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Globalstar 10-Q 2016
Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016 
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                

Commission file number 001-33117 
GLOBALSTAR, INC.
(Exact Name of Registrant as Specified in Its Charter) 
Delaware
 
41-2116508
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
300 Holiday Square Blvd.
Covington, Louisiana 70433
(Address of principal executive offices and zip code)
Registrant's Telephone Number, Including Area Code: (985) 335-1500
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
Accelerated filer
 
 
 
Non-accelerated filer
 
Smaller reporting company  
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
 No 
 
As of October 28, 2016, 947,666,353 shares of voting common stock and 134,008,656 shares of nonvoting common stock were outstanding. Unless the context otherwise requires, references to common stock in this Report mean the Registrant’s voting common stock. 




FORM 10-Q

GLOBALSTAR, INC.
TABLE OF CONTENTS
 





PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
GLOBALSTAR, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Revenue:
 
 
 
 
 

 
 

Service revenues
$
21,952

 
$
19,644

 
$
61,671

 
$
55,367

Subscriber equipment sales
3,592

 
4,034

 
10,795

 
12,356

Total revenue
25,544

 
23,678

 
72,466

 
67,723

Operating expenses:
 
 
 
 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
8,373

 
7,761

 
23,901

 
23,222

Cost of subscriber equipment sales
2,411

 
2,914

 
7,475

 
9,028

Marketing, general and administrative
10,077

 
9,675

 
30,137

 
28,430

Depreciation, amortization, and accretion
19,446

 
19,417

 
57,825

 
57,734

Total operating expenses
40,307

 
39,767

 
119,338

 
118,414

Loss from operations
(14,763
)
 
(16,089
)
 
(46,872
)
 
(50,691
)
Other income (expense):
 
 
 
 
 

 
 

Loss on extinguishment of debt

 

 

 
(2,254
)
Gain (loss) on equity issuance
4,272

 
(2,920
)
 
2,349

 
(5,832
)
Interest income and expense, net of amounts capitalized
(8,866
)
 
(9,019
)
 
(27,020
)
 
(26,780
)
Derivative gain
10,982

 
54,194

 
50,137

 
183,416

Other
(505
)
 
(1,953
)
 
(581
)
 
1,728

Total other income (expense)
5,883

 
40,302

 
24,885

 
150,278

Income (loss) before income taxes
(8,880
)
 
24,213

 
(21,987
)
 
99,587

Income tax expense (benefit)
(6,303
)
 
115

 
(6,562
)
 
449

Net income (loss)
$
(2,577
)
 
$
24,098

 
$
(15,425
)
 
$
99,138

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
84

 
(615
)
 
(1,492
)
 
(1,458
)
Total comprehensive income (loss)
$
(2,493
)
 
$
23,483

 
$
(16,917
)
 
$
97,680

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 

 
 

Basic
$
0.00

 
$
0.02

 
$
(0.01
)
 
$
0.10

Diluted
0.00

 
0.02

 
(0.01
)
 
0.09

Weighted-average shares outstanding:
 
 
 
 
 

 
 

Basic
1,080,313

 
1,031,398

 
1,056,993

 
1,014,165

Diluted
1,080,313

 
1,234,551

 
1,056,993

 
1,221,287

 
See accompanying notes to unaudited interim condensed consolidated financial statements. 

1



GLOBALSTAR, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)  
(Unaudited) 
 
September 30, 2016
 
December 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
12,910

 
$
7,476

Accounts receivable, net of allowance of $4,099 and $5,270, respectively
16,585

 
14,536

Inventory
9,731

 
12,023

Prepaid expenses and other current assets
5,571

 
4,456

Total current assets
44,797

 
38,491

Property and equipment, net
1,048,322

 
1,077,560

Restricted cash
37,959

 
37,918

Prepaid second-generation ground costs
2,579

 
8,929

Intangible and other assets, net of accumulated amortization of $6,943 and $6,315, respectively
15,106

 
12,117

Total assets
$
1,148,763

 
$
1,175,015

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
38,112

 
$
32,835

Accounts payable
6,570

 
8,118

Accrued contract termination charge
19,654

 
19,121

Accrued expenses
28,066

 
22,439

Payables to affiliates
243

 
616

Deferred revenue
27,354

 
23,902

Total current liabilities
119,999

 
107,031

Long-term debt, less current portion
547,311

 
548,286

Employee benefit obligations
4,911

 
4,810

Derivative liabilities
189,500

 
239,642

Deferred revenue
6,068

 
6,413

Debt restructuring fees
20,795

 
20,795

Other non-current liabilities
5,477

 
10,907

Total non-current liabilities
774,062

 
830,853

Commitments and contingent liabilities (Notes 7 and 8)


 


Stockholders’ equity:
 

 
 

Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

Voting Common Stock of $0.0001 par value; 1,200,000,000 shares authorized; 946,322,913 and 904,448,226 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
95

 
90

Nonvoting Common Stock of $0.0001 par value; 400,000,000 shares authorized; 134,008,656 shares issued and outstanding at September 30, 2016 and December 31, 2015
13

 
13

Additional paid-in capital
1,625,926

 
1,591,443

Accumulated other comprehensive loss
(6,325
)
 
(4,833
)
Retained deficit
(1,365,007
)
 
(1,349,582
)
Total stockholders’ equity
254,702

 
237,131

Total liabilities and stockholders’ equity
$
1,148,763

 
$
1,175,015

 
See accompanying notes to unaudited interim condensed consolidated financial statements.  

2



GLOBALSTAR, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 30,
2016
 
September 30,
2015
Cash flows provided by (used in) operating activities:
 

 
 

Net income (loss)
$
(15,425
)
 
$
99,138

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation, amortization and accretion
57,825

 
57,734

Change in fair value of derivative assets and liabilities
(50,137
)
 
(183,416
)
Stock-based compensation expense
2,963

 
2,073

Amortization of deferred financing costs
6,932

 
7,110

Provision for bad debts
860

 
3,035

Noncash interest and accretion expense
8,320

 
8,381

Loss on extinguishment of debt

 
2,254

Change in fair value related to equity issuance
(2,349
)
 
5,832

Noncash expense related to legal settlement
1,094

 

Reversal of uncertain tax position
(6,317
)
 

Unrealized foreign currency (gain) loss
357

 
(2,150
)
Other, net
114

 
424

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(3,066
)
 
(2,532
)
Inventory
2,972

 
2,045

Prepaid expenses and other current assets
(1,276
)
 
749

Other assets
(476
)
 
(648
)
Accounts payable and accrued expenses
2,714

 
4,534

Payables to affiliates
(374
)
 
55

Other non-current liabilities
82

 
(904
)
Deferred revenue
2,891

 
3,600

Net cash provided by operating activities
7,704

 
7,314

Cash flows used in investing activities:
 

 
 

Second-generation network costs (including interest)
(8,472
)
 
(15,484
)
Property and equipment additions
(7,646
)
 
(4,222
)
Purchase of intangible assets
(1,327
)
 
(1,840
)
Change in restricted cash
(41
)
 

Net cash used in investing activities
(17,486
)
 
(21,546
)
Cash flows provided by (used in) financing activities:
 

 
 

Principal payments of the Facility Agreement
(16,418
)
 
(3,225
)
Proceeds from issuance of stock to Terrapin
28,500

 
39,000

Proceeds from issuance of common stock and exercise of options and warrants
3,001

 
426

Net cash provided by financing activities
15,083

 
36,201

Effect of exchange rate changes on cash
133

 
(1,117
)
Net increase in cash and cash equivalents
5,434

 
20,852

Cash and cash equivalents, beginning of period
7,476

 
7,121

Cash and cash equivalents, end of period
$
12,910

 
$
27,973

Supplemental disclosure of cash flow information:
 

 
 

Cash paid for:
 

 
 

Interest
$
11,409

 
$
9,746

Income taxes
152

 
5

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30,
2016
 
September 30,
2015
Supplemental disclosure of non-cash financing and investing activities:
 

 
 

Increase in capitalized accrued interest for second-generation ground costs
2,340

 
1,574

Increase in accrued second-generation network costs

 
2,392

Capitalized accretion of debt discount and amortization of prepaid financing costs
3,225

 
2,416

Payments made in convertible notes and common stock

 
735

Principal amount of debt converted into common stock

 
6,491

Reduction of debt discount and issuance costs due to note conversions

 
2,085

Increase of principal amount of Thermo Loan Agreement

 
6,000

Fair value of common stock issued upon conversion of debt

 
26,669

Reduction in derivative liability due to conversion of debt

 
20,008

Fair value of common stock issued to vendor for payment of invoices

 
16,684

See accompanying notes to unaudited interim condensed consolidated financial statements.

3



GLOBALSTAR, INC.  
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION

Globalstar, Inc. (“Globalstar” or the “Company”) provides Mobile Satellite Services (“MSS”) including voice and data communications services through its global satellite network. Thermo Capital Partners LLC, through its affiliates (collectively, “Thermo”), is the principal owner and largest stockholder of Globalstar. The Company’s Chairman and Chief Executive Officer controls Thermo. Two other members of the Company's Board of Directors are also directors, officers or minority equity owners of various Thermo entities.

The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and footnote disclosures normally in financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"); however, management believes the disclosures made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Globalstar Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on February 26, 2016 (the "2015 Annual Report"), and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. The Company evaluates estimates on an ongoing basis. Significant estimates include the value of derivative instruments, the allowance for doubtful accounts, the net realizable value of inventory, the useful life and value of property and equipment, the value of stock-based compensation and income taxes. The Company has made certain reclassifications to prior period condensed consolidated financial statements to conform to current period presentation.

These unaudited interim condensed consolidated financial statements include the accounts of Globalstar and all its subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, the information included herein includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s condensed consolidated statements of operations, condensed consolidated balance sheets, and condensed consolidated statements of cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year or any future period.

Recently Issued Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 has been modified four times since its initial release. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact that these standards will have on its financial statements and related disclosures and believes that the most significant changes to the Company's revenue recognition accounting policies will be related to the allocation and timing of revenue recognized between service revenue and subscriber equipment sales. This ASU also requires the deferment of certain contract acquisition costs and the recognition of these costs over a customer's contract period or over a customer's expected life. The Company has not yet selected a transition method nor has it determined the effect of these standards on its ongoing reporting.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU No. 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and retail inventory method (RIM) are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely align U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years, and interim periods within those years, beginning after December 15, 2016. Prospective application is required and early adoption is permitted as of the beginning of an interim or annual reporting period. This ASU will not have a material effect on the Company's consolidated financial statements and related disclosures.

4



In November 2015, the FASB issued ASU. No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 simplifies the presentation of deferred taxes on the balance sheet by requiring classification of all deferred tax items as noncurrent including valuation allowances by jurisdiction. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures, but does not expect the effect to be material.
In March 2016, the FASB issued ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016-02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company has not yet determined the effect of the standard on its ongoing reporting.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU No. 2016-04 contains specific guidance for the derecognition of prepaid stored-value product liabilities within the scope of this ASU. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not expect this ASU to have a material effect on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU. No. 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments. ASU No. 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company has not yet determined the effect of this standard on its ongoing reporting.
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s incurred loss approach with an expected loss model for instruments measured at amortized cost. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company has not yet determined the effect of this standard on its ongoing reporting.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 is intended to reduce diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle pursuant to which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures, but does not expect it to have a material effect on the Company's consolidated financial statements and related disclosures.


5



2. PROPERTY AND EQUIPMENT
 Property and equipment consists of the following (in thousands): 
 
September 30,
2016
 
December 31,
2015
Globalstar System:
 

 
 

Space component
 

 
 

First and second-generation satellites in service
$
1,211,090

 
$
1,211,768

Prepaid long-lead items
17,040

 
17,040

Second-generation satellite, on-ground spare
32,481

 
32,481

Ground component
48,382

 
46,870

Construction in progress:
 

 
 

Space component
81

 
81

Ground component
197,712

 
177,780

Next-generation software upgrades
9,552

 
3,440

Other
2,517

 
2,153

Total Globalstar System
1,518,855

 
1,491,613

Internally developed and purchased software
14,702

 
14,492

Equipment
11,959

 
10,802

Land and buildings
3,333

 
3,151

Leasehold improvements
1,732

 
1,671

Total property and equipment
1,550,581

 
1,521,729

Accumulated depreciation
(502,259
)
 
(444,169
)
Total property and equipment, net
$
1,048,322

 
$
1,077,560


Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation and ground upgrades. The ground component of construction in progress represents costs (including capitalized interest) associated with the Company's contracts with Hughes Network Systems, LLC ("Hughes") and Ericsson Inc. (“Ericsson”) to complete next-generation upgrades to the Company's ground infrastructure. The Company expects to begin depreciating this asset in the near future. See Note 7: Commitments for further discussion of these contracts.

Amounts included in the Company’s second-generation satellite, on-ground spare balance as of September 30, 2016 consist primarily of costs related to a spare second-generation satellite that has not been placed in orbit, but is capable of being included in a future launch. As of September 30, 2016, this satellite and the prepaid long-lead items ("LLI") have not been placed into service; therefore, the Company has not started to record depreciation expense for these items.

Pursuant to the Amended and Restated Contract for the construction of Globalstar Satellites for the Second Generation Constellation between the Company and Thales Alenia Space France ("Thales"), dated and executed in June 2009 (the "2009 Contract"), the Company paid €12 million in purchase price plus an additional €3.1 million in procurement costs for the LLI to be procured by Thales on the Company's behalf. The LLI were to be used in the construction of the Phase 3 satellites for the Company. As reflected on the Company's condensed consolidated balance sheets and in the above table, the Company believes that it owns the LLI and that title to them transferred upon payment. The Company has asked Thales to turn over the LLI. Despite historical statements to the contrary, Thales currently disputes the Company's ownership of the LLI and has asserted that the Company released its title to the LLI pursuant to that certain Release Agreement, dated as of June 24, 2012, which is described more fully in Note 8: Contingencies. Thales further asserts that the LLI belong to Thales and that Thales has no obligation to turn over possession of the LLI to the Company. The Company disputes Thales' assertions and is currently considering its rights and remedies to recover the LLI. At this time, the Company cannot predict the outcome related to this dispute, including, without limitation, the likelihood of any settlement or the probability of success with respect to any litigation that the Company may determine to commence with respect to the LLI.


6



Capitalized Interest and Depreciation Expense 

The following table summarizes capitalized interest (in thousands):   
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Interest costs eligible to be capitalized
$
12,092

 
$
10,935

 
$
35,884

 
$
31,640

Interest costs recorded in interest income (expense), net
(8,504
)
 
(8,292
)
 
(25,649
)
 
(24,400
)
Net interest capitalized
$
3,588

 
$
2,643

 
$
10,235

 
$
7,240

 
The following table summarizes depreciation expense (in thousands): 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Depreciation expense
$
19,341

 
$
19,299

 
$
57,508

 
$
57,330

  
3. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS 

As required by U.S. GAAP, the Company adopted the provisions of ASU No. 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issue Costs during the quarter ended March 31, 2016. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the condensed consolidated balance sheets as a reduction in the carrying amount of the related debt liability, consistent with debt discounts. The Company has applied the provisions of this ASU on a retrospective basis, and therefore, the Company has reduced long-term debt on its condensed consolidated balance sheet as of December 31, 2015 by $57.9 million of deferred financing costs previously reported as assets.
Long-term debt consists of the following (in thousands): 
 
September 30, 2016
 
December 31, 2015
 
Principal
Amount
 
Unamortized Discount and Deferred Financing Costs
 
Carrying
Value
 
Principal
Amount
 
Unamortized Discount and Deferred Financing Costs
 
Carrying
Value
Facility Agreement
$
559,429

 
$
48,677

 
$
510,752

 
$
575,846

 
$
57,829

 
$
518,017

Thermo Loan Agreement
91,139

 
30,387

 
60,752

 
83,222

 
32,558

 
50,664

8.00% Convertible Senior Notes Issued in 2013
16,936

 
3,017

 
13,919

 
16,747

 
4,307

 
12,440

Total Debt
667,504

 
82,081

 
585,423

 
675,815

 
94,694

 
581,121

Less: Current Portion
38,112

 

 
38,112

 
32,835

 

 
32,835

Long-Term Debt
$
629,392

 
$
82,081

 
$
547,311

 
$
642,980

 
$
94,694

 
$
548,286


The principal amounts shown above include payment of in-kind interest, as applicable. The carrying value is net of deferred financing costs and any discounts to the loan amounts at issuance, including accretion, as further described below. The current portion of long-term debt represents the scheduled principal repayments under the Facility Agreement due within one year of the balance sheet date.
 

7



Facility Agreement 

On July 31, 2013, the Company entered into a Global Deed of Amendment and Restatement with Thermo, the Company's domestic subsidiaries, a syndicate of bank lenders, including BNP Paribas, Société Générale, Natixis, Credit Agricole Corporate and Investment Bank and Credit Industrial et Commercial, as arrangers, and BNP Paribas, as the security agent and COFACE Agent, providing for the amendment and restatement of its former facility agreement and certain related credit documents effective August 22, 2013 (the amended and restated facility agreement is herein referred to as the "Facility Agreement"). On August 7, 2015, the Company, Thermo, the lenders and their agent entered into a Second Global Amendment and Restatement Agreement (the "2015 GARA").

The Facility Agreement is scheduled to mature in December 2022. As of September 30, 2016, the Facility Agreement was fully drawn. Semi-annual principal repayments began in December 2014. The facility bears interest at a floating rate of LIBOR plus 2.75% through June 2017, increasing by an additional 0.5% each year thereafter to a maximum rate of LIBOR plus 5.75%Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by COFACE, the French export credit agency. The Company’s obligations under the Facility Agreement are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.  

The Facility Agreement contains customary events of default and requires that the Company satisfy various financial and non-financial covenants. Pursuant to the terms of the Facility Agreement, the Company has the ability to cure noncompliance with financial covenants with Equity Cure Contributions (as described below) through a date as late as June 2019. If the Company violates any of these covenants and is unable to make a sufficient Equity Cure Contribution or obtain a waiver, it would be in default under the agreement and payment of the indebtedness could be accelerated. The acceleration of the Company's indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-acceleration provisions. The covenants in the Facility Agreement limit the Company's ability to, among other things, incur or guarantee additional indebtedness; make certain investments, acquisitions or capital expenditures above certain agreed levels; pay dividends or repurchase or redeem capital stock or subordinated indebtedness; grant liens on its assets; incur restrictions on the ability of its subsidiaries to pay dividends or to make other payments to the Company; enter into transactions with its affiliates; merge or consolidate with other entities or transfer all or substantially all of its assets; and transfer or sell assets. As of September 30, 2016, the Company was in compliance with respect to the covenants of the Facility Agreement.

The compliance calculations of the financial covenants of the Facility Agreement permit inclusion of certain cash funds contributed to the Company from the issuance of the Company's common stock and/or subordinated indebtedness. These funds are referred to as "Equity Cure Contributions" and may be used to achieve compliance with financial covenants, subject to the conditions set forth in the Facility Agreement. Each Equity Cure Contribution must be made in a minimum amount of $10 million for each measurement period or in the aggregate for all periods until the date that such funding is no longer allowed by the Facility Agreement. In August 2015, February 2016, and June 2016, the Company drew $15 million, $6.5 million, and $22.0 million, respectively, under its common stock purchase agreement with Terrapin Opportunity, L.P. ("Terrapin") (the "August 2015 Terrapin Agreement"). The Company used these funds as Equity Cure Contributions under the Facility Agreement with respect to the calculation of compliance with financial covenants for the measurement periods ended December 31, 2015 and June 30, 2016. The Company anticipates that it will continue to use Equity Cure Contributions to maintain compliance with certain financial covenants under the Facility Agreement for the measurement periods ending December 31, 2016 and June 30, 2017, including, but not limited to, the remaining amounts available under the August 2015 Terrapin Agreement.

The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account, which is pledged to secure all of the Company's obligations under the Facility Agreement. The use of these funds is restricted to making principal and interest payments under the Facility Agreement. As of September 30, 2016, the balance in the debt service reserve account, which was established with the proceeds of the loan agreement with Thermo discussed below, was $38.0 million and classified as restricted cash on the Company's condensed consolidated balance sheets. 
Thermo Loan Agreement 
In connection with the amendment and restatement of the Facility Agreement, the Company amended and restated its loan agreement with Thermo (as amended and restated, the “Loan Agreement”). All obligations of the Company to Thermo under the Loan Agreement are subordinated to all of the Company’s obligations under the Facility Agreement.


8



The Loan Agreement accrues interest at 12% per annum, which is capitalized and added to the outstanding principal in lieu of cash payments. The Company will make payments to Thermo only when permitted by the Facility Agreement. Principal and interest under the Loan Agreement become due and payable six months after the obligations under the Facility Agreement have been paid in full, or earlier if the Company has a change in control or if any acceleration of the maturity of the loans under the Facility Agreement occurs. As of September 30, 2016, $47.6 million of interest had accrued since 2009 with respect to the Loan Agreement; the Loan Agreement is included in long-term debt on the Company’s condensed consolidated balance sheets.

The Company evaluated the various embedded derivatives within the Loan Agreement (See Note 5: Fair Value Measurements for additional information about the embedded derivative in the Loan Agreement). The Company determined that the conversion option and the contingent put feature upon a fundamental change required bifurcation from the Loan Agreement. The conversion option and the contingent put feature were not deemed clearly and closely related to the Loan Agreement and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount, which is netted against the face value of the Loan Agreement.

The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the maturity of the Loan Agreement using an effective interest rate method. The fair value of the compound embedded derivative liability is marked-to-market at the end of each reporting period, with any changes in value reported in the condensed consolidated statements of operations. The Company determines the fair value of the compound embedded derivative using a blend of a Monte Carlo simulation model and market prices.

In connection with, and as a condition to the effectiveness of, the 2015 GARA, Thermo and certain of its affiliates executed and delivered to the agent under the Facility Agreement an undertaking (the “Second Thermo Group Undertaking Letter”) in which they agreed that, during the period commencing on the effective date of the 2015 GARA and ending on the later of March 31, 2018 and, if the Company's 2013 8.00% Notes shall have been redeemed in full, September 30, 2019 (the “Commitment Period”), under certain circumstances, they will make, or cause to be made, available to the Company cash equity financing in the aggregate amount of up to $30.0 million.

The balance of this commitment is reduced by any cash equity financing received by the Company during the Commitment Period from Thermo or an external equity funding source, including Terrapin, if the Company uses the funds as an Equity Cure Contribution.

Simultaneously with the execution of the 2015 GARA and the Second Thermo Group Undertaking Letter, the Company entered into an Equity Commitment Agreement (the “Equity Agreement”) and the Loan Agreement.

Pursuant to the Equity Agreement, Thermo agreed to make, or cause to be made, available to the Company up to $30.0 million in additional cash equity investments as contemplated by the 2015 GARA and the Second Thermo Group Undertaking Letter. The price per share that Thermo will pay to purchase any shares of the Company's common stock pursuant to this equity commitment will be established using the same method as used to establish the price per share under the August 2015 Terrapin Agreement. If the issuance of shares of voting common stock to Thermo pursuant to the Equity Agreement would constitute a “Change of Control,” “Default” or “Event of Default” under any applicable agreement, the Company will issue instead an equal number of shares of non-voting common stock.

Since the inception of the 2015 GARA, the Company has received cash equity financing in excess of Thermo's equity commitment. This cash equity financing primarily includes draws under the August 2015 Terrapin Agreement in August 2015, February 2016, and June 2016 for $15.0 million, $6.5 million, and $22.0 million, respectively. As a result, Thermo has no remaining cash equity commitment under the Equity Agreement as of September 30, 2016.

All of the transactions between the Company and Thermo and its affiliates were reviewed and approved on the Company's behalf by a Special Committee of its independent directors, who were represented by independent counsel.


9



8.00% Convertible Senior Notes Issued in 2013
 
The 8.00% Convertible Senior Notes Issued in 2013 (the "2013 8.00% Notes") initially were convertible into shares of common stock at a conversion price of $0.80 per share of common stock, or 1,250 shares of the Company’s common stock per $1,000 principal amount of the 2013 8.00% Notes, subject to adjustment. The conversion price of the 2013 8.00% Notes is adjusted in the event of certain stock splits or extraordinary share distributions, or as a reset of the base conversion and exercise price pursuant to the terms of the Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as Trustee, dated May 20, 2013 (the "Indenture"). Due to common stock issuances by the Company since May 20, 2013 at prices below the then effective conversion rate, the base conversion price (rounded to the nearest cent) has been reduced to $0.73 per share of common stock as of September 30, 2016

The 2013 8.00% Notes are senior unsecured debt obligations of the Company with no sinking fund. The 2013 8.00% Notes will mature on April 1, 2028, subject to various call and put features, and bear interest at a rate of 8.00% per annum. Interest on the 2013 8.00% Notes is payable semi-annually in arrears on April 1 and October 1 of each year. Interest is paid in cash at a rate of 5.75% per annum and in additional notes at a rate of 2.25% per annum. The Indenture for the 2013 8.00% Notes provides for customary events of default. As of September 30, 2016, the Company was in compliance with respect to the terms of the 2013 8.00% Notes and the Indenture. 

Subject to certain conditions set forth in the Indenture, the Company may redeem the 2013 8.00% Notes, with the prior approval of the majority lenders under the Facility Agreement, in whole or in part, at any time on or after April 1, 2018, at a price equal to the principal amount of the 2013 8.00% Notes to be redeemed plus all accrued and unpaid interest thereon. 

A holder of the 2013 8.00% Notes has the right, at the holder’s option, to require the Company to purchase some or all of the 2013 8.00% Notes held by it on each of April 1, 2018 and April 1, 2023 at a price equal to the principal amount of the 2013 8.00% Notes to be purchased plus accrued and unpaid interest. 

Subject to the procedures for conversion and other terms and conditions of the Indenture, a holder may convert its 2013 8.00% Notes at its option at any time prior to the close of business on the business day immediately preceding April 1, 2028, into shares of common stock (or, at the option of the Company, cash in lieu of all or a portion thereof, provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders). 

As of September 30, 2016, holders had converted a total of $39.4 million principal amount of the 2013 8.00% Notes, resulting in the issuance of approximately 72.1 million shares of voting common stock. There were no conversions during the three and nine-month periods ended September 30, 2016. There were no conversions during the three-month period ended September 30, 2015. During the nine-month period ended September 30, 2015, holders converted a total of $6.5 million principal amount of the 2013 8.00% Notes, resulting in the issuance of approximately 10.9 million shares of voting common stock, and recognition of a loss on extinguishment of debt of $2.3 million.

Holders who convert 2013 8.00% Notes receive conversion shares over a 40-consecutive trading day settlement period. Accordingly, the portion of converted debt is extinguished on an incremental basis over the 40-day settlement period, reducing the Company's outstanding debt balance. As of September 30, 2016, no conversions had been initiated but not yet fully settled.

The Company evaluated the various embedded derivatives within the Indenture for the 2013 8.00% Notes. The Company determined that the conversion option and the contingent put feature within the Indenture required bifurcation from the 2013 8.00% Notes. The Company did not deem the conversion option and the contingent put feature to be clearly and closely related to the 2013 8.00% Notes and separately accounted for them as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount which is netted against the face value of the 2013 8.00% Notes. 

The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the first put date of the 2013 8.00% Notes (April 1, 2018) using an effective interest rate method. The Company is marking to market the fair value of the compound embedded derivative liability at the end of each reporting period, with any changes in value reported in the condensed consolidated statements of operations. The Company determines the fair value of the compound embedded derivative using a blend of a Monte Carlo simulation model and market prices. 

10




Warrants Outstanding

Warrants are outstanding to purchase shares of common stock as shown in the table below: 
 
Outstanding Warrants
 
Strike Price
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Contingent Equity Agreement (1)
24,571,428

 
30,191,866

 
$
0.01

 
$
0.01

5.0% Warrants (2)

 
8,000,000

 

 
0.32

 
24,571,428

 
38,191,866

 
 

 
 


(1)
Pursuant to the terms of the Contingent Equity Agreement with Thermo (See Note 9: Related Party Transactions in the Consolidated Financial Statements in the 2015 Annual Report for a description of the Contingent Equity Agreement), the Company issued to Thermo warrants to purchase shares of common stock pursuant to the annual availability fee and subsequent reset provisions in the Contingent Equity Agreement. These warrants were issued between June 2009 and June 2012 and have a five-year exercise period from issuance. As of September 30, 2016, Thermo had exercised warrants to purchase approximately 16.9 million of these shares prior to the expiration of the associated warrants. In June 2016, Thermo exercised warrants to purchase 5.6 million shares of voting common stock for a total purchase price of $0.1 million. The exercise period for the remaining outstanding warrants expires in June 2017.

(2)
In June 2011, the Company issued warrants (the “5.0% Warrants”) to purchase 15.2 million shares of its voting common stock in connection with the issuance of its 5.0% Convertible Senior Unsecured Notes. In June 2016, Thermo exercised all of the remaining warrants outstanding to purchase 8.0 million shares of voting common stock for a total purchase price of $2.5 million. See Note 3: Long-Term Debt and Other Financing Arrangements in the Consolidated Financial Statements in the 2015 Annual Report for a complete description of the 5.0% Warrants.

Terrapin Opportunity, L.P. Common Stock Purchase Agreement 

On December 28, 2012 the Company entered into a common stock purchase agreement with Terrapin pursuant to which the Company, subject to certain conditions, could require Terrapin to purchase up to $30.0 million of shares of voting common stock over the 24-month term following the effectiveness of a resale registration statement, which became effective on August 2, 2013. When the Company made a draw under this Terrapin common stock purchase agreement, it issued Terrapin shares of common stock at a price per share calculated as specified in the agreement. During the nine months ended September 30, 2015, the Company drew $24.0 million under the agreement and issued 11.1 million shares of voting common stock to Terrapin at an average price of $2.18 per share. Through the term of this agreement, Terrapin purchased a total of 17.2 million shares of voting common stock at a total purchase price of $30.0 million. No funds remain available under this agreement.

In conjunction with the amendment of the Facility Agreement in August 2015 (as discussed above), the Company entered into a new common stock purchase agreement with Terrapin pursuant to which the Company may require Terrapin to purchase up to $75.0 million of shares of the Company’s voting common stock over the 24-month term following the date of the agreement. From time to time over the 24-month term, in the Company’s discretion, the Company may present Terrapin with up to 24 draw notices requiring Terrapin to purchase a specified dollar amount of shares of voting common stock, based on the price per share per day over ten consecutive trading days (a "Draw Down Period"). The per share purchase price for these shares of voting common stock will equal the daily volume weighted average price of the common stock on each date during the Draw Down Period on which shares are purchased by Terrapin, but not less than a minimum price specified by the Company (a “Threshold Price”), less a discount ranging from 2.75% to 4.00% based on the Threshold Price. In addition, in the Company’s discretion, but subject to certain limitations, the Company may grant to Terrapin the option to purchase additional shares during a Draw Down Period. The Company has agreed not to sell to Terrapin a number of shares of voting common stock that, when aggregated with all other shares of voting common stock then beneficially owned by Terrapin and its affiliates, would result in their beneficial ownership of more than 9.9% of the then issued and outstanding shares of voting common stock. As discussed above in this Note 3: Long-Term Debt and Other Financing Arrangements and in Note 9: Related Party Transactions, Thermo committed, under certain conditions, to purchase equity securities of the Company on the same pricing terms as the August 2015 Terrapin Agreement.


11



In August 2015, the Company drew $15.0 million under the August 2015 Terrapin Agreement and issued 9.3 million shares of voting common stock to Terrapin at an average price of $1.61 per share. In February 2016, the Company drew $6.5 million under the August 2015 Terrapin Agreement and issued 6.4 million shares of voting common stock to Terrapin at an average price of $1.02 per share. In June 2016, the Company drew $22.0 million under the August 2015 Terrapin Agreement and issued 19.5 million shares of voting common stock to Terrapin at an average price of $1.13 per share. As of September 30, 2016, $31.5 million remained available under the August 2015 Terrapin Agreement.

4. DERIVATIVES 

In connection with certain existing and past borrowing arrangements, the Company was required to record derivative instruments on its condensed consolidated balance sheets. None of these derivative instruments is designated as a hedge. The following tables disclose the fair values of the derivative instruments on the Company’s condensed consolidated balance sheets (in thousands):
 
September 30, 2016
 
December 31, 2015
Derivative assets:
 

 
 

Interest rate cap
$
1

 
$
6

Total derivative assets
$
1

 
$
6

Derivative liabilities:
 

 
 

Compound embedded derivative with 2013 8.00% Notes
$
(18,779
)
 
$
(26,203
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
(170,721
)
 
(213,439
)
Total derivative liabilities
$
(189,500
)
 
$
(239,642
)
 The following table discloses the changes in value recorded as derivative gain (loss) in the Company’s condensed consolidated statement of operations (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Interest rate cap
$

 
$
(11
)
 
$
(5
)
 
$
(38
)
Compound embedded derivative with 2013 8.00% Notes
1,641

 
11,475

 
7,424

 
30,367

Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
9,341

 
42,730

 
42,718

 
153,087

Total derivative gain
$
10,982

 
$
54,194

 
$
50,137

 
$
183,416

Intangible and Other Assets 

Interest Rate Cap 

In June 2009, in connection with entering into the Facility Agreement, under which interest accrues at a variable rate, the Company entered into five ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement and is capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed 6.5%, the Company’s Base Rate will be 1% less than the then six-month Libor rate. The Company paid an approximately $12.4 million upfront fee for the interest rate cap agreements. The interest rate cap did not qualify for hedge accounting treatment, and changes in the fair value of the agreements are included in the condensed consolidated statements of operations. 


12



Derivative Liabilities 

The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments. These embedded derivatives required bifurcation from the debt host agreement. All embedded derivatives that required bifurcation are recorded as a derivative liability on the Company’s condensed consolidated balance sheets with a corresponding debt discount netted against the principal amount of the related debt instrument. The Company accretes the debt discount associated with each derivative liability to interest expense over the term of the related debt instrument using an effective interest rate method. The fair value of each embedded derivative liability is marked-to-market at the end of each reporting period with any changes in value reported in its condensed consolidated statements of operations. Each liability and the features embedded in the debt instrument, which required the Company to account for the instrument as a derivative, are described below.  

Compound Embedded Derivative with the 2013 8.00% Notes 

As a result of the conversion option and the contingent put feature within the 2013 8.00% Notes, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount that is netted against the face value of the 2013 8.00% Notes. The Company determined the fair value of the compound embedded derivative liability using a blend of a Monte Carlo simulation model and market prices. 

Compound Embedded Derivative with the Amended and Restated Thermo Loan Agreement 

As a result of the conversion option and the contingent put feature within the Thermo Loan Agreement, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount that is netted against the face value of the Amended and Restated Loan Agreement. The Company determined the fair value of the compound embedded derivative liability using a blend of a Monte Carlo simulation model and market prices.  

5. FAIR VALUE MEASUREMENTS 

The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities, including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

13




Recurring Fair Value Measurements 

The following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis (in thousands): 
 
September 30, 2016
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Assets:
 

 
 

 
 

 
 

Interest rate cap
$

 
$
1

 
$

 
$
1

Total assets measured at fair value
$

 
$
1

 
$

 
$
1

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Liability for potential stock issuance to Hughes
$

 
$
(3,146
)
 
$

 
$
(3,146
)
Compound embedded derivative with 2013 8.00% Notes

 

 
(18,779
)
 
(18,779
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement

 

 
(170,721
)
 
(170,721
)
Total liabilities measured at fair value
$

 
$
(3,146
)
 
$
(189,500
)
 
$
(192,646
)
 
 
December 31, 2015
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Assets:
 

 
 

 
 

 
 

Interest rate cap
$

 
$
6

 
$

 
$
6

Total assets measured at fair value
$

 
$
6

 
$

 
$
6

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Liability for potential stock issuance to Hughes
$

 
$
(5,495
)
 
$

 
$
(5,495
)
Compound embedded derivative with 2013 8.00% Notes

 

 
(26,203
)
 
(26,203
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement

 

 
(213,439
)
 
(213,439
)
Total liabilities measured at fair value
$

 
$
(5,495
)
 
$
(239,642
)
 
$
(245,137
)
 
Assets 

Interest Rate Cap 

The fair value of the interest rate cap is determined using observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes at the reporting date. See Note 4: Derivatives for further discussion.

Liabilities 

Liability for potential stock issuance to Hughes

The Company has one liability classified as Level 2. As described in Note 7: Commitments, the Company agreed to provide downside protection after the issuance of shares of common stock to Hughes in lieu of cash for contract payments in June 2015. This feature requires the Company to issue to Hughes additional shares of common stock equal to the difference, if any, between $15.5 million and the total amount of gross proceeds Hughes receives from the sale of any shares plus the market value of any shares still held by Hughes as of the close of trading on December 30, 2016. The value of this option is calculated using a Black-Scholes pricing model. This liability is marked-to-market at each balance sheet date and through the settlement date.

Derivative Liabilities

The Company has two derivative liabilities classified as Level 3. The Company marks-to-market these liabilities at each reporting date with the changes in fair value recognized in the Company’s condensed consolidated statements of operations. See Note 4: Derivatives for further discussion. 

14




The significant quantitative Level 3 inputs utilized in the valuation models are shown in the tables below: 
 
September 30, 2016
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes
100% - 125%
 
0.7
%
 
$
0.73

 
$
1.21

Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
40% - 125%
 
1.4
%
 
$
0.73

 
$
1.21

 
 
December 31, 2015
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Market Price of Common Stock
Compound embedded derivative with 2013 8.00% Notes
75% - 90%
 
1.1
%
 
$
0.73

 
$
1.44

Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
50% - 90%
 
2.1
%
 
$
0.73

 
$
1.44


Fluctuation in the Company’s stock price is the primary driver for the changes in the derivative valuations during each reporting period. As the stock price decreases towards the current conversion price for each of the related derivative instruments, the value to the holder of the instrument generally decreases, thereby decreasing the liability on the Company’s condensed consolidated balance sheets. These valuations are sensitive to the weighting applied to each of the simulated values. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the expected volatility of the Company's stock price. Decreases in expected volatility would generally result in a lower fair value measurement. 

Probability of a change of control is another significant unobservable input used in the fair value measurement of the Company’s derivative instruments. Subject to certain restrictions in each indenture, the Company’s debt instruments contain certain provisions whereby holders may require the Company to purchase all or any portion of the convertible debt instrument upon a change of control. A change of control will occur upon certain changes in the ownership of the Company or certain events relating to the trading of the Company’s common stock. The simulated fair value of the derivative liabilities above is sensitive to changes in the assumed probabilities of a change of control. Decreases in the assumed probability of a change of control would generally result in a lower fair value measurement. 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivatives within the Company’s 2013 8.00% Notes and Thermo Loan Agreement included the following inputs and features: discount rate, payment in kind interest payments, make whole premiums, a 40-day stock issuance settlement period upon conversion, automatic conversions, estimated maturity date, and the principal balance of each loan at the balance sheet date. There are also certain put and call features within the 2013 8.00% Notes that impact the valuation model. The trading activity in the market provides the Company with additional valuation support. The Company uses a weight factor to calculate the fair value of the embedded derivatives to align the fair value produced from the Monte Carlo simulation model with the market value of the 2013 8.00% Notes. Due to the similarities of the debt instruments, the Company applies a similar weight to the embedded derivative in the Thermo Loan Agreement. These valuations are sensitive to the weighting applied to each of the simulated values.

The following table presents a rollforward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
(200,482
)
 
$
(292,293
)
 
$
(239,642
)
 
$
(441,550
)
Derivative adjustment related to conversions

 

 

 
20,008

Unrealized gain, included in derivative gain
10,982

 
54,206

 
50,142

 
183,455

Balance at end of period
$
(189,500
)
 
$
(238,087
)
 
$
(189,500
)
 
$
(238,087
)

15



Fair Value of Debt Instruments

The Company believes it is not practicable to determine the fair value of the Facility Agreement. Unlike typical long-term debt, interest rates and other terms for the Facility Agreement are not readily available and generally involve a variety of factors, including due diligence by the debt holders. As such, it is not practicable to determine the fair value of the Facility Agreement without incurring significant additional costs. The following table sets forth the carrying values and estimated fair values of the Company's other debt instruments, which are classified as Level 3 financial instruments (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Thermo Loan Agreement
$
60,752

 
$
38,552

 
$
50,664

 
$
17,244

2013 8.00% Notes
13,919

 
13,247

 
12,440

 
9,831


6. ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES  

Accrued expenses consist of the following (in thousands): 
 
September 30,
2016
 
December 31,
2015
Accrued interest
$
5,776

 
$
317

Accrued compensation and benefits
3,562

 
2,098

Accrued property and other taxes
4,213

 
4,125

Accrued customer liabilities and deposits
3,477

 
3,216

Accrued professional and other service provider fees
2,860

 
1,830

Accrued commissions
715

 
1,216

Accrued telecommunications expenses
618

 
1,487

Accrued inventory
62

 
502

Accrued liability for potential stock issuance to Hughes
3,146

 
5,495

Accrued liability for legal settlement
1,411

 
328

Other accrued expenses
2,226

 
1,825

   Total accrued expenses
$
28,066

 
$
22,439


Accrued liability for potential stock issuance to Hughes includes the estimated value at September 30, 2016 of the downside protection that the Company provided to Hughes in connection with its April 2015 agreement (as amended).  See Note 5: Fair Value Measurements and Note 7: Commitments for further discussion.

Other accrued expenses include primarily capital lease obligations, warranty reserve, occupancy costs, advertising costs, payments to independent gateway operators ("IGOs") and estimated payroll shortfall under the Cooperative Endeavor Agreement with the Louisiana Department of Economic Development. 

Other non-current liabilities consist of the following (in thousands):   
 
September 30,
2016
 
December 31,
2015
Long-term accrued interest
$
194

 
$
96

Asset retirement obligation
1,408

 
1,302

Deferred rent and other deferred expense
517

 
593

Liability related to the Cooperative Endeavor Agreement with the State of Louisiana
573

 
716

Uncertain income tax positions

 
5,795

Foreign tax contingencies
2,624

 
2,311

Capital lease obligations
161

 
94

   Total other non-current liabilities
$
5,477

 
$
10,907


16



 
As a result of the expiration of the statute of limitations associated with the tax position of one of the Company's foreign subsidiaries, the Company removed the total unrecognized tax position of $6.3 million, inclusive of cumulative interest and penalties, from its non-current liabilities and recorded a $6.3 million tax benefit in its condensed consolidated financial statements during the quarter ended September 30, 2016.

7. COMMITMENTS 

Contractual Obligations - Second-Generation Satellites, Next-Generation Gateways and Other Ground Facilities 

As of September 30, 2016, the Company had purchase commitments with Thales, Hughes and Ericsson related to the procurement, deployment and maintenance of the second-generation network.  

Second-Generation Satellites
 
As of September 30, 2016, the Company had a contract with Thales for the construction of the Company’s second-generation low-earth orbit satellites and related services. The Company has successfully launched all of these second-generation satellites, excluding one on-ground spare. The Company and Thales have discussed the ownership of certain deliverables under this contract, but have been unable to reach an agreement.

Effective October 24, 2014, the Company entered into a contract with Thales for in-orbit support services for the second-generation satellites delivered under the 2009 contract described in Note 2: Property and Equipment. These services will be performed over a three-year period for a total cost of approximately €1.9 million. A credit of €0.6 million was applied to the total cost, reducing the first annual payment to €0. This credit results from a settlement of amounts previously paid in conjunction with the 2009 contract.
 
Next-Generation Gateways and Other Ground Facilities
 
Hughes Network Systems

In May 2008, the Company entered into a contract with Hughes under which Hughes will design, supply and implement the Radio Access Network (RAN) ground network equipment and software upgrades for installation at a number of the Company’s satellite gateway ground stations and satellite interface chips to be used in various second-generation Globalstar devices.

In March 2015, the Company entered into an agreement with Hughes for the design, development, build, testing and delivery of four custom test equipment units for a total of $1.9 million. This test equipment was delivered during the fourth quarter of 2015. In April 2015, the Company extended the scope of work for delivery of two additional RANs for a total of $4.0 million. These RANs were delivered in February 2016. As of September 30, 2016, the Company had purchase commitments due under this contract of $0.8 million, which will be payable upon final acceptance.

In April 2015, Hughes exercised an option to be paid in shares of the Company's common stock (at a price 7% below market) in lieu of cash for certain of its remaining contract payments, including those related to the 2015 work mentioned above, totaling approximately $15.5 million. In June 2015, the Company issued 7.4 million shares of freely tradable common stock at the 7% discount pursuant to this option. The portion of these contract payments related to future milestone work is included in Prepaid second-generation ground costs on the condensed consolidated balance sheets as of September 30, 2016. As the contract milestones are achieved, the Company reclassifies the related costs from Prepaid second-generation ground costs to construction in progress within Property and equipment. In the April 2015 agreement (as amended), the Company agreed to provide downside protection through December 30, 2016. This feature requires that the Company issue additional shares of common stock equal to the difference, if any, between $15.5 million and the total amount of gross proceeds Hughes receives from the sale of any shares plus the market value of any shares still held by Hughes as of the close of trading on December 30, 2016. Pursuant to this agreement, the Company recorded a liability of $3.1 million as of September 30, 2016 and $5.5 million as of December 31, 2015, respectively. The Company calculated these estimates of the value of this option using a Black-Scholes pricing model and an estimate of the number of shares of common stock held by Hughes as of the balance sheet dates. This liability is marked-to-market at each balance sheet date and through the settlement date. The Company records gains and losses resulting from changes in the value of this liability in its condensed consolidated statement of operations.


17



Ericsson

In October 2008, the Company entered into a contract with Ericsson to develop, implement and maintain a ground interface, or core network system, which will be installed at a number of the Company’s satellite gateway ground stations. In July 2014, the parties signed an amended and restated contract to specify the remaining contract value and a new milestone schedule to reflect a revised program timeline. Prior to the amended and restated contract being finalized, Ericsson and the Company agreed to defer certain milestone payments previously due under the 2008 contract to 2014 and beyond. The deferred payments were incurring interest at a rate of 6.5% per annum. In April 2015, the Company signed an amendment to the 2014 contract to incorporate certain changes in scope and timing identified as necessary by the parties. In conjunction with signing this amendment, the parties executed a new letter agreement under which Ericsson waived the remaining $1.0 million in deferred milestone payments and $0.4 million in interest accrued on the milestone payments under the 2008 contract. In the first quarter of 2015, the Company reversed these amounts from accounts payable, accrued expenses and construction in progress on the Company's condensed consolidated balance sheet. In August 2015, the Company and Ericsson executed a second amendment to the 2014 contract which incorporated revised payment and pricing schedules. This amendment also reflected an accelerated timeline for the project providing that the work was estimated to be completed in the second quarter, instead of the third quarter, of 2016. During the second quarter of 2016, the Company took possession of the final Ericsson hardware for the Company's global deployment. As of September 30, 2016, the Company had purchase commitments due under this contract of $2.9 million, which is related to the final acceptance of all contract deliverables.

Other Second-Generation Commitments

Various maintenance, licensing and royalty agreements are necessary for the use of proprietary, third-party technology embedded in its second-generation ground infrastructure and products. The fees due under these maintenance and license agreements are projected to be approximately $3.6 million per year and will be recognized in the Company's condensed consolidated statement of operations over the maintenance and license terms, which are expected to begin at various times during 2017. The fees due under the royalty agreements will fluctuate based on product sales and will be recognized in the Company's condensed consolidated statement of operations on a per unit basis as second-generation products are manufactured, sold or activated. As of September 30, 2016, a portion of these fees have been paid and are recorded as a prepaid asset in the Company's condensed consolidated balance sheets.

8. CONTINGENCIES 

Arbitration 

On June 3, 2011, Globalstar filed a demand for arbitration against Thales before the American Arbitration Association to enforce certain rights to order additional satellites under the 2009 Contract. The Company did not include within its demand any claims that it had against Thales for work previously performed under the contract to design, manufacture and timely deliver the first 25 second-generation satellites. On May 10, 2012, the arbitration tribunal issued its award in which it determined that the Company had terminated the 2009 Contract "for convenience" and had materially breached the contract by failing to pay to Thales the €51.3 million in termination charges required under the contract. The tribunal additionally determined that absent further agreement between the parties, Thales had no further obligation to manufacture or deliver satellites under Phase 3 of the 2009 Contract. Based on these determinations, the tribunal directed the Company to pay Thales approximately €53 million in termination charges, plus interest by June 9, 2012. On May 23, 2012, Thales commenced an action in the United States District Court for the Southern District of New York by filing a petition to confirm the arbitration award (the “New York Proceeding”). Thales and the Company entered into a tolling agreement as of June 13, 2013, under which Thales dismissed the New York Proceeding without prejudice. The tolling agreement has expired. Thales may refile the petition at a later date and pursue the confirmation of the arbitration award, which the Company would oppose. Should Thales be successful in confirming the arbitration award, this would have a material adverse effect on the Company's financial condition, results of operations and liquidity.

On June 24, 2012, the Company and Thales agreed to settle their prior commercial disputes, including those disputes that were the subject of the arbitration award. In order to effectuate this settlement, the Company and Thales entered into a Release Agreement, a Settlement Agreement and a Submission Agreement. Under the terms of the Release Agreement, Thales agreed unconditionally and irrevocably to release and forever discharge the Company from any and all claims and obligations (with the exception of those items payable under the Settlement Agreement or in connection with a new contract for the purchase of any additional second-generation satellites), including, without limitation, a full release from paying €35.6 million of the termination charges awarded in the arbitration together with all interest on the award amount effective upon the earlier of December 31, 2012, and the effective date of the financing for the purchase of any additional second-generation satellites. Under the terms of the Release Agreement, the Company agreed unconditionally and irrevocably to release and forever discharge Thales from any and all claims (with limited exceptions), including, without limitation, claims related to Thales’ work under the 2009 satellite construction contract, including

18



any obligation to pay liquidated damages, effective upon the earlier of December 31, 2012, and the effective date of the financing for the purchase of any additional second-generation satellites. In connection with the Release Agreement and the Settlement Agreement, the Company recorded a contract termination charge of approximately €17.5 million which is recorded in the Company’s condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015. The releases became effective on December 31, 2012.

Under the terms of the Settlement Agreement, the Company agreed to pay €17.5 million to Thales, representing one-third of the termination charges awarded to Thales in the arbitration, subject to certain conditions, on the later of the effective date of the new contract for the purchase of any additional second-generation satellites and the effective date of the financing for the purchase of these satellites. As of September 30, 2016, this condition had not been satisfied. Because the effective date of the new contract for the purchase of additional second-generation satellites did not occur on or prior to February 28, 2013, any party may terminate the Settlement Agreement. If any party terminates the Settlement Agreement, all parties’ rights and obligations under the Settlement Agreement shall terminate. The Release Agreement is a separate and independent agreement from the Settlement Agreement and provides that it supersedes all prior understandings, commitments and representations between the parties with respect to the subject matter thereof; therefore it would survive any termination of the Settlement Agreement. As of September 30, 2016, no party had terminated the Settlement Agreement.

Litigation

Due to the nature of the Company's business, the Company is involved, from time to time, in various litigation matters or subject to disputes or routine claims regarding its business activities. Legal costs related to these matters are expensed as incurred. During the second quarter of 2016, the Company increased an accrual related to the settlement of litigation incurred on behalf of the Company's Brazilian subsidiary. The Company paid the total settlement of 4.5 million reais, or $1.4 million, by issuing approximately 1.3 million shares of Globalstar common stock on October 24, 2016.

In management's opinion, there is no pending litigation, dispute or claim, other than those described in this report, which could be expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity. 

9. RELATED PARTY TRANSACTIONS  

Payables to Thermo and other affiliates related to normal purchase transactions were $0.2 million and $0.6 million at each of September 30, 2016 and December 31, 2015, respectively. 

Transactions with Thermo 

Expenses incurred by Thermo on behalf of the Company, including non-cash expenses and those expenses charged to the Company, were $0.2 million and $0.4 million during the three months ended September 30, 2016 and 2015, respectively and were $0.5 million and $0.7 million during the nine months ended September 30, 2016 and 2015, respectively. Non-cash expenses, which the Company accounts for as a contribution to capital, relate to services provided by two executive officers of Thermo (who are also directors of the Company and receive no cash compensation from the Company). The Thermo expense charges are based on actual amounts (with no mark-up) incurred or upon allocated employee time. 

As of September 30, 2016, the principal amount outstanding under the Loan Agreement with Thermo was $91.1 million, and the fair value of the compound embedded derivative liability associated with the Loan Agreement was $170.7 million. During the three months ended September 30, 2016 and 2015, interest accrued on the Loan Agreement was approximately $2.7 million and $2.4 million, respectively. During the nine months ended September 30, 2016 and 2015, interest accrued on the Loan Agreement was approximately $7.9 million and $6.6 million, respectively. In addition, as of September 30, 2016, warrants to purchase approximately 24.6 million shares issued under the Contingent Equity Agreement remain outstanding, all of which are held by Thermo and are scheduled to expire in June 2017. In June 2016, Thermo exercised warrants to purchase 5.6 million and 8.0 million shares of voting common stock related to the Contingent Equity Agreement and the Company's 5.0% Warrants, respectively. As a result of these warrant exercises, the Company received aggregate proceeds of $2.6 million in June 2016.

In August 2015, the Company entered into an Equity Agreement with Thermo. Thermo agreed to purchase up to $30.0 million in equity securities of the Company if the Company so requests or if an event of default is continuing under the Facility Agreement and funds are not available under the August 2015 Terrapin Agreement. The Company has received cash equity financing in excess of Thermo's equity commitment. This cash equity financing primarily includes draws under the August 2015 Terrapin Agreement in August 2015, February 2016, and June 2016 for $15.0 million, $6.5 million, and $22.0 million, respectively. As a result, Thermo had no remaining cash equity commitment under the Equity Agreement as of September 30, 2016.


19



The Facility Agreement requires Thermo to maintain minimum and maximum ownership levels in the Company's common stock. Thermo may convert shares of nonvoting common stock into shares of voting common stock as needed to comply with these ownership limitations.

See Note 3: Long-Term Debt and Other Financing Arrangements and Note 4: Derivatives for further discussion of the Company's debt and financing transactions with Thermo.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 

Accumulated other comprehensive income (loss) includes all changes in equity during a period from non-owner sources.

The components of accumulated other comprehensive income (loss) were as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Accumulated other comprehensive loss, beginning of period
$
(6,409
)
 
$
(3,741
)
 
$
(4,833
)
 
$
(2,898
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustments
84

 
(615
)
 
(1,492
)
 
(1,458
)
Accumulated other comprehensive loss, end of period
$
(6,325
)
 
$
(4,356
)
 
$
(6,325
)
 
$
(4,356
)
 
No amounts were reclassified out of accumulated other comprehensive loss for the periods shown above.

11.  GEOGRAPHIC INFORMATION
 
The Company attributes subscriber equipment sales to various countries based on the location where equipment is sold. Service revenue is generally attributed to the various countries based on the Globalstar entity that holds the customer contract. Property and equipment is attributed to the various countries based on the physical location of the asset at the end of a given period, except for the Company's satellites that are included in the property and equipment of the United States. The Company’s information by geographic area is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 

 
 

Service revenue:
 
 
 
 
 

 
 

United States
$
14,703

 
$
13,506

 
$
42,379

 
$
37,689

Canada
4,512

 
3,863

 
11,822

 
11,067

Europe
1,785

 
1,634

 
5,048

 
4,377

Central and South America
824

 
486

 
2,012

 
1,788

Others
128

 
155

 
410

 
446

Total service revenue
$
21,952

 
$
19,644

 
$
61,671

 
$
55,367

Subscriber equipment sales:
 
 
 
 
 

 
 

United States
2,150

 
2,304

 
5,680

 
5,883

Canada
689

 
962

 
2,502

 
3,401

Europe
242

 
313

 
1,198

 
1,299

Central and South America
505

 
409

 
1,172

 
1,465

Others
6

 
46

 
243

 
308

Total subscriber equipment sales
$
3,592

 
$
4,034

 
$
10,795

 
$
12,356

Total revenue
$
25,544

 
$
23,678

 
$
72,466

 
$
67,723

 

20



 
September 30,
2016
 
December 31,
2015
Property and equipment, net:
 

 
 

United States
$
1,043,827

 
$
1,073,327

Canada
675

 
510

Europe
435

 
484

Central and South America
3,147

 
2,782

Others
238

 
457

Total property and equipment, net
$
1,048,322

 
$
1,077,560

 

12. EARNINGS (LOSS) PER SHARE 

Basic earnings (loss) per share are computed based on the weighted average number of shares of common stock outstanding during the period. Common stock equivalents are included in the calculation of diluted earnings per share only when the effect of their inclusion would be dilutive. 

The following table sets forth the calculation of basic and diluted earnings (loss) per share for the periods indicated (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(2,577
)
 
$
24,098

 
$
(15,425
)
 
$
99,138

Effect of dilutive securities:
 
 
 
 
 
 
 
2013 8.00% Notes
550

 
547

 
1,625

 
1,860

Thermo Loan Agreement
2,453

 
2,291

 
7,211

 
6,542

Income (loss) to common stockholders plus assumed conversions
$
426

 
$
26,936

 
$
(6,589
)
 
$
107,540

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic shares outstanding
1,080,313

 
1,031,398

 
1,056,993

 
1,014,165

Incremental shares from assumed exercises, conversions and other issuances:
 
 
 
 
 
 
 
Stock options, restricted stock, restricted stock units and ESPP

 
7,111

 

 
8,550

2013 8.00% Notes

 
27,475

 

 
27,778

Thermo Loan Agreement

 
130,375

 

 
132,602

Warrants and other

 
38,192

 

 
38,192

Diluted shares outstanding
1,080,313

 
1,234,551

 
1,056,993

 
1,221,287

Income (loss) per share:
 
 
 
 
 
 
 
Basic

 
0.02

 
(0.01
)
 
0.10

Diluted

 
0.02

 
(0.01
)
 
0.09


For the three and nine months ended September 30, 2016, 195.8 million and 199.7 million shares of potential common stock were excluded from diluted shares outstanding because the effects of assuming issuance of these potentially dilutive securities would be anti-dilutive.



21




13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION 
In connection with the Company’s issuance of the 2013 8.00% Notes, certain of the Company’s 100% owned domestic subsidiaries (the “Guarantor Subsidiaries”), fully, unconditionally, jointly, and severally guaranteed the payment obligations under the 2013 8.00% Notes. The following financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and statements of cash flows for Globalstar, Inc. (the “Parent Company”), for the Guarantor Subsidiaries and for the Parent Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”).   
The condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include disclosures included in annual financial statements. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. 

Globalstar, Inc.
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2016
(Unaudited)  
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenue:
 

 
 

 
 

 
 

 
 

Service revenues
$
23,996

 
$
7,529

 
$
11,501

 
$
(21,074
)
 
$
21,952

Subscriber equipment sales
84

 
2,833

 
1,559

 
(884
)
 
3,592

Total revenue
24,080

 
10,362

 
13,060

 
(21,958
)
 
25,544

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
5,178

 
2,538

 
8,442

 
(7,785
)
 
8,373

Cost of subscriber equipment sales
(18
)
 
2,108

 
1,203

 
(882
)
 
2,411

Marketing, general and administrative
5,229

 
1,504

 
15,497

 
(12,153
)
 
10,077

Depreciation, amortization, and accretion
19,083

 
194

 
291

 
(122
)
 
19,446

Total operating expenses
29,472

 
6,344

 
25,433

 
(20,942
)
 
40,307

Income (loss) from operations
(5,392
)
 
4,018

 
(12,373
)
 
(1,016
)
 
(14,763
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Gain on equity issuance
4,272

 

 

 

 
4,272

Interest income and expense, net of amounts capitalized
(8,894
)
 
(9
)
 
36

 
1

 
(8,866
)
Derivative gain
10,982

 

 

 

 
10,982

Equity in subsidiary earnings (loss)
(2,743
)
 
(12,794
)
 

 
15,537

 

Other
(802
)
 
(80
)
 
284

 
93

 
(505
)
Total other income (expense)
2,815

 
(12,883
)
 
320

 
15,631

 
5,883

Income (loss) before income taxes
(2,577
)
 
(8,865
)
 
(12,053
)
 
14,615

 
(8,880
)
Income tax benefit

 

 
(6,303
)
 

 
(6,303
)
Net income (loss)
$
(2,577
)
 
$
(8,865
)
 
$
(5,750
)
 
$
14,615

 
$
(2,577
)
Comprehensive income (loss)
$
(2,577
)
 
$
(8,865
)
 
$
(5,659
)
 
$
14,608

 
$
(2,493
)


22



Globalstar, Inc.
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2015
(Unaudited)
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenue:
 
 
 

 
 

 
 

 
 

Service revenues
$
14,830

 
$
8,426

 
$
8,251

 
$
(11,863
)
 
$
19,644

Subscriber equipment sales
219

 
2,853

 
889

 
73

 
4,034

Total revenue
15,049

 
11,279

 
9,140

 
(11,790
)
 
23,678

Operating expenses: