million was due to the conversion of certain of our 8.00% Notes Issued in 2009 and 8.00% Notes Issued in 2013. Approximately $8.8 million principal amount of our 8.00% Notes Issued in 2009 converted in the first quarter of 2013, resulting in a gain on extinguishment of debt of $0.4 million. This gain was due to the portion of the derivative liability written off due to these conversions offset by the fair value of shares issued to the holders upon conversion. Additionally, pursuant to the terms of the indenture for the 8.00% Notes Issued in 2013, approximately 15%, or $7.0 million, of the principal amount of 8.00% Notes Issued in 2013 converted on March 20, 2014 resulting in a loss on extinguishment of debt of $10.5 million. This loss was due primarily to the number and fair value of shares issued to the holders, offset partially by the portion of the derivative liability written off due to these conversions.

Interest Income and Expense

Interest income and expense, net, increased by $3.1 million to $10.9 million for the three months ended March 31, 2014 from $7.8 million for the same period in 2013. The increase in interest expense was due to a reduction in our capitalized interest due to the decline in our construction in progress balance. As we placed satellites into service, our construction in progress balance related to our second-generation satellites decreased, which reduced the amount of interest we can capitalize under GAAP.

Derivative Gain (Loss)

Derivative gain (loss) fluctuated by $209.9 million to a loss of $209.4 million for the three months ended March 31, 2014 compared to a gain of $0.5 million for the same period in 2013. We recognize gains or losses due to the change in the value of certain embedded features within our debt instruments that require standalone derivative accounting. These fluctuations are due primarily to changes in our stock price as well as other inputs used in our valuation models. Our stock price increased over 700% from March 31, 2013 to March 31, 2014; this increase in stock price is one of the most significant drivers for the change in value of these derivative instruments.

Other

Other income increased by $0.1 million to $0.7 million for the three months ended March 31, 2014 from income of $0.6 million for the same period in 2013. Changes in other income (expense) are due primarily to foreign currency gains and losses recognized during the respective periods.

Liquidity and Capital Resources

Our principal liquidity requirements include paying remaining amounts outstanding related to the deployment of our second-generation constellation, making improvements to our ground infrastructure, repaying our debt and funding our operating costs. Our principal sources of liquidity include cash on hand, cash flows from operations and funds available under the equity line agreement with Terrapin. We also have funds available under the Consent Agreement with Thermo. See below for further discussion. Additionally, we have approximately $37.9 million in restricted cash which must be maintained through the term of the Facility Agreement and may be used to pay the final principal and interest payments under the Facility Agreement.

Comparison of Cash Flows for the three months ended March 31, 2014 and 2013

The following table shows our cash flows from operating, investing and financing activities for the three months ended March 31, 2014 and 2013 (in thousands):

                                                                    Three Months Ended
                                                            March 31, 2014       March 31, 2013
Net cash provided by (used in) operating activities        $          3,799     $           (533 )
Net cash used in investing activities                                (1,794 )             (9,183 )
Net cash provided by (used in) financing activities                     146                 (489 )
Effect of exchange rate changes on cash                                  36                 (287 )
Net increase (decrease) in cash and cash equivalents       $          2,187     $        (10,492 )

Cash Flows Used by Operating Activities

Net cash provided by operating activities during the three months ended March . . .

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