Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018 
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                

Commission file number 001-33117 
GLOBALSTAR, INC.
(Exact Name of Registrant as Specified in Its Charter) 
Delaware
 
41-2116508
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
300 Holiday Square Blvd.
Covington, Louisiana 70433
(Address of principal executive offices and zip code)
Registrant's Telephone Number, Including Area Code: (985) 335-1500
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ☒
 
Accelerated filer ☐
 
 
 
Non-accelerated filer ☐
 
Smaller reporting company  ☐
(Do not check if a smaller reporting company)
 
Emerging growth company  ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of October 26, 2018, 1,266 million shares of voting common stock and no shares of nonvoting common stock were outstanding. Unless the context otherwise requires, references to common stock in this Report mean the Registrant’s voting common stock. 




FORM 10-Q

GLOBALSTAR, INC.
TABLE OF CONTENTS
 
 
Page
PART I -  FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II -  OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A. 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
GLOBALSTAR, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Revenue:
 
 
 
 
 

 
 

Service revenue
$
29,898

 
$
26,069

 
$
83,903

 
$
71,851

Subscriber equipment sales
5,794

 
4,389

 
14,264

 
11,382

Total revenue
35,692

 
30,458

 
98,167

 
83,233

Operating expenses:
 
 
 
 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
9,429

 
9,315

 
27,984

 
27,325

Cost of subscriber equipment sales
4,426

 
2,905

 
10,768

 
7,779

Marketing, general and administrative
15,061

 
9,545

 
42,280

 
28,436

Revision to contract termination charge

 

 
(20,478
)
 

Depreciation, amortization and accretion
24,738

 
19,415

 
66,585

 
57,984

Total operating expenses
53,654

 
41,180

 
127,139

 
121,524

Operating loss
(17,962
)
 
(10,722
)
 
(28,972
)
 
(38,291
)
Other income (expense):
 
 
 
 
 

 
 

Loss on extinguishment of debt

 
(6,306
)
 

 
(6,306
)
Gain on equity issuance

 

 

 
2,670

Interest income and expense, net of amounts capitalized
(13,358
)
 
(8,954
)
 
(31,016
)
 
(26,632
)
Derivative gain
39,059

 
78,840

 
145,944

 
4,933

Gain on legal settlement

 

 
6,779

 

Other
1,331

 
(385
)
 
(2,682
)
 
(2,654
)
Total other income (expense)
27,032

 
63,195

 
119,025

 
(27,989
)
Income (loss) before income taxes
9,070

 
52,473

 
90,053

 
(66,280
)
Income tax expense
51

 
67

 
116

 
209

Net income (loss)
$
9,019

 
$
52,406

 
$
89,937

 
$
(66,489
)
 
 
 
 
 
 
 
 
Other Comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
500

 
(902
)
 
2,800

 
(1,767
)
Comprehensive income (loss)
$
9,519

 
$
51,504

 
$
92,737

 
$
(68,256
)
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 

 
 

Basic
$
0.01

 
$
0.04

 
$
0.07

 
$
(0.06
)
Diluted
0.01

 
0.04

 
0.07

 
(0.06
)
Weighted-average shares outstanding:
 
 
 
 
 

 
 

Basic
1,264,516

 
1,169,993

 
1,263,416

 
1,137,854

Diluted
1,427,800

 
1,345,905

 
1,448,920

 
1,137,854

 
See accompanying notes to unaudited interim condensed consolidated financial statements. 

1



GLOBALSTAR, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)  
(Unaudited) 
 
September 30, 2018
 
December 31, 2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
20,462

 
$
41,644

Restricted cash
52,934

 
63,635

Accounts receivable, net of allowance of $3,312 and $3,610, respectively
20,471

 
17,113

Inventory
13,067

 
7,273

Prepaid expenses and other current assets
8,800

 
6,745

Total current assets
115,734

 
136,410

Property and equipment, net
903,990

 
971,119

Intangible and other assets, net of accumulated amortization of $7,721 and $7,314, respectively
38,097

 
21,736

Total assets
$
1,057,821

 
$
1,129,265

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
87,732

 
$
79,215

Accounts payable
9,525

 
6,048

Accrued contract termination charge

 
21,002

Accrued expenses
28,999

 
20,754

Derivative liabilities
617

 
1,326

Payables to affiliates
645

 
225

Deferred revenue
35,031

 
31,747

Total current liabilities
162,549

 
160,317

Long-term debt, less current portion
407,615

 
434,651

Employee benefit obligations
4,450

 
4,389

Derivative liabilities
81,424

 
226,659

Deferred revenue
5,758

 
6,052

Other non-current liabilities
3,925

 
5,973

Total non-current liabilities
503,172

 
677,724

 
 
 
 
Contingencies (Note 7)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

Voting Common Stock of $0.0001 par value; 1,500,000,000 shares authorized; 1,265,622,288 and 1,261,949,123 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
127

 
126

Nonvoting Common Stock of $0.0001 par value; 400,000,000 shares authorized and none issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

Additional paid-in capital
1,874,384

 
1,869,339

Accumulated other comprehensive loss
(4,139
)
 
(6,939
)
Retained deficit
(1,478,272
)
 
(1,571,302
)
Total stockholders’ equity
392,100

 
291,224

Total liabilities and stockholders’ equity
$
1,057,821

 
$
1,129,265

 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,
2018

September 30,
2017
Cash flows provided by (used in) operating activities:
 

 
 

Net income (loss)
$
89,937

 
$
(66,489
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation, amortization and accretion
66,585

 
57,984

Change in fair value of derivative assets and liabilities
(145,944
)
 
(4,933
)
Stock-based compensation expense
4,218

 
3,592

Amortization of deferred financing costs
6,349

 
6,147

Provision for bad debts
964

 
707

Noncash interest and accretion expense
10,275

 
8,497

Loss on extinguishment of debt

 
6,306

Change in fair value related to equity issuance

 
(2,670
)
Revision to contract termination charge
(20,478
)
 

Unrealized foreign currency loss
2,479

 
1,762

Other, net
979

 
680

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(4,486
)
 
(2,876
)
Inventory
1,383

 
(282
)
Prepaid expenses and other current assets
(4,326
)
 
(1,501
)
Other assets
(3,756
)
 
(691
)
Accounts payable and accrued expenses
12,350

 
3,993

Payables to affiliates
420

 
73

Other non-current liabilities
(1,027
)
 
(26
)
Deferred revenue
3,846

 
6,355

Net cash provided by operating activities
19,768

 
16,628

Cash flows used in investing activities:
 

 
 

Second-generation network costs (including interest)
(5,887
)
 
(6,862
)
Property and equipment additions
(5,346
)
 
(4,033
)
Purchase of intangible assets
(1,948
)
 
(2,674
)
Net cash used in investing activities
(13,181
)
 
(13,569
)
Cash flows provided by (used in) financing activities:
 

 
 

Principal payments of the Facility Agreement
(38,933
)
 
(21,695
)
Proceeds from Thermo Common Stock Purchase Agreement

 
33,000

Payment of debt restructuring fee

 
(20,795
)
Payments for debt and equity issuance costs

 
(413
)
Proceeds from issuance of stock to Terrapin

 
12,000

Proceeds from issuance of common stock and exercise of options and warrants
395

 
642

Net cash provided by (used in) financing activities
(38,538
)
 
2,739

Effect of exchange rate changes on cash, cash equivalents and restricted cash
68

 
216

Net increase (decrease) in cash, cash equivalents and restricted cash
(31,883
)
 
6,014

Cash, cash equivalents and restricted cash, beginning of period
105,279

 
48,213

Cash, cash equivalents and restricted cash, end of period
$
73,396

 
$
54,227

 
As of:
 
September 30,
2018
 
December 31,
2017
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
20,462

 
$
41,644

Restricted cash (See Note 4 for further discussion on restrictions)
52,934

 
63,635

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
73,396

 
$
105,279

 
 
 
 
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
12,109

 
$
11,697

 
 
 
 
Supplemental disclosure of non-cash financing and investing activities:
 

 
 

Increase in capitalized accrued interest for second-generation network costs
$
1,974

 
$
3,134

Capitalized accretion of debt discount and amortization of prepaid financing costs
1,825

 
3,844

Issuance of common stock for legal settlement

 
453

See accompanying notes to unaudited interim condensed consolidated financial statements.

3



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

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

The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and footnote disclosures normally in financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”); however, management believes the disclosures made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Globalstar Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018 (the “2017 Annual Report”), and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. 

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

These unaudited interim condensed consolidated financial statements include the accounts of Globalstar and all its subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, the information included herein includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s condensed consolidated statements of operations, condensed consolidated balance sheets, and condensed consolidated statements of cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year or any future period.

Recently Issued Accounting Pronouncements 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016-02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides for the election of transition methods between the modified retrospective method and the optional transition relief method. The modified retrospective method is applied to all prior reporting periods presented with a cumulative-effect adjustment recorded in the earliest comparative period while the optional transition relief method is applied beginning in the period of adoption with a cumulative-effect adjustment recorded in the first quarter of 2019. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company will adopt this standard when it becomes effective, on January 1, 2019, and expects to elect the optional transition relief method. The Company has an internal project team that is currently evaluating the impact this standard will have on its financial statements, accounting systems and related disclosures; for operating leases in which the Company is the lessee, it will recognize a right-of-use asset and associated lease liability upon adoption.

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other

4



instruments that are not measured at fair value through net income. The standard will replace today’s incurred loss approach with an expected loss model for instruments measured at amortized cost. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company has not yet determined the impact this standard will have on its financial statements and related disclosures.

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. This ASU amends current US GAAP to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. This standard will replace today's yield-to-maturity approach, which generally requires amortization of premium over the life of the instrument. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not expect it to have a material effect on the Company's financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance allows companies to reclassify items in accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). This ASU is effective for all entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Companies may apply the guidance in the period of adoption or retrospectively to each period in which the income tax effects of the Tax Act related to items in accumulated other comprehensive income are recognized. The Company does not expect it to have a material effect on the Company's financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and nonemployees. Measurement of equity-classified nonemployee awards will now be valued on the grant date and will no longer be remeasured through the performance completion date. This amendment also changes the accounting for nonemployee awards with performance conditions to recognize compensation cost when achievement of the performance condition is probable, rather than upon achievement of the performance condition, as well as eliminating the requirement to reassess the equity or liability classification for nonemployee awards upon vesting, except for certain award types. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. When adopted, the new guidance should be applied to all new grants and other transition provisions are included in the guidance to simplify this adoption for most companies. The Company does not expect it to have a material effect on the Company's financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. As part of the FASB's disclosure framework project, it has eliminated, amended and added disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements. Public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of any interim or annual reporting period. This ASU will have an impact on the Company's disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. As part of the FASB's disclosure framework project, it has changed the disclosure requirements for defined pension and other post-retirement benefit plans. The FASB eliminated disclosure requirements related to the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, if any, information related to Japanese Welfare Pension Insurance Law, information about the amount of future annual benefits covered by insurance contracts and significant transactions between the employer or related parties and the plan, and the disclosure of the effects of a one-percentage-point change in the assumed health care cost trend rates on the (1) aggregate of the service and interest cost components of net periodic benefit costs and the (2) benefit obligation for postretirement health care benefits. Entities will be required to disclose the weighted-average interest crediting rate for cash balance plans and other plans with promised interest crediting rates as well as an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for public entities for annual periods beginning after

5



December 15, 2020. Early adoption is permitted as of the beginning of any annual reporting period. This ASU will have an impact on the Company's disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU requires companies to defer specified implementation costs in a cloud computing arrangement that are often expensed under current US GAAP and recognize these costs to expense over the noncancellable term of the arrangement. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not expect it to have a material effect on the Company's financial statements and related disclosures.

Recently Issued Financial Reporting Rules

In August 2018, the SEC adopted the final rule under SEC Release 33-10532, Disclosure Update and Simplification, which amended its rules to eliminate, modify, or integrate into other SEC requirements certain disclosure rules. The amendments are part of the SEC’s ongoing disclosure effectiveness initiative. The amendments eliminate redundant and duplicative requirements including, but not limited to, the ratio of earnings to fixed charges, outdated regulatory disclosures, certain accounting policies about derivative instruments and specific SEC disclosures that are also required under current US GAAP. The amendments may expand current disclosures for certain companies, specifically the requirement to disclose the change in stockholders' equity for the current and comparative quarter and year-to-date interim periods. The amended rules will become effective November 5, 2018 and will be applied to any filings after that date. On September 25, 2018, the SEC released guidance advising it will not object to a registrant adopting the requirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule. The Company does not expect these final rules to have a material impact on its disclosures and financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 became effective for annual reporting periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. See Note 2: Revenue for further discussion, including the impact on the Company's condensed consolidated financial statements and required disclosures.

In February 2017, the FASB issued No. ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 was issued to provide clarity on the scope and application for recognizing gains and losses from the sale or transfer of nonfinancial assets, and should be adopted concurrently with ASU 2014-09, Revenue from Contracts with Customers. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements or related disclosures.

In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored Value Products. ASU No. 2016-04 contains specific guidance for the derecognition of prepaid stored-value product liabilities within the scope of this ASU. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements or related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 is intended to reduce diversity and clarify the classification of how certain cash receipts and cash payments are presented in the statement of cash flows. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements or related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires entities to account for the income tax effects of intercompany sales and transfers of assets other than inventory when the transfer occurs rather than current guidance which requires companies to defer the income tax effects of intercompany transfers of an asset until the asset has been sold to an outside party or otherwise recognized. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements or related disclosures.

6




In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash. ASU No. 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption was permitted as of the beginning of any interim or annual reporting period. The Company adopted this standard effective with reporting periods beginning on January 1, 2017 and added required disclosures pursuant to ASC No. 2016-18 to its condensed consolidated statements of cash flows.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. ASU No. 2017-01 most significantly revises guidance specific to the definition of a business related to accounting for acquisitions. Additionally, ASU No. 2017-01 also affects other areas of US GAAP, such as the definition of a business related to the consolidation of variable interest entities, the consolidation of a subsidiary or group of assets, components of an operating segment, and disposals of reporting units and the impact on goodwill. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements or related disclosures.

In February 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires sponsors of benefit plans to present the service cost component of net periodic benefit cost in the same income statement line or items as other employee costs and present the remaining components of net periodic benefit cost in one or more separate line items outside of income from operations. This ASU also limits the capitalization of benefit costs to only the service cost component. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. As a result of the retrospective adoption of this standard, for the three and nine months ended September 30, 2017, the Company reclassified $0.1 million and $0.2 million, respectively, from marketing, general and administrative expense to other income (expense). The service cost component of periodic benefit cost is the only cost that remains in income from operations; all other periodic benefit costs, including interest cost, expected return on plan assets and amortization of amounts deferred from previous periods are now reflected outside of income from operations and reflected in the other income (expense) line item on the Company's condensed consolidated statements of operations. There were no other changes to the Company's condensed consolidated financial statements or disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation: Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, a company will apply modification accounting only if the fair value, vesting conditions or classification of the award change due to a modification in the terms or conditions of the share-based payment award. This ASU became effective for public entities for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements or related disclosures.

In July 2017, the FASB issued ASU No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception. Part I of this ASU reduces the complexity associated with accounting for certain financial instruments with down round features. Part II of this ASU recharacterizes the indefinite deferral provisions described in Topic 480: Distinguishing Liabilities from Equity. It does not have an accounting effect. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company adopted this ASU on October 1, 2017. The Company evaluated its debt and related derivative instruments and determined that this standard did not have an impact on the Company's condensed consolidated financial statements or related disclosures.


7



2. REVENUE

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which amended the FASB Accounting Standards Codification (“ASC”) and created a new ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained deficit. The Company applied the new revenue standard to new and existing contracts that were not complete as of the date of initial application. The Company has applied the transitional practical expedient related to contract modifications and it has not retrospectively restated contracts that were modified prior to January 1, 2018.

As a result of applying this standard using the modified retrospective method, the Company has presented financial results and applied its accounting policies for the period beginning January 1, 2018 under ASC 606, while prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to ASC 605.

As a result of adopting ASC 606, the Company recorded a net increase of $3.1 million to opening retained deficit as of January 1, 2018 as a cumulative catch-up adjustment for all open contracts as of the date of adoption. The most significant drivers of this adjustment included the Company’s change in accounting policy related to the deferral of costs to obtain a contract and the accrual of contract breakage to revenue based on historical usage patterns of existing contracts (see further discussion below).

Nature of Products and Services

Revenue consists primarily of satellite voice and data service revenue and revenue generated from the sale of fixed and mobile devices as well as other products and accessories. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Each type of revenue is a separate performance obligation with distinct deliverables and is therefore accounted for discretely. Revenue is measured based on the consideration specified in a contract with a customer, adjusted for credits and discounts, as applicable, and is recognized when the Company satisfies a performance obligation by transferring control over a product or service to a customer.

Unless otherwise disclosed, service revenue is recognized over a period of time and revenue from the sale of subscriber equipment is recognized at a point in time. The recognition of revenue for service is over time as the customer simultaneously receives and consumes the benefits of the Company’s performance over the contract term. The recognition of revenue for subscriber equipment is at a point in time as the risks and rewards of ownership of the hardware transfer to the customer generally upon shipment, which is when legal title of the product transfers to the customer, among other things (as discussed further below).

The Company does not record sales taxes, telecommunication taxes or other governmental fees collected from customers in revenue. The Company excludes these taxes from the measurement of contract transaction prices.

The Company receives payment from customers in accordance with billing statements or invoices for customer contracts; these payments may be in advance or arrears of services provided to the customer by the Company. Customer payments received in advance of the corresponding service period are recorded as deferred revenue.

Upon activation of a Globalstar device, certain customers are charged an activation fee, which is recognized over the term of the expected customer life. Credits granted to customers are expensed or charged against revenue or accounts receivable over the remaining term of the contract. Estimates related to earned but unbilled service revenue are calculated using current subscriber data, including plan subscriptions and usage between the end of the billing cycle and the end of the period. The recognition of revenue related to amounts allocated to performance obligations that were satisfied (or partially satisfied) in a previous period is not routine or material to the Company’s financial statements.

Provisions for estimated future warranty costs, returns and rebates are recorded as a cost of sale, or a reduction to revenue, as applicable. These costs are based on historical trends and the provision is reviewed regularly and periodically adjusted to reflect changes in estimates.

Certain contracts with customers may contain a financing component. Under ASC 606, an entity should adjust the promised amount of the consideration for the effects of time value of money if the timing of the payments agreed upon by the parties to the contract provides the customer or the entity with a significant benefit of financing for the transfer of goods or services to the customer. This type of transaction is infrequent and not considered significant to the Company. Additionally, the Company has

8



applied the practical expedient related to the existence of a significant financing component as it expects at contract inception that the period between payment by the customer and transfer of the promised goods or services will be one year or less.

The following describes the principal activities from which the Company generates its revenue. The Company’s only reportable segment is its MSS business.

Duplex Service Revenue. The Company recognizes revenue for monthly access fees in the period services are rendered. Access fees represent the minimum monthly charge for each line of service based on its associated rate plan. The Company also recognizes revenue for airtime minutes and data in excess of the monthly access fees in the period such minutes or data are used. The Company offers certain annual plans whereby a customer prepays for a predetermined amount of minutes and data. In these cases, revenue is recognized consistent with a customer’s expected pattern of usage based on historical experience because the Company believes that this method most accurately depicts the satisfaction of the Company’s obligation to the customer. This usage pattern is typically seasonal and highest in the second and third calendar quarters of the year. The Company offers other annual plans whereby the customer is charged an annual fee to access the Company’s system with an unlimited amount of usage. Annual fees for unlimited plans are recognized on a straight-line basis over the term of the plans.

SPOT Service Revenue. The Company sells SPOT services as monthly, annual or multi-year plans and recognizes revenue on a straight-line basis over the service term, beginning when the service is activated by the customer.

Simplex Service Revenue. The Company sells Simplex services as monthly, annual or multi-year plans and recognizes revenue ratably over the service term or as service is used, beginning when the service is activated by the customer.

Independent Gateway Operator (“IGO”) Service Revenue. The Company owns and operates its satellite constellation and earns a portion of its revenues through the sale of airtime minutes or data on a wholesale basis to IGOs. Revenue from services provided to IGOs is recognized based upon airtime minutes or data packages used by customers of the IGOs and in accordance with contractual fee arrangements.

Equipment Revenue. Subscriber equipment revenue represents the sale of fixed and mobile user terminals, SPOT and Simplex products, and accessories. The Company recognizes revenue upon shipment provided control has transferred to the customer. Indicators of transfer of control include, but are not limited to; 1) the Company’s right to payment, 2) the customer has legal title of the equipment, 3) the Company has transferred physical possession of the equipment to the customer or carrier, and 4) the customer has significant risks and rewards of ownership of the equipment. The Company sells equipment designed to work on its network through various channels, including through dealers, retailers and resellers (including IGOs) as well as direct to consumers or other businesses by its global sales team and through its e-commerce website. The sales channel depends primarily on the type of equipment and geographic region. Promotional rebates are offered from time to time. A reduction to revenue is recorded to reflect the lower transaction price based on an estimate of the customer take rate at the time of the sale using primarily historical data. This estimate is adjusted periodically to reflect actual rebates given to the Company’s customers. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.

Other Service Revenue. Other service revenue includes primarily revenue associated with engineering services provided to governmental customers. The Company provides certain engineering services to assist customers in developing new applications related to its system. The revenue associated with these engineering services is generally recorded over time as the services are rendered and the Company’s obligation to the customer is satisfied.

Multiple-Element Arrangement Contracts. At times, the Company will sell subscriber equipment through multiple-element arrangement contracts with services. When the Company sells subscriber equipment and services in bundled arrangements and determines that it has separate performance obligations, the Company allocates the bundled contract price among the various performance obligations based on relative stand-alone selling prices at contract inception of the distinct goods or services underlying each performance obligation and recognizes revenue when, or as, each performance obligation is satisfied.


9



Impact on Financial Statements

The following tables summarize the impact of the adoption of ASC 606 on the Company’s condensed consolidated financial statements. As noted above, the change in accounting policy related to the deferral of costs to obtain a contract and the accrual of estimated contract breakage to revenue based on historical usage patterns of existing contracts resulted in the most significant change to the Company’s condensed consolidated financial statements. The impact on the Company's financial statements related to the change in accounting policy related to 1) deferred costs to obtain a contract are primarily reflected in the marketing, general and administrative as well as the intangible and other assets, net, lines in the tables below and 2) the accrual of estimated contract breakage to revenue is reflected primarily in the service revenue and deferred revenue lines in the tables below. Amounts presented in the tables below are in thousands.

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2018

 
Impact on change in accounting policy
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
 
As
reported
 
Impact of
ASC 606
 
Legacy GAAP
 
As
reported
 
Impact of
ASC 606
 
Legacy GAAP
Service revenue
$
29,898

 
$
(1,243
)
 
$
28,655

 
$
83,903

 
$
(98
)
 
$
83,805

Subscriber equipment sales
5,794

 
(200
)
 
5,594

 
14,264

 
(281
)
 
13,983

Cost of subscriber equipment sales
4,426

 
(138
)
 
4,288

 
10,768

 
(202
)
 
10,566

Marketing, general and administrative
15,061

 
(26
)
 
15,035

 
42,280

 
(176
)
 
42,104

Other
1,331

 
14

 
1,345

 
(2,682
)
 
(28
)
 
(2,710
)
Net income
9,019

 
(1,293
)
 
7,726

 
89,937

 
27

 
89,964

Comprehensive income
9,519

 
(1,293
)
 
8,226

 
92,737

 
27

 
92,764

 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.01

 
$

 
$
0.01

 
$
0.07

 
$

 
$
0.07

Diluted
0.01

 

 
0.01

 
0.07

 

 
0.07


Condensed Consolidated Balance Sheet
As of September 30, 2018
 
Impact on change in accounting policy
 
September 30, 2018
 
As
reported
 
Impact of
ASC 606
 
Legacy
GAAP
Accounts receivable, net
$
20,471

 
$
(419
)
 
$
20,052

Prepaid expenses and other current assets
8,800

 
199

 
8,999

Intangible and other assets, net
38,097

 
(1,996
)
 
36,101

Deferred revenue, current and long-term
40,789

 
770

 
41,559

Retained earnings (deficit)
(1,478,272
)
 
3,066

 
(1,475,206
)


10



Disaggregation of Revenue

The following table discloses revenue disaggregated by type of product and service (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017 (1)
 
September 30, 2018
 
September 30, 2017 (1)
Service revenue:
 
 
 
 
 
 
 
Duplex
$
12,213

 
$
10,576

 
$
31,130

 
$
27,496

SPOT
12,957

 
11,248

 
39,787

 
32,838

Simplex
3,542

 
2,903

 
9,847

 
7,845

IGO
257

 
260

 
682

 
847

Other
929

 
1,082

 
2,457

 
2,825

Total service revenue
29,898

 
26,069

 
83,903

 
71,851

 
 
 
 
 
 
 
 
Subscriber equipment sales:
 
 
 
 
 
 
 
Duplex
$
432

 
$
777

 
$
1,613

 
$
2,288

SPOT
2,871

 
1,410

 
6,212

 
4,461

Simplex
2,318

 
2,192

 
5,968

 
4,171

IGO
141

 
54

 
347

 
523

Other
32

 
(44
)
 
124

 
(61
)
Total subscriber equipment sales
5,794

 
4,389

 
14,264

 
11,382

 
 
 
 
 
 
 
 
Total revenue
$
35,692

 
$
30,458

 
$
98,167

 
$
83,233


(1) As noted above, prior periods have not been adjusted under the modified retrospective method of adoption.

The Company attributes equipment revenue to various countries based on the location where equipment is sold. Service revenue is generally attributed to the various countries based on the Globalstar entity that holds the customer contract. The following table discloses revenue disaggregated by geographical market (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017 (1)
 
September 30, 2018
 
September 30, 2017 (1)
Service revenue:
 
 
 
 
 
 
 
United States
$
21,096

 
$
17,809

 
$
59,581

 
$
49,744

Canada
5,723

 
5,283

 
15,003

 
13,441

Europe
2,462

 
2,150

 
7,113

 
6,104

Central and South America
527

 
701

 
1,708

 
2,191

Others
90

 
126

 
498

 
371

Total service revenue
29,898

 
26,069

 
83,903

 
71,851

 
 
 
 
 
 
 
 
Subscriber equipment sales:
 
 
 
 
 
 
 
United States
$
3,414

 
$
2,921

 
$
8,469

 
$
7,035

Canada
1,121

 
722

 
2,264

 
2,264

Europe
765

 
416

 
2,194

 
1,191

Central and South America
370

 
315

 
1,096

 
868

Others
124

 
15

 
241

 
24

Total subscriber equipment sales
5,794

 
4,389

 
14,264

 
11,382

 
 
 
 
 
 
 
 
Total revenue
$
35,692

 
$
30,458

 
$
98,167

 
$
83,233


(1) As noted above, prior periods have not been adjusted under the modified retrospective method of adoption.


11



Contract Balances

The following table discloses information about accounts receivable, costs to obtain a contract, and contract liabilities from contracts with customers (amounts in thousands):
 
September 30, 2018
 
January 1, 2018
Accounts receivable
$
20,471

 
$
17,113

Capitalized costs to obtain a contract
2,070

 
2,265

Contract liabilities
40,789

 
37,799


Accounts Receivable

Receivables are recorded when the right to consideration from the customer becomes unconditional, which is generally upon billing or upon satisfaction of a performance obligation, whichever is earlier. Receivables are uncollateralized, without interest, and consist primarily of receivables from the sale of Globalstar services and equipment. For service customers, payment is generally due within thirty days of the invoice date and for equipment customers, payment is generally due within thirty to sixty days of the invoice date, or, for some customers, may be made in advance of shipment. Included in the accounts receivable balance in the table above are contract assets, which represent primarily unbilled amounts related to performance obligations satisfied by the Company, of $0.5 million and $0.1 million as of September 30, 2018 and January 1, 2018, respectively.

The Company has agreements with certain of its IGOs whereby the parties net settle outstanding payables and receivables between the respective entities on a periodic basis. As of September 30, 2018, $9.1 million related to these agreements were included in accounts receivable on the Company’s condensed consolidated balance sheet.

The Company performs ongoing credit evaluations of its customers and impairs receivable balances by recording specific allowances for bad debts based on factors such as current trends, the length of time the receivables are past due and historical collection experience. Accounts receivable are considered past due in accordance with the contractual terms of the arrangements. Accounts receivable balances that are determined likely to be uncollectible are included in the allowance for doubtful accounts. After attempts to collect a receivable have failed, the receivable is written off against the allowance. During the three and nine months ended September 30, 2018, impairment losses on receivables from contracts with customers were $0.4 million and $2.2 million, respectively, including both provisions for bad debt and the reversal of revenue for accounts where collectability is not reasonably assured.

Costs to Obtain a Contract

Capitalized costs to obtain a contract include certain deferred subscriber acquisition costs which are amortized consistently with the pattern of transfer of the good or delivery of the service to which the asset relates. The Company’s subscriber acquisition costs primarily include dealer and internal sales commissions and certain other costs, including but not limited to, promotional costs, cooperative marketing credits and shipping and fulfillment costs. The Company capitalizes incremental costs to obtain a contract to the extent it expects to recover them. These capitalized contract costs include only internal and external initial activation commissions because these costs are considered incremental and would not have been incurred if the contract had not been obtained. These capitalized costs are included in other assets on the Company’s condensed consolidated balance sheet and are amortized to marketing, general and administrative expenses on the Company’s condensed consolidated statement of operations on a straight-line basis over the estimated contract term of three years. For the three and nine months ended September 30, 2018, the amount of amortization related to previously capitalized costs to obtain a contract was $0.4 million and $1.2 million, respectively.

The Company applies the practicable expedient pursuant to the guidance in ASC 606 and recognizes the incremental costs of obtaining contracts as expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in marketing, general and administrative expenses in the period in which the cost is incurred.

When a contract terminates prior to the end of its expected life, the remaining deferred costs asset associated with it becomes impaired. An immediate recognition of expense for individual remaining costs to obtain a contract following deactivation is not practicable. Because early terminations are factored into the determination of the expected customer life and therefore affect the amortization period, the Company does not recognize early termination expense on individual assets because the incremental effect would be immaterial and doing do would be impractical.


12



Contract Liabilities

Contract liabilities, which are included in deferred revenue on the Company’s condensed consolidated balance sheet, represent the Company’s obligation to transfer service or equipment to a customer for which it has previously received consideration from a customer. As of September 30, 2018, the total transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was $40.8 million. As discussed above, revenue is recognized when the Company satisfies a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized during the nine months ended September 30, 2018 from performance obligations included in the contract liability balance at the beginning of the period was $27.1 million.

In general, the duration of the Company’s contracts is one year or less; however, from time to time, the Company offers multi-year contracts. As of September 30, 2018, the Company expects to recognize $35.0 million, or approximately 86%, of its remaining performance obligations during the next twelve months and $2.9 million, or approximately 7%, between two to seven years from the balance sheet date. The remaining $2.9 million, or approximately 7%, is related to a single contract and will be recognized as work is performed by the Company, the timing of which is currently unknown. The Company has applied the practical expedient pursuant to ASC 606 allowing for limited disclosure of contract liabilities with a remaining duration of one year or less.

3. PROPERTY AND EQUIPMENT
 Property and equipment consists of the following (in thousands): 
 
September 30,
2018
 
December 31,
2017
Globalstar System:
 

 
 

Space component
 

 
 

First and second-generation satellites in service
$
1,195,291

 
$
1,195,426

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

 
32,481

Ground component
257,865

 
48,710

Construction in progress:
 

 
 

Ground component
16,498

 
227,167

Next-generation software upgrades
1,633

 
12,414

Other
2,307

 
2,575

Total Globalstar System
1,506,075

 
1,518,773

Internally developed and purchased software
25,902

 
16,132

Equipment
10,929

 
9,966

Land and buildings
3,141

 
3,322

Leasehold improvements
2,003

 
1,969

Total property and equipment
1,548,050

 
1,550,162

Accumulated depreciation
(644,060
)
 
(579,043
)
Total property and equipment, net
$
903,990

 
$
971,119


Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation and ground upgrades. In connection with the 2018 launch of Sat-Fi2TM, the first device to operate on the Company's upgraded ground network, the Company placed into service the portion of the next-generation ground component (including associated developed technology and software upgrades), which represents the gateways currently capable of supporting commercial traffic. The remaining ground component of construction in progress represents costs (including capitalized interest) associated with the Company's contracts primarily with Hughes Network Systems, LLC (“Hughes”) and Ericsson Inc. (“Ericsson”) for the Company's ground infrastructure in certain regions around the world, of which the majority is expected to be placed into service in the coming months.

Amounts included in the Company’s second-generation satellite, on-ground spare balance as of September 30, 2018 and December 31, 2017, consist primarily of costs related to a spare second-generation satellite that has not been placed in orbit, but is capable of being included in a future launch. As of September 30, 2018, this satellite has not been placed into service; therefore, the Company has not started to record depreciation expense.
  

13



4. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS 
 
Long-term debt consists of the following (in thousands): 
 
September 30, 2018
 
December 31, 2017
 
Principal
Amount
 
Unamortized Discount and Deferred Financing Costs
 
Carrying
Value
 
Principal
Amount
 
Unamortized Discount and Deferred Financing Costs
 
Carrying
Value
Facility Agreement
$
428,323

 
$
26,815

 
$
401,508

 
$
467,256

 
$
34,459

 
$
432,797

Loan Agreement with Thermo
116,105

 
23,629

 
92,476

 
106,054

 
26,333

 
79,721

8.00% Convertible Senior Notes Issued in 2013
1,363

 

 
1,363

 
1,348

 

 
1,348

Total Debt
545,791

 
50,444

 
495,347

 
574,658

 
60,792

 
513,866

Less: Current Portion
87,732

 

 
87,732

 
79,215

 

 
79,215

Long-Term Debt
$
458,059

 
$
50,444

 
$
407,615

 
$
495,443

 
$
60,792

 
$
434,651


The principal amounts shown above include payment of in-kind interest, as applicable. The carrying value is net of deferred financing costs and any discounts to the loan amounts at issuance, including accretion, as further described below. The current portion of long-term debt represents the scheduled principal repayments under the Facility Agreement due within one year of the balance sheet date and the total outstanding balance of the Company's 8.00% Convertible Senior Notes Issued in 2013 (the "2013 8.00% Notes") because it currently intends on redeeming such notes in the near future if the Company's stock price exceeds the conversion price of the notes. Accordingly, any such redemption is expected to result in the conversion of the notes by the holders in lieu of a cash payment by the Company at par value. The Company believes that the principal payments due in December 2018 and June 2019 under the Facility Agreement will be in excess of its available sources of cash in order to also maintain compliance with the required balance in the debt service reserve account. The Company intends to raise funds in sufficient amounts to meet its obligations; however, the source of funds has not yet been fully arranged.
 
Facility Agreement 

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

The Facility Agreement is scheduled to mature in December 2022. As of September 30, 2018, the Facility Agreement was fully drawn. Semi-annual principal repayments began in December 2014. Indebtedness under the facility bears interest at a floating rate of LIBOR plus 3.75% through June 2019, increasing by an additional 0.5% each year thereafter to a maximum rate of LIBOR plus 5.75%. Interest on the Facility Agreement is payable semi-annually in arrears on June 30 and December 31 of each calendar year. Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by Bpifrance Assurance Export S.A.S. (“BPIFAE”) (formerly COFACE), the French export credit agency. The Company’s obligations under the Facility Agreement are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.  

The Facility Agreement contains customary events of default and requires that the Company satisfy various financial and non-financial covenants. The covenants in the Facility Agreement limit the Company's ability to, among other things, incur or guarantee additional indebtedness; make certain investments, acquisitions or capital expenditures above certain agreed levels; pay dividends or repurchase or redeem capital stock or subordinated indebtedness; grant liens on its assets; incur restrictions on the ability of its subsidiaries to pay dividends or to make other payments to the Company; enter into transactions with its affiliates; merge or consolidate with other entities or transfer all or substantially all of its assets; and transfer or sell assets.

In calculating compliance with the financial covenants of the Facility Agreement, the Company may include certain cash funds contributed to the Company from the issuance of the Company's common stock and/or subordinated indebtedness. These funds are referred to as “Equity Cure Contributions” and may be used to achieve compliance with financial covenants through December 2019. If the Company violates any covenants and is unable to obtain a sufficient Equity Cure Contribution or obtain a waiver, or is unable to make payments to satisfy its debt obligations under the Facility Agreement when due and is unable to obtain a waiver,

14



it would be in default under the Facility Agreement and payment of the indebtedness could be accelerated. The acceleration of the Company's indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-acceleration provisions. The Company anticipates that it will need an Equity Cure Contribution to maintain compliance with financial covenants under the Facility Agreement for the measurement period ended December 31, 2018. The source of funds for any needed Equity Cure Contribution has not yet been fully arranged. As of September 30, 2018, the Company was in compliance with respect to the covenants of the Facility Agreement.

The Facility Agreement also requires the Company to maintain a debt service reserve account, which is pledged to secure all of the Company's obligations under the Facility Agreement. The use of the debt service reserve account funds is restricted to making principal and interest payments under the Facility Agreement. The balance in the debt service reserve account must equal the total amount of principal and interest payable by the Company on the next payment date. As of September 30, 2018, the balance in the debt service reserve account was $52.9 million, which is classified as restricted cash on the Company's condensed consolidated balance sheet.

Thermo Loan Agreement 

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

The Loan Agreement accrues interest at 12% per annum, which is capitalized and added to the outstanding principal in lieu of cash payments. The Company will make payments to Thermo only when permitted by the Facility Agreement. Principal and interest under the Loan Agreement become due and payable six months after the obligations under the Facility Agreement have been paid in full, or earlier if the Company has a change in control or if any acceleration of the maturity of the loans under the Facility Agreement occurs. As of September 30, 2018, $72.6 million of interest had accrued since 2009 with respect to the Loan Agreement; the Loan Agreement is included in long-term debt on the Company’s condensed consolidated balance sheets.

The Company evaluated the various embedded derivatives within the Loan Agreement (See Note 6: Fair Value Measurements for additional information about the embedded derivative in the Loan Agreement). The Company determined that the conversion option and the contingent put feature upon a fundamental change required bifurcation from the Loan Agreement. The conversion option and the contingent put feature were not deemed clearly and closely related to the Loan Agreement and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount, which is netted against the face value of the Loan Agreement.

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

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

8.00% Convertible Senior Notes Issued in 2013
 
The 2013 8.00% Notes are convertible into shares of common stock at a conversion price of $0.73 (as adjusted) per share of common stock. The conversion price of the 2013 8.00% Notes is adjusted in the event of certain stock splits or extraordinary share distributions, or as a reset of the base conversion and exercise price pursuant to the terms of the Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as Trustee, dated May 20, 2013 (the “Indenture”).

The 2013 8.00% Notes are senior unsecured debt obligations of the Company with no sinking fund. The 2013 8.00% Notes will mature on April 1, 2028, subject to various call and put features, and bear interest at a rate of 8.00% per annum. Interest on the 2013 8.00% Notes is payable semi-annually in arrears on April 1 and October 1 of each year. Interest is paid in cash at a rate of 5.75% per annum and in additional notes at a rate of 2.25% per annum. The Indenture for the 2013 8.00% Notes provides for customary events of default. As of September 30, 2018, the Company was in compliance with respect to the terms of the 2013 8.00% Notes and the Indenture. 


15



Subject to certain conditions set forth in the Indenture, the Company may redeem the 2013 8.00% Notes, with the prior approval of the majority lenders under the Facility Agreement, in whole or in part, at any time on or after April 1, 2018, at a price equal to the principal amount of the 2013 8.00% Notes to be redeemed plus all accrued and unpaid interest thereon. As of September 30, 2018, the 2013 8.00% Notes have not been redeemed by the Company.

A holder of the 2013 8.00% Notes has the right, at the holder’s option, to require the Company to purchase some or all of the 2013 8.00% Notes held by it on each of April 1, 2018 and April 1, 2023 at a price equal to the principal amount of the 2013 8.00% Notes to be purchased plus accrued and unpaid interest. The holders did not exercise this option on April 1, 2018.

Subject to the procedures for conversion and other terms and conditions of the Indenture, a holder may convert its 2013 8.00% Notes at its option at any time prior to the close of business on the business day immediately preceding April 1, 2028, into shares of common stock (or, at the option of the Company, cash in lieu of all or a portion thereof, provided that, under the Facility Agreement, the Company may pay cash only with the consent of the majority lenders).
 
As of September 30, 2018, holders had converted a total of $55.4 million principal amount of the 2013 8.00% Notes, resulting in the issuance of approximately 98.5 million shares of voting common stock. There were no conversions during the three and nine month periods ending September 30, 2018.

Holders who convert 2013 8.00% Notes may receive conversion shares over a 40-consecutive trading day settlement period. Accordingly, the portion of converted debt is extinguished on an incremental basis over the 40-day settlement period, reducing the Company's outstanding debt balance. As of September 30, 2018, no conversions had been initiated but not yet fully settled.

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

The Company was accreting the debt discount associated with the compound embedded derivative liability to interest expense through the first put date of the 2013 8.00% Notes (April 1, 2018) using an effective interest rate method. Due to significant conversions since issuance, the entire debt discount has been recorded to interest expense resulting in no balance as of September 30, 2018. The Company is marking to market the fair value of the compound embedded derivative liability at the end of each reporting period, or more frequently as deemed necessary, and as of the date of a significant conversion, with any changes in value reported in the condensed consolidated statements of operations. The Company determines the fair value of the compound embedded derivative using a Monte Carlo simulation model. 

5. DERIVATIVES 

In connection with certain existing borrowing arrangements, the Company was required to record derivative instruments on its condensed consolidated balance sheets. None of these derivative instruments are designated as a hedge. The following table discloses the fair values of the derivative instruments on the Company’s condensed consolidated balance sheets (in thousands):

 
September 30, 2018
 
December 31, 2017
Derivative liabilities:
 

 
 

Compound embedded derivative with the 2013 8.00% Notes
$
(617
)
 
$
(1,326
)
Compound embedded derivative with the Loan Agreement with Thermo
(81,424
)
 
(226,659
)
Total derivative liabilities
$
(82,041
)
 
$
(227,985
)

16




 The following table discloses the changes in value recorded as derivative gain (loss) in the Company’s condensed consolidated statement of operations (in thousands): 

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Interest rate cap
$

 
$

 
$

 
$
(3
)
Compound embedded derivative with the 2013 8.00% Notes
322

 
2,949

 
709

 
(7,247
)
Compound embedded derivative with the Loan Agreement with Thermo
38,737

 
75,891

 
145,235

 
12,183

Total derivative gain
$
39,059

 
$
78,840

 
$
145,944

 
$
4,933


Intangible and Other Assets 

Interest Rate Cap 

In June 2009, in connection with entering into the Facility Agreement, under which interest accrues at a variable rate, the Company entered into five ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement and is capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed 6.5%, the Company’s Base Rate will be 1% less than the then six-month Libor rate. The Company paid an approximately $12.4 million upfront fee for the interest rate cap agreements. The interest rate cap did not qualify for hedge accounting treatment, and changes in the fair value of the agreements are included in the condensed consolidated statements of operations. The value of the interest rate cap was approximately zero as of September 30, 2018 and December 31, 2017, respectively.

Derivative Liabilities 

The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments, including the conversion option and the contingent put feature within both the 2013 8.00% Notes and the Loan Agreement with Thermo. The fair value of each embedded derivative liability is marked-to-market at the end of each reporting period, or more frequently as deemed necessary, with any changes in value reported in its condensed consolidated statements of operations and its condensed consolidated statements of cash flows as an operating activity. The Company determined the fair value of its compound embedded derivative liabilities using a Monte Carlo simulation model. See Note 6: Fair Value Measurements for further discussion. Consistent with the classification of the 2013 8.00% Notes as current debt on the Company's condensed consolidated balance sheet, the Company has classified this derivative liability as current on its condensed consolidated balance sheet at September 30, 2018.

6. 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).

17




Recurring Fair Value Measurements 

The following tables provide a summary of the financial liabilities measured at fair value on a recurring basis (in thousands): 
 
September 30, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Compound embedded derivative with the 2013 8.00% Notes

 

 
(617
)
 
(617
)
Compound embedded derivative with the Loan Agreement with Thermo

 

 
(81,424
)
 
(81,424
)
Total liabilities measured at fair value
$

 
$

 
$
(82,041
)
 
$
(82,041
)
 
 
December 31, 2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 Balance
Compound embedded derivative with the 2013 8.00% Notes

 

 
(1,326
)
 
(1,326
)
Compound embedded derivative with the Loan Agreement with Thermo

 

 
(226,659
)
 
(226,659
)
Total liabilities measured at fair value
$

 
$

 
$
(227,985
)
 
$
(227,985
)

Derivative Liabilities

The Company has two derivative liabilities classified as Level 3. The Company marks-to-market these liabilities at each reporting date, or more frequently as deemed necessary, with the changes in fair value recognized in the Company’s condensed consolidated statements of operations. See Note 5: Derivatives for further discussion. 

The significant quantitative Level 3 inputs utilized in the valuation models are shown in the tables below: 
 
September 30, 2018
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Discount Rate
 
Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes
40% - 95%
 
2.9
%
 
$
0.73

 
25
%
 
$
0.51

Compound embedded derivative with the Loan Agreement with Thermo
40% - 95%
 
2.9
%
 
$
0.73

 
25
%
 
$
0.51

 
 
December 31, 2017
 
Stock Price
Volatility
 
Risk-Free
Interest
Rate
 
Note
Conversion
Price
 
Discount Rate
 
Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes
78
%
 
1.4
%
 
$
0.73

 
27
%
 
$
1.31

Compound embedded derivative with the Loan Agreement with Thermo
40% - 77%

 
2.2
%
 
$
0.73

 
27
%
 
$
1.31


Fluctuation in the Company’s stock price is one of the primary drivers for the changes in the derivative valuations during each reporting period. As the stock price decreases, the value to the holder of the instrument generally decreases, thereby decreasing the liability on the Company’s condensed consolidated balance sheets. Additionally, stock price volatility is a significant unobservable input 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. Increases in expected volatility would generally result in a higher fair value measurement. 

18




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. Increases in the assumed probability of a change of control in the short-term would generally result in a lower fair value measurement, while increases in the assumed probability of a change of control in the long-term would generally result in a higher fair value measurement. 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivatives within the Company’s 2013 8.00% Notes and Loan Agreement with Thermo included the following inputs and features: payment-in-kind interest payments, make-whole premiums, a 40-day stock issuance settlement period upon conversion, estimated maturity date, and the principal balance of each loan at the balance sheet date. There are also certain put and call features within the 2013 8.00% Notes that impact the valuation model.

The following table presents a rollforward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
(121,100
)
 
$
(355,075
)
 
$
(227,985
)
 
$
(281,171
)
Derivative adjustment related to conversions

 
32,000

 

 
32,000

Unrealized gain, included in derivative gain
39,059

 
78,840

 
145,944

 
4,936

Balance at end of period
$
(82,041
)
 
$
(244,235
)
 
$
(82,041
)
 
$
(244,235
)

Fair Value of Debt Instruments

The Company believes it is not practicable to determine the fair value of the Facility Agreement without incurring significant additional costs. Unlike typical long-term debt, interest rates and other terms for the Facility Agreement are not readily available and generally involve a variety of factors, including due diligence by the debt holders. The following table sets forth the carrying values and estimated fair values of the Company's other debt instruments, which are classified as Level 3 financial instruments (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Loan Agreement with Thermo
$
92,476

 
$
70,929

 
$
79,721

 
$
54,936

2013 8.00% Notes
1,363

 
770

 
1,348

 
1,295



19



7. CONTINGENCIES 

Arbitration 

On June 3, 2011, Globalstar filed a demand for arbitration against Thales before the American Arbitration Association to enforce certain rights to order additional satellites under the 2009 Contract. The Company did not include within its demand any claims that it had against Thales for work previously performed under the contract to design, manufacture and timely deliver the first 25 second-generation satellites. On May 10, 2012, the arbitration tribunal issued its award in which it determined that the Company had terminated the 2009 Contract “for convenience” and had materially breached the contract by failing to pay to Thales the €51.3 million in termination charges required under the contract. The tribunal additionally determined that absent further agreement between the parties, Thales had no further obligation to manufacture or deliver satellites under Phase 3 of the 2009 Contract. Based on these determinations, the tribunal directed the Company to pay Thales approximately €53 million in termination charges, plus interest by June 9, 2012. On May 23, 2012, Thales commenced an action in the United States District Court for the Southern District of New York by filing a petition to confirm the arbitration award (the “New York Proceeding”). Thales and the Company entered into tolling agreements under which Thales dismissed the New York Proceeding without prejudice. These tolling agreements have expired. Accordingly, as of May 10, 2018, Thales's right to enforce the arbitration award pursuant to the Federal Arbitration Act is now time-barred.

On June 24, 2012, the Company and Thales agreed to settle their prior commercial disputes, including those disputes that were the subject of the arbitration award. In order to effectuate this settlement, the Company and Thales entered into a Release Agreement, a Settlement Agreement and a Submission Agreement. Under the terms of the Release Agreement, Thales agreed unconditionally and irrevocably to release and forever discharge the Company from any and all claims and obligations (with the exception of those items payable under the Settlement Agreement or in connection with a new contract for the purchase of any additional second-generation satellites), including, without limitation, a full release from paying €35.6 million of the termination charges awarded in the arbitration together with all interest on the award amount effective upon the earlier of December 31, 2012, and the effective date of the financing for the purchase of any additional second-generation satellites. Under the terms of the Release Agreement, the Company agreed unconditionally and irrevocably to release and forever discharge Thales from any and all claims (with limited exceptions), including, without limitation, claims related to Thales’s 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. The releases became effective on December 31, 2012. In connection with the Release Agreement and the Settlement Agreement, the Company recorded a contract termination charge of approximately €17.5 million in its condensed consolidated balance sheet during the second quarter of 2012. As discussed above, the statute of limitations for Thales to enforce the arbitration award pursuant to the Federal Arbitration Act has expired. As such, the Company believes that payment of the contract termination charge is not probable and removed this liability from its condensed consolidated balance sheet during the second quarter of 2018. Nevertheless, there can be no assurance that Thales would not or could not seek some alternative means to pursue all or a portion of the €17.5 million contract termination charge, which would be defended vigorously by the Company.

Under the terms of the Settlement Agreement, the Company agreed to pay €17.5 million to Thales, representing one-third of the termination charges awarded to Thales in the arbitration, subject to certain conditions, on the later of the effective date of the new contract for the purchase of any additional second-generation satellites and the effective date of the financing for the purchase of these satellites. As of September 30, 2018, this condition had not been satisfied. Because the effective date of the new contract for the purchase of additional second-generation satellites did not occur on or prior to February 28, 2013, any party may terminate the Settlement Agreement. If any party terminates the Settlement Agreement, all parties’ rights and obligations under the Settlement Agreement shall terminate. The Release Agreement is a separate and independent agreement from the Settlement Agreement and provides that it supersedes all prior understandings, commitments and representations between the parties with respect to the subject matter thereof; therefore, it would survive any termination of the Settlement Agreement. As of September 30, 2018, no party had terminated the Settlement Agreement.


20



Securities Claim

On September 25, 2018, a shareholder action was filed against the Company, members of the Board of Directors, Thermo Companies, Inc., and certain members of Globalstar management in the Court of Chancery of the State of Delaware, captioned Mudrick Capital Management, LP, et al. v. Monroe, et al., C.A. No. 2018-0699-TMR (the "Action"). In the Action, plaintiffs allege that individuals named as director defendants and Thermo Companies, Inc. violated their fiduciary duties in connection with certain outreach to third parties related to a possible monetization of the Company's spectrum, the Company's October 2017 offering, the Agreement and Plan of Merger with GBS Acquisitions, Inc., Thermo Acquisitions, Inc., and Thermo Development, Inc. dated April 24, 2018 (the "Merger Agreement"), which has since been terminated, and certain related transactions. Plaintiffs also allege that certain directors of the Company were unjustly enriched by certain restricted stock awards, that James Monroe III breached his fiduciary duties by purportedly trading while in possession of the Company's proprietary information, and that the non-director management defendants aided and abetted the directors’ alleged breaches of fiduciary duty. The Action seeks a declaratory judgment on the above allegations, damages, and an award of attorneys' fees and costs for bringing the Action and also in connection with a demand to inspect certain books and records of the Company, a now-adjudicated lawsuit seeking to enforce the demand in the Delaware Court of Chancery (the "Books and Records Matters"), and in connection with the termination of the Merger Agreement. The Company is identified as a defendant as to the direct claim for certain attorneys' fees and costs. All other claims are purported to be brought derivatively on behalf of the Company. The Company intends to vigorously defend against the litigation and expects the other defendants to do so as well.

In connection with the Action described above, the plaintiffs’ claims for damages from the Company are limited to the payment of certain attorneys' fees and costs. The Company evaluated the facts and circumstances under applicable accounting guidance and determined that, as a defendant in the Action and as an indemnitor to certain other defendants, a loss for such attorneys' fees and costs is reasonably possible; however, an estimate for potential losses or range of losses under the Action cannot be made at this time. As such, the Company has not recorded an accrual related to the Action described above for the period ended September 30, 2018. Additionally, as the Company is also a nominal plaintiff in the Action, the Company evaluated the facts and circumstances under applicable accounting guidance and determined that a gain resulting from certain claims described above may be possible; however, at this time, any such gain is not estimable nor realizable. As such, the Company has not recorded a gain related to the Action described above for the period ended September 30, 2018. The Company continues to review and evaluate its accounting conclusions in light of developments of this Action.

During the nine months ended September 30, 2018, the Company incurred approximately $2.4 million in legal and other adviser costs resulting from the Action and the Books and Records Matters, which are recorded in marketing, general and administrative expenses on the Company’s condensed consolidated statement of operations. The Company expects that these costs are at least partially covered by the Company’s directors and officers insurance policy, subject to the retention and limits provided in the policy. According to ASC 450, a recovery related to a contingent loss (e.g., insurance recovery) is a contingent gain. Recovery of a recorded contingent loss shall be recognized only when realization of the recovery is deemed probable and reasonably estimable. Costs incurred in connection with a books and records demand are subject to a $250,000 sublimit. Until additional coverage is confirmed by the Company’s insurance carrier, the Company has recorded a receivable of $250,000 as partial recovery of the costs incurred in connection with the Books and Records Matters with an offsetting reduction to marketing, general and administrative expenses during the quarter ended September 30, 2018 as the Company believes that collection of at least this amount is probable under the terms of its insurance policy.

Business Economic Loss Claim

In May 2018, the Company concluded the settlement of a business economic loss claim in which it was an absent member in a tort class action lawsuit. The Company will receive proceeds of $7.4 million, net of legal fees, related to this settlement. The cash proceeds will be received in equal installments in January 2019 and January 2020, respectively. During the second quarter of 2018, the Company recorded the present value of the proceeds of $6.8 million and a discount of $0.6 million. The present value of the net proceeds of $6.8 million was recorded in other income on the Company's condensed consolidated statement of operations. The discount of $0.6 million was recorded on the Company's condensed consolidated balance sheet and is being accreted to interest income over the term of the receivable using the effective interest method.

Other 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 those described in this report, which could be expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity. 

21




8. RELATED PARTY TRANSACTIONS  

Payables to Thermo and other affiliates related to normal purchase transactions were $0.6 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively. This increase is related to the timing of payment of expenses incurred by Thermo on behalf of the Company related to the Merger Agreement.

Transactions with Thermo 

Certain general and administrative expenses are incurred by Thermo on behalf of the Company. These expenses, which include non-cash expenses that the Company accounts for as a contribution to capital, relate to services provided by certain executive officers of Thermo. The expenses charged are based on actual amounts (with no mark-up) incurred by Thermo or upon allocated employee time. The expenses charged to the Company were $0.2 million during each of the three months ended September 30, 2018 and 2017 and $0.6 million during each of the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, the principal amount outstanding under the Loan Agreement with Thermo was $116.1 million, and the fair value of the compound embedded derivative liability associated with the Loan Agreement was $81.4 million. During the three months ended September 30, 2018 and 2017, interest accrued on the Loan Agreement was approximately $3.5 million and $3.1 million, respectively. During the nine months ended September 30, 2018 and 2017, interest accrued on the Loan Agreement was approximately $10.0 million and $8.9 million, respectively.

On April 24, 2018, Globalstar entered into the Merger Agreement with GBS Acquisitions, Inc., a Delaware corporation and wholly owned subsidiary of Globalstar (“Merger Sub”), Thermo Acquisitions, Inc., a Delaware corporation (“Thermo Acquisitions”), the stockholders of Thermo Acquisitions (collectively, the “Thermo Stockholders,” and each, individually, a “Thermo Stockholder”), and Thermo Development, Inc., in its capacity as the representative of the Thermo Stockholders as set forth therein (the “Stockholders’ Representative”). Thermo Acquisitions is controlled by James Monroe III, Executive Chairman of the Board of Directors of Globalstar and former Chief Executive Officer of Globalstar. Pursuant to the terms of the Merger Agreement, Merger Sub would merge with and into Thermo Acquisitions with Thermo Acquisitions continuing as the surviving corporation and a wholly owned subsidiary of Globalstar (the “Merger”). The transaction was unanimously recommended by the Special Committee of the Board of Directors of Globalstar, consisting entirely of disinterested independent directors, and unanimously approved by the full Board of Directors. On July 31, 2018, Globalstar, following the unanimous recommendation of its Special Committee of independent directors, and the Stockholders’ Representative, terminated the Merger Agreement by mutual written agreement by entering into a Termination of Agreement and Plan of Merger, between Globalstar and the Stockholders’ Representative. In addition, on July 31, 2018, the Voting Agreement between Globalstar and certain of its stockholders terminated in accordance with its terms as a result of the termination of the Merger Agreement. No termination fees are payable in connection with the termination of the Merger Agreement.

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

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


22



9. EARNINGS (LOSS) PER SHARE 

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

The following table sets forth the calculation of basic and diluted earnings (loss) per share and reconciles basic weighted average shares to diluted weighted average shares of common stock outstanding for the periods indicated (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
9,019

 
$
52,406

 
$
89,937

 
$
(66,489
)
Effect of dilutive securities:
 
 
 
 
 
 
 
2013 8.00% Notes
28

 
388

 
66

 

Loan Agreement with Thermo
4,387

 
2,520

 
10,256

 

Income (loss) to common stockholders plus assumed conversions
$
13,434

 
$
55,314

 
$
100,259

 
$
(66,489
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic shares outstanding
1,264,516

 
1,169,993

 
1,263,416

 
1,137,854

Incremental shares from assumed exercises, conversions and other issuance of:
 
 
 
 
 
 
 
Stock options, restricted stock, restricted stock units and ESPP
2,370

 
7,364

 
5,661

 

2013 8.00% Notes
1,867

 
2,157

 
2,087

 

Loan Agreement with Thermo
159,047

 
166,391

 
177,756

 

Diluted shares outstanding
1,427,800

 
1,345,905

 
1,448,920

 
1,137,854

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.04

 
$
0.07

 
$
(0.06
)
Diluted
0.01

 
0.04

 
0.07

 
(0.06
)

For the nine months ended September 30, 2017, 171.5 million shares of potential common stock were excluded from diluted shares outstanding because the effects of assuming issuance of these potentially dilutive securities would be anti-dilutive.



23



10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

Globalstar, Inc.
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2018
(Unaudited)  
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenue:
 

 
 

 
 

 
 

 
 

Service revenue
$
22,750

 
$
11,627

 
$
16,915

 
$
(21,394
)
 
$
29,898

Subscriber equipment sales
260

 
5,144

 
1,695

 
(1,305
)
 
5,794

Total revenue
23,010

 
16,771

 
18,610

 
(22,699
)
 
35,692

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
6,825

 
1,556

 
2,429

 
(1,381
)
 
9,429

Cost of subscriber equipment sales
176

 
4,259

 
1,297

 
(1,306
)
 
4,426

Marketing, general and administrative
10,706

 
1,468

 
22,911

 
(20,024
)
 
15,061

Depreciation, amortization and accretion
25,041

 
52

 
(355
)
 

 
24,738

Total operating expenses
42,748

 
7,335

 
26,282

 
(22,711
)
 
53,654

Income (loss) from operations
(19,738
)
 
9,436

 
(7,672
)
 
12

 
(17,962
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Interest income and expense, net of amounts capitalized
(13,360
)
 
(5
)
 
7

 

 
(13,358
)
Derivative gain
39,059

 

 

 

 
39,059

Equity in subsidiary earnings (loss)
3,170

 
(2,571
)
 

 
(599
)
 

Other
(112
)
 
23

 
1,431

 
(11
)
 
1,331

Total other income (expense)
28,757

 
(2,553
)
 
1,438

 
(610
)
 
27,032

Income (loss) before income taxes
9,019

 
6,883

 
(6,234
)
 
(598
)
 
9,070

Income tax expense

 
5

 
46

 

 
51

Net income (loss)
$
9,019

 
$
6,878

 
$
(6,280
)
 
$
(598
)
 
$
9,019

Comprehensive income (loss)
$
9,019

 
$
6,878

 
$
(5,906
)
 
$
(472
)
 
$
9,519


24



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

 
 

 
 

 
 

Service revenue
$
20,018

 
$
10,163

 
$
14,678

 
$
(18,790
)
 
$
26,069

Subscriber equipment sales
55

 
3,524

 
1,762

 
(952
)
 
4,389

Total revenue
20,073

 
13,687

 
16,440

 
(19,742
)
 
30,458

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
6,460

 
1,523

 
2,819

 
(1,487
)
 
9,315

Cost of subscriber equipment sales
8

 
2,494

 
1,354

 
(951
)
 
2,905

Marketing, general and administrative
5,685

 
1,268

 
19,911

 
(17,319
)
 
9,545

Depreciation, amortization and accretion
19,250

 
116

 
49

 

 
19,415

Total operating expenses
31,403

 
5,401

 
24,133

 
(19,757
)
 
41,180

Income (loss) from operations
(11,330
)
 
8,286

 
(7,693
)
 
15

 
(10,722
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Loss on extinguishment of debt
(6,306
)
 

 

 

 
(6,306
)
Interest income and expense, net of amounts capitalized
(8,895
)
 
(5
)
 
(51
)
 
(3
)
 
(8,954
)
Derivative gain
78,840

 

 

 

 
78,840

Equity in subsidiary earnings (loss)
754

 
(3,202
)
 

 
2,448

 

Other
(657
)
 
(182
)
 
471

 
(17
)
 
(385
)
Total other income (expense)
63,736

 
(3,389
)
 
420

 
2,428

 
63,195

Income (loss) before income taxes
52,406

 
4,897

 
(7,273
)
 
2,443

 
52,473

Income tax expense

 
5

 
62

 

 
67

Net income (loss)
$
52,406

 
$
4,892

 
$
(7,335
)
 
$
2,443

 
$
52,406

Comprehensive income (loss)
$
52,406

 
$
4,892

 
$
(8,243
)
 
$
2,449

 
$
51,504

 


25




Globalstar, Inc.
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2018
(Unaudited)
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Revenue:
 

 
 

 
 

 
 

 
 

Service revenue
$
66,554

 
$
30,993

 
$
48,929

 
$
(62,573
)
 
$
83,903

Subscriber equipment sales
511

 
12,541

 
4,266

 
(3,054
)
 
14,264

Total revenue
67,065

 
43,534

 
53,195

 
(65,627
)
 
98,167

Operating expenses:
 

 
 

 
 

 
 

 
 

Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
19,827

 
4,444

 
7,591

 
(3,878
)
 
27,984

Cost of subscriber equipment sales
382

 
10,350

 
3,091

 
(3,055
)
 
10,768

Marketing, general and administrative
29,173

 
3,989

 
67,852

 
(58,734
)
 
42,280

Revision to contract termination charge
(20,478
)
 

 

 

 
(20,478
)
Depreciation, amortization and accretion
65,434

 
216

 
935

 

 
66,585

Total operating expenses
94,338

 
18,999

 
79,469

 
(65,667
)
 
127,139

Income (loss) from operations
(27,273
)
 
24,535

 
(26,274
)
 
40

 
(28,972
)
Other income (expense):
 

 
 

 
 

 
 

 
 

Interest income and expense, net of amounts capitalized
(31,081
)
 
(9
)
 
24

 
50

 
(31,016
)
Derivative gain
145,944

 

 

 

 
145,944

Gain on legal settlement
6,779

 

 

 

 
6,779

Equity in subsidiary earnings (loss)
(3,950
)
 
(12,199
)
 

 
16,149

 

Other
(482
)
 
140

 
(2,302
)
 
(38
)
 
(2,682
)
Total other income (expense)
117,210

 
(12,068
)
 
(2,278
)
 
16,161

 
119,025

Income (loss) before income taxes
89,937

 
12,467

 
(28,552
)
 
16,201

 
90,053

Income tax expense

 
21