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Globalstar 10-Q 2017
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 June 30, 2017 
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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)
 
Emerging growth company  ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 July 28, 2017, 1,025,397,826 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
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Revenue:
 
 
 
 
 

 
 

Service revenues
$
24,301

 
$
20,970

 
$
45,782

 
$
39,719

Subscriber equipment sales
3,822

 
4,116

 
6,993

 
7,203

Total revenue
28,123

 
25,086

 
52,775

 
46,922

Operating expenses:
 
 
 
 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
9,036

 
7,937

 
18,010

 
15,528

Cost of subscriber equipment sales
2,778

 
2,886

 
4,874

 
5,064

Marketing, general and administrative
9,544

 
11,450

 
19,034

 
20,060

Depreciation, amortization and accretion
19,275

 
19,224

 
38,569

 
38,379

Total operating expenses
40,633

 
41,497

 
80,487

 
79,031

Loss from operations
(12,510
)
 
(16,411
)
 
(27,712
)
 
(32,109
)
Other income (expense):
 
 
 
 
 

 
 

Gain (loss) on equity issuance
1,964

 
(2,075
)
 
2,670

 
(1,923
)
Interest income and expense, net of amounts capitalized
(8,850
)
 
(9,049
)
 
(17,678
)
 
(18,154
)
Derivative gain (loss)
(77,130
)
 
40,499

 
(73,907
)
 
39,155

Other
(2,102
)
 
685

 
(2,126
)
 
(76
)
Total other income (expense)
(86,118
)
 
30,060

 
(91,041
)
 
19,002

Income (loss) before income taxes
(98,628
)
 
13,649

 
(118,753
)
 
(13,107
)
Income tax expense (benefit)
106

 
(450
)
 
142

 
(259
)
Net income (loss)
$
(98,734
)
 
$
14,099

 
$
(118,895
)
 
$
(12,848
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(45
)
 
(925
)
 
(865
)
 
(1,576
)
Total comprehensive income (loss)
$
(98,779
)
 
$
13,174

 
$
(119,760
)
 
$
(14,424
)
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 

 
 

Basic
$
(0.09
)
 
$
0.01

 
$
(0.11
)
 
$
(0.01
)
Diluted
(0.09
)
 
0.01

 
(0.11
)
 
(0.01
)
Weighted-average shares outstanding:
 
 
 
 
 

 
 

Basic
1,128,985

 
1,049,381

 
1,121,518

 
1,045,205

Diluted
1,128,985

 
1,249,672

 
1,121,518

 
1,045,205

 
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) 
 
June 30, 2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
8,838

 
$
10,230

Accounts receivable, net of allowance of $4,116 and $3,966, respectively
15,369

 
15,219

Inventory
8,814

 
8,093

Prepaid expenses and other current assets
5,189

 
4,588

Total current assets
38,210

 
38,130

Property and equipment, net
1,013,798

 
1,039,719

Restricted cash
37,915

 
37,983

Intangible and other assets, net of accumulated amortization of $7,137 and $7,021, respectively
20,046

 
16,782

Total assets
$
1,109,969

 
$
1,132,614

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
108,720

 
$
75,755

     Debt restructuring fees

 
20,795

Accounts payable
7,624

 
7,499

Accrued contract termination charge
20,026

 
18,451

Accrued expenses
20,664

 
23,162

Derivative liabilities
36,860

 

Payables to affiliates
304

 
309

Deferred revenue
29,476

 
26,479

Total current liabilities
223,674

 
172,450

Long-term debt, less current portion
459,966

 
500,524

Employee benefit obligations
4,944

 
4,883

Derivative liabilities
318,215

 
281,171

Deferred revenue
5,866

 
5,877

Other non-current liabilities
5,830

 
5,890

Total non-current liabilities
794,821

 
798,345

 
 
 
 
Commitments and contingencies (Note 6)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

Voting Common Stock of $0.0001 par value; 1,500,000,000 and 1,200,000,000 shares authorized; 1,025,388,954 and 972,602,824 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
103

 
97

Nonvoting Common Stock of $0.0001 par value; 400,000,000 shares authorized; 134,008,656 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
13

 
13

Additional paid-in capital
1,698,724

 
1,649,315

Accumulated other comprehensive loss
(6,243
)
 
(5,378
)
Retained deficit
(1,601,123
)
 
(1,482,228
)
Total stockholders’ equity
91,474

 
161,819

Total liabilities and stockholders’ equity
$
1,109,969

 
$
1,132,614

 
See accompanying notes to unaudited interim condensed consolidated financial statements.  

2



GLOBALSTAR, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
2017

June 30,
2016
 
Cash flows provided by (used in) operating activities:
 

 
 

 
Net loss
$
(118,895
)
 
$
(12,848
)
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

 
Depreciation, amortization and accretion
38,569

 
38,379

 
Change in fair value of derivative assets and liabilities
73,907

 
(39,155
)
 
Stock-based compensation expense
2,488

 
1,848

 
Amortization of deferred financing costs
4,158

 
4,672

 
Provision for bad debts
808

 
396

 
Noncash interest and accretion expense
5,688

 
5,487

 
Change in fair value related to equity issuance
(2,670
)
 
1,923

 
Noncash expense related to legal settlement

 
1,094

 
Unrealized foreign currency (gain) loss
1,571

 
(77
)
 
Other, net
660

 
262

 
Changes in operating assets and liabilities:
 

 
 

 
Accounts receivable
(823
)
 
(2,144
)
 
Inventory
(622
)
 
2,924

 
Prepaid expenses and other current assets
(990
)
 
(868
)
 
Other assets
(792
)
 
104

 
Accounts payable and accrued expenses
529

 
(1,474
)
 
Payables to affiliates
(5
)
 
(377
)
 
Other non-current liabilities
24

 
50

 
Deferred revenue
2,651

 
805

 
Net cash provided by operating activities
6,256

 
1,001

 
Cash flows used in investing activities:
 

 
 

 
Second-generation network costs (including interest)
(6,530
)
 
(5,307
)
 
Property and equipment additions
(2,116
)
 
(6,345
)
 
Purchase of intangible assets
(2,044
)
 
(806
)
 
Net cash used in investing activities
(10,690
)
 
(12,458
)
 
Cash flows provided by (used in) financing activities:
 

 
 

 
Principal payments of the Facility Agreement
(21,695
)
 
(16,418
)
 
Proceeds from Thermo Common Stock Purchase Agreement
33,000

 

 
Payment of debt restructuring fee
(20,795
)
 

 
Payment of debt amendment fee
(255
)
 

 
Proceeds from issuance of stock to Terrapin
12,000

 
28,500

 
Proceeds from issuance of common stock and exercise of options and warrants
635

 
3,016

 
Net cash provided by financing activities
2,890

 
15,098

 
Effect of exchange rate changes on cash
84

 
152

 
Net increase (decrease) in cash, cash equivalents and restricted cash
(1,460
)
 
3,793

 
Cash, cash equivalents and restricted cash, beginning of period
48,213

 
45,394

 
Cash, cash equivalents and restricted cash, end of period
$
46,753

 
$
49,187

 
 
 
 
 
 
 
As of:
 
 
June 30, 2017
 
December 31, 2016
 
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
 
Cash and cash equivalents
$
8,838

 
$
10,230

 
Restricted cash (See Note 3 for further discussion on restrictions)
37,915

 
37,983

 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
46,753

 
$
48,213

 
 
 
 
 
 
 
Six Months Ended
 
 
June 30,
2017
 
June 30,
2016
 
Supplemental disclosure of cash flow information:
 

 
 

 
Cash paid for interest
$
11,659

 
$
10,922

 
 
 
 
 
 
Supplemental disclosure of non-cash financing and investing activities:
 

 
 

 
Increase in capitalized accrued interest for second-generation network costs
$
2,003

 
$
1,500

 
Capitalized accretion of debt discount and amortization of prepaid financing costs
2,510

 
2,099

 
Issuance of common stock for legal settlement
453

 

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, 2016, as filed with the SEC on February 23, 2017 (the "2016 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 six months ended June 30, 2017 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 ("FASB") issued Accounting Standards Updates ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 has been modified multiple 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; however, the Company plans on adopting this standard when it becomes effective on January 1, 2018. The Company has an internal project team that is evaluating the impact this standard will have on its financial statements, accounting systems and related disclosures. Currently, the Company expects that the most significant changes to the Company's revenue recognition accounting policies will be related to the following: 1) the allocation and timing of revenue recognized between service revenue and subscriber equipment sales, 2) the timing of service revenue recognized for breakage during certain customer's prepaid contracts and 3) the deferment of certain contract acquisition costs and the recognition of these costs over the expected life of a customer's contract. The standard permits the use of either the retrospective or cumulative effect transition method. The Company expects to follow the cumulative effect method of adoption.

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

4



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 is currently evaluating the impact this standard will have on its financial statements and related disclosures.

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 impact this standard will have on its financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. ASU 2017-01 most significantly revises guidance specific to the definition of a business related to accounting for acquisitions. Additionally, ASU 2017-01 also affects other areas of US GAAP, such as the definition of a business related to the consolidation of variable interest entities, the consolidation of a subsidiary or group of assets, components of an operating segment, and disposals of reporting units and the impact on goodwill. 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 it to have a material effect on the Company's condensed consolidated financial statements and related disclosures.

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-06 was issued to provide clarity on the scope and application for recognizing gains and losses from the sale or transfer of nonfinancial assets, and should be adopted concurrently with ASU 2014-09: Revenue from Contracts with Customers. 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.

In February 2017, the FASB issued ASU 2017-07: Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires sponsors of benefit plans to present the service cost component of net periodic benefit cost in the same income statement line or items as other employee costs and present the remaining components of net periodic benefit cost in one or more separate line items outside of income from operations. This ASU also limits the capitalization of benefit costs to only the service cost component. 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 it to have a material effect on the Company's condensed consolidated financial statements and related disclosures.

In March 2017, the FASB issued ASU 2017-08: Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. This ASU amends current US GAAP to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not expect it to have a material effect on the Company's condensed consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09: Compensation—Stock Compensation: Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, a company will apply modification accounting only if the fair value, vesting conditions or classification of the award change due to a modification in the terms or conditions of the share-based payment award. 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 it to have a material effect on the Company's condensed consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU 2017-11: I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception. Part I of this ASU reduces the complexity associated with accounting for certain financial instruments with down round features. Part II of this ASU recharacterizes the indefinite deferral provisions described in Topic 480: Distinguishing Liabilities from Equity. It does not have an accounting effect.

5



This ASU is effective for public entities for annual and interim periods beginning after December 15, 2018. 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.

Recently Adopted Accounting Pronouncements

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. 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 adopted this standard effective with reporting periods beginning on January 1, 2017 and reflected the impact of this standard using a retrospective transition method for each period presented. Additionally, the Company added required disclosures pursuant to ASC 2016-18 to its condensed consolidated statements of cash flows.
2. PROPERTY AND EQUIPMENT
 Property and equipment consists of the following (in thousands): 
 
June 30,
2017
 
December 31,
2016
Globalstar System:
 

 
 

Space component
 

 
 

First and second-generation satellites in service
$
1,195,180

 
$
1,211,090

Prepaid long-lead items
17,040

 
17,040

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

 
32,481

Ground component
48,562

 
48,400

Construction in progress:
 

 
 

Space component
463

 
81

Ground component
217,199

 
207,127

Next-generation software upgrades
11,091

 
10,223

Other
1,917

 
2,299

Total Globalstar System
1,523,933

 
1,528,741

Internally developed and purchased software
16,530

 
15,005

Equipment
10,153

 
9,875

Land and buildings
3,319

 
3,330

Leasehold improvements
1,940

 
1,893

Total property and equipment
1,555,875

 
1,558,844

Accumulated depreciation
(542,077
)
 
(519,125
)
Total property and equipment, net
$
1,013,798

 
$
1,039,719


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”) related to the second-generation upgrades to the Company's ground infrastructure. The Company will begin depreciating this asset when the second-generation gateways are placed into commercial service. See Note 6: Commitments and Contingencies for further discussion of these contracts.

Amounts included in the Company’s second-generation satellite, on-ground spare balance as of June 30, 2017 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 June 30, 2017, 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

6



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 the LLI transferred to the Company 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 6: Commitments and 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 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.
  
3. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS 
 
Long-term debt consists of the following (in thousands): 
 
June 30, 2017
 
December 31, 2016
 
Principal
Amount
 
Unamortized Discount and Deferred Financing Costs
 
Carrying
Value
 
Principal
Amount
 
Unamortized Discount and Deferred Financing Costs
 
Carrying
Value
Facility Agreement
$
521,317

 
$
40,098

 
$
481,219

 
$
543,011

 
$
45,651

 
$
497,360

Thermo Loan Agreement
99,776

 
28,035

 
71,741

 
93,962

 
29,615

 
64,347

8.00% Convertible Senior Notes Issued in 2013
17,319

 
1,593

 
15,726

 
17,126

 
2,554

 
14,572

Total Debt
638,412

 
69,726

 
568,686

 
654,099

 
77,820

 
576,279

Less: Current Portion
110,313

 
1,593

 
108,720

 
75,755

 

 
75,755

Long-Term Debt
$
528,099

 
$
68,133

 
$
459,966

 
$
578,344

 
$
77,820

 
$
500,524


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 and the total outstanding balance of the Company's 2013 8.00% Notes (as defined below) as the first put date of the notes is April 1, 2018. These short-term debt obligations are significant and the Company believes these obligations will be in excess of its cash flows from operations. The Company intends to raise funds in sufficient amounts to make these payments; however, the source of funds has not yet been fully arranged.
 
Facility Agreement 

In 2009, the Company entered into the Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Société Générale, Natixis, Crédit Agricole Corporate and Investment Bank (formerly Calyon) and Crédit Industriel et Commercial, as arrangers, and BNP Paribas, as the security agent. The Facility Agreement was amended and restated in July 2013, August 2015 and June 2017.

The Facility Agreement is scheduled to mature in December 2022. As of June 30, 2017, the Facility Agreement was fully drawn. Semi-annual principal repayments began in December 2014. Indebtedness under 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%. Interest on the Facility Agreement is payable semi-annually in arrears on June 30 and December 31 of each calendar year. Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by Bpifrance Assurance Export S.A.S. ("BPIFAE") (formerly 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. 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

7



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.

In calculating compliance with the financial covenants of the Facility Agreement, the Company may include 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 through December 2019. If the Company violates any covenants and is unable to obtain a sufficient Equity Cure Contribution or obtain a waiver, or is unable to make payments to satisfy its debt obligations under the Facility Agreement and is unable to obtain a waiver, it would be in default under the Facility 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. As of June 30, 2017, the Company was in compliance with respect to the covenants of the Facility Agreement.

The Facility Agreement also requires the Company to maintain 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. Prior to October 30, 2017, the Company must maintain a total of $37.9 million in a debt service reserve account. On October 30, 2017, the balance in the debt service reserve account must equal the total amount of principal and interest payable by the Company on the next payment date. As of June 30, 2017, the balance in the debt service reserve account was $37.9 million and classified as restricted cash on the Company's condensed consolidated balance sheets. 

On June 30, 2017, the Company, Thermo, the lenders and the BPIFAE and Security Agent entered into a Third Global Amendment and Restatement Agreement (the “2017 GARA”). Pursuant to the 2017 GARA, the Facility Agreement was amended and restated and the Company, Thermo and the lenders agreed to the following:

The amendments to the Facility Agreement defer most financial covenants until the measurement period ending December 31, 2018; extend to the measurement period ending December 31, 2019 the date through which Equity Cure Contributions can be made; eliminate the requirement of the Company to redeem in full the 2013 8.00% Notes (as defined below); defer mandatory prepayments from qualifying equity raises until January 1, 2020; and revise the definition of the debt service reserve account required balance after October 30, 2017 to mean an amount equal to the Debt Service (as defined in the 2017 GARA) amount due on the next payment date.

The Company agreed to raise at least $159.0 million in equity, which includes $12.0 million previously raised from its common stock purchase agreement with Terrapin Opportunity, L.P. ("Terrapin") in January 2017. The Company was required to raise a portion of the total $159.0 million by June 30, 2017 and the remaining amount no later than October 30, 2017. The Company was required to raise approximately $33.0 million as of June 30, 2017, which included amounts for the Company's outstanding restructuring fees, insurance premiums to BPIFAE and principal and interest due under the Facility Agreement as of June 30, 2017. If the Company does not raise the remaining funds by October 30, 2017, it would constitute an event of default under the Facility Agreement. The Company is required to deposit 80% of any equity proceeds raised through December 31, 2019 (including those funds required to be raised in 2017) into a restricted account, separate from the debt service reserve account discussed above, that may only be used to pay obligations under the Facility Agreement.

The 2017 GARA required Thermo to fund or backstop the amounts required to be raised as of June 30, 2017. The total $33.0 million was raised pursuant to the Common Stock Purchase Agreement with Thermo, discussed further below.

The Company agreed to limit capital expenditures in connection with its spectrum rights to be the lesser of (1) $20.0 million and (2) 20% of the proceeds of the aggregate of any equity the Company raises from January 1, 2017 through December 31, 2019.

The Company agreed to pay an amendment fee to the agent and lenders in the aggregate amount of $255,000 and accelerated the payment of the restructuring fee and insurance premium of approximately $20.8 million, which was previously due December 31, 2017 and accrued as a current liability on the Company's condensed consolidated balance sheet.

The amendment and restatement of the Facility Agreement was considered a debt modification pursuant to applicable accounting guidance. As such, fees paid to the creditors were capitalized on the Company's condensed consolidated balance sheet as deferred financing costs and fees paid to the Company's advisors and other third parties were expensed in the Company's statement of operations for the period ended June 30, 2017.


8



Thermo Loan Agreement 

In connection with the amendment and restatement of the Facility Agreement in July 2013, the Company amended and restated its loan agreement with Thermo (the “Loan Agreement”). All obligations of the Company to Thermo under the Loan Agreement are subordinated to the Company’s obligations under the Facility Agreement.

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 June 30, 2017, $56.3 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.

The amount by which the if-converted value of the Thermo Loan Agreement exceeds the principal amount at June 30, 2017, assuming conversion at the closing price of the Company's common stock on that date of $2.13 per share, is approximately $190.7 million.

As discussed above, in connection with the 2017 GARA, Thermo and certain of its affiliates agreed to fund or backstop approximately $33.0 million in funding to the Company by June 30, 2017. The total amount was raised pursuant to the Common Stock Purchase Agreement entered into between the Company and Thermo on June 30, 2017. According to the terms of the Common Stock Purchase Agreement, Thermo purchased 17.8 million shares of the Company's voting common stock for $33.0 million at a purchase price of $1.85, which represented a 10% discount to the closing price of the Company's voting common stock on June 29, 2017. The terms of the Common Stock Purchase Agreement were approved by a special committee of independent directors of the Board of Directors, who were represented by independent legal counsel.

8.00% Convertible Senior Notes Issued in 2013
 
The 8.00% Convertible Senior Notes Issued in 2013 (the "2013 8.00% Notes") are convertible into shares of common stock at a conversion price of $0.73 (as adjusted) per share of common stock. 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").

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 June 30, 2017, 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. 


9



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 June 30, 2017, 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 six-month periods ending June 30, 2017.

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 June 30, 2017, 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. 

The amount by which the if-converted value of the 2013 8.00% Notes exceeded the principal amount at June 30, 2017, assuming conversion at the closing price of the Company's common stock on that date of $2.13 per share, is approximately $33.1 million.

Warrants Outstanding

Pursuant to the terms of the Contingent Equity Agreement with Thermo (See Note 9: Related Party Transactions in the Consolidated Financial Statements in the 2016 Annual Report for a description of the Contingent Equity Agreement), the Company issued to Thermo 41.5 million warrants at a strike price of $0.01 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. In May 2017, Thermo exercised the remaining 24.6 million of the total 41.5 million warrants issued, resulting in the issuance of 24.6 million shares of the Company's common stock. As of June 30, 2017, no warrants remain outstanding under this agreement.

Terrapin Opportunity, L.P. Common Stock Purchase Agreement 

In August 2015, the Company entered into a common stock purchase agreement with Terrapin pursuant to which the Company could 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. Through the term of this agreement, Terrapin purchased a total of 67.3 million shares of voting common stock for a total purchase price of $75.0 million. In January 2017, the Company drew $12.0 million and issued to Terrapin 8.9 million shares of voting common stock. No funds remain available under this agreement.


10



4. DERIVATIVES 

In connection with certain existing 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 table discloses the fair values of the derivative instruments on the Company’s condensed consolidated balance sheets (in thousands):

 
June 30, 2017
 
December 31, 2016
Derivative assets:
 

 
 

Interest rate cap
$
1

 
$
4

Total derivative assets
$
1

 
$
4

Derivative liabilities:
 

 
 

Compound embedded derivative with the 2013 8.00% Notes
$
(36,860
)
 
$
(26,664
)
Compound embedded derivative with the Thermo Loan Agreement
(318,215
)
 
(254,507
)
Total derivative liabilities
$
(355,075
)
 
$
(281,171
)

 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
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Interest rate cap
$
(1
)
 
$
(1
)
 
$
(3
)
 
$
(5
)
Compound embedded derivative with the 2013 8.00% Notes
(11,354
)
 
5,335

 
(10,196
)
 
5,783

Compound embedded derivative with the Thermo Loan Agreement
(65,775
)
 
35,165

 
(63,708
)
 
33,377

Total derivative gain (loss)
$
(77,130
)
 
$
40,499

 
$
(73,907
)
 
$
39,155


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. 

Derivative Liabilities 

The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments, including the conversion option and the contingent put feature within both the 2013 8.00% Notes and the Thermo Loan Agreement. These embedded derivatives required bifurcation from the debt host agreement and 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. The Company determined the fair value of its compound embedded derivative liabilities using a blend of a Monte Carlo simulation model and market prices. See Note 5: Fair Value Measurements for further discussion. As the first put date for the 2013 8.00% Notes is on April 1, 2018, the Company has classified this derivative liability as current on its condensed consolidated balance sheet at June 30, 2017.

11




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).

Recurring Fair Value Measurements 

The following tables provide a summary of the financial assets and liabilities measured at fair value on a recurring basis (in thousands): 
 
June 30, 2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Assets:
 

 
 

 
 

 
 

Interest rate cap
$

 
$
1

 
$

 
$
1

Total assets measured at fair value
$

 
$
1

 
$

 
$
1

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Compound embedded derivative with 2013 8.00% Notes

 

 
(36,860
)
 
(36,860
)
Compound embedded derivative with the Thermo Loan Agreement

 

 
(318,215
)
 
(318,215
)
Total liabilities measured at fair value
$

 
$

 
$
(355,075
)
 
$
(355,075
)
 
 
December 31, 2016
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Assets:
 

 
 

 
 

 
 

Interest rate cap
$

 
$
4

 
$

 
$
4

Total assets measured at fair value
$

 
$
4

 
$

 
$
4

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Liability for potential stock issuance to Hughes
$

 
$
(2,706
)
 
$

 
$
(2,706
)
Liability for stock issuance due to legal settlement

 
(389
)
 

 
(389
)
Compound embedded derivative with 2013 8.00% Notes

 

 
(26,664
)
 
(26,664
)
Compound embedded derivative with the Thermo Loan Agreement

 

 
(254,507
)
 
(254,507
)
Total liabilities measured at fair value
$

 
$
(3,095
)
 
$
(281,171
)
 
$
(284,266
)
 
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.

12




Liabilities 

Liability for potential stock issuance to Hughes

As described in Note 6: Commitments and Contingencies, 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 required the Company to issue to Hughes additional shares of common stock equal to the difference, if any, between the initial consideration of $15.5 million and the total amount of gross proceeds Hughes received from the sale of any shares plus the market value of any shares still held by Hughes as of the close of trading on June 30, 2017. In April 2017, Hughes sold all remaining shares of Globalstar common stock and the Company was not required to issue additional shares. Prior to settlement, this liability was recorded on the Company's condensed consolidated balance sheet in accrued expenses and was marked-to-market at each balance sheet date. The value of this option was calculated using a Black-Scholes pricing model. The Company recorded gains and losses resulting from changes in the value of this liability in its condensed consolidated statement of operations. As of June 30, 2017, this liability was no longer outstanding.

Liability for future stock issuance due to legal settlement

As described in Note 6: Commitments and Contingencies, the Company settled litigation related to its Brazilian subsidiary in October 2016 through the payment of Globalstar common stock. In connection with this settlement, the Company agreed to provide downside protection for the difference between the total settlement amount and the total amount of gross proceeds the counterparty receives from the sale of these shares. An estimate of $0.4 million for this liability was recorded in accrued expenses in the Company's condensed consolidated financial statements as of December 31, 2016. In March 2017, the Company settled this liability through the final payment of approximately 0.3 million shares of Globalstar common stock.

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. 

The significant quantitative Level 3 inputs utilized in the valuation models are shown in the tables below: 

 
June 30, 2017
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Discount Rate
 
Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes
90%
 
1.2
%
 
$
0.73

 
26
%
 
$
2.13

Compound embedded derivative with the Thermo Loan Agreement
40% - 85%
 
2.0
%
 
$
0.73

 
26
%
 
$
2.13

 
 
December 31, 2016
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Discount Rate
 
Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes
100% - 110%
 
1.0
%
 
$
0.73

 
25
%
 
$
1.58

Compound embedded derivative with the Thermo Loan Agreement
40% - 110%
 
2.2
%
 
$
0.73

 
25
%
 
$
1.58


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 increases away from the current conversion price for each of the related derivative instruments, the value to the holder of the instrument generally increases, thereby increasing 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

13



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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
(277,946
)
 
$
(240,982
)
 
$
(281,171
)
 
$
(239,642
)
Unrealized gain (loss), included in derivative gain (loss)
(77,129
)
 
40,500

 
(73,904
)
 
39,160

Balance at end of period
$
(355,075
)
 
$
(200,482
)
 
$
(355,075
)
 
$
(200,482
)

Fair Value of Debt Instruments

The Company believes it is not practicable to determine the fair value of the Facility Agreement without incurring significant additional costs. 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. 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):

 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Thermo Loan Agreement
$
71,741

 
$
51,045

 
$
64,347

 
$
47,874

2013 8.00% Notes
15,726

 
15,459

 
14,572

 
14,350



14



6. COMMITMENTS AND CONTINGENCIES 

Contractual Obligations - Next-Generation Gateways and Other Ground Facilities

As of June 30, 2017, the Company had purchase commitments with Thales, Hughes and Ericsson related to the procurement, deployment and maintenance of the second-generation network.  The Company is obligated to make payments under these purchase commitments totaling approximately $1.1 million during 2017, all of which are owed to Ericsson and were accrued on its condensed consolidated balance sheet in accrued expenses as of June 30, 2017.

Hughes designed, supplied and implemented the Radio Access Network ("RAN") ground network equipment and software upgrades for installation at a number of the Company’s gateways. Hughes also provided the satellite interface chips to be used in various second-generation Globalstar devices. Ericsson developed, implemented and installed the Company's ground interface, or core network system, at certain of the Company's gateways. The second-generation Ericsson core links the Hughes RANs to the public-switched telephone network (“PSTN”), cellular networks and Internet. In December 2016, the Company formally accepted all contract deliverables under the core contracts for both Hughes and Ericsson necessary to deploy its second-generation ground infrastructure. The Company intends to complete certain add-ons outside of the scope of the core contracts, which include certain punch list items with Ericsson and the installation of second-generation RANs at certain additional gateways.

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, 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. In the April 2015 agreement (as amended), the Company agreed to provide downside protection through June 30, 2017. This feature required that the Company issue additional shares of common stock equal to the difference, if any, between the initial consideration of $15.5 million and the total amount of gross proceeds Hughes received from the sale of any shares plus the market value of any shares still held by Hughes as of the close of trading on June 30, 2017. In April 2017, Hughes sold all remaining shares of Globalstar common stock. The Company was not required to issue additional shares. See Note 5: Fair Value Measurements for further discussion of the fair value of this liability.

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 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

15



Company’s condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016. 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 June 30, 2017, 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 June 30, 2017, 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. In 2016, the Company settled 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 in October 2016. The Company agreed to provide downside protection for the difference between the total settlement amount of 4.5 million reais and the total gross proceeds received by the third party upon sale of these shares. In March 2017, the Company paid 0.3 million shares of Globalstar common stock related to this downside protection, valued at 1.4 million reais, or $0.5 million.

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. 

7. RELATED PARTY TRANSACTIONS  

Payables to Thermo and other affiliates related to normal purchase transactions were $0.3 million as of June 30, 2017 and December 31, 2016, respectively. 

Transactions with Thermo 

General and administrative expenses are related to non-cash expenses and those expenses incurred by Thermo on behalf of the Company which are charged to the Company. 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. Those expenses charged to the Company were $0.2 million during the three months ended June 30, 2017 and 2016 and $0.4 million and $0.3 million for the six months ended June 30, 2017 and 2016, respectively.

As of June 30, 2017, the principal amount outstanding under the Loan Agreement with Thermo was $99.8 million, and the fair value of the compound embedded derivative liability associated with the Loan Agreement was $318.2 million. During the three months ended June 30, 2017 and 2016, interest accrued on the Loan Agreement was approximately $3.0 million and $2.6 million, respectively. During the six months ended June 30, 2017 and 2016, interest accrued on the Loan Agreement was approximately and $5.8 million and $5.2 million, respectively.

In May 2017, Thermo exercised all remaining warrants to purchase approximately 24.6 million shares issued under the Contingent Equity Agreement for a purchase price of $0.2 million.

In June 2017, the Company and Thermo entered into a Common Stock Purchase Agreement in connection with the amendment and restatement of the Company's Facility Agreement.

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.


16



In 2013, the Company's Board of Directors formed a special committee consisting solely of independent directors of the Company, represented by independent legal counsel. This special committee serves as an independent board to review and approve certain transactions between the Company and Thermo.

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

8. 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(98,734
)
 
$
14,099

 
$
(118,895
)
 
$
(12,848
)
Effect of dilutive securities:
 
 
 
 
 
 
 
2013 8.00% Notes

 
537

 

 

Thermo Loan Agreement

 
2,401

 

 

Income (loss) to common stockholders plus assumed conversions
$
(98,734
)
 
$
17,037

 
$
(118,895
)
 
$
(12,848
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic shares outstanding
1,128,985

 
1,049,381

 
1,121,518

 
1,045,205

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

 
5,793

 

 

2013 8.00% Notes

 
27,164

 

 

Thermo Loan Agreement

 
139,709

 

 

Warrants and other

 
27,625

 

 

Diluted shares outstanding
1,128,985

 
1,249,672

 
1,121,518

 
1,045,205

Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.09
)
 
$
0.01

 
(0.11
)
 
(0.01
)
Diluted
(0.09
)
 
0.01

 
(0.11
)
 
(0.01
)

For the six months ended June 30, 2017 and 2016, 191.6 million and 197.0 million shares, respectively, 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. For the three months ended June 30, 2017, the number of shares excluded from diluted shares outstanding was 190.5 million.


17



9. 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 June 30, 2017
(Unaudited)  
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenue:
 

 
 

 
 

 
 

 
 

Service revenues
$
18,685

 
$
9,846

 
$
13,096

 
$
(17,326
)
 
$
24,301

Subscriber equipment sales
60

 
3,702

 
1,491

 
(1,431
)
 
3,822

Total revenue
18,745

 
13,548

 
14,587

 
(18,757
)
 
28,123

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
6,415

 
1,403

 
1,974

 
(756
)
 
9,036

Cost of subscriber equipment sales
32

 
3,106

 
1,525

 
(1,885
)
 
2,778

Marketing, general and administrative
5,312

 
997

 
19,357

 
(16,122
)
 
9,544

Depreciation, amortization and accretion
19,101

 
120

 
54

 

 
19,275

Total operating expenses
30,860

 
5,626

 
22,910

 
(18,763
)
 
40,633

Income (loss) from operations
(12,115
)
 
7,922

 
(8,323
)
 
6

 
(12,510
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Gain on equity issuance
1,964

 

 

 

 
1,964

Interest income and expense, net of amounts capitalized
(8,829
)
 
7

 
(32
)
 
4

 
(8,850
)
Derivative loss
(77,130
)
 

 

 

 
(77,130
)
Equity in subsidiary earnings (loss)
(1,282
)
 
(4,076
)
 

 
5,358

 

Other
(1,342
)
 
(337
)
 
(418
)
 
(5
)
 
(2,102
)
Total other income (expense)
(86,619
)
 
(4,406
)
 
(450
)
 
5,357

 
(86,118
)
Income (loss) before income taxes
(98,734
)
 
3,516

 
(8,773
)
 
5,363

 
(98,628
)
Income tax expense

 
4

 
102

 

 
106

Net income (loss)
$
(98,734
)
 
$
3,512

 
$
(8,875
)
 
$
5,363

 
$
(98,734
)
Comprehensive income (loss)
$
(98,734
)
 
$
3,512

 
$
(8,911
)
 
$
5,354

 
$
(98,779
)

18



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

 
 

 
 

 
 

Service revenues
$
10,944

 
$
10,863

 
$
10,689

 
$
(11,526
)
 
$
20,970

Subscriber equipment sales
96

 
2,774

 
1,997

 
(751
)
 
4,116

Total revenue
11,040

 
13,637

 
12,686

 
(12,277
)
 
25,086

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
5,135

 
1,034

 
2,702

 
(934
)
 
7,937

Cost of subscriber equipment sales
43

 
2,112

 
1,478

 
(747
)
 
2,886

Marketing, general and administrative
5,430

 
1,322

 
16,219

 
(11,521
)
 
11,450

Depreciation, amortization and accretion
18,851

 
206

 
288

 
(121
)
 
19,224

Total operating expenses
29,459

 
4,674

 
20,687

 
(13,323
)
 
41,497

Income (loss) from operations
(18,419
)
 
8,963

 
(8,001
)
 
1,046

 
(16,411
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Loss on equity issuance
(2,075
)
 

 

 

 
(2,075
)
Interest income and expense, net of amounts capitalized
(9,000
)
 
(3
)
 
(47
)
 
1

 
(9,049
)
Derivative gain
40,499

 

 

 

 
40,499

Equity in subsidiary earnings (loss)
2,924

 
(968
)
 

 
(1,956
)
 

Other
170

 
92

 
328

 
95

 
685

Total other income (expense)
32,518

 
(879
)
 
281

 
(1,860
)
 
30,060

Income (loss) before income taxes
14,099

 
8,084

 
(7,720
)
 
(814
)
 
13,649

Income tax benefit

 

 
(450
)
 

 
(450
)
Net income (loss)
$
14,099

 
$
8,084

 
$
(7,270
)
 
$
(814
)
 
$
14,099

Comprehensive income (loss)
$
14,099

 
$
8,084

 
$
(8,195
)
 
$
(814
)
 
$
13,174

 

19



Globalstar, Inc.
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2017
(Unaudited)
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenue:
 

 
 

 
 

 
 

 
 

Service revenues
$
36,297

 
$
19,202

 
$
24,097

 
$
(33,814
)
 
$
45,782

Subscriber equipment sales
127

 
5,993

 
2,841

 
(1,968
)
 
6,993

Total revenue
36,424

 
25,195

 
26,938

 
(35,782
)
 
52,775

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
12,543

 
2,828

 
5,147

 
(2,508
)
 
18,010

Cost of subscriber equipment sales
66

 
4,823

 
1,952

 
(1,967
)
 
4,874

Marketing, general and administrative
10,971

 
2,116

 
37,265

 
(31,318
)
 
19,034

Depreciation, amortization and accretion
38,052

 
402

 
115

 

 
38,569

Total operating expenses
61,632

 
10,169

 
44,479

 
(35,793
)
 
80,487

Income (loss) from operations
(25,208
)
 
15,026

 
(17,541
)
 
11

 
(27,712
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Gain (loss) on equity issuance
2,706

 

 
(36
)
 

 
2,670

Interest income and expense, net of amounts capitalized
(17,584
)
 
(1
)
 
(101
)
 
8

 
(17,678
)
Derivative loss
(73,907
)
 

 

 

 
(73,907
)
Equity in subsidiary earnings (loss)
(3,215
)
 
(7,510
)
 

 
10,725

 

Other
(1,687
)
 
(437
)
 
5

 
(7
)
 
(2,126
)
Total other income (expense)
(93,687
)
 
(7,948
)
 
(132
)
 
10,726

 
(91,041
)
Income (loss) before income taxes
(118,895
)
 
7,078

 
(17,673
)
 
10,737

 
(118,753
)
Income tax expense

 
9

 
133

 

 
142

Net income (loss)
$
(118,895
)
 
$
7,069

 
$
(17,806
)
 
$
10,737

 
$
(118,895
)
Comprehensive income (loss)
$
(118,895
)
 
$
7,069

 
$
(18,662
)
 
$
10,728

 
$
(119,760
)
 

20



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

 
 

 
 

 
 

Service revenues
$
27,882

 
$
18,358

 
$
20,114

 
$
(26,635
)
 
$
39,719

Subscriber equipment sales
424