GSAT-2014.09.30-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014 
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 if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes ¨ No x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
 
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  x  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  x  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 x
 
 
 
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 x
 
As of October 31, 2014, 855,827,575 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 Registrant’s voting common stock. 




GLOBALSTAR, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1A. 
 
 
 
Item 6.
 
 
 
 





PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
GLOBALSTAR, INC.
  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Revenue:
 
 
 
 
 

 
 

Service revenues
$
18,511

 
$
17,056

 
$
52,647

 
$
47,854

Subscriber equipment sales
4,930

 
5,493

 
15,324

 
13,863

Total revenue
23,441

 
22,549

 
67,971

 
61,717

Operating expenses:


 


 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
7,868

 
8,181

 
21,926

 
22,913

Cost of subscriber equipment sales
3,836

 
4,148

 
11,240

 
10,675

Cost of subscriber equipment sales - reduction in the value of inventory

 

 
7,317

 

Marketing, general, and administrative
8,783

 
9,079

 
24,799

 
22,579

Depreciation, amortization, and accretion
21,047

 
23,715

 
66,393

 
66,114

Total operating expenses
41,534

 
45,123

 
131,675

 
122,281

Loss from operations
(18,093
)
 
(22,574
)
 
(63,704
)
 
(60,564
)
Other income (expense):


 


 
 

 
 

Loss on extinguishment of debt
(12,936
)
 
(63,569
)
 
(39,615
)
 
(110,809
)
Loss on equity issuance

 
(2,733
)
 

 
(16,701
)
Interest income and expense, net of amounts capitalized
(9,067
)
 
(16,901
)
 
(33,853
)
 
(39,869
)
Derivative gain (loss)
166,989

 
(97,534
)
 
(418,663
)
 
(126,911
)
Other
2,586

 
(1,540
)
 
2,207

 
(1,125
)
Total other income (expense)
147,572

 
(182,277
)
 
(489,924
)
 
(295,415
)
Income (loss) before income taxes
129,479

 
(204,851
)
 
(553,628
)
 
(355,979
)
Income tax expense
89

 
118

 
1,255

 
341

Net income (loss)
$
129,390

 
$
(204,969
)
 
$
(554,883
)
 
$
(356,320
)
Income (loss) per common share:


 


 
 

 
 

Basic
$
0.13

 
$
(0.30
)
 
$
(0.61
)
 
$
(0.64
)
Diluted
0.11

 
(0.30
)
 
(0.61
)
 
(0.64
)
Weighted-average shares outstanding:


 


 
 

 
 

Basic
987,668

 
673,546

 
914,474

 
559,515

Diluted
1,189,190

 
673,546

 
914,474

 
559,515

Comprehensive income (loss)
$
128,896

 
$
(204,417
)
 
$
(555,754
)

$
(356,417
)
 
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)  
 
September 30,
2014
 
December 31, 2013
 
(Unaudited)
 
(Audited)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
27,221

 
$
17,408

Accounts receivable, net of allowance of $4,977 and $7,419, respectively
16,217

 
15,723

Inventory
29,277

 
31,817

Advances for inventory
196

 
9,359

Prepaid expenses and other current assets
7,456

 
7,059

Total current assets
80,367

 
81,366

Property and equipment, net
1,120,156

 
1,169,785

Restricted cash
37,918

 
37,918

Deferred financing costs
66,816

 
76,436

Intangible and other assets, net of accumulated amortization of $6,138 and $5,669, respectively
14,703

 
7,103

Total assets
$
1,319,960

 
$
1,372,608

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
7,271

 
$
4,046

Accounts payable, including contractor payables of $6,580 and $7,665, respectively
12,195

 
14,627

Accrued contract termination charge
22,238

 
24,133

Accrued expenses
25,866

 
22,700

Payables to affiliates
443

 
202

Derivative liabilities

 
57,048

Deferred revenue
22,191

 
17,284

Total current liabilities
90,204

 
140,040

Long-term debt, less current portion
623,770

 
665,236

Employee benefit obligations
3,146

 
3,529

Derivative liabilities
575,803

 
405,478

Deferred revenue
6,787

 
7,079

Debt restructuring fees
20,795

 
20,795

Other non-current liabilities
13,987

 
13,696

Total non-current liabilities
1,244,288

 
1,115,813

Commitments and contingent liabilities (Notes 7 and 8)


 


Stockholders’ (deficit) equity:
 

 
 

Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at September 30, 2014 and December 31, 2013:


 


Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none issued and outstanding at September 30, 2014 and December 31, 2013

 

Voting Common Stock of $0.0001 par value; 1,200,000,000 shares authorized; 855,827,575 and 535,883,461 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
86

 
54

Nonvoting Common Stock of $0.0001 par value; 400,000,000 shares authorized; 134,008,656 and 309,008,656 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
13

 
31

Additional paid-in capital
1,499,290

 
1,074,837

Accumulated other comprehensive income

 
871

Retained deficit
(1,513,921
)
 
(959,038
)
Total stockholders’ (deficit) equity
(14,532
)
 
116,755

Total liabilities and stockholders’ (deficit) equity
$
1,319,960

 
$
1,372,608

 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,
2014
 
September 30,
2013
Cash flows provided by (used in) operating activities:
 

 
 

Net loss
$
(554,883
)
 
$
(356,320
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation, amortization, and accretion
66,393

 
66,114

Change in fair value of derivative assets and liabilities
418,663

 
126,067

Stock-based compensation expense
2,312

 
1,850

Amortization of deferred financing costs
7,591

 
6,256

Provision for bad debts
1,688

 
1,359

Reduction in the value of inventory
7,317

 

Noncash interest and accretion expense
13,511

 
22,341

Loss on extinguishment of debt
39,615

 
110,809

Loss on equity issuance

 
16,701

Discount on future shares issued to vendor
748

 

Other, net
1,426

 
605

Unrealized foreign currency (gain) loss
(3,017
)
 
635

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(2,699
)
 
(4,001
)
Inventory
4,403

 
4,253

Prepaid expenses and other current assets
(961
)
 
(1,353
)
Other assets
(2,028
)
 
874

Accounts payable and accrued expenses
1,317

 
4,617

Payables to affiliates
242

 
73

Other non-current liabilities
193

 
(996
)
Deferred revenue
5,044

 
2,450

Net cash provided by operating activities
6,875

 
2,334

Cash flows (provided by) used in investing activities:
 

 
 

Second-generation satellites, ground and related launch costs (including interest)
(3,862
)
 
(37,732
)
Property and equipment additions
(2,203
)
 
(1,225
)
Investment in business

 
(496
)
Restricted cash

 
8,838

Net cash used in investing activities
(6,065
)
 
(30,615
)
Cash flows provided by (used in) financing activities
 

 
 

Borrowings from Facility Agreement

 
672

Proceeds from contingent equity agreement

 
1,071

Payments to reduce principal amount of exchanged 5.75% Notes

 
(13,544
)
Payments for 5.75% Notes not exchanged

 
(6,250
)
Payments to lenders and other fees associated with exchange

 
(2,482
)
Proceeds from equity issuance to related party

 
51,500

Payments of deferred financing costs
(164
)
 
(16,904
)
Proceeds from issuance of common stock and exercise of warrants
9,303

 
8,979

Net cash provided by financing activities
9,139

 
23,042

Effect of exchange rate changes on cash
(136
)
 
90

Net increase (decrease) in cash and cash equivalents
9,813

 
(5,149
)
Cash and cash equivalents, beginning of period
17,408

 
11,792

Cash and cash equivalents, end of period
$
27,221

 
$
6,643

Supplemental disclosure of cash flow information:
 

 
 

Cash paid for:
 

 
 

Interest
$
10,335

 
$
11,445

Income taxes
95

 
28

Supplemental disclosure of non-cash financing and investing activities:
 

 
 

Increase in non-cash capitalized accrued interest for second-generation satellites and ground costs
1,237

 
3,691

Capitalization of the accretion of debt discount and amortization of prepaid financing costs
1,973

 
4,716

Payments made in convertible notes and common stock
12,910

 
4,240

Principal amount of debt converted into common stock
76,040

 
23,570

Reduction of debt discount and deferred financing costs due to conversion of debt
28,073

 
13,164

Increase (reduction) in accrued second-generation satellites and ground costs
1,887

 
(9,688
)
Reduction in carrying amount of Thermo Loan agreement due to amendment

 
(35,026
)
Fair value of common stock issued upon conversion of debt
269,826

 

Reduction in derivative liability due to conversion of debt
182,051

 

Extinguishment of principal amount of 5.75% Notes

 
(71,804
)
Issuance of principal amount of 8.00% Notes Issued in 2013

 
54,611

Issuance of common stock to exchanging note holders

 
12,127

 
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
 
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 (“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; 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 Globalstar, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013 and Management's Discussion and Analysis of Financial Condition and Results of Operations herein.
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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. 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, the reserve for product warranties, and income taxes. Actual results could differ from these estimates.
 
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. These unaudited interim condensed consolidated financial statements include the accounts of Globalstar and its majority owned or otherwise controlled subsidiaries. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year or any future period.

The Company evaluates events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure. Based on the evaluation, the Company determined that there were no material subsequent events for recognition or disclosure other than those disclosed herein.
 
Recently Issued Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing reporting.
  

4



2. PROPERTY AND EQUIPMENT
 
Property and equipment consists of the following (in thousands):
 
 
September 30,
2014
 
December 31,
2013
Globalstar System:
 

 
 

Space component
 

 
 

Second-generation satellites in service
$
1,212,040

 
$
1,212,099

Prepaid long-lead items
17,040

 
17,040

Second-generation satellite, on-ground spare
32,459

 
32,365

Ground component
48,126

 
48,378

Construction in progress:
 

 
 

Space component
11

 

Ground component
129,489

 
116,377

Other
1,811

 
1,115

Total Globalstar System
1,440,976

 
1,427,374

Internally developed and purchased software
15,794

 
14,931

Equipment
12,670

 
12,385

Land and buildings
3,719

 
3,768

Leasehold improvements
1,662

 
1,644

Total property and equipment
1,474,821

 
1,460,102

Accumulated depreciation
(354,665
)
 
(290,317
)
Total property and equipment, net
$
1,120,156

 
$
1,169,785

 
Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation and ground upgrades. Amounts included in the Company’s second-generation satellite, on-ground spare balance as of September 30, 2014 consist of costs related to a spare second-generation satellite that is capable of being included in a future launch of satellites. As of September 30, 2014, this satellite and the prepaid long-lead items have not been placed into service, and therefore the Company has not yet recorded depreciation expense for these items.
 
Capitalized Interest and Depreciation Expense
 
The following tables summarize capitalized interest for the periods indicated below (in thousands):
   
 
Three Months Ended

Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Interest cost eligible to be capitalized
$
10,508

 
$
13,119

 
$
34,123

 
$
38,851

Interest cost recorded in interest expense, net
(8,557
)
 
(10,151
)
 
(28,365
)
 
(24,302
)
Net interest capitalized
$
1,951

 
$
2,968

 
$
5,758

 
$
14,549

 
The following table summarizes depreciation expense for the periods indicated below (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Depreciation Expense
$
20,653

 
$
23,931

 
$
65,040

 
$
65,622

  

5



3. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
 
Long-term debt consists of the following (in thousands): 
 
 
September 30, 2014
 
December 31, 2013
 
Principal
Amount
 
Carrying
Value
 
Principal
Amount
 
Carrying
Value
Facility Agreement
$
586,342

 
$
586,342

 
$
586,342

 
$
586,342

Thermo Loan Agreement
66,106

 
30,307

 
60,383

 
22,854

8.00% Convertible Senior Notes Issued in 2013
23,032

 
14,392

 
46,971

 
26,291

8.00% Convertible Senior Unsecured Notes Issued in 2009

 

 
51,652

 
33,795

Total Debt
675,480

 
631,041

 
745,348

 
669,282

Less: Current Portion
7,271

 
7,271

 
4,046

 
4,046

Long-Term Debt
$
668,209

 
$
623,770

 
$
741,302

 
$
665,236

 
The above table presents the principal amount and carrying value of long-term debt at September 30, 2014 and December 31, 2013. The principal amounts shown above include payment of in-kind interest as of the date paid-in-kind notes, if any, are issued. The carrying value is net of any discounts to the loan amounts at issuance, including accretion, as further described below. The amount included in the table above as the current portion of long-term debt includes the next scheduled principal repayments under the Facility Agreement, which are due in December 2014 and June 2015.
 
Facility Agreement
 
The Company’s senior secured credit facility agreement (“Facility Agreement”) was amended and restated in August 2013 and is scheduled to mature in December 2022. Semi-annual principal repayments are scheduled to begin 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 nonfinancial covenants. Pursuant to the terms of the Facility Agreement, the Company has the ability to cure noncompliance with financial covenants with equity contributions through June 2017. If the Company violates any of these financial and nonfinancial covenants and is unable to obtain waivers or avoid an event of default through an equity cure contribution, the Company 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 Company was in compliance with all covenants in the Facility Agreement as of September 30, 2014.

The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account. The use of the funds in this account is restricted to making principal and interest payments under the Facility Agreement. As of September 30, 2014, the balance in the debt service reserve account was $37.9 million and classified as restricted cash.
  
Thermo Loan Agreement
 
The Company has an Amended and Restated Loan Agreement (the “Loan Agreement”) with Thermo whereby Thermo agreed to lend the Company $25.0 million for the purpose of funding the debt service reserve account required under the Facility Agreement. In 2011, this loan was increased to $37.5 million. This loan is subordinated to, and the debt service reserve account is pledged to secure, all of the Company’s obligations under the Facility Agreement. Amounts deposited in the debt service reserve account are restricted to payments due under the Facility Agreement, unless otherwise authorized by the lenders.
 
The loan 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 under the Facility Agreement. The loan becomes due and payable 6 months after the obligations under the Facility Agreement have been paid in full, or earlier if the Company has a change in control or any acceleration of the maturity of the loans under the Facility Agreement occurs. As of September 30,

6



2014, $28.6 million of interest was accrued; this amount is included in long-term debt on the Company’s condensed consolidated balance sheet.
  
The Company evaluated the various embedded derivatives within 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 sheet 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 determined the fair value of the compound embedded derivative using a blend of a Monte Carlo simulation model and market prices.

8.00% Convertible Senior Notes Issued in 2013
 
On May 20, 2013, the Company entered into an Exchange Agreement with the beneficial owners and investment managers for beneficial owners (the “Exchanging Note Holders”) of approximately 91.5% of its outstanding 5.75% Convertible Senior Notes (“5.75% Notes”) and completed the transactions contemplated by the Exchange Agreement. Pursuant to the Exchange Agreement, the Company issued $54.6 million aggregate principal amount of 8.00% Convertible Senior Notes (the “8.00% Notes Issued in 2013”) to the Exchanging Note Holders. The 8.00% Notes Issued in 2013 are convertible into shares of common stock at an initial 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 8.00% Notes Issued in 2013, subject to adjustment as provided in the Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as Trustee (the “New Indenture”). As a result of the exchange and redemption, the Company recognized a loss on extinguishment of debt of approximately $47.2 million in the second quarter of 2013, representing the difference between the old 5.75% Notes and the fair value of the consideration given in the exchange. The conversion price of the 8.00% Notes Issued in 2013 will be 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 New Indenture. Due to common stock issuances by the Company since May 20, 2013 at prices below the then effective conversion rate, the base conversion rate had been reduced to $0.73 per share of common stock as of September 30, 2014.
 
The 8.00% Notes Issued in 2013 are senior unsecured debt obligations of the Company, with no sinking fund. The 8.00% Notes Issued in 2013 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 8.00% Notes Issued in 2013 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 additional notes at a rate of 2.25% per annum. The New Indenture provides for customary events of default. As of September 30, 2014, the Company was not in default under the New Indenture with respect to the 8.00% Notes Issued in 2013.
 
Subject to certain conditions set forth in the New Indenture, the Company may redeem the 8.00% Notes Issued in 2013, with the prior approval of the Majority Lenders, in whole or in part, at any time on or after April 1, 2018, at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be redeemed plus all accrued and unpaid interest thereon.
 
A holder of 8.00% Notes Issued in 2013 has the right, at the Holder’s option, to require the Company to purchase some or all of the 8.00% Notes Issued in 2013 held by it on each of April 1, 2018 and April 1, 2023 at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be purchased plus accrued and unpaid interest.
 
Subject to the procedures for conversion and other terms and conditions of the New Indenture, a holder may convert its 8.00% Notes Issued in 2013 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).
 
A holder was permitted to elect to convert up to 15% of its 8.00% Notes Issued in 2013 on each of July 19, 2013 and March 20, 2014. If a holder had elected to convert on either of those dates, it would have received, at the Company’s option, either cash equal to the par value of the 8.00% Notes Issued in 2013 plus accrued interest (provided that, under the Facility Agreement, the Company could pay cash only with the consent of the Majority Lenders) or shares of the Company’s common stock equal to the principal amount of the 8.00% Notes Issued in 2013 to be converted plus accrued interest divided by the lower of the average price of the common stock in a specified period and $0.50. On July 19, 2013, $7.0 million principal amount (approximately 12.9%

7



of the outstanding principal amount) of 8.00% Notes Issued in 2013 were converted, resulting in the issuance of 14.3 million shares of common stock. On March 20, 2014, $7.0 million principal amount (approximately 15.0% of the outstanding principal amount) of 8.00% Notes Issued in 2013 were converted, resulting in the issuance of an additional 14.6 million shares. Through September 30, 2014, a total of $32.4 million principal amount of 8.00% Notes Issued in 2013 had been converted, resulting in the issuance of approximately 59.5 million shares of voting common stock relating to the special conversions discussed above as well as normal conversions pursuant to the terms of the New Indenture. The Company recorded a loss on extinguishment of debt of approximately $43.8 million during the nine months ended September 30, 2014 related to these conversions. Pursuant to the terms in the New Indenture for the 8.00% Notes Issued in 2013 for normal conversions, holders receive conversion shares over a 40-consecutive trading day settlement period. As a result of this feature, the portion of converted debt is extinguished on an incremental basis over the 40-day settlement period, reducing the Company's debt balance outstanding. As of September 30, 2014, there were no conversions that had been initiated, but not yet fully settled.
   
The Company evaluated the various embedded derivatives within the New Indenture. The Company determined that the conversion option and the contingent put feature within the New Indenture required bifurcation from the 8.00% Notes Issued in 2013. The conversion option and the contingent put feature were not deemed clearly and closely related to the 8.00% Notes Issued in 2013 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 sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013.
 
The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the first put date of the 8.00% Notes Issued in 2013 (April 1, 2018) using an effective interest rate method. The fair value of the compound embedded derivative liability is being 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 determined the fair value of the compound embedded derivative using a blend of a Monte Carlo simulation model and market prices.
 
8.00% Convertible Senior Notes Issued in 2009
 
In June 2009, the Company sold $55.0 million in aggregate principal amount of 8.00% Notes Issued in 2009 and Warrants (the “8.00% Warrants”) to purchase 15.3 million shares of the Company’s common stock. The 8.00% Notes Issued in 2009 were subordinated to all of the Company’s obligations under the Facility Agreement. The 8.00% Notes Issued in 2009 were the Company’s senior unsecured debt obligations and, except as described in the preceding sentence, ranked pari passu with its existing unsecured, unsubordinated obligations, including its 8.00% Notes Issued in 2013. The 8.00% Notes Issued in 2009 were scheduled to mature at the later of the tenth anniversary of closing (June 19, 2019) or six months following the maturity date of the Facility Agreement and bore interest at a rate of 8.00% per annum. Interest on the 8.00% Notes Issued in 2009 was payable in the form of additional notes or, subject to certain restrictions, in common stock at the option of the holder. Interest was payable semi-annually in arrears on June 15 and December 15 of each year.

The 8.00% Warrants contained full ratchet anti-dilution protection, and the exercise price of the Warrants was subject to adjustment under certain circumstances. In the event of certain transactions that involve a change of control, the holders of the 8.00% Warrants maintained the right to make the Company purchase the warrants for cash, subject to certain conditions. The exercise period for the 8.00% Warrants began on December 19, 2009 and ended on June 19, 2014. As a result of the expiration of this period on June 19, 2014, all outstanding 8.00% Warrants were exercised during the second quarter of 2014, resulting in the issuance of 38.2 million shares of Globalstar common stock.  Holders of the 8.00% Warrants had the right to exercise on either a cash or cashless basis. The Company received approximately $7.5 million in cash as a result of these exercises.

Pursuant to the terms of the indenture governing the 8.00% Notes Issued in 2009, if at any time the closing price of the common stock were to exceed 200% of the conversion price of the 8.00% Notes Issued in 2009 for 30 consecutive trading days, all of the outstanding 8.00% Notes Issued in 2009 would be automatically converted into common stock. The condition for the automatic conversion was met on April 15, 2014, and all outstanding 8.00% Notes Issued in 2009 (approximately $37.8 million principal amount at that time) converted on that date into approximately 34.5 million shares of the Company’s voting common stock.

 Prior to expiration of the 8.00% Warrants and the automatic conversion of the 8.00% Notes Issued in 2009, the exercise price of the 8.00% Warrants was $0.32, and the base conversion price of the 8.00% Notes Issued in 2009 was $1.14.




The Company initially accreted the debt discount associated with the compound embedded derivative liability to interest expense over the outstanding term of the 8.00% Notes Issued in 2009 using an effective interest rate method. Upon the automatic conversion

8



of the 8.00% Notes Issued in 2009, the remaining debt discount was written off through extinguishment gain (loss). The Company recorded a gain on extinguishment of debt of approximately $4.3 million during the nine months ended September 30, 2014 related to these conversions.

Warrants Outstanding
 
As a result of the Company’s financing arrangements described above, as of September 30, 2014 and December 31, 2013, warrants were outstanding to purchase 45.1 million and 93.5 million shares, respectively, of the Company’s common stock as shown in the table below:
 
 
Outstanding Warrants
 
Strike Price
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Contingent Equity Agreement (1)
37,088,418

 
41,467,980

 
$
0.01

 
$
0.01

Thermo Loan Agreement (2)

 
4,205,608

 

 
0.01

5.0% Notes (3)
8,000,000

 
8,000,000

 
0.32

 
0.32

8.00% Notes Issued in 2009 (4)

 
39,842,813

 

 
0.32

 
45,088,418

 
93,516,401

 
 

 
 

 
(1)
Pursuant to the terms of the Contingent Equity Agreement, the Company has 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 have a five-year exercise period from issuance. These warrants were issued between June 2009 and June 2012, and the exercise periods expire between June 2014 and June 2017. As of September 30, 2014, Thermo had exercised warrants to purchase approximately 4.4 million of these shares prior to the expiration of the associated warrants.
(2)
As consideration for the Loan Agreement with Thermo, the Company issued Thermo warrants to purchase shares of common stock. The exercise period of the warrants issued in connection with the Thermo Loan Agreement was five years from issuance, which expired in June 2014. Thermo exercised all of these warrants in the second quarter of 2014.
(3)
The 5.0% Warrants are exercisable until June 2016, which is five years after their issuance.
(4)
The exercise period for the 8.00% Warrants began on December 19, 2009 and ended on June 14, 2014. All 8.00% Warrants were exercised in the second quarter of 2014.

Consent Agreement and Common Stock Purchase (and Option) Agreement
 
As discussed above, on May 20, 2013, the Company exchanged its 5.75% Notes for the 8.00% Notes Issued in 2013. In connection with this exchange, the Company and Thermo entered into various financial arrangements as described below.
 
The Consent Agreement
 
On May 20, 2013, the Company entered into the Equity Commitment, Restructuring Support and Consent Agreement dated as of May 20, 2013 among Globalstar, Thermo, BNP Paribas, as agent, and the lenders under the Facility Agreement (the “Consent Agreement”) and the Global Deed of Amendment and Restatement (the “GARA”) with Thermo. To obtain the lenders’ consent to the transactions contemplated by the Exchange Agreement, pursuant to the Consent Agreement, Thermo agreed that it would make, or arrange for third parties to make, cash contributions to the Company in exchange for equity, subordinated convertible debt or other equity-linked securities as follows:
 
At the closing of the exchange transaction and thereafter each week until no later than July 31, 2013, an amount sufficient to enable the Company to maintain a consolidated unrestricted cash balance of at least $4.0 million;
At the closing of the exchange transaction, $25.0 million to satisfy all cash requirements associated with the exchange transaction, including agreed principal and interest payments to the holders of the 5.75% Notes as contemplated by the Exchange Agreement, with any remaining portion being retained by the Company for working capital and general corporate purposes;
Contemporaneously with, and as a condition to the closing of, any restructuring of the Facility Agreement, $20.0 million (less any amount contributed pursuant to the commitment described above with respect to the Company’s minimum cash balance);
Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 26, 2013, $20.0 million; and

9



Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 31, 2014, $20.0 million, less the amount by which the aggregate amount of cash received by the Company under the first, third and fourth commitments described above exceeds $40 million.

In accordance with the terms of the Common Stock Purchase Agreement and Common Stock Purchase and Option Agreement, discussed below, as of September 30, 2014, Thermo had contributed a total of $65.0 million to the Company in exchange for 171.9 million shares of the Company’s nonvoting common stock. As of September 30, 2014, Thermo had fulfilled its obligations under the agreements.
 
The Common Stock Purchase Agreement
 
On May 20, 2013, the Company and Thermo entered into a Common Stock Purchase Agreement pursuant to which Thermo purchased 78,125,000 shares of the Company’s common stock for $25.0 million ($0.32 per share). Thermo also agreed to purchase additional shares of common stock at $0.32 per share as and when required to fulfill its equity commitment described above to maintain the Company’s consolidated unrestricted cash balance at not less than $4.0 million until the earlier of July 31, 2013 and the closing of a restructuring of the Facility Agreement. In furtherance thereof, at the closing of the transactions contemplated by the Exchange Agreement, Thermo purchased an additional 15,625,000 shares of common stock for an aggregate purchase price of $5.0 million. In June 2013, Thermo purchased an additional 28,125,000 shares of common stock for an aggregate purchase price of $9.0 million pursuant to the Common Stock Purchase Agreement. Pursuant to its commitment, Thermo invested $6.0 million in July 2013 and $6.5 million in August 2013 on terms determined by a special committee of the Company's board of directors consisting solely of unaffiliated directors as described below.

During 2013, Thermo purchased in total approximately 121.9 million shares of the Company’s common stock pursuant to the Common Stock Purchase Agreement for an aggregate $39.0 million, as discussed in the previous paragraph. As a result of these transactions, during the second quarter of 2013, the Company recognized a loss on the sale of these shares of approximately $14.0 million (included in other income/expense on the condensed consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale). Pursuant to the Common Stock Purchase Agreement, the shares of common stock are intended to be shares of non-voting common stock. As of May 20, 2013, the Company's certificate of incorporation did not provide for any authorized but unissued shares of non-voting common stock. On July 8, 2013, the Company filed an amendment to its certificate of incorporation increasing the number of authorized shares of non-voting common stock, and the Company subsequently delivered Thermo shares of non-voting common stock for the payments previously made.
 
The terms of the Common Stock Purchase Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase Agreement were fair and in the best interests of the Company and its shareholders.
 
The Common Stock Purchase and Option Agreement
 
On October 14, 2013, the Company and Thermo entered into a Common Stock Purchase and Option Agreement pursuant to which Thermo agreed to purchase 11,538,461 shares of the Company’s nonvoting common stock at a purchase price of $0.52 per share in exchange for $6.0 million invested in July and an additional $20 million, or 38,461,538 shares, of which $6.5 million was invested in August 2013 and the remaining $13.5 million was invested under the First Option, described below. The Common Stock Purchase and Option Agreement also granted the Company a First Option and a Second Option, as defined in the agreement, to sell to Thermo up to $13.5 million and $11.5 million, respectively, of nonvoting common stock, as and when exercised by the special committee, through November 28, 2013 and December 31, 2013, respectively. The First Option to sell up to $13.5 million in shares to Thermo was at a purchase price of $0.52 per share. The Second Option to sell up to $11.5 million in shares to Thermo was at a price equal to 85% of the average closing price of the voting common stock during the ten trading days immediately preceding the date of the special committee’s exercise of the option. In November 2013, the Company and the special committee amended the Common Stock Purchase and Option Agreement to defer the expiration date of the Second Option to March 31, 2014. The Second Option under the Common Stock Purchase and Option Agreement was not exercised and therefore has expired.
 
During 2013, Thermo purchased approximately 24.0 million shares of the Company’s common stock pursuant to the terms of the Common Stock Purchase and Option Agreement for an aggregate purchase price of $12.5 million. As a result of these transactions, during the third quarter of 2013, the Company recognized a loss on the sale of these shares of approximately $2.4 million (included in other income/expense on the condensed consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale).

10



 
In November 2013, the Company exercised the First Option, and on December 27, 2013 Thermo purchased 26.0 million shares of common stock at a purchase price of $0.52 per share for a total additional investment of $13.5 million.
 
The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase and Option Agreement were fair and in the best interests of the Company and its shareholders.
 
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 may, subject to certain conditions, 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. This type of arrangement is sometimes referred to as a committed equity line financing facility. From time to time over the 24-month term following the effectiveness of the registration statement, and in the Company’s sole discretion, the Company may present Terrapin with up to 36 draw down 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 will equal the daily volume weighted average price of common stock on each date during the Draw Down Period on which shares are purchased, less a discount ranging from 3.5% to 8% based on a minimum price that the Company specifies. In addition, in the Company’s sole discretion, but subject to certain limitations, the Company may require Terrapin to purchase a percentage of the daily trading volume of its common stock for each trading day during the Draw Down Period. The Company has agreed not to sell to Terrapin a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9% of the then issued and outstanding shares of voting common stock.
 
When the Company makes a draw under the Terrapin equity line agreement, it will issue Terrapin shares of common stock calculated using a price per share as specified in the agreement. As of September 30, 2014, Terrapin had purchased a total of 6.1 million shares of voting common stock at a purchase price of $6.0 million pursuant to the terms of the agreement. As of September 30, 2014, $24.0 million remains available under this agreement.

4. DERIVATIVES
 
In connection with certain borrowings disclosed in Note 3, the Company was required to record derivative instruments on its condensed consolidated balance sheets. None of these derivative instruments are designated as a hedge. The following tables disclose the fair values and classification of the derivative instruments on the Company’s condensed consolidated balance sheets (in thousands):
 
 
September 30,
2014
 
December 31, 2013
Intangible and other assets:
 

 
 

Interest rate cap
$
72

 
$
185

Total intangible and other assets
$
72

 
$
185

Derivative liabilities, current:
 

 
 

Warrants issued with 8.00% Notes Issued in 2009
$

 
$
(57,048
)
Derivative liabilities, non-current:
 

 
 

Compound embedded derivative with 8.00% Notes Issued in 2009
$

 
$
(66,022
)
Compound embedded derivative with 8.00% Notes Issued in 2013
(109,896
)
 
(109,794
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
(465,907
)
 
(229,662
)
Total derivative liabilities, non-current:
(575,803
)
 
(405,478
)
Total derivative liabilities, current and non-current
$
(575,803
)
 
$
(462,526
)
 

11



The following table discloses the changes in value during the three and nine months ended September 30, 2014 and 2013 recorded as derivative gain (loss) on the Company’s condensed consolidated statement of operations (in thousands):
 
 
Three Months Ended
 
September 30, 2014
 
September 30, 2013
Interest rate cap
$
(7
)
 
$
(30
)
Warrants issued with 8.00% Notes Issued in 2009

 
(6,323
)
Compound embedded derivative with 8.00% Notes Issued in 2009

 
(29,986
)
Contingent put feature embedded in the 5.0% Convertible Senior Notes

 
848

Compound embedded derivative with 8.00% Notes Issued in 2013
43,050

 
(25,590
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
123,946

 
(36,453
)
Total derivative gain (loss)
$
166,989

 
$
(97,534
)
 
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
Interest rate cap
$
(113
)
 
$
86

Warrants issued with 8.00% Notes Issued in 2009
(67,523
)
 
(28,949
)
Compound embedded derivative with 8.00% Notes Issued in 2009
(16,406
)
 
(37,233
)
Contingent put feature embedded in the 5.0% Convertible Senior Notes

 
2,133

Compound embedded derivative with 8.00% Notes Issued in 2013
(98,376
)
 
(26,495
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
(236,245
)
 
(36,453
)
Total derivative loss
$
(418,663
)
 
$
(126,911
)

Intangible and Other Assets
 
Interest Rate Cap
 
In June 2009, in connection with entering into the Facility Agreement, which provides for interest 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 ranging from $586.3 million to $14.8 million 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. These embedded derivatives required bifurcation from the debt host instrument. All embedded derivatives that required bifurcation are recorded as a derivative liability on the Company’s condensed consolidated balance sheet 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. See below for further discussion for each liability and the features embedded in the debt instrument which required the Company to account for the instrument as a derivative.


 

12



Warrants Issued with 8.00% Notes Issued in 2009
 
Due to the reset features in the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the Company recorded the 8.00% Warrants as an embedded derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which was netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the warrant derivative using a Monte Carlo simulation model. The exercise period for the 8.00% Warrants expired in June 2014; accordingly, the derivative liability for the 8.00% Warrants is no longer outstanding.
 
Compound Embedded Derivative with 8.00% Notes Issued in 2009
 
As a result of the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which was netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model. On April 15, 2014, the remaining principal amount of 8.00% Notes Issued in 2009 was converted into common stock; accordingly, the derivative liability embedded in the 8.00% Notes Issued in 2009 is no longer outstanding.
 
Contingent Put Feature Embedded in the 5.0% Convertible Senior Notes
 
As a result of the contingent put feature within the 5.0% Convertible Senior Notes (“5.0% Notes”), the Company recorded a derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which was netted against the principal amount of the 5.0% Notes.  The Company determined the fair value of the contingent put feature derivative using a Monte Carlo simulation model. On November 7, 2013, the remaining principal amount of the 5.0% Notes was converted into common stock; accordingly, the derivative liability embedded in the 5.0% Notes is no longer outstanding.
 
Compound Embedded Derivative with 8.00% Notes Issued in 2013
 
As a result of the conversion option and the contingent put feature within the 8.00% Notes Issued in 2013, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013. 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 Loan Agreement with Thermo entered into in July 2013, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which 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 as of September 30, 2014 and December 31, 2013 (in thousands):
 
 
Fair Value Measurements at September 30, 2014:
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Assets:
 

 
 

 
 

 
 

Interest rate cap
$

 
$
72

 
$

 
$
72

Total assets measured at fair value
$

 
$
72

 
$

 
$
72

Liabilities:
 

 
 

 
 

 
 

Derivative Liabilities:
 

 
 

 
 

 
 

Compound embedded derivative with 8.00% Notes Issued in 2013
$

 
$

 
(109,896
)
 
$
(109,896
)
Compound embedded derivative with the  Amended and Restated Thermo Loan Agreement

 

 
(465,907
)
 
(465,907
)
Total Derivative Liabilities

 

 
(575,803
)
 
(575,803
)
Current Liabilities:
 

 
 

 
 

 
 

Liability for contingent consideration

 

 
(1,149
)
 
(1,149
)
Total liabilities measured at fair value
$

 
$

 
$
(576,952
)
 
$
(576,952
)
 
 
Fair Value Measurements at December 31, 2013:
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Assets:
 

 
 

 
 

 
 

Interest rate cap
$

 
$
185

 
$

 
$
185

Total assets measured at fair value
$

 
$
185

 
$

 
$
185

Liabilities:
 

 
 

 
 

 
 

Derivative Liabilities:
 

 
 

 
 

 
 

Warrants issued with 8.00% Notes Issued in 2009
$

 
$

 
$
(57,048
)
 
$
(57,048
)
Compound embedded derivative with 8.00% Notes Issued in 2009

 

 
(66,022
)
 
(66,022
)
Compound embedded derivative with 8.00% Notes Issued in 2013

 

 
(109,794
)
 
(109,794
)
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement

 

 
(229,662
)
 
(229,662
)
Total Derivative Liabilities

 

 
(462,526
)
 
(462,526
)
Current Liabilities:
 

 
 

 
 

 
 

Liability for contingent consideration

 

 
(1,923
)
 
(1,923
)
Total liabilities measured at fair value
$

 
$

 
$
(464,449
)
 
$
(464,449
)
 
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 for further discussion.
 
Liabilities
 
The Company has various derivative liabilities in 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 for further discussion.

14



 
The significant quantitative Level 3 inputs utilized in the valuation models as of September 30, 2014 and December 31, 2013 are shown in the tables below:
 
 
Level 3 Inputs at September 30, 2014:
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Warrant
Exercise
  Price
 
Market Price of Common Stock
Compound embedded derivative with 8.00% Notes Issued in 2013
65% - 95%
 
1.3
%
 
$
0.73

 
N/A
 
$
3.66

Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
50% - 90%
 
2.4
%
 
$
0.73

 
N/A
 
$
3.66

 
 
Level 3 Inputs at December 31, 2013:
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Warrant
Exercise
Price
 
Market Price of Common Stock
Compound embedded derivative with 8.00% Notes Issued in 2009
65% - 100%

 
1.5
%
 
$
1.14

 
N/A

 
$
1.75

Warrants issued with 8.00% Notes Issued in 2009
100
%
 
0.1
%
 
N/A

 
$
0.32

 
$
1.75

Compound embedded derivative with 8.00% Notes Issued in 2013
65% - 100%

 
1.5
%
 
$
0.73

 
N/A

 
$
1.75

Compound embedded derivative with the Amended and Restated Thermo Loan Agreement
65% - 100%

 
3.0
%
 
$
0.73

 
N/A

 
$
1.75

 
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases above 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 sheet. As previously discussed, the Company uses a blend of a Monte Carlo simulation model and market prices to determine the fair value of the derivative valuations. 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 Level 3 inputs described above, the indentures governing the related debt instrument for each of the derivative liabilities included in the Company’s Level 3 fair value measurements have specific features that impact the valuation of each liability at reporting periods. These features are further described below for each of the Company’s derivative liabilities.
 
Compound Embedded Derivative with 8.00% Notes Issued in 2009
 
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the 8.00% Notes Issued in 2009 included payment in kind interest payments, make whole premiums and automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2009, the base conversion rate could not reset to lower than $1.00; therefore if the Company made future equity issuances at prices below the then current conversion price, this conversion price would have been adjusted downward to as low as $1.00. As discussed in Note 3, pursuant to the terms of the indenture governing the 8.00% Notes Issued in 2009, if at any time the closing price of the common stock had exceeded 200% of

15



the conversion price of the 8.00% Notes Issued in 2009 then in effect for 30 consecutive trading days, all of the outstanding 8.00% Notes Issued in 2009 automatically would have been converted into common stock. This condition for the automatic conversion was met on April 15, 2014, and all outstanding 8.00% Notes Issued in 2009 converted into shares of the Company’s common stock; accordingly, this derivative liability is no longer outstanding.
 
Warrants Issued with 8.00% Notes Issued in 2009
 
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the 8.00% Warrants issued with the 8.00% Notes Issued in 2009 included certain reset features. Pursuant to the terms of the 8.00% Warrants, there was no floor within the reset feature for the exercise price of the 8.00% Warrants; therefore if the Company had made future equity issuances at prices below the current exercise price, this exercise price would have been adjusted downward. If the stock price on the issuance date had been less than the then current exercise price of the outstanding 8.00% Warrants, additional warrants would have been issued, which would have increased the fair value of the warrant liability. The exercise period for the 8.00% Warrants expired in June 2014; accordingly, this derivative liability is no longer outstanding.
 
Compound Embedded Derivative with 8.00% Notes Issued in 2013
 
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the Company’s 8.00% Notes Issued in 2013 includes payment in kind interest payments, make whole premiums, a 40-day stock issuance settlement period upon conversion and automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2013 Indenture, there are also special distributions and certain put and call features within the notes which impact the valuation model. The trading activity in the market provides the Company with additional valuation support. In 2014, the Company implemented a weight factor to the fair value of the embedded derivative to align the fair value produced from the valuation model to the fair value of the notes traded in the market.

As previously described, fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. Given the stock price decline subsequent to September 30, 2014 and through the date of this report, there may be a material decrease in the compound embedded derivative within the Company's 8.00% Notes Issued in 2013 on the condensed consolidated balance sheet, and a material derivative gain on the condensed consolidated statement of operations, if the stock price does not recover prior to the next reporting date of December 31, 2014.    
 
Compound Embedded Derivative with Amended and Restated Thermo Loan Agreement
 
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the Amended and Restated Loan Agreement with Thermo includes payment in kind interest payments, make whole premiums, a 40-day stock issuance settlement period upon conversion and automatic conversions. The compound embedded derivative in the Amended and Restated Loan Agreement with Thermo contains similar features to the 8.00% Notes Issued in 2013. As stated in the previous section, in 2014, the Company implemented a weight factor to the fair value of the embedded derivative in the 8.00% Notes Issued in 2013 to align the fair value produced from the valuation model to the fair value of the notes traded in the market. Due to the similarities in the debt instruments, a similar weight factor was applied to the embedded derivative in the Amended and Restated Loan Agreement with Thermo.

As previously described, fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. Given the decline in the Company's stock price subsequent to September 30, 2014, which has continued through the date of this report, there may be a material decrease in the compound embedded derivative within the Amended and Restated Loan Agreement with Thermo on the condensed consolidated balance sheet, and a material derivative gain on the condensed consolidated statement of operations, for the fourth quarter of 2014, to the extent that the stock price does not recover prior to December 31, 2014.    
 
Other Liabilities
 
Liability for Contingent Consideration
 
In connection with the acquisition of Axonn LLC (“Axonn”) in December 2009, the Company is obligated to pay up to an additional $10.8 million in contingent consideration for earnouts based on sales of existing and new products over a five-year earnout period beginning January 1, 2010. The Company will make earnout payments in stock not to exceed 26,684,807 shares of common stock (10% of the Company’s pre-transaction outstanding shares of common stock), but at its option may make payments in cash after 13.0 million shares have been issued. The Company’s initial estimate of the total earnout expected to be paid was $10.8 million. Since the earnout period started, the Company has made revisions to this estimate, which was $9.8 million

16



at September 30, 2014. Through September 30, 2014, the Company had made $8.7 million in earnout payments by issuing 18.7 million shares of voting common stock. The liability of $1.1 million recorded at September 30, 2014 represents the remaining projected earnout payments to be made under the agreement.
 
The fair value of the accrued contingent consideration was determined using a probability-weighted discounted cash flow approach at the acquisition date and reporting date. The approach is based on significant inputs that are not observable in the market, which are referred to as Level 3 inputs. The fair value is based on the Company's reaching specific performance metrics through the remaining earnout period. The change in fair value of the contingent consideration is recorded through accretion expense in the Company’s condensed consolidated statements of operations.
 
The significant unobservable inputs used in the fair value measurement of the Company’s liability for contingent consideration are projected future sales of existing and new products as well as earnout payments made each quarter determined by actual product sales. Decreases in forecasted sales would result in a lower fair value measurement.
 
The following table presents a rollforward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 as follows (in thousands):
 
Balance at June 30, 2014
$
(775,361
)
Earnout payments made related to liability for contingent consideration
585

Change in fair value of contingent consideration
(189
)
Derivative adjustment related to conversions and exercises
31,017

Unrealized gain, included in derivative gain (loss)
166,996

Balance at September 30, 2014
$
(576,952
)
 
Balance at December 31, 2013
$
(464,449
)
Earnout payments made related to liability for contingent consideration
1,583

Change in fair value of contingent consideration
(809
)
Derivative adjustment related to conversions and exercises
305,274

Unrealized loss, included in derivative gain (loss)
(418,551
)
Balance at September 30, 2014
$
(576,952
)

6. ACCRUED EXPENSES AND NON-CURRENT LIABILITIES
 
Accrued expenses consist of the following (in thousands): 
 
 
September 30,
2014
 
December 31,
2013
Accrued interest
$
5,750

 
$
1,200

Accrued compensation and benefits
2,552

 
3,927

Accrued property and other taxes
5,366

 
5,744

Accrued customer liabilities and deposits
2,822

 
2,663

Accrued professional and other service provider fees
1,826

 
705

Accrued liability for contingent consideration
1,149

 
1,922

Accrued commissions
974

 
1,316

Accrued telecommunications expenses
918

 
649

Accrued second-generation constellation costs
1,887

 

Other accrued expenses
2,622

 
4,574

Total accrued expenses
$
25,866

 
$
22,700

 
Other accrued expenses include primarily outsourced logistics services, storage, accruals for inventory in transit, warranty reserve, maintenance and payments to IGOs.

17



 
Noncurrent liabilities consist of the following (in thousands): 
  
 
September 30,
2014
 
December 31,
2013
Long-term accrued interest
$
259

 
$
451

Asset retirement obligation
1,158

 
1,083

Deferred rent and capital lease obligations
433

 
456

Liabilities related to the Cooperative Endeavor Agreement with the State of Louisiana
1,594

 
1,575

Uncertain income tax positions
6,704

 
5,918

Foreign tax contingencies
3,839

 
4,213

Total noncurrent liabilities
$
13,987

 
$
13,696

 
7. COMMITMENTS
 
Contractual Obligations
 
As of September 30, 2014, the Company had purchase commitments with Thales Alenia Space France (“Thales”), Arianespace, Ericsson Inc. (“Ericsson”) and Hughes Network Systems, LLC (“Hughes”) related to the procurement and deployment of the second-generation network. 
 
Second-Generation Satellites
 
As of September 30, 2014, 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 has also incurred additional costs for certain related services, of which a portion are still owed to Thales. Discussions between the Company and Thales are ongoing regarding the remaining amounts owed by both parties under the contract.
  
As of September 30, 2014, the Company had a contract with Arianespace for the launch of the Company’s second-generation satellites and certain pre and post-launch services under which Arianespace agreed to make four launches of satellites. The Company has successfully completed all of these launches. The Company has also incurred additional costs which are owed to Arianespace for launch delays.
 
Next-Generation Gateways and Other Ground Facilities
 
As of September 30, 2014, the Company had 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 next-generation Globalstar devices.

In May 2014, the Company entered into an agreement with Hughes to incorporate changes to the scope of work for the RAN and UTS being supplied to the Company. The additional work increased the total contract value by $3.8 million. In May 2014, the Company and Hughes also entered into a letter agreement whereby Hughes was granted the option to accept the pre-payment of certain payment milestones in the form of Globalstar stock at a 7% discount from the market value in lieu of cash. These payment milestones totaled $9.9 million. The stock was issued to Hughes on July 1, 2014. In valuing the shares, a loss of approximately $0.7 million was recorded in the Company's condensed consolidated statement of operations during the second quarter of 2014. 

In October 2014, the Company and Hughes formally amended the contract to include the revised scope of work agreed to in the May letter agreement.  The amendment also adjusted the schedule of the program and the remaining payment milestones and program milestones to incorporate the agreed upon changes. The additional $3.8 million in work agreed to in May is now reflected in the contract through this amendment.



18



As of September 30, 2014, the Company had an agreement with Ericsson, which will work with the Company to develop, implement and maintain a ground interface, or core network system, that will be installed at a number of the Company’s satellite gateway ground stations. In July 2014, the Company and Ericsson entered into an amended and restated agreement for the Company’s core network system specifying the remaining contract value of $25.4 million for the work and a new milestone schedule to reflect the new program timeline.
 
Since 2004, the Company has issued separate purchase orders for additional phone equipment and accessories under the terms of an executed commercial agreement with Qualcomm. This contract was canceled in March 2013 the parties thereafter sought to resolve the issues related to the contract termination. The Company and Qualcomm signed an agreement in July 2014 specifying terms for the sale of the remaining inventory to the Company. The Company previously recorded total advances to Qualcomm for inventory of $9.2 million on its condensed consolidated balance sheet. The Company agreed to pay to Qualcomm $0.1 million to take ownership of the finished goods and raw materials held by Qualcomm, as well as certain limited support services to be provided to the Company. This final payment was made in July 2014 and eliminated Globalstar's obligations to purchase additional equipment from Qualcomm. As a result of certain terms in the July 2014 agreement, the Company recorded a reduction in the value of inventory of $7.3 million related to raw materials that are not likely to be used in the future production of inventory. With the final payment of $0.1 million made in July, the Company assumed title to the inventory; therefore, the remaining balance of approximately $2.0 million, representing primarily finished goods, is included in inventory on the Company's condensed consolidated balance sheet as of September 30, 2014.

  
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 Amended and Restated Contract for the construction of the Globalstar Satellite for the Second Generation Constellation dated and executed in June 2009 (“2009 Contract”). Globalstar 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 Globalstar materially breached the contract by failing to pay to Thales termination charges in the amount of €51,330,875.00 by October 9, 2011, and that absent further agreement between the parties, Thales has no further obligation to manufacture or deliver satellites under Phase 3 of the 2009 Contract. The award also required Globalstar to pay Thales approximately €53 million in termination charges and 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. Thales may refile the petition at a later date and pursue the confirmation of the arbitration award, which Globalstar will oppose. Should Thales be successful in confirming the arbitration award, this would have a material adverse effect on the Company’s financial condition 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 obligation to pay €35,623,770 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, Globalstar agreed unconditionally and irrevocably to release and forever discharge Thales from any and all 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, the Company recorded a contract termination charge of approximately €17.5 million which is recorded in the Company’s condensed consolidated financial statements for the period ended September 30, 2014. The releases became effective on December 31, 2012.
 
Under the terms of the Settlement Agreement, Globalstar agreed to pay €17,530,000 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. 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. However, the Release Agreement

19



provides that it will survive a termination of the Settlement Agreement. As of September 30, 2014, 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 management's opinion, there is no pending litigation, dispute or claim, other than the arbitration award discussed above, that may 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 relate to normal purchase transactions and were $0.4 million and $0.2 million at September 30, 2014 and December 31, 2013, respectively.
 
Transactions with Thermo
 
Thermo incurs certain expenses on behalf of the Company.  The table below summarizes the total expense for the periods indicated below (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
General and administrative expenses
$
174

 
$
74

 
$
236

 
$
229

Non-cash expenses
137

 
137

 
411

 
411

Loss on equity issuance

 
2,404

 

 
16,373

Loss on extinguishment of debt related to amendment and restatement of Thermo Loan Agreement

 
66,088

 

 
$
66,088

Total
$
311

 
$
68,703

 
$
647

 
$
83,101

  
General and administrative expenses are related to expenses incurred by Thermo on the Company’s behalf which are charged to the Company. Non-cash expenses are related to services provided by two executive officers of Thermo (who are also directors of the Company) who receive no cash compensation from the Company; these expenses are treated as a contribution to capital. The Thermo expenses are based on actual amounts (with no mark-up) incurred or upon allocated employee time.
 
Since June 2009, Thermo and its affiliates have also deposited $60.0 million into a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement, purchased $20.0 million of the Company’s 5.0% Notes, purchased $11.4 million of the Company's 8.00% Notes Issued in 2009, provided a $2.3 million short-term loan to the Company (which was subsequently converted into nonvoting common stock), and loaned $37.5 million to the Company to fund the debt service reserve account. 
 
On May 20, 2013, the Company issued 8.00% Notes Issued in 2013 and other consideration in exchange for its outstanding 5.75% Notes. In connection with this exchange, the Company entered into the Consent Agreement, the Common Stock Purchase Agreement and the Common Stock Purchase and Option Agreement (see Note 3 for further discussion). As a result of these transactions, during 2013 the Company recognized a loss on the sale of shares of approximately $16.4 million (which is included in other income/expense on the condensed consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company's common stock (measured as the closing stock price on the date of each sale).
 
In August 2013, the Company drew the remaining $1.1 million from the interest earned on the contingent equity account under the Facility Agreement and in October 2013 issued 2,133,656 shares of nonvoting common stock to Thermo. The value of the 20% discount on the shares issued to Thermo was recorded as a deferred financing cost on the Company's condensed consolidated balance sheet as of September 30, 2013.
 
In July 2013, the Company and Thermo entered into an Amended and Restated Loan Agreement. As a result of this transaction, the Company was required to record this Loan Agreement initially at fair value as the amendment and restatement of the Loan Agreement was considered to be an extinguishment of debt. As of the amendment and restatement date the fair value of the Loan

20



Agreement was $120.1 million. The Company recorded a loss on extinguishment of debt of $66.1 million in its condensed consolidated statement of operations for the third quarter of 2013. The Company computed this loss as the difference between the fair value of the debt, as amended and restated, and its carrying value just prior to amendment and restatement.
 
   The terms of the Amended and Restated Loan Agreement with Thermo, the Common Stock Purchase and the Common Stock Purchase and Option Agreement were approved by a special committee of the Company's board of directors consisting solely of the Company's unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of these agreements were fair and in the best interests of the Company and its shareholders.

During the second quarter of 2014, Thermo exercised warrants that were scheduled to expire in June 2014. The warrants that were exercised in the second quarter of 2014 included warrants for 4.2 million shares issued as partial consideration for the Thermo Loan Agreement, resulting in the issuance of 4.2 million shares of Globalstar common stock; warrants for 4.4 million shares issued in connection with the annual availability fee for the Contingent Equity Agreement in 2009, resulting in the issuance of 4.4 million shares of Globalstar common stock; and 16.3 million 8.00% Warrants issued in 2009, resulting in the issuance of 14.7 million shares of Globalstar common stock. As of September 30, 2014, warrants to purchase approximately 37.1 million shares issued under the Contingent Equity Agreement and 8.0 million 5.0% Warrants remain outstanding, all of which are held by Thermo and are scheduled to expire between December 2014 and June 2017.

Thermo is required to maintain minimum ownership levels in the Company's common stock as defined in the Facility Agreement. As needed, Thermo may convert shares of nonvoting common stock into shares of voting common stock to ensure compliance with these ownership levels. During August 2014, Thermo converted 75 million shares of nonvoting common stock to voting common stock for this purpose.
 
See Note 3 for further discussion of the Company's debt and financing transactions with Thermo.
 
10. INCOME TAXES
 
The Company follows authoritative guidance surrounding accounting for uncertainty in income taxes. The Company's policy is to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. For the periods ending September 30, 2014 and December 31, 2013, the net deferred tax assets were fully reserved.
  
In January 2012, the Company’s Canadian subsidiary was notified that its income tax returns for the years ended October 31, 2008 and 2009 had been selected for audit. The Canada Revenue Agency is in the process of reviewing the information provided by the Canadian subsidiary.
 
In December 2013, the Company’s Singapore subsidiary was notified that its income tax returns for the years ended 2009 to 2012 had been selected for audit. The Inland Revenue Authority reviewed the submitted information and had minimal adjustments to the Singapore subsidiary's total net operating loss carried forward schedule.
 
Except for the audits noted above, neither the Company nor any of its subsidiaries is currently under audit by the IRS, any state jurisdiction in the United States or any foreign jurisdiction. The Company's corporate U.S. tax returns for 2010 and subsequent years remain subject to examination by tax authorities. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.
 
The Company has not provided United States income taxes and foreign withholding taxes on approximately $12.2 million of undistributed earnings from certain foreign subsidiaries indefinitely invested outside the United States. Should the Company decide to repatriate these foreign earnings, the Company would have to adjust the income tax provision in the period in which management believes the Company would repatriate the earnings.
 
On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014.  The Company has evaluated these regulations and determined they will not have a material impact on its consolidated results of operations, cash flows or financial position.
 
Through a prior foreign acquisition, the Company acquired a tax liability for which the Company has been indemnified by the previous owners. As of September 30, 2014 and December 31, 2013, the Company had recorded a tax liability of $2.1 million and $2.2 million, respectively, to the foreign tax authorities with an offsetting tax receivable from the previous owners.

21



 
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Accumulated other comprehensive income (loss) includes all changes in equity during a period from non-owner sources. The change in accumulated other comprehensive loss for all periods presented resulted from foreign currency translation adjustments.
 
The components of accumulated other comprehensive income (loss) were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Accumulated other comprehensive income (loss), June 30, 2014 and 2013 and December 31, 2013 and 2012, respectively
$
493

 
$
(2,408
)
 
$
871

 
$
(1,758
)
Other comprehensive income (loss) :
 

 
 

 
 

 
 

Foreign currency translation adjustments
(493
)
 
553

 
(871
)
 
(97
)
Accumulated other comprehensive income (loss), September 30, 2014 and 2013, respectively
$

 
$
(1,855
)
 
$

 
$
(1,855
)
 
No amounts were reclassified out of accumulated other comprehensive income (loss) for the periods shown above.
 
12. STOCK COMPENSATION
 
The Company’s 2006 Equity Incentive Plan (“Equity Plan”) provides long-term incentives to the Company’s key employees, including officers, directors, consultants and advisers (“Eligible Participants”) and to align stockholder and employee interests.  Under the Equity Plan, the Company may grant incentive stock options, restricted stock awards, restricted stock units, and other stock based awards or any combination thereof to Eligible Participants.  The Compensation Committee of the Company’s board of directors establishes the terms and conditions of any awards granted under the plans.  
 
For the three months ended September 30, 2014 and 2013, the Company recorded compensation expense related to these plans of $1.1 million and $1.0 million, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded compensation expense related to these plans of $2.1 million and $1.7 million, respectively. These expenses are reflected in marketing, general and administrative expenses. In the third quarter 2013, the Company's stock price traded for more than ten consecutive trading days at a price above $0.80, triggering immediate vesting of nonstatutory stock options and restricted stock granted in October 2011. This vesting resulted in recognition of compensation expense of $0.8 million, which is included in the amount of compensation expense above for the three and nine months ended September 30, 2013.

Grants to Eligible Participants of incentive stock options, restricted stock awards, and restricted stock units during the period are indicated in the table below (in thousands):
  
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Grants of restricted stock awards and restricted stock units
201

 
14

 
607

 
852

Grants of options to purchase common stock
134

 
1,224

 
595

 
1,829

Total
335

 
1,238

 
1,202

 
2,681


Employee Stock Purchase Plan
 
The Company’s Employee Stock Purchase Plan (the “Plan”) provides eligible employees of the Company and its subsidiaries with an opportunity to acquire shares of its common stock at a discount. The Plan permits eligible employees to purchase shares of common stock during two semi-annual offering periods beginning on June 15 and December 15, unless adjusted by the Board or one of its designated committees (the “Offering Periods”). Eligible employees may purchase shares in an amount of up to 15% of their total compensation per pay period, but may purchase no more than the lesser of $25,000 fair market value of common stock or 500,000 shares of common stock in any calendar year, as measured as of the first day of each applicable Offering Period.

22



The price an employee pays is 85% of the fair market value of the common stock. Fair market value is equal to the lesser of the closing price of a share of common stock on either the first or last day of the Offering Period.
 
For each of the three and nine months ended September 30, 2014 and 2013, the Company recorded expense for the fair value of the grant of $0.1 million and $0.2 million, respectively, which is reflected in marketing, general and administrative expenses. Through September 30, 2014, the Company had issued 2,486,902 shares of common stock pursuant to this Plan.
 
13.  GEOGRAPHIC INFORMATION
 
The Company attributes equipment revenue to various countries based on the location equipment is sold.  Service revenue is attributed to the various countries based on where the service is processed.  Long-lived assets consist primarily of property and equipment and are attributed to various countries based on the physical location of the asset at a given fiscal year-end, except for the satellites which are included in the long-lived assets 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,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 

 
 

Service:
 
 
 
 
 

 
 

United States
$
12,267

 
$
11,660

 
$
35,000

 
$
33,666

Canada
4,077

 
3,446

 
10,946

 
9,123

Europe
1,655

 
1,185

 
4,407

 
2,736

Central and South America
440

 
625

 
1,886

 
1,918

Others
72

 
140

 
408

 
411

Total service revenue
$
18,511

 
$
17,056

 
$
52,647

 
$
47,854

Subscriber equipment:
 
 
 
 
 

 
 

United States
2,510

 
3,688

 
8,340

 
8,756

Canada
1,418

 
1,201

 
4,187

 
2,964

Europe
540

 
327

 
1,628

 
1,228

Central and South America
437

 
177

 
930

 
712

Others
25

 
100

 
239

 
203

Total subscriber equipment revenue
$
4,930

 
$
5,493

 
$
15,324

 
$
13,863

Total revenue
$
23,441

 
$
22,549

 
$
67,971

 
$
61,717

 
 
September 30,
2014
 
December 31,
2013
Long-lived assets:
 

 
 

United States
$
1,114,934

 
$
1,164,358

Canada
318

 
247

Europe
470

 
408

Central and South America
3,510

 
3,595

Others
924

 
1,177

Total long-lived assets
$
1,120,156

 
$
1,169,785

 


23



14. EARNINGS (LOSS) PER SHARE
 
The Company is required to present basic and diluted earnings per share. Basic earnings per share are computed based on the weighted average number of common shares 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 reconciles basic weighted average common shares to diluted weighted average common shares outstanding for the three months ended September 30, 2014 (in thousands):

 
Three Months Ended September 30, 2014
Weighted average common shares outstanding:
 
Basic shares outstanding
987,668

Incremental shares from assumed exercises of:
 
Stock options, restricted stock, restricted stock units and ESPP
7,340

8% Convertible Senior Notes Issued in 2013
39,625

Thermo Loan Agreement
109,469

Warrants
45,088

Diluted shares outstanding
1,189,190



For the three months ended September 30, 2014, net income was adjusted for interest expense (net of capitalized amounts) related to the 8% Convertible Senior Notes Issued in 2013 and the Thermo Loan Agreement for the computation of diluted earnings per share as these notes were assumed to be converted at the start of the period. There were no anti-dilutive stock options, restricted stock or restricted stock units excluded from diluted shares outstanding for the third quarter of 2014.

For the three months ended September 30, 2013 and nine months ended September 30, 2014 and 2013, diluted net loss per share of common stock was the same as basic net loss per share of common stock because the effects of potentially dilutive securities are anti-dilutive.


24



15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
In connection with the Company’s issuance of the 8.00% Notes issued in 2013, certain of the Company’s 100% owned domestic subsidiaries (the “Guarantor Subsidiaries”), fully, unconditionally, jointly, and severally guaranteed the payment obligations under the 8.00% Notes Issued in 2013. The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and statements of cash flows for Globalstar, Inc. (“Parent Company”), for the Guarantor Subsidiaries and for the Parent Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”).  
 
The supplemental 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.
 Supplemental Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2014
(Unaudited) 
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenues:
 

 
 

 
 

 
 

 
 

Service revenues
$
19,258

 
$
1,494

 
$
6,389

 
$
(8,630
)
 
$
18,511

Subscriber equipment sales
71

 
3,471

 
5,118

 
(3,730
)
 
4,930

Total revenue
19,329

 
4,965

 
11,507

 
(12,360
)
 
23,441

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
2,903

 
2,653

 
2,563

 
(251
)
 
7,868

Cost of subscriber equipment sales
31

 
2,962

 
4,823

 
(3,980
)
 
3,836

Cost of subscriber equipment sales - reduction in the value of inventory

 

 

 

 

Marketing, general and administrative
1,906

 
3,850

 
4,408

 
(1,381
)
 
8,783

Depreciation, amortization, and accretion
19,180

 
1,879

 
6,974

 
(6,986
)
 
21,047

Total operating expenses
24,020

 
11,344

 
18,768

 
(12,598
)
 
41,534

Loss from operations
(4,691
)
 
(6,379
)
 
(7,261
)
 
238

 
(18,093
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Loss on extinguishment of debt
(12,936
)
 

 

 

 
(12,936
)
Interest income and expense, net of amounts capitalized
(9,001
)
 
(10
)
 
(57
)
 
1

 
(9,067
)
Derivative gain
166,989

 

 

 

 
166,989

Equity in subsidiary earnings
(12,653
)
 
(884
)
 

 
13,537

 

Other
1,782

 
409

 
364

 
31

 
2,586

Total other income (expense)
134,181

 
(485
)
 
307

 
13,569

 
147,572

Income (loss) before income taxes
129,490

 
(6,864
)
 
(6,954
)
 
13,807

 
129,479

Income tax expense
100

 
7

 
(18
)
 

 
89

Net income (loss)
$
129,390

 
$
(6,871
)
 
$
(6,936
)
 
$
13,807

 
$
129,390

Comprehensive income (loss)
$
129,390

 
$
(6,871
)
 
$
(7,430
)
 
$
13,807

 
$
128,896



25



Globalstar, Inc.
 Supplemental Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2013
(Unaudited)
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenues:
 
 
 

 
 

 
 

 
 

Service revenues
$
18,726

 
$
2,478

 
$
4,940

 
$
(9,088
)
 
$
17,056

Subscriber equipment sales
127

 
4,254

 
1,070

 
42

 
5,493

Total revenue
18,853

 
6,732

 
6,010

 
(9,046
)
 
22,549

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
3,125

 
3,126

 
1,941

 
(11
)
 
8,181

Cost of subscriber equipment sales
90

 
3,334

 
1,819

 
(1,095
)
 
4,148

Marketing, general and administrative
2,008

 
4,666

 
3,774

 
(1,369
)
 
9,079

Depreciation, amortization, and accretion
19,645

 
4,914

 
6,485

 
(7,329
)
 
23,715

Total operating expenses
24,868

 
16,040

 
14,019

 
(9,804
)
 
45,123

Loss from operations
(6,015
)
 
(9,308
)
 
(8,009
)
 
758

 
(22,574
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Loss on extinguishment of debt
(63,569
)
 

 

 

 
(63,569
)
Loss on equity issuance
(2,733
)
 

 

 

 
(2,733
)
Interest income and expense, net of amounts capitalized
(16,636
)
 
(3
)
 
(262
)
 

 
(16,901
)
Derivative loss
(97,534
)
 

 

 

 
(97,534
)
Equity in subsidiary earnings
(17,090
)
 
(1,729
)
 

 
18,819

 

Other
(1,343
)
 
(171
)
 
(21
)
 
(5
)
 
(1,540
)
Total other income (expense)
(198,905
)
 
(1,903
)
 
(283
)
 
18,814

 
(182,277
)
Loss before income taxes
(204,920
)
 
(11,211
)
 
(8,292
)
 
19,572

 
(204,851
)
Income tax expense
49

 
6

 
63

 

 
118

Net (loss) income
$
(204,969
)
 
$
(11,217
)
 
$
(8,355
)
 
$
19,572

 
$
(204,969
)
Comprehensive (loss) income
$
(204,969
)
 
$
(11,217
)
 
$
(7,803
)
 
$
19,572

 
$
(204,417
)

 

26



Globalstar, Inc.
 Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2014
(Unaudited) 
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenues:
 

 
 

 
 

 
 

 
 

Service revenues
$
56,627

 
$
4,859

 
$
17,279

 
$
(26,118
)
 
$
52,647

Subscriber equipment sales
387

 
10,966

 
9,271

 
(5,300
)
 
15,324

Total revenue
57,014