[March 15, 2013] GLOBALSTAR, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations Tweet (Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our consolidated financial statements and applicable notes to our consolidated financial statements and other information included elsewhere in this Annual Report on Form 10-K, including risk factors disclosed in Part I, Item IA. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K. 25 Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1 to our consolidated financial statements contains a description of the accounting policies used in the preparation of our financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition; property and equipment; income taxes; derivative instruments; inventory; allowance for doubtful accounts; pension plan; stock-based compensation; long-lived assets; and litigation, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different assumptions and conditions. We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting policies and estimates used in the preparation of our consolidated financial statements. In addition, there are other items within our consolidated financial statements that require estimates but are not deemed critical as defined in this paragraph. Revenue Recognition Our primary types of revenue include (i) service revenue from two-way voice communication and data transmissions and one-way data transmissions between a mobile or fixed device and (ii) subscriber equipment revenue from the sale of Duplex two-way transmission products, SPOT consumer retail products, and Simplex one-way transmission products. Additionally, we generate revenue by providing engineering and support services to certain customers. We provide Duplex, SPOT and Simplex services directly to customers and through resellers and IGOs. Duplex For our Duplex customers and resellers, we recognize 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. We also recognize revenue for airtime minutes in excess of the monthly access fees in the period such minutes are used. Under certain annual plans where customers prepay for a predetermined amount of minutes, we defer revenue until the minutes are used or the prepaid time period expires. Unused minutes accumulate until they expire, at which point revenue is recognized for any remaining unused minutes. For annual access fees charged for certain annual plans, revenue is recognized on a straight-line basis over the term of the plan. We expense or charge credits granted to customers against revenue or deferred revenue upon issuance. We expense certain subscriber acquisition costs, including such items as dealer commissions, internal sales commissions and equipment subsidies at the timeof the related sale. SPOT and Simplex We sell SPOT and Simplex services as annual or multi-year plans and recognize revenue ratably over the service term or as service is used, beginning when the service is activated by the customer. We record amounts received in advanceas deferred revenue. IGO We earn a portion of our revenues through the sale of airtime minutes or data packages on a wholesale basis to IGOs. We recognize revenue from services provided to IGOs based upon airtime minutes or data packages used by their customers and in accordance with contractual fee arrangements. If collection is uncertain, we recognize revenue when cash payment is received. Equipment Subscriber equipment revenue represents the sale of fixed and mobile user terminals, accessories and our SPOT and Simplex products. We recognize revenue upon shipment provided title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable, and collection is probable. 26 Other We also provide certain engineering services to assist customers in developing new technologies related to our system. We recognize the revenues associated with these services when the services are rendered, and we recognize the expenses when incurred. We recognize revenues and costs associated with long-term engineering contracts on the percentage-of-completion basis of accounting. Property and Equipment We capitalize costs associated with the design, manufacture, test and launch of our low earth orbit satellites. We track capitalized costs associated with our satellites by fixed asset category and allocate them to each asset as it comes into service. For assets that are sold or retired, including satellites that are de-orbited and no longer providing services, we remove the estimated cost and accumulated depreciation. We recognize a loss from an in-orbit failure of a satellite as an expense in the period it is determined that the satellite is not recoverable. We depreciate satellites over their estimated useful lives, beginning on the date each satellite is placed into service. We evaluate the appropriateness of estimated useful lives assigned to our property and equipment and revise such lives to the extent warranted by changing facts and circumstances. We review the carrying value of our assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. We look to current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. If we determine that impairment exists, we calculate any related impairment loss based on fair value. Income Taxes We use the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. We recognize the effect of a change in tax rates as income or expense in the period that the rate is enacted. We are required to assess whether it is more likely than not that we will be able to realize some or all of our deferred tax assets. If we cannot determine that deferred tax assets are more likely than not recoverable, we are required to provide a valuation allowance against those assets. This assessment takes into account factors including: (a) the nature, frequency, and severity of current and cumulative financial reporting losses; (b) sources of estimated future taxable income; and (c) tax planning strategies. Derivative Instruments We recognize all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. We record recognized gains or losses on derivative instruments in the consolidated statements of operations. We estimate the fair values of our derivative financial instruments using various techniques that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that embody it and the expected means of settlement. We determine the fair value of our interest rate cap using pricing models developed based on the LIBOR rate and other observable market data. That value is adjusted to reflect nonperformance risk of both the counterparty and us. For the conversion rights and features embedded within the 8.00% Notes and the warrants issued with the 8.00% Notes, we use the Monte Carlo valuation technique to determine fair value. For the contingent put feature embedded in the 5.0% Notes, we use the Monte Carlo valuation technique to determine fair value. Valuations derived from these models are subject to ongoing internal and external verification and review. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Our financial position and results of operations may vary materially from quarter-to-quarter based on conditions other than our operating revenues and expenses. Inventory Inventory consists of purchased products, including fixed and mobile user terminals and accessories. We compute cost using the first-in, first-out (FIFO) method and state inventory transactions at the lower of cost or market. Inventory write-downs are measured as the difference between the cost of inventory and market, and are recorded as a cost of subscriber equipment sales - reduction in the value of inventory. At the point of any inventory write-downs to market, a new, lower cost basis for that inventory is established, and any subsequent changes in facts and circumstances do not result in the restoration of the former cost basis or increase in that newly established cost basis. 27 We review product sales and returns from the previous 12 months and future demand forecasts and write off any excess or obsolete inventory. We also assess inventory for obsolescence by testing finished goods to ensure they have been properly stored and maintained so that they will perform according to specifications. In addition, we assess the market for competing products to determine that the existing inventory will be competitive in the marketplace. We also record a liability for firm, noncancelable, and unconditional purchase commitments with contact manufacturers and suppliers for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. If there were to be a sudden and significant decrease in future demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to write down our inventory, and our liability for purchase commitments with contract manufacturers and suppliers, and accordingly gross margin could be adversely affected. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments. We review these estimated allowances on a case by case basis, analyzing the customer's payment history and information regarding the customer's creditworthiness known to us. In addition, we record a reserve based on the size and age of all receivable balances against those balances that do not have specific reserves. If the financial condition of our customers deteriorates, resulting in their inability to make payments, we would record additional allowances. Pension Plan We calculate our pension benefit obligation and expense using actuarial models. Critical assumptions and estimates we use in the actuarial calculations include discount rate, expected rate of return on plan assets and other participant data, such as demographic factors, mortality, and termination. We determine discount rates annually based on our calculated average of rates of return of long-term corporate bonds. We based discount rates on Moody's and Citigroup's annualized yield curve index as of December 31, 2012 and 2011. The discount rate used at the measurement date decreased to 3.75% from 4.00% in 2011. A 100 basis point increase in our discount rate would reduce our benefit obligation by $2.2 million. We determine expected long-term rates of return on plan assets based on an evaluation of our plan assets, historical trends and experience, taking into account current and expected market conditions. Plan assets are comprised primarily of equity and debt securities. The rate of return on plan assets decreased to 7.12% from 7.50% in 2011. To determine the rates of return, we consider historical experience and expected future performance of plan assets. Stock-Based Compensation To measure compensation expense, we use valuation models which require estimates such as, forfeitures, vesting terms (calculated based on market conditions associated with a certain award), volatility, and risk free interest rates. Additionally we recognize stock-based compensation expense over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term. Long-Lived Assets We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, we write the asset down to its fair market value. Litigation, Commitments and Contingencies We are subject to various claims and lawsuits that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment and assessment based on professional knowledge and experience of our management and legal counsel. The ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstancesbecome known. Performance Indicators Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of and potential variability of our earnings and cash flows. These key performance indicators include: • total revenue, which is an indicator of our overall business growth; • subscriber growth and churn rate, which are both indicators of the satisfaction of our customers; • average monthly revenue per user, or ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-value customers. We calculate ARPU separately for each type of our Duplex, Simplex, SPOT, and IGO revenue; 28 • operating income and adjusted EBITDA, which are both indicators of our financial performance; and • capital expenditures, which are an indicator of future revenue growth potential and cash requirements. Comparison of the Results of Operations for the years ended December 31, 2012 and 2011 Revenue: Total revenue increased by $3.5 million, or approximately 5%, to $76.3 million for 2012 from $72.8 million in 2011. During the first quarter of 2011, we recognized $2.0 million in nonrecurring revenue as a result of the termination of our Open Range partnership. Excluding this revenue recognized, total revenue increased $5.5 million, or approximately 8%. We attribute this increase to higher sales of Simplex equipment and increased service revenue as a result of growth in our SPOT and Simplex subscriber base. These increases were offset primarily by decreases in sales of SPOT equipment due to the introduction of new product offerings in early 2011. The majority of the subscribers we gained as a result of higher SPOT equipment sales in 2011 is in our current subscriber base and continues to generate service revenue. The following table sets forth amounts and percentages of our revenue by type of service for 2012 and 2011 (in thousands): Year Ended Year Ended December 31, 2012 December 31, 2011 % of Total % of Total Revenue Revenue Revenue Revenue Service Revenues: Duplex $ 18,438 24 % $ 19,778 27 % SPOT 25,227 33 19,753 27 Simplex 6,146 8 5,495 8 IGO 804 1 1,533 2 Other 6,853 9 8,838 12 Total Service Revenues $ 57,468 75 % $ 55,397 76 % The following table sets forth amounts and percentages of our revenue for equipment sales for 2012 and 2011 (in thousands). Year Ended Year Ended December 31, 2012 December 31, 2011 % of Total % of Total Revenue Revenue Revenue RevenueEquipment Revenues: Duplex $ 2,652 4 % $ 1,826 3 % SPOT 4,997 7 7,932 11 Simplex 9,081 12 6,431 9 IGO 990 1 1,128 1 Other 1,130 1 113 - Total Equipment Revenues $ 18,850 25 % $ 17,430 24 % Other equipment revenue includes sales of accessories to support our current lineup of Duplex, SPOT and Simplex products. The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for 2012 and 2011. The following numbers are subject to immaterial rounding inherent in calculating averages. 29 December 31, 2012 2011 Average number of subscribers for the period (year ended): Duplex 88,189 93,963 SPOT 221,911 177,247 Simplex 164,459 136,037 IGO 42,252 47,920 ARPU (monthly): Duplex $ 17.42 $ 17.54 SPOT 9.47 9.29 Simplex 3.11 3.37 IGO 1.59 2.67 Number of subscribers (end of period): Duplex 84,330 92,047 SPOT 241,081 202,741 Simplex 188,158 140,760 IGO 41,146 43,357 Other 7,239 7,548 Total 561,954 486,453 Other service revenue includes primarily revenue generated from engineering services and our former Open Range partnership, which is not subscriber driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts. Service Revenue Duplex revenue decreased approximately 7% in 2012 from 2011. Our two-way communication issues continue to affect our Duplex revenue. Despite our efforts to maintain our Duplex subscriber base by lowering prices for our Duplex equipment, our subscriber base decreased by approximately 8% during 2012. During 2012, we began a process to convert certain Duplex customers to higher rate plans commensurate with our improved service levels. As a result, we have experienced some additional churn in our subscriber base. As a result of launching and placing into service our second-generation satellites, we are experiencing increases in demand for our Duplex two-way voice and data products. As these units are activated, we expect to see increases in the related Duplex service in the future. SPOT revenue increased approximately 28% in 2012. We generated increased service revenue from SPOT and added additional service revenue from the release of other SPOT consumer retail products sold during 2011, which are reflected in our 2012 subscriber base. Our SPOT subscriber base increased by approximately 19% during 2012. Our subscriber count includes suspended subscribers, who are subscribers who have activated their devices, have access, but no service revenue is being recognized for their fees while we are in the process of collecting payment. These suspended accounts represented 19% and 20% of our total SPOT subscribers as of December 31, 2012 and 2011, respectively. Beginning in 2013, we initiated a process to deactivate these suspended accounts. Simplex revenue increased approximately 12% in 2012 from 2011. We generated increased service revenue due to a 34% increase in our Simplex subscribers during 2012. Revenue growth for our Simplex customers is not necessarily commensurate with subscriber growth due to the various competitive pricing plans we offer and product mix. Other revenue decreased approximately 22% in 2012. This decrease related to the nonrecurrence in 2012 of revenue recognized as a result of the termination of our Open Range contract in the first quarter of 2011. Excluding the recognition of Open Range revenue of approximately $2.0 million, other revenue remained consistent, which was due primarily to higher engineering services revenue and higher activation fees recognized during 2012 compared to 2011. These increases were offset by decreases in service revenue recognized from third party sources. Equipment Revenue Duplex equipment sales increased by approximately 45% in 2012. As a result of launching and placing into service our second-generation satellites, we are experiencing increased demand for our Duplex two-way voice and data products. As these units are activated, we expect to see increases in the related Duplex service in the future. As we place into service the remaining second-generation satellites that we launched in February 2013, our two-way communication reliability will continue to improve, and we expect Duplex equipment revenue to increase. Our inventory and advances for inventory balances were $42.2 million and $9.2 million, respectively, as of December 31, 2012, compared with subscriber equipment sales of $18.9 million for 2012. A significant portion of our inventory consists of Duplex products which are designed to operate with both our first-generation and our second-generation satellites. Our advances for inventory relate to our commitment with Qualcomm to purchase additional Duplex products. In May 2008, we entered into an agreement with Hughes under which Hughes will design, supply and implement (a) RAN ground network equipment and software upgrades for installation at a number of our satellite gateway ground stations and (b) satellite interface chips to be a part of the UTS in various next-generation Globalstar devices. 30 We sold a limited number of Duplex products in 2012 and 2011, compared to the high level of inventory on hand. However, we have several initiatives underway intended to increase future sales of Duplex products, which depend upon successfully completing the deployment of our second-generation constellation. With the improvement of both coverage and quality for our Duplex services resulting from the deployment of our second-generation constellation, we expect an increase in the sale of Duplex products which would result in a reduction in the inventory currently on hand. SPOT equipment sales decreased approximately 37% in 2012. The decrease relates primarily to higher sales of certain new SPOT consumer retail products which were released in early 2011 which did not recur in 2012. We anticipate introducing additional SPOT products during 2013 that we expect will further drive sales, subscriber and revenue growth. Simplex equipment sales increased approximately 41% in 2012. The increase is due primarily to continued success of our commercial applications for M2M asset monitoring and tracking. Operating Expenses: Total operating expenses increased $25.2 million, or approximately 17%, to $171.3 million from $146.1 million in 2011. This increase is primarily due to the $22.0 million agreed termination charge related to the settlement with Thales regarding the construction of Phase 3 satellites, as well as the recognition of a loss of approximately $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. Excluding these one-time items, total operating expenses decreased $3.9 million, or 3%, during 2012 due to decreases in various components of operating expenses, partially offset by higher depreciation expense of $19.8 million as a result of additional second-generation satellites coming into service throughout 2011and 2012. Cost of Services Cost of services decreased $6.0 million, or approximately 21%, to $23.2 million from $29.2 million in 2011. Cost of services is comprised primarily of network operating costs, which are generally fixed in nature. The decrease during the year was due primarily to implementation of our plans to lower costs by monitoring operating expenses and streamlining operations. Cost of Subscriber Equipment Sales Cost of subscriber equipment sales increased $1.4 million, or approximately 11%, to $13.3 million from $11.9 million in 2011. These increases were due primarily to increases in equipment revenue of 8% for 2012 from 2011. These increases were offset slightly by lower manufacturing costs for our SPOT and Simplex products. Marketing, general and administrative Marketing, general and administrative expenses decreased $8.1 million, or approximately 19%, to $34.3 million from $42.4 million in 2011. This decrease was due primarily to higher legal fees incurred during 2011 related to the arbitration with Thales, and our recording a provision for contingent payroll reimbursements as a result of our relocation agreement with the State of Louisiana during 2011. We also experienced decreases across all expense categories due to improvements in our cost structure from monitoring operating costs and streamlining operations. Contract Termination Charge During the second quarter of 2012, we recorded a contract termination charge of €17.5 million. This charge related to the agreement between us and Thales regarding construction of additional second-generation satellites. See Note 9 to our Consolidated Financial Statements for further discussion. Reduction in the Value of Inventory Cost of subscriber equipment sales - reduction in the value of inventory was $1.4 million compared to $8.8 million in 2011. During 2012, we recorded an inventory reserve of $1.0 million related to component parts that will not be utilized in the manufacturing or production of current or future products. In 2011, we recorded impairment charges on our phones and related inventory that use our two-way communication services. These charges were recognized after assessment of our inventory quantities and our forecasted equipment sales and prices given the current and expected market conditions for this type of equipment. During 2011, we also recorded impairment charges of $1.0 million as a result of discontinuing the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially all on-going product development activities. 31 Reduction in the Value of Long-Lived Assets Reduction in the value of long-lived assets was $7.2 million during 2012 and $3.6 million during 2011. During the second quarter of 2012, we recorded a loss of $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. See Note 8 to our Consolidated Financial Statements for further discussion. During 2011, we recorded an impairment charge of $3.0 million related to intangible assets, equipment, and capitalized software costs as a result of discontinuing the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially all on-going product development activities. Depreciation, Amortization and Accretion Depreciation, amortization, and accretion expense increased $19.8 million, or approximately 39%, to $69.8 million from $50.0 million in 2011. The increase relates primarily to additional depreciation expense for our second-generation satellites placed into service throughout 2011 and 2012. Other Income (Expense): Interest Income and Expense Interest income and expense, net, increased by $16.7 million to a net expense of $21.5 million for 2012 from $4.8 million in 2011. This increase was due primarily to a reduction in our capitalized interest due to the status of our construction in progress. As we place satellites into service, our construction in progress balance related to our second-generation satellites decreases, which reduces the amount of interest we can capitalize under Generally Accepted Accounting Principles ("GAAP"). As a result of this decrease in our construction in progress balance, we recorded approximately $17.1 million of interest expense during 2012 and $0 in 2011. Derivative Gain (Loss) Derivative gain (loss) decreased by $16.9 million to a gain of $6.9 million for 2012 from a gain of $23.8 million in 2011, due primarily to changes in ourstock price. Other Other income (expense) increased by $1.5 million to expense of $2.3 million for 2012 from expense of $0.8 million in 2011. Changes in other income (expense) are due primarily to foreign currency gains and losses recognized during the respective periods. Comparison of the Results of Operations for the years ended December 31, 2011 and 2010 Revenue: Total revenue increased by $4.9 million, or approximately 7%, to $72.8 million for 2011 from $67.9 million in 2010. We attribute this increase to higher service and equipment revenues as a result of increases in our SPOT and Simplex subscriber base. The increase in our SPOT and Simplex sales was partially offset by decreases in service revenue and equipment sales in our Duplex business, which continues to be affected by our two-way communication issues. The following table sets forth amounts and percentages of our revenue by type of service for 2011 and 2010 (in thousands). Year Ended Year Ended December 31, 2011 December 31, 2010 % of Total % of Total Revenue Revenue Revenue Revenue Service Revenues: Duplex $ 19,778 27 % $ 23,294 34 % SPOT 19,753 27 14,756 22 Simplex 5,495 8 4,583 7 IGO 1,533 2 1,140 2 Other 8,838 12 7,164 10 Total Service Revenues $ 55,397 76 % $ 50,937 75 % The following table sets forth amounts and percentages of our revenue for equipment sales for 2011 and 2010 (in thousands). 32 Year Ended Year Ended December 31, 2011 December 31, 2010 % of Total % of Total Revenue Revenue Revenue Revenue Equipment Revenues: Duplex $ 1,826 3 % $ 2,148 3 % SPOT 7,932 11 8,548 13 Simplex 6,431 9 5,337 8 IGO 1,128 1 659 1 Other 113 - 312 - Total Equipment Revenues $ 17,430 24 % $ 17,004 25 % The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for 2011 and 2010. The following numbers are subject to immaterial rounding inherent in calculating averages. December 31, 2011 2010 Average number of subscribers for the period (year ended): Duplex 93,963 97,453 SPOT 177,247 127,633 Simplex 136,037 123,348 IGO 47,920 58,603 ARPU (monthly): Duplex $ 17.54 $ 19.92 SPOT 9.29 9.64 Simplex 3.37 3.10 IGO 2.67 1.62 Number of subscribers (end of period): Duplex 92,047 95,879 SPOT 202,741 151,752 Simplex 140,760 131,313 IGO 43,357 52,483 Other 7,548 7,826 Total 486,453 439,253 Other service revenue includes revenue generated from engineering services and our former Open Range partnership, which is not subscriber driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts. Service Revenue Duplex revenue decreased approximately 15% in 2011 from 2010. Our two-way communication issues continue to adversely affect our Duplex revenue. Despite our efforts to maintain our Duplex subscriber base by lowering prices for our Duplex products, our subscriber base decreased by approximately 4% during 2011. As we launch and place into service our remaining second-generation satellites during 2012, our two-way communication reliability will improve, and we expect Duplex service revenue to increase in 2012. SPOT revenue increased approximately 34% in 2011. We generated increased revenue from our SPOT Satellite GPS Messenger and added additional service revenue from the release of other SPOT consumer retail products during the second half of 2010 and the first quarter of 2011. Our SPOT subscriber base increased by approximately 34% during 2011. Our subscriber count includes suspended subscribers, which are subscribers who have activated their devices, have access, but no service revenue is being recognized for their fees while we are in the process of collecting payments. These suspended accounts represented 25% and 15% of our total SPOT subscribers as of December 31, 2011 and 2010, respectively. In January 2013, we implemented a plan to no longer provide service to suspended subscribers as their contracts reach the end of their activation period. This plan will result in these subscribers no longer being included in our subscriber count. Simplex revenue increased approximately 20% in 2011 from 2010. We generated increased service revenue due to an increase in our Simplex subscribers of 7% during 2011. 33 Subscriber Equipment Sales Duplex equipment sales decreased by approximately 15% in 2011 from 2010. Our two-way communication issues continue to affect adversely our Duplex equipment sales. Despite our efforts to maintain our Duplex equipment sales by lowering prices for our Duplex products, we continue to be affected by our two-way communication issues. Our inventory and advances for inventory balances were $41.8 million and $9.2 million, respectively, as of December 31, 2011, compared with subscriber equipment sales of $17.4 million for the year then ended. A significant portion of our inventory consists of Duplex products which are designed to operate with both our initial constellation and our second-generation constellation. Our advances for inventory relate to our commitment with Qualcomm to purchase additional Duplex products. As discussed in Note 8 to the consolidated financial statements, we are currently seeking to negotiate termination of this commitment. We have not entered into any other purchase commitments to produce or purchase the next generation of Duplex products. The deterioration of our initial constellation has resulted in substantially reduced ability to provide reliable two-way communications, which has resulted in a decrease in demand for our Duplex products. As such, we sold a limited number of Duplex products in 2011 and 2010, compared to the high level of inventory on hand. However, we have several initiatives underway to increase our subscriber equipment sales for Duplex products in the future, which depend upon successfully completing the deployment of our second-generation constellation. With the improvement of both coverage and quality for our Duplex services resulting from the deployment of our second-generation constellation, we expect an increase in the sale of Duplex products which would result in a reduction in the inventory currently on hand. SPOT equipment sales decreased approximately 7% in 2011. The decrease relates primarily to higher sales in 2010 related to the release of our SPOT 2 Satellite GPS Messenger during that period, which was offset partially by the release of other SPOT consumer retail products during the second half of 2010 and thefirst quarter of 2011. Simplex equipment sales increased approximately 21% in 2011. The increase is due primarily to increased demand for our machine-to-machine ("M2M") products. Operating Expenses: Total operating expenses increased $18.4 million, or approximately 14%, to $146.1 million for 2011 from $127.7 million in 2010. We attribute this increase to higher depreciation expense as a result of our second-generation satellites coming into service during the fourth quarter 2010 and throughout 2011, offset by decreases in other components of operating expenses. Cost of Services Cost of services decreased $1.9 million, or approximately 6%, to $29.3 million for 2011 from $31.2 million in 2010. Cost of services is comprised primarily of network operating costs, which are generally fixed in nature. The decrease during the year was due primarily to a recently implemented plan to improve cost structure by reducing headcount and monitoring operating costs. Cost of Subscriber Equipment Sales Cost of subscriber equipment sales decreased $1.3 million, or approximately 10%, to $11.9 million for 2011 from $13.2 million in 2010. We experienced a decrease in costs during the second half of 2010 and throughout 2011 due to lower manufacturing costs for our SPOT products as a result of our acquisition of Axonn at the end of 2009, as well as increased warranty expense recognized due to the release of other SPOT consumer retail products during 2010 and the first quarter of 2011. Additionally, we incurred higher costs in 2010 due to increased expediting fees paid to suppliers that did not recur in 2011. This decrease was offset by an increase (3%) in equipment revenue during 2011. Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory Cost of subscriber equipment sales - reduction in the value of inventory decreased $2.1 million to $8.8 million for 2011 from $10.9 million in 2010. During 2010, we recorded impairment charges to adjust the cost of certain products that require the use of our two-way communication services. In 2011, we recoded additional charges on products that use our two-way communication services. Impairment charges on inventory represent write-downs of our second-generation phones and related accessory inventory. These charges were recognized after assessment of our inventory quantities and our forecasted equipment sales and prices given the current and expected market conditions for this type of equipment. During 2011, we recorded additional impairment charges as a result of discontinuing of the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially all on-going product development activities. 34 Reduction in the Value of Long-Lived Assets Reduction in the value of long-lived assets increased $0.3 million, or 10%, during 2011. During 2011, we recorded an impairment charge related to intangible assets, equipment, and capitalized software costs as a result of discontinuing the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially all on-going product development activities. During 2010, we recognized an impairment charge to goodwill of $2.7 million based on our annual impairment analysis. Additional reductions in the value of assets were related to gateway spare parts of $0.5 million and other spare parts of $0.1 million during 2010. Marketing, general and administrative Marketing, general and administrative expenses increased $0.6 million, or approximately 1%, to $42.4 million for 2011 from $41.8 million in 2010. This increase related primarily to higher legal fees incurred during the year, primarily related to the arbitration with Thales, and our recording a provision for contingent payroll reimbursements as a result of our relocation agreement with the State of Louisiana. These increases were offset partially by our recently implemented plan to improve cost structure by reducing headcount and monitoring operating costs. Depreciation, Amortization and Accretion Depreciation, amortization, and accretion expense increased $22.6 million, or approximately 83%, to $50.0 million for 2011 from $27.4 million in 2010. The increase relates primarily to additional depreciation expense for the second-generation satellites placed into service during the fourth quarter2010 and throughout 2011. Other Income (Expense): Interest Expense Interest expense decreased by $0.2 million to $4.8 million for 2011 from $5.0 million in 2010. This decrease is due to conversion of notes to common stock in 2010, which resulted in a write-off of a portion of the deferred financingcosts at the time of conversion. This resulted in less amortization in 2011. Derivative Gain (Loss) Derivative gain (loss) improved by $53.8 million to a gain of $23.8 million for 2011 from a loss of $30.0 million in 2010, reflecting the fair value adjustment to our derivative assets and liabilities. The derivative gain was due primarily to decreases in our stock price over the year. Other Other expense decreased by $1.9 million to $0.8 million for 2011 from $2.7 million in 2010. This decrease relates primarily to losses we recognized on equity method investments in 2010 that did not recur in 2011. 35 Liquidity and Capital Resources Our principal liquidity requirements are to meet capital expenditure needs, including deploying our second-generation constellation, next-generation ground upgrades, repayment of our current and long-term debt, operating costs, and working capital. Our principal sources of liquidity include cash on hand ($11.8 million at December 31, 2012), cash flows from operations ($6.9 million for the year ended December 31, 2012), the remaining funds available under our Facility Agreement ($0.7 million at December 31, 2012, subject to certain restrictions, see below for further discussion), interest earned from funds previously held in our contingent equity account ($1.1 million at December 31, 2012), amounts held in our debt service reserve account ($8.9 million at December 31, 2012). We are seeking additional funds from financing not yet arranged. On December 28, 2012, we entered into an equity line agreement with Terrapin under which we may require Terrapin to purchase up to $30.0 million of our common stock. See below for further discussion. Cash Flows for the years ended December 31, 2012, 2011, and 2010 The following table shows our cash flows from operating, investing and financing activities for 2012, 2011 and 2010 (in thousands): Year Ended December 31, Statements of Cash Flows 2012 2011 2010Net cash provided by (used in) operating activities $ 6,874 $ (5,503 ) $ (23,338 ) Net cash used in investing activities (58,010 ) (99,419 ) (205,391 ) Net cash provided by financing activities 52,386 82,638 194,670 Effect of exchange rate changes on cash 591 (782 ) (805 ) Net increase (decrease) in cash and cash equivalents $ 1,841 $ (23,066 ) $ (34,864 ) Cash Flows Used by Operating Activities Net cash provided by operating activities during 2012 was $6.9 million compared to net cash used of $5.5 million in 2011. During the third quarter of 2012, we received a $6.0 million refund related to the termination of an agreement with a vendor for services related to our second-generation constellation. We also experienced favorable changes in operating assets and liabilities during 2012, which resulted in positive cash flows from operations for 2012. Net cash used by operating activities during 2011 was $5.5 million compared to $23.3 million in 2010. This decrease in cash used resulted primarily from favorable changes in operating assets and liabilities during 2011. We continued to use cash to fund operating losses (after adjustments for non-cash expenses including depreciation, amortization, accretion, stock based compensation, impairment of assets, and changes in the fair values of derivative assets and liabilities). Cash Flows Used in Investing Activities Cash used in investing activities was $58.0 million during 2012 compared to $99.4 million during 2011. The decrease in cash used during 2012 when compared to 2011 resulted primarily from decreased payments related to the construction of our second-generation constellation as the second-generation satellites neared completion and the deferral of payments to contactors working on the construction of our next-generation ground upgrades. We will continue to incur capital expenditures in the first quarter of 2013 relating to the construction and deployment of our second-generation satellites (our remaining satellites were launched in February 2013) and throughout 2013 relating to additional capital expenditures to upgrade our gateways and other ground facilities. These capital expenditures will support our growth and delivery of new revenue streams. Cash used in investing activities was $99.4 million during 2011 compared to $205.4 million during 2010. This decrease in cash used during 2011 was the result primarily of decreased payments related to the construction of our second-generation constellation during 2011, as the second-generation satellites neared completion, and the deferral of payments to contractors working on the construction of our next generation ground upgrades. Cash Flows Provided by Financing Activities Net cash provided by financing activities in 2012 decreased by $30.2 million to $52.4 million from $82.6 million in 2011. The decrease from 2011 to 2012 was attributable primarily to the issuance of $38.0 million of our 5% Notes during June 2011, which did not recur in 2012. We funded 2012 activities by borrowing under our Facility Agreement and drawing from our contingent equity account. We continue to seek additional financing to fund capital expenditures. 36 Net cash provided by financing activities decreased by $112.1 million to $82.6 million during 2011 from $194.7 million in 2010. The decrease was due primarily to lower funding needs related to the construction of our second-generation satellites and related ground facilities. We funded these activities by borrowing under our Facility Agreement, issuing 5.0% Notes, and drawing from our contingent equity account. We spent approximately $85.5 million on these projects in 2011 compared to approximately $201.1 million during 2010. We also made $1.2 million non-recurring debt financing payments in 2011 compared to$0.1 million during 2010. Cash Position and Indebtedness As of December 31, 2012, cash and cash equivalents were $11.8 million; cash available under our Facility Agreement was $0.7 million (subject to certain restrictions, see below for further discussion); interest earned from funds previously held in our contingent equity account was $1.1 million, and amounts held in our debt service reserve account were $8.9 million; compared to cash and cash equivalents, cash available under our Facility Agreement and cash in our contingent equity account at December 31, 2011 of $9.9 million, $8.0 million and $45.8 million, respectively. The carrying amount of current and long-term debt outstanding was $655.9 million and $95.1 million, respectively, at December 31, 2012 compared to current and long-term debt of $0 million and $723.9 million, respectively, at December 31, 2011. On December 28, 2012, we entered into an equity line agreement with Terrapin under which we may require Terrapin to purchase up to $30.0 million of our common stock. See below for further discussion. Facility Agreement On June 5, 2009, we entered into a $586.3 million Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP Paribas as the security agent and the agent for the lenders under our Facility Agreement. COFACE, the French export credit agency, has provided a 95% guarantee to the lending syndicate of our obligations under the Facility Agreement. The facility is scheduled to mature 84 months after the first repayment date, as amended. Scheduled semi-annual principal repayments will begin on June 30, 2013. The facility bears interest at a floating LIBOR rate, plus a margin of 2.07% through December 2012, increasing to 2.25% through December 2017 and 2.40% thereafter. Interest payments are due on a semi-annual basis. The Facility Agreement, as amended, requires that: • following December 31, 2014, we maintain a minimum liquidity of $5.0 million; • we achieve for each period the following minimum adjusted consolidated EBITDA (as defined in the Facility Agreement): Period Minimum Amount 7/1/11-6/30/12 $ (5.0) million 1/1/12-12/31/12 $ 7.0 million 7/1/12-6/30/13 $ 65.0 million 1/1/13-12/31/13 $ 78.0 million • beginning in June 2013, we maintain a minimum debt service coverage ratio of 1.00:1.00, gradually increasing to a ratio of 1.50:1.00 through 2019; and • beginning in June 2013, we maintain a maximum net debt to adjusted consolidated EBITDA ratio of 7.25:1.00 on a last twelve months basis, gradually decreasing to 2.50:1.00 through 2019. Our obligations under the Facility Agreement are guaranteed on a senior secured basis by all of our domestic subsidiaries and are secured by a first priority lien on substantially all of our assets and those of our domestic subsidiaries (other than FCC licenses), including patents and trademarks, 100% of the equity of our domestic subsidiaries and 65% of the equity of certain foreign subsidiaries. We may not re-borrow amounts repaid. We must repay the loans (a) in full upon a change in control or (b) partially (i) if there are excess cash flows on certain dates, (ii) upon certain insurance and condemnation events and (iii) upon certain asset dispositions. In addition to the financial covenants described above, the Facility Agreement places limitations on our ability and the ability of our subsidiaries to incur debt, create liens, dispose of assets, carry out mergers and acquisitions, make loans, investments, distributions or other transfers and capital expenditures or enter into certain transactions withaffiliates. 37 Pursuant to the terms of the Facility Agreement, in June 2009 we were required to fund a total of $46.8 million to the debt service reserve account. The required amount was to be funded until the date that was six months prior to the first principal repayment date, currently scheduled for June 2013. The minimum required balance fluctuates over time based on the timing of principal and interest payment dates. In January 2013, the amount required to be funded into the debt service reserve account was reduced by approximately $8.9 million due to the timing of the first principal repayment date scheduled for June 2013. The agent for our Facility Agreement permitted us to withdraw this amount to pay certain capital expenditure costs associated with the fourth launch of our second-generation satellites in February 2013. To the extent the first repayment date is extended to a date later than June 2013, the $8.9 million may be required to be refunded into this account. During the second quarter of 2012, we received two reservation of rights letters from the agent for our Facility Agreement identifying potential existing defaults of certain non-financial covenants in the Facility Agreement that may have occurred as a result of the Thales arbitration ruling and the subsequent settlement agreements reached with Thales related to the arbitration. (See Note 9 to our Consolidated Financial Statements for further discussion of this arbitration.) The letters indicated that the lenders were evaluating their position with respect to the potential defaults. During the evaluation process, the lenders did not permit funding of the remaining $3.0 million available under the Facility Agreement to pay Thales for the remaining milestone payments on the second-generation satellites or allow us to draw funds from the contingent equity account. On October 12, 2012, we entered into Waiver Letter No. 11, which permitted us to make a draw from the contingent equity account. In the waiver letter we acknowledged the lenders' conclusion that events of default did occur as a result of our entering into settlement agreements with Thales related to the arbitration ruling. As of the date of this Report, the agent for our Facility Agreement has not notified us of the lenders' intention to accelerate the debt; however, we have shown the borrowings as current on the December 31, 2012 balance sheet in accordance with applicable accounting rules. We are currently working with the lenders to seek all necessary waivers or amendments associated with any default issues, but there can be no assurance that we will be successful. On October 24, 2012, the lenders permitted funding of $2.3 million of the amount available under the Facility Agreement to make a milestone payment to Thales. In November and December 2012, the lenders permitted us to continue to withdraw the funds available in the contingent equity account. The lenders currently do not permit funding of the remaining $0.7 million available under the Facility Agreement. Due to the launch delays, we expect that we may not be in compliance with certain financial and nonfinancial covenants specified in the Facility Agreement during the next 12 months. Projected noncompliance with covenants include, but are not limited to, minimum consolidated adjusted EBITDA, minimum debt service coverage ratio, minimum net debt to adjusted consolidated EBITDA, and final in-orbit acceptance of our second-generation satellites by April 30, 2013. If we cannot obtain either a waiver or an amendment, any of these failures to comply would represent an additional event of default. An event of default under the Facility Agreement would permit the lenders to accelerate the indebtedness under the Facility Agreement. That acceleration would permit acceleration of our obligations under other indebtedness that contains cross-acceleration provisions. See Note 4 to our Consolidated Financial Statements for further discussion of the Facility Agreement and other current and long-term debt. Terrapin Common Stock Purchase Agreement On December 28, 2012 we entered into a Common Stock Purchase Agreement with Terrapin pursuant to which we may, subject to certain conditions, require Terrapin to purchase up to $30.0 million of shares of our voting common stock over the 24-month term following the effective date of a resale registration statement. This type of arrangement is sometimes referred to as a committed equity line financing facility. From time to time over the 24-month term, and in our sole discretion, we may present Terrapin with up to 36 draw down notices requiring Terrapin to purchase a specified dollar amount of shares of our voting common stock. We will not sell Terrapin a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9% of our then issued and outstanding shares of voting common stock. See Note 4 to our Consolidated Financial Statements for further discussion of the Terrapin agreement. Capital Expenditures We have entered into various contractual agreements related to the procurement and deployment of our second-generation constellation and next-generation ground upgrades, as summarized below. We are currently in negotiations with certain contractors to defer some scheduled milestones and related payments to beyond 2013. The discussion below is based on our current contractual obligationsto these contractors. 38 Second-Generation Satellites We have a contract with Thales for the construction of the second-generation low-earth orbit satellites and related services. We successfully completed launches of our second-generation satellites in October 2010, July 2011, December 2011 and February 2013. We have a contract with Arianespace for the launch of these second-generation satellites and certain pre and post-launch. We have also incurred additional costs which are owed to Arianespace for launch delays. The amount of capital expenditures incurred as of December 31, 2012 and estimated future capital expenditures (excluding capitalized interest) related to the construction and deployment of the satellites for our second-generation constellation and the launch services contract is presented in the table below (in thousands): Payments through December 31, Estimated Future Payments Capital Expenditures 2012 2013 2014 Thereafter TotalThales Second-Generation Satellites $ 622,018 672 $ - $ - $ 622,690 Arianespace Launch Services 207,375 8,625 - - 216,000 Launch Insurance 30,693 9,210 - - 39,903 Other Capital Expenditures and Capitalized Labor 49,931 10,211 - - 60,142 Total $ 910,017 $ 28,718 $ - $ - $ 938,735 As of December 31, 2012, $7.4 million of these capital expenditures were recorded in accounts payable and accrued expenses. Next-Generation Gateways and Other Ground Facilities In May 2008, we entered into an agreement with Hughes to design, supply and implement (a) RAN ground network equipment and software upgrades for installation at a number of our satellite gateway ground stations and (b) satellite interface chips to be a part of the UTS in various next-generation Globalstar devices. In August 2009, we amended this agreement extending the performance schedule by 15 months and revising certain payment milestones. In March 2010, we further amended the contract adding new features, including the option to purchase additional RANs and other software and hardware improvements at pre-negotiated prices. In October 2008, we signed an agreement with Ericsson, a leading global provider of technology and services to telecom operators. According to the contract, including subsequent additions, Ericsson will work with us to develop, implement and maintain a ground interface, or core network, system that will be installed at our satellite gateway ground stations. The following table presents the amount of actual and contractual capital expenditures (excluding capitalized interest) related to the construction of the ground component and related costs (in thousands): Payments through December 31, Estimated Future Payments Capital Expenditures 2012 2013 2014 Thereafter Total Hughes second-generation ground component (including research and development expense) $ 60,241 $ 25,259 $ 9,307 $ 10,791 $ 105,598 Ericsson ground network 4,184 4,957 18,629 1,266 29,036 Total $ 64,425 $ 30,216 $ 27,936 $ 12,057 $ 134,634 As of December 31, 2012, we recorded $20.5 million of these capital expenditures in accounts payable. 39 In December 2012, we entered into an agreement with Hughes to extend to March 28, 2013 our deadline to make payments previously due under the contract, provided we made payments of $0.2 million in January 2013 and $0.8 million in March 2013. We have made the January payment. The deferred payments continue to incur interest at the rate of 10% per annum. As of December 31, 2012 we had incurred and capitalized $72.7 million of costs related to this contract, of which $17.9 million is recorded in accounts payable. If we terminate the contract for convenience, we must make a final payment of $20.0 million in either cash or our common stock at our election. If we elect to pay in our common stock, Hughes will have the option either to accept the common stock or instruct us to complete a block sale of the stock and deliver the proceeds to Hughes. If Hughes chooses to accept common stock, the number of shares it will receive will be calculated based on the final payment amount plus 5%. In January 2013, we further amended our contract with Hughes to extend the schedule of the RAN and UTS program and to revise the remaining payment milestones and program milestones to reflect the revised program timeline. This amendment extended certain payments previously due in 2013 to 2014 and beyond. In February 2013, we entered into an agreement with Ericsson which deferred to the earlier of June 1, 2013, or the close of a financing, approximately $2.6 million in milestone payments due under the contract, provided we make two payments of $0.1 million each in February 2013. We have made both payments. The remaining milestones previously scheduled under the contract were deferred to later in 2013 and beyond. The deferred payments will continue to incur interest at a rate of 6.5% per annum. As of December 31, 2012 we had incurred and capitalized $6.8 million of costs related to this contract, of which we recorded $2.6 million in accounts payable. If we terminate the contract for convenience, we must make a final payment of $10.0 million in either cash or our common stock at our election. If we elect to make payment in common stock, Ericsson will have the option either to accept the common stock or instruct us to complete a block sale of the common stock and deliver the proceeds to Ericsson. If Ericsson chooses to accept common stock, the number of shares it will receive will be calculated based on the final payment amount plus 5%. In accordance with the French Ministry's authorization to operate our second-generation satellite constellation, we are currently on schedule to enhance the existing gateway operations in Aussaguel, France to include satellite operations and control functions during 2013. The above table does not include any costs for this facility or any other capital expenditures not yet contracted for or capitalized labor. Contractual Obligations and Commitments Contractual obligations at December 31, 2012 are as follows (in thousands): Contractual Obligations: 2013 2014 2015 2016 2017 Thereafter Total Debt obligations (1) $ 658,146 $ - $ - $ - $ - $ 281,424 $ 939,570 Interest on long-term debt (2) 2,694 - - - - - 2,694 Purchase obligations (3), (4), (5), (6), (7) 59,110 27,936 12,057 - - - 99,103 Contract termination charge (8) 23,166 - - - - - 23,166 Operating lease obligations 1,597 872 815 767 776 1,403 6,230 Pension obligations 964 981 970 963 958 4,985 9,821 Liability for contingent consideration (9) 2,660 2,081 - - - - 4,741 Total $ 748,337 $ 31,870 $ 13,842 $ 1,730 $ 1,734 $ 287,812 $ 1,085,325 (1) We were not in compliance with certain financial and nonfinancial covenants under the Facility Agreement as of December 31, 2012. As of the date of this Report, the agent for the Facility Agreement has not notified us of its intention to accelerate the debt; however, we have shown the borrowings as current on the December 31, 2012 balance sheet in accordance with applicable accounting rules. We have shown all amounts due under the Facility Agreement in 2013 in the table above. Amounts for the Facility Agreement assume borrowing of the entire $586.3 million under our Facility Agreement. If we regain compliance with certain financial and nonfinancial covenants, principal amounts due under the Facility Agreement will be $34.2 million in 2013, $60.5 million in 2014, $64.1 million in 2015, $67.9 million in 2016, $81.7 million 2017 and $277.9 million thereafter. The maturity date of the 5.75% Convertible Senior Unsecured Notes is April 1, 2028; however the holders of the Notes can require us to purchase any or all of the Notes at par in cash on April 1, 2013. For purposes of this schedule, the Notes are shown as due in 2013 as a result of this put option. As of December 31, 2012, the purchase price of the 5.75% Notes was approximately $71.8 million, which is included in 2013 obligations above. We currently do not have the funds to purchase all of these Notes if they are put to us for purchase at April 1, 2013 and are seeking alternatives to avoid any default. The holders of our remaining indebtedness may accelerate it upon default of related covenants or acceleration of other indebtedness. (See Note 4 to our Consolidated Financial Statements) Debt obligations include interest to be paid in common stock or payment in kind interest ("PIK"). Such amounts are shown as due in the year the underlying debt is due. 40 (2) Amounts include projected interest payments to be made in cash. Amounts include projected interest to be paid on the 5.75% Convertible Senior Unsecured Notes through the first put date of April 1, 2013, assuming the Notes will be refinanced in 2013 by issuing additional debt, and we cannot estimate interest expense in future periods as the terms of any refinancing are unknown at this time. As stated above, we were not in compliance with certain financial and nonfinancial covenants under the Facility Agreement as of December 31, 2012. Accordingly, we have only shown accrued interest through December 31, 2012 as due in 2013 and no other amounts for interest on the Facility Agreement. This debt bears interest at a floating rate, accordingly, we estimated our interest costs in future periods. If we regain compliance with certain financial and nonfinancial covenants, interest due under the Facility Agreement will be $17.5 million in 2013, $17.9 million in 2014, $16.7 million in 2015, $17.4 million in 2016, $15.5 million 2017 and $26.1 million thereafter. (3) We have purchase commitments with Thales, Arianespace, Ericsson, Hughes and other vendors related to the procurement and deployment of our second-generation network. See Note 8 to our Consolidated Financial Statements for further discussion of our contractual obligations. (4) We have converted the purchase obligations under our core contract for the construction of our second-generation satellites to U.S. dollars using an exchange rate of €1.00 = $1.42. We have converted all other purchase obligations for our second-generation satellites and other launch costs to U.S. dollars using an estimated exchange rate of €1.00 = $1.30. (5) Amounts based on when cash payment is scheduled to be made. (6) We will pay approximately $0.7 million of purchase obligations in 2013 using the remaining funds under our Facility Agreement, which is subject to certain restrictions (see Note 4 to our Consolidated Financial Statements for further discussion). (7) We have a remaining commitment to purchase $8.8 million of mobile phones, services and other equipment under various commercial agreements with Qualcomm. We have been in negotiations with Qualcomm to terminate the current agreement as neither party is performing under the terms of the current agreement. We expect to negotiate the termination of this contract in 2013 and have not included these obligations in the table above. We expect that the termination of this contract will not require us to pay cash in 2013, as amounts paid to Qualcomm, if any, will be made in our common stock or deferred to 2014. During 2012, we did not purchase any amounts related to this contract. (8) In June 2012, we settled our prior commercial disputes with Thales, including those disputes that were the subject of an arbitration award, for €17,530,000. This amount represented one-third of the termination charges awarded to Thales in the arbitration. The payment is due on the later of the effective date of the new contract for the purchase of additional second-generation satellites and the occurrence of the effective date of the financing for the purchase of these satellites and the first draw from the financing. This amount is included in 2013 above, although the timing of any payment is indefinite and undeterminable. For purposes of the table above, the termination charge is converted to U.S. dollars using the exchange rate in effect at December 31, 2012. See Note 9 to our Consolidated Financial Statements for further discussion. (9) In connection with our acquisition of Axonn in 2009, we are obligated to pay contingent consideration in stock for earnouts based on sales of existing and new products over a five-year earnout period ending December 31, 2014. Amounts above are an estimate of the future liability. Liquidity As discussed in Note 2 to our Consolidated Financial Statements, we have developed a plan to improve operations and to complete the development, construction, and activation of additional second-generation satellites and next-generation ground upgrades. We currently lack sufficient resources to meet our existing contractual obligations over the next 12 months. As a result, there is substantial doubt that we can continue as a going concern. In order to continue as a going concern, we must obtain additional external financing; amend the Facility Agreement and certain other contractual obligations; and restructure the 5.75% Notes. In addition, substantial uncertainties remain related to our noncompliance with certain of the Facility Agreement's covenants (see Note 4 to our Consolidated Financial Statements for further discussion) and the impact and timing of our plans to improve operating cash flows and to restructure our contractual obligations. If the resolution of these uncertainties materially and negatively impacts cash and liquidity, our ability to continue to execute our business plans will be adversely affected. Completion of the foregoing actions is not solely within our control and we may be unable to successfully complete one or all of these actions. Our principal long-term liquidity needs include making improvements to our constellation, gateways and other ground facilities, funding our working capital and cash operating needs, including any growth in our business, and to fund repayment of our indebtedness, both principal and interest, when due. We expect sources of long-term liquidity to include the exercise of warrants and other additional debt and equity financings which have not yet been arranged. We cannot assure you that we can obtain sufficient additional financing on acceptable terms, if at all. We also expect cash flows from operations to be a source of long-term liquidity once we have fully deployed our second-generation satellite constellation. We are not in a position to estimate when, or if, these longer-term plans will be completed and the effect this will have on our performance and liquidity. 41 Off-Balance Sheet Transactions We have no material off-balance sheet transactions. Recently Issued Accounting Pronouncements For a discussion of recent accounting guidance and the expected impact that the guidance and the expected impact that the guidance could have on our consolidated financial statements, see Note 1 to our Consolidated Financial Statements - Summary of Significant Accounting Policies. 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