What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-09 · 201 added, 149 removed, 183 unchanged (66% of the section changed)

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These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.

Forward-looking statements, such as the statements regarding our ability to develop and expand our business (including our ability to monetize our spectrum rights), our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes (including regulation related to the use of our spectrum), the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis, business interruptions due to natural disasters, unexpected events or public health crises, including viral pandemics such as the COVID-19 coronavirus, and other statements contained in this Report regarding matters that are not historical facts, involve predictions.

Forward-looking statements, such as the statements regarding our ability to develop and expand our business (including our ability to monetize our spectrum rights), our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes (including regulation related to the use of our spectrum), the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), our expectations for future increases in our revenue and profitability, our performance and financial results under the Service Agreements, the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis, business interruptions due to natural disasters, unexpected events or public health crises, including viral pandemics such as the COVID-19 coronavirus, and other statements contained in this Report regarding matters that are not historical facts, involve predictions.

Risks and uncertainties that could cause or contribute to such differences include, without limitation, those in Item 1A.

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Globalstar, Inc.

("we", "us" or the "Company") provides Mobile Satellite Services (“MSS”) including voice and data communications services globally via satellite.

("we", "us" or the "Company") provides Mobile Satellite Services (“MSS”) including voice and data communications services in addition to wholesale capacity services through its global satellite network.

We offer these services over our network of in-orbit satellites and our active ground stations (“gateways”), which we refer to collectively as the Globalstar System.

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By providing wireless communications services across the globe, we meet our customers' increasing desire for connectivity.

We currently provide the following communications services:

• two-way voice communication and data transmissions via our GSP-1600 and GSP-1700 phone ("Duplex");

• one-way or two-way communication and data transmissions using mobile devices, including our SPOT family of products, such as SPOT X ® , SPOT Gen4 ™ and SPOT Trace ® , that transmit messages and the location of the device ("SPOT");

• one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station, including our commercial IoT products, such as our battery- and solar-powered SmartOne, STX-3 and ST100 ("Commercial IoT");

• engineering services to assist certain customers (including our customer under the Terms Agreement (discussed in Note 8:

Commitments and Contingencies to our Condensed Consolidated Financial Statements)) in developing new applications to operate on our network, making enhancements to our ground network, and providing other communication services using our MSS and terrestrial spectrum licenses ("Engineering and Other").

Our constellation of Low Earth Orbit ("LEO") satellites includes second-generation satellites and certain first-generation satellites.

We designed our satellite network to maximize the probability that at least one satellite is visible from any point on the Earth's surface between the latitudes 70° north and 70° south.

We designed our second-generation satellites to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost compared to our first-generation satellites.

Our goal is to provide service levels and call or message success rates equal to or better than our MSS competitors so our products and services are attractive to potential customers.

We believe that our system outperforms geostationary (“GEO”) satellites used by some of our competitors.

GEO satellite signals must travel approximately 42,000 additional miles on average, which introduces considerable delay and signal degradation to GEO calls.

Recent Developments

In February 2022, we entered into a satellite procurement agreement (the "Procurement Agreement") with Macdonald, Dettwiler and Associates Corporation (the "Vendor") pursuant to which we will acquire 17 satellites that will replenish our existing constellation and ensure long-term continuity of our mobile satellite services.

We are acquiring the satellites to provide continuous satellite services to the potential customer under the Terms Agreement (defined below), as well as services to our current and future customers.

We are acquiring the satellites to provide continuous satellite services to Partner (defined below) under the Service Agreements (defined below), as well as services to our current and future customers.

We have committed to purchase these new satellites for a total contract price of $327.0 million and have the option to purchase additional satellites at a lower per unit cost, subject to certain conditions.

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The agreement requires the Vendor to deliver the initial 17 new satellites by 2025, all of which are expected to be launched by the end of 2025.

Under the Terms Agreement, the counterparty is required to reimburse 95% of the capital expenditures and certain other costs incurred for the new satellites.

Under the Service Agreements, Partner is required to pay us a service fee equal to 95% of the capital expenditures and certain other costs incurred for the new satellites.

In June 2022, we successfully launched our on-ground spare second-generation satellite.

T his satellite is expected to remain as an in-orbit spare and will only be raised to its operational orbit at a future date if needed.

Our ground network includes our ground equipment, which uses patented CDMA technology to permit communication to multiple satellites.

Our system architecture provides full frequency re-use.

This maximizes satellite diversity (which maximizes quality) and network capacity as we can reuse the assigned spectrum in every satellite beam in every satellite.

In addition, we have developed a proprietary technology for our SPOT and Commercial IoT services.

In September 2022, Apple Inc.

(“Partner”) announced new satellite-enabled services for certain of its products (the “Services”).

We will be the satellite operator for the Services pursuant to the agreement (the “Service Agreement”) and certain related ancillary agreements (such agreements, together with the Service Agreement, the “Service Agreements”).

Since execution of the Service Agreements in 2020, the parties have completed several milestones, including (i) a feasibility phase, (ii) material upgrades to our ground network, (iii) construction of 10 new gateways around the world, (iv) the successful launch of the ground spare satellite, and (v) rigorous in-field system testing.

The Service Agreements generally require us to allocate network capacity to support the Services and provide for the inclusion of our Band 53/n53 in Partner’s cellular-enabled devices that use the Services, for use by third parties, subject to certain terms and conditions.

It is currently expected that Partner will make the Services available to customers during the fourth quarter of 2022 (the “Service Launch”).

In consideration for the services provided by us, Partner will make payments to us under the Service Agreements, including a recurring service fee, payments relating to certain Service-related operating expenses and capital expenditures, and potential bonus payments subject to satisfaction of certain licensing, service and related criteria.

Communications Products and Services

We currently provide the following communications services:

• two-way voice communication and data transmissions via our GSP-1600 and GSP-1700 phone ("Duplex");

• satellite network access and related services utilizing our satellite spectrum and network of satellites and gateways under our agreement with Partner ("Wholesale Capacity Services");

• engineering and other communication services using our MSS and terrestrial spectrum licenses ("Engineering and Other").

We compete aggressively on price.

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These initiatives include evaluating our product and service offerings in light of the shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices.

To align our business model with this evolution, we have temporarily ceased sales of and services to subscribers for certain Duplex devices, such as Sat-Fi2®.

We are currently evaluating opportunities for these devices relative to other product and service offerings as well as the capacity required to support these devices relative to other possible uses for the capacity.

Integrated with this assessment is the development of a two-way reference design module to expand our Commercial IoT offerings, which is among our other current initiatives.

We have evaluated the continuation of second-generation Duplex services in light of other potential uses for our capacity, such as those within the Service Agreements.

In early 2021, we terminated our second-generation Duplex services to support extended testing of the Services to Partner;

however, such termination was considered temporary unless and until Partner announced its intent to proceed with launch of the Services.

Due to this shift in strategy triggered by Partner's announcement in September 2022, we abandoned our second-generation Duplex assets, including gateway property, prepaid licenses and royalties, and inventory.

We will continue to support first-generation Duplex services, including voice communications and data transmissions.

Our Commercial IoT use cases continue to expand.

In June 2022, we introduced the Realm Enablement Suite, an innovative portfolio of satellite asset tracking hardware and software solutions featuring a powerful application enablement platform for processing smart data at the edge.

With Realm, partners can accelerate new solutions to market with smart

applications that generate an advanced level of telematics data.

Realm Enablement Suite introduces Integrity 150, the first solar-powered, deployment-ready satellite asset tracking device with an application enablement platform;

ST150M satellite modem module that drastically simplifies product development;

and Realm application enablement platform, offering tools and an extensive library for quickly accessing and developing smart applications at the edge for vertical-specific solutions.

With Realm, partners can accelerate new solutions to market with smart applications that generate an advanced level of telematics data.

The Realm Enablement Suite includes Integrity 150, the first solar-powered, deployment-ready satellite asset tracking device with an application enablement platform;

ST150M, a satellite modem module that drastically simplifies product development;

and the Realm application enablement platform, which will offer tools and an extensive library for quickly accessing and developing smart applications at the edge for vertical-specific solutions.

We also continue to expand deployments that support environmentally friendly initiatives.

Recent deployments include remote monitoring of fluid levels and tanks, which replaces the need for motor vehicles to access these assets, as well as asset monitoring solutions for solar lighting and other renewable energy sources.

The specialized needs of our global customers span many industries.

As of June 30, 2022, we had approximately 762,000 subscribers worldwide, principally within the following markets:

Globalstar System

Our constellation of Low Earth Orbit ("LEO") satellites includes second-generation satellites and certain first-generation satellites.

We designed our satellite network to maximize the probability that at least one satellite is visible from any point on the Earth's surface between the latitudes 70° north and 70° south.

We designed our second-generation satellites to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost compared to our first-generation satellites.

Our goal is to provide service levels and call or message success rates equal to or better than our MSS competitors so our products and services are attractive to potential customers.

We believe that our system outperforms geostationary (“GEO”) satellites used by some of our competitors.

GEO satellite signals must travel approximately 42,000 additional miles on average, which introduces considerable delay and signal degradation to GEO calls.

Our ground network includes our ground equipment, which uses patented CDMA technology to permit communication to multiple satellites.

Our system architecture provides full frequency re-use.

This maximizes satellite diversity (which maximizes quality) and network capacity as we can reuse the assigned spectrum in every satellite beam in every satellite.

In addition, we have developed a proprietary technology for our SPOT and Commercial IoT services.

For our subscriber driven revenue, the specialized needs of our global customers span many industries.

As of September 30, 2022, we had approximately 762,000 subscribers worldwide, principally within the following markets:

recreation and personal;

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Although traditional users of wireless telephony and broadband data services have access to these services in developed locations, our customers often operate, travel or live in remote regions or regions with under-developed telecommunications infrastructure where these services are not readily available or are not provided on a reliable basis.

For wholesale capacity revenue, we provide primarily satellite network access and related services to our Partner.

We intend to seek to offer wholesale opportunities to commercial customers over the our remaining satellite capacity for IoT and other initiatives.

Spectrum and Regulatory Structure

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By having global 5G band support for n53 in Qualcomm Technologies’ 5G solutions, our potential device ecosystem expands significantly to include the most popular smartphones, laptops, tablets, automated equipment and other IoT modules.

The Service Agreements provide for the inclusion of Globalstar’s Band 53/n53 in Partner’s cellular-enabled devices that use the Services, for use by third parties, subject to certain terms and conditions;

this inclusion materially enhances the device ecosystem for Band 53/n53.

We believe our MSS spectrum position provides potential for harmonized terrestrial authority across many international regulatory domains and have been seeking approvals in various international jurisdictions.

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In addition, low frequency carrier spectrum is not physically well suited to high-density small cell topologies, and mmWave spectrum is subject to range and attenuation limitations.

We believe that our licensed 2.4 GHz band holds physical,

regulatory and ecosystem qualities that distinguishes it from other current and anticipated allocations, and that it is well positioned to balance favorable range, capacity and attenuation characteristics.

We believe that our licensed 2.4 GHz band holds physical, regulatory and ecosystem qualities that distinguishes it from other current and anticipated allocations, and that it is well positioned to balance favorable range, capacity and attenuation characteristics.

Performance Indicators

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• capital expenditures, which are an indicator of future revenue growth potential and cash requirements.

Comparison of the Results of Operations for the three and six months ended June 30, 2022 and 2021

Comparison of the Results of Operations for the three and nine months ended September 30, 2022 and 2021

Our revenue is categorized as service revenue and equipment revenue.

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Equipment revenue is generated from the sale of devices that work over our network.

For the three months ended June 30, 2022, total revenue increased 21% to $36.8 million from $30.3 million for the same period in 2021.

For the six months ended June 30, 2022, total revenue increased 22% to $69.6 million from $57.2 million for the same period in 2021.

For the three months ended September 30, 2022, total revenue increased 15% to $37.6 million from $32.6 million for the same period in 2021.

For the nine months ended September 30, 2022, total revenue increased 19% to $107.2 million from $89.8 million for the same period in 2021.

See below for a further discussion of the fluctuations in revenue.

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Three Months Ended

June 30, 2022 Three Months Ended

June 30, 2021 Six Months Ended

June 30, 2022 Six Months Ended

June 30, 2021

September 30, 2022 Three Months Ended

September 30, 2021 Nine Months Ended

September 30, 2022 Nine Months Ended

September 30, 2021

Revenue % of Total

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Service Revenue:

Subscriber services

Duplex $ 9,021 24 % $ 9,632 30 % $ 22,103 21 % $ 23,530 26 %

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Commercial IoT 4,673 13 4,458 14 14,381 13 13,443 15

Engineering and other 9,538 26 2,731 9 16,811 24 3,697 6

Wholesale capacity services (1)

6,972 19 1,301 4 22,640 21 3,999 4

Engineering and other services 882 2 584 2 2,025 2 1,583 2

Total Service Revenue $ 33,301 89 % $ 27,848 85 % $ 95,693 89 % $ 76,551 85 %

Prior to the third quarter of 2022, revenue from wholesale capacity services was included in engineering and other services in the table above.

The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands).

Three Months Ended

June 30, 2022 Three Months Ended

June 30, 2021 Six Months Ended

June 30, 2022 Six Months Ended

June 30, 2021

September 30, 2022 Three Months Ended

September 30, 2021 Nine Months Ended

September 30, 2022 Nine Months Ended

September 30, 2021

Revenue % of Total

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The following table sets forth our average number of subscribers and ARPU by type of revenue.

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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We count "subscribers" based on the number of devices that are subject to agreements that entitle them to use our voice or data communications services rather than the number of persons or entities who own or lease those devices.

Engineering and other service revenue includes revenue generated primarily from certain governmental and engineering service contracts which are not subscriber driven.

Accordingly, we do not present ARPU for engineering and other service revenue in the table above.

Wholesale capacity service revenue includes revenue generated from satellite network access and related services under the Service Agreements and engineering and other service revenue includes revenue generated primarily from certain governmental and engineering service contracts;

neither of these service revenue items is subscriber driven.

Accordingly, we do not present ARPU for wholesale capacity service revenue and engineering and other service revenue in the table above.

As previously discussed, during the first quarter of 2022, approximately 25,000 subscribers previously recorded in Other in the table above were removed from our subscriber count.

Service Revenue

Duplex service revenue decreased 4% and 6%, respectively, for the three and six months ended June 30, 2022 due primarily to a decrease in average subscribers of 3% and 6%, respectively.

The decrease in average subscribers is due to fewer gross subscriber activations over the last twelve months.

Duplex service revenue decreased 6% for each of the three and nine month periods ended September 30, 2022 due primarily to a decrease in average subscribers of 8% and 10%, respectively, offset partially by higher ARPU in both periods.

The decrease in average subscribers is due to churn exceeding gross activations over the last twelve months.

In line with the shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices, we expect the decline in our Duplex subscriber base to continue as we focus our investments on IoT-enabled devices and services.

SPOT service revenue increased 4% and 3%, respectively, for the three and six months ended June 30, 2022 due primarily to an increase in average subscribers of 5% and 4%, respectively.

Lower churn during 2022 has positively contributed to the increase in average subscribers, while gross activations are down slightly compared to the prior twelve month period.

Supply chain disruptions over the past few quarters (discussed further below) have reduced equipment sales, and therefore activations, during 2022.

However, we have recently experienced growth in our Latin American subscriber base;

average subscribers for this region increased 13% and 3% for the three and six month periods respectively, and represents 10% and 3% of our average subscriber growth in total over the same periods.

ARPU decreased by 1% for both the three and six months ended June 30, 2022 due to the mix of subscriber rate plans, including the continued popularity of our flex plans which carry lower rates than our traditional prepaid unlimited plans.

Commercial IoT service revenue increased 12% and 8%, respectively, for the three and six months ended June 30, 2022 due to a 6% increase in average subscribers for both periods.

The increase in average subscribers is driven by higher gross subscriber activations of 25% and lower churn over the last twelve months.

Despite supply chain issues causing significant production delays in 2022, Commercial IoT equipment sales increased over the last twelve months compared to the prior year period (discussed further below), which contributed to higher subscriber activations.

Similar to SPOT, we have recently experienced steady growth in our Latin American subscriber base;

average subscribers for this region increased 63% and 55% for the three and six month periods, respectively, and represent 9% and 7% of our average subscriber growth in total.

For the three and six month periods, ARPU increased 6% and 2%, respectively, driven by the favorable mix of subscribers on various rate plans.

Engineering and other service revenue increased $6.8 million and $13.1 million for the three and six months ended June 30, 2022 compared to the same periods in 2021.

Fluctuations in engineering and other service revenue are due primarily to the timing and amount of revenue recognized associated with the Terms Agreement.

The increase in revenue recognized during 2022 is due primarily to consideration received for performance obligations associated with our work to expand and upgrade our gateways around the globe and under the satellite procurement agreement.

As previously discussed, we disconnected service to approximately 25,000 subscribers in Russia.

SPOT service revenue decreased 1% and increased 2%, respectively, for the three and nine months ended September 30, 2022.

For the three month period, a 3% decrease in ARPU was offset partially by a 2% increase in average subscribers, driving a net decrease in revenue for the period.

For the nine month period, higher average subscribers contributed to a 3% increase in revenue and was offset partially by a 1% decrease in ARPU.

During 2022, our subscriber base increased despite fewer than forecasted activations resulting from supply chain disruptions over the past few quarters (see discussion below).

The slight decrease in ARPU for both periods is due to the mix of subscriber rate plans, including the continued popularity of our flex plans, which have contributed to the increase in average subscribers however generally carry lower rates than our traditional prepaid unlimited plans.

Commercial IoT service revenue increased 5% and 7%, respectively, for the three and nine months ended September 30, 2022 due primarily to an increase in average subscribers.

For the three month period, average subscribers increased 8% and ARPU decreased 3%.

For the nine month period, average subscribers increased 6% and ARPU increased 1%.

Gross subscriber activations have increased 24% over the last twelve months and subscriber churn is lower over the same period.

Our average subscriber base has grown despite significant production delays in 2022 resulting from component part shortages (discussed further below).

As we fulfill sales back orders for Commercial IoT products, we expect to see activations continue to increase.

We have recently experienced steady growth in our Latin American subscriber base;

average subscribers for this region increased 49% and 40% for the three and nine month periods, respectively, and represent 5% and 6% of our average subscriber growth in total.

The fluctuations in ARPU for both periods is driven by the mix of subscribers on various rate plans.

Wholesale capacity service revenue increased $5.7 million and $18.6 million, respectively, for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

Fluctuations in wholesale capacity service revenue are due primarily to the timing and amount of revenue recognized associated with the Service Agreements.

In consideration for the services provided by us, Partner make payments to us under the Service Agreements, including a recurring service fee, payments relating to certain service-related operating expenses and capital expenditures, and potential bonus payments subject to satisfaction of certain licensing, service and related criteria.

Once the second phase of the Service Agreements commences, Partner has agreed to also make service payments equal to (i) 95% of the approved capital expenditures under the Procurement Agreement (to be paid on a straight-line basis over the useful life of the satellites);

(ii) certain costs of the Company’s borrowings related to the new satellites;

and (iii) other approved costs.

Engineering and other service revenue increased $0.3 million and $0.4 million for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

Throughout 2022, we have made significant progress on constructing a teleport for a customer at one of our gateway locations in Brazil;

the services performed for this customer contributed $0.6 million and $0.9 million, respectively, to the total revenue recognized for Engineering and other service revenue for the three and nine month periods.

Offsetting this increase are fluctuations in the volume of other engineering service contracts.

Additionally, as previously discussed, we disconnected service to approximately 25,000 subscribers in Russia.

During 2021, we billed less than $0.3 million to these subscribers and the revenue associated with these subscribers was recorded in Engineering and other service revenue.

Subscriber Equipment Sales

Revenue from Duplex equipment sales decreased $0.2 million and $0.4 million for the three and six months ended June 30, 2022 compared to the same periods in 2021.

Revenue from Duplex equipment sales decreased $0.3 million and $0.6 million for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

These decreases were driven primarily by a lower sales volume of phones and accessories due to a lack of available inventory since these devices are no longer being manufactured.

Revenue from SPOT equipment sales decreased $0.6 million and $1.0 million for the three and six months ended June 30, 2022 compared to the same periods in 2021.

These decreases resulted from a lower sales volume.

Two of our core SPOT products are on back order due to inventory shortages, which delayed the fulfillment of orders during the first half of 2022.

Revenue from SPOT equipment sales decreased $1.1 million and $2.1 million for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

These decreases resulted from a lower sales volume of all products over the last twelve months.

Two of our core SPOT products are on back order due to inventory shortages, which delayed the fulfillment of orders during the nine months of 2022.

We continue to see demand exceeding supply resulting from supply chain disruptions caused by component part shortages.

We are actively working to address this issue and expect production to resume in the third quarter of 2022.

Revenue from Commercial IoT equipment sales decreased $0.2 million and increased $0.1 million for the three and six months ended June 30, 2022 compared to the same periods in 2021.

IoT equipment sales continue to be negatively impacted by component part shortages, which has impacted our ability to produce inventory at sufficient quantities to fulfill sales orders.

This situation has resulted in significant back orders of two of our most profitable products.

We expect these production issues to be resolved during the third quarter of 2022.

Despite these challenges, sales volume of our SmartOne Solar was up 11% year over year and up 10% over the last twelve months.

We are actively working to address this issue and expect production to resume in the fourth quarter of 2022.

Revenue from Commercial IoT equipment sales increased $0.9 million and $1.0 million for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

During the third quarter, we were able to fulfill a portion of the back orders of certain devices.

As a result, the volume of our SmartOne Solar device sales increased over 100% from the third quarter of 2021 and revenue from this product increased over $1.2 million during the same period.

While production issues were substantially resolved during the third quarter of 2022, IoT equipment sales continue to be negatively impacted by component part shortages, which has impacted our ability to produce inventory at sufficient quantities to fulfill sales orders and we continue to have back orders of two of our most profitable products.

Operating Expenses

Total operating expenses increased to $48.2 million from $46.3 million and increased to $94.6 million from $92.5 million, respectively, for the three and six months ended June 30, 2022 compared to the same periods in 2021.

For both the three and six month periods, higher cost of services and a reduction in value of long-lived assets were offset by a reduction in the value of inventory.

For the six month period, lower management, general and administrative ("MG&A") costs partially offset the increases noted above.

Total operating expenses increased to $224.3 million from $47.3 million and increased to $318.9 million from $139.8 million, respectively, for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

For both the three and nine month periods, reductions in the value of inventory and long-lived assets contributed to the majority of the increase in expense.

Additionally, higher cost of services and management, general and administrative ("MG&A") costs were offset partially by lower cost of subscriber equipment sales.

The main contributors to the variance in operating expenses are explained in further detail below.

Cost of Services

Cost of services increased $1.6 million and $3.3 million for the three and six months ended June 30, 2022 compared to the same periods in 2021.

For the three and six month periods, personnel costs increased $0.4 million and $1.3 million, respectively;

the year to date variance included $0.7 million related to annual cash bonuses and non-recurring separation pay during the first quarter of 2022.

Cost of services increased $1.6 million and $4.9 million for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

For the three and nine month periods, personnel costs increased $0.6 million and $1.9 million, respectively;

the year to date increase included $0.7 million related to annual cash bonuses and non-recurring separation pay during the first quarter of 2022.

Higher lease expense associated with new teleport leases (including associated occupancy costs, such as utilities and other building services), which commenced throughout the second half of 2021, contributed to $0.3 million and $1.4 million, respectively, of the total increase.

These leases were executed in connection with the gateway expansion project associated with the Terms Agreement;

these lease and related costs are being reimbursed to us, and this consideration is being recognized as revenue (as further discussed above in Engineering and other service revenue).

These leases were executed in connection with the gateway expansion project associated with the Service Agreements;

these lease and related costs are being reimbursed to us, and this consideration is being recognized as revenue (as further discussed above in "Wholesale capacity service revenue").

Higher professional fees and licensing costs related to our implementation of a new enterprise resource planning ("ERP") system, which went live in January 2022, as well as other costs for information technology security and maintenance contributed $0.8 million and $1.4 million, respectively, to the total increase.

Cost of Subscriber Equipment Sales

Cost of subscriber equipment sales increased $0.2 million and decreased $0.1 million for the three and six months ended June 30, 2022 from the same periods in 2021.

These fluctuations are generally consistent with the fluctuations in total revenue from subscriber equipment sales, and were also impacted by the reversal of a prior year accrual for tariffs during the second quarter 2021.

Pursuant to regulatory developments, we reversed this accrual for potential tariffs owed on imports from China made prior to a ruling by the U.S Customs and Border Protection in September 2019 that we no longer believe will be due, resulting in an expense reduction of $0.9 million.

Cost of subscriber equipment sales decreased $0.6 million and $0.7 million for the three and nine months ended September 30, 2022 from the same periods in 2021.

These decreases are generally consistent with the decreases in total revenue from subscriber equipment sales, and were also impacted by the reversal of a prior year accrual for tariffs during the second quarter 2021.

Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory

During the third quarter of 2022, we recorded a reduction in the value of inventory totaling $8.5 million.

As disclosed in Note 7:

Fair Value Measurements to our Condensed Consolidated Financial Statements, upon Partner's announcement in September 2022, our strategy relative to second-generation Duplex assets shifted.

Due to this shift in strategy, we concluded that there was no remaining net realizable value of our second-generation Duplex inventory, resulting in an $8.5 million reduction in value of inventory.

During the second quarter of 2021, we recorded a reduction in the value of inventory totaling $0.8 million.

We wrote off certain Sat-Fi2 materials that are not likely to be used in production as well as defective inventory units that are not saleable.

Similar activity did not occur at a significant level in 2022.

We wrote off certain Sat-Fi2 materials that were not likely to be used in production as well as defective inventory units that were not saleable.

Marketing, General and Administrative

MG&A expenses were flat for the three month period and decreased $0.7 million for the six month period ended June 30, 2022, compared to the same periods in 2021.

MG&A expense for both periods was impacted by certain non-recurring items, including lower subscriber acquisition costs of $0.5 million and $0.9 million, respectively, which was due primarily to the one-time deactivation of all Sat-Fi2 subscribers during the first half of 2021.

MG&A expenses increased $1.5 million and $0.8 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021.

For the three and nine month periods, increases in personnel costs totaling $1.1 million and $2.7 million, respectively, contributed to the increase in MG&A expense.

Included in personnel costs are higher stock-based compensation driven by performance grants to certain employees associated with their efforts under the Service Agreements, annual cash bonuses and separation pay.

For the nine-month period, higher professional and legal fees totaling $0.8 million also increased MG&A expense.

These increases for the nine-month period were offset partially by certain non-recurring items, including lower subscriber acquisition costs of $1.0 million due primarily to the deactivation of all Sat-Fi2 subscribers during the first half of 2021.

Additionally, during 2021, we terminated our dealer program and reduced advertising spend for Duplex products and services;

these items contributed $0.5 million and $1.0 million, respectively, to the decrease in MG&A expense for the three and six month periods.

these items contributed $0.8 million to the decrease in MG&A expense.

Finally, during the first quarter of 2022, we reversed a $1.0 million accrual related to professional services associated with the 2018 shareholder litigation based on our assessment of the likelihood of payment.

Offsetting these decreases was an increase in personnel costs totaling $0.4 million and $1.6 million, for the three and six month periods;

of which $0.3 million and $1.2 million, respectively were related to annual cash bonuses and non-recurring separation pay.

Other smaller items contributed to the remaining variance in expense for both periods.

Reduction in Value of Long-Lived Assets

During the second quarter of 2022, we recorded a reduction in the value of intangible and other assets totaling $0.5 million.

During the third quarter of 2022, we recorded a reduction in the value of long-lived assets totaling $166.0 million.

As disclosed in Note 7:

Fair Value Measurements to our Condensed Consolidated Financial Statements, upon Partner's announcement in September 2022, our strategy relative to our second-generation Duplex assets shifted.

Due to this shift in strategy, we re-assessed our asset grouping for long-lived assets and determined that the second-generation Duplex assets (including the gateways (and related technology) capable of providing commercial traffic to support Sat-Fi2®) are no longer part of our overall satellite and ground network.

These second-generation Duplex assets will no longer provide future cash flows to us - these assets totaled approximately $161.2 million prior to their write down in September 2022.

Also reflected in the reduction in the value of long-lived assets were certain prepaid licenses and royalties necessary for the manufacture and distribution of second-generation Duplex products and services.

These prepaid items are no longer considered recoverable as there are no longer separately identifiable cash flows for such assets - these assets totaled approximately $4.7 million prior to their write down in September 2022.

During the second and third quarters of 2022, we recorded reductions in the value of intangible and other assets totaling $0.5 million and $0.1 million, respectively.

We wrote off work in progress associated with spectrum licensing efforts in certain countries around the world.

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Other (Expense) Income

Gain on Extinguishment of Debt

Gain on extinguishment of debt for the three and six months ended June 30, 2021 was $2.7 million.

(Loss) Gain on Extinguishment of Debt

We recorded gain on extinguishment of debt during the second quarter of 2021 totaling $5.0 million.

In June 2021, the Small Business Administration ("SBA") approved our request for forgiveness of amounts outstanding under the Paycheck Protection Program ("PPP") loan.

Accordingly, we recorded a gain on extinguishment of debt totaling $5.0 million during the second quarter of 2021.

Offsetting this gain was a $2.3 million write-off of a portion of remaining deferred financing costs resulting from unscheduled principal repayments of the First Lien Facility Agreement during the second quarter of 2021.

Offsetting this gain during the nine-month period were the write-offs of a portion of remaining deferred financing costs totaling $2.3 million and $0.8 million during the second and third quarters of 2021, respectively, resulting from unscheduled principal repayments of the 2009 Facility Agreement in those quarters.

Similar activity did not occur in 2022.

Interest Income and Expense

Interest income and expense, net, decreased $3.6 million and $5.6 million during the three and six months ended June 30, 2022, compared to the same periods in 2021.

The decrease for both periods was primarily driven by higher capitalized interest (which decreases interest expense) of $3.9 million and $4.8 million, respectively.

Lower gross interest costs totaling $1.0 million also contributed to the decrease in expense for the six month period.

Gross interest costs were generally flat for the three month periods and down $1.0 million for the six month period.

For the three month period, lower interest of $2.2 million associated with the 2009 Facility Agreement was offset by higher interest of $1.3 million on the 2019 Facility Agreement and imputed interest associated with the significant financing component related to advance payments from the customer under the Terms Agreement of $0.8 million.

For the six month period, lower interest of $5.6 million associated with the 2009 Facility Agreement was offset by higher interest of $2.6 million on the 2019 Facility Agreement and imputed interest associated with the significant financing component related to advance payments from the customer under the Terms Agreement of $1.8 million.

Derivative Loss

We recorded derivative losses of $1.2 million and $1.3 million for the three months ended June 30, 2022 and 2021, respectively.

We recorded derivative losses of $1.7 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively.

Interest income and expense, net, decreased $3.8 million and $9.5 million during the three and nine months ended September 30, 2022, compared to the same periods in 2021.

The decrease for both periods was driven primarily by higher capitalized interest (which decreases interest expense) of $3.7 million and $8.5 million, respectively.

Lower gross interest costs totaling $1.0 million also contributed to the decrease in expense for the nine month period.

Gross interest costs were generally flat for the three month periods and down $1.0 million for the nine month period.

For the three month period, lower interest of $1.6 million associated with the 2009 Facility Agreement was offset by higher interest of $1.3 million associated with the 2019 Facility Agreement, imputed interest associated with the significant financing component related to advance payments from Partner under the Service Agreements of $0.2 million, and the accrual of interest associated with our vendor financing totaling $0.2 million.

For the nine month period, lower interest of $7.2 million associated with the 2009 Facility Agreement was offset by higher interest of $3.9 million on the 2019 Facility Agreement, imputed interest associated with the significant financing component related to advance payments from Partner under the Service Agreements of $1.9 million, and $0.2 million of interest accrued associated with our vendor financing.

Derivative Gain (Loss)

We recorded derivative gains of $0.7 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively.

We recorded derivative losses of $1.1 million and $2.2 million for the nine months ended September 30, 2022 and 2021, respectively.

We recognize derivative gains or losses due to the change in the value of certain embedded features within our debt instruments that require standalone derivative accounting.

The losses recorded during the three and six months ended June 30, 2022 were impacted primarily by an increase in the discount rate used in the valuation of the derivative associated with our 2019 Facility Agreement.

For the six month period, the loss was offset partially by a gain on the valuation adjustment of the embedded derivative associated with our 2013 8.00% Notes.

During the first quarter of 2022, the remaining holders of our 2013 8.00% Notes converted the principal balance into shares of Globalstar common stock.

As a result of these conversions, we marked-to-market the embedded derivative and recorded a net gain due to a decrease in our stock price and a shorter term to maturity.

The losses recorded during the three and six months ended June 30, 2021 were primarily impacted by increases in our stock price and stock price volatility, which are significant inputs used in the valuation of the embedded derivative associated with our 2013 8.00% Notes.

The gain recorded during the three months ended September 30, 2022 was driven primarily by the increased likelihood of conversion of our 2019 Facility Agreement and associated derivative.

For the nine months ended September 30, 2022, an increase in the discount rate was offset by changes in the probability and timing of prepayments contemplated in the valuation of the derivative associated with our 2019 Facility Agreement.

Additionally, for the nine month period, the loss was offset partially by a gain on the valuation adjustment of the embedded derivative associated with our 2013 8.00% Notes following their conversion.

The gains recorded during the three months ended September 30, 2021 were primarily impacted by a decrease in our stock price, which was a significant input used in the valuation of the embedded derivative associated with our 2013 8.00% Notes.

Conversely, the loss recorded during the nine months ended September 30, 2021 was primarily impacted by increases in our stock price and stock price volatility.

Fair Value Measurements to our condensed consolidated financial statements for further discussion of the computation of the fair value of our derivatives.

Foreign Currency (Loss) Gain

Foreign currency (loss) gain fluctuated by $11.5 million to a loss of $7.1 million for the three months ended June 30, 2022 from a gain of $4.4 million for the same period in 2021.

Foreign currency (loss) gain fluctuated by $4.0 million to a loss of $3.9 million for the six months ended June 30, 2022 from a gain of $0.1 million for the same period in 2021.

Foreign Currency Loss

Foreign currency loss fluctuated by $4.6 million and $8.7 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021.

Changes in foreign currency gains and losses are driven by the remeasurement of financial statement items, which are denominated in various currencies, at the end of each reporting period.

For the three months ended June 30, 2022, the foreign currency loss was due to the weakening of the Canadian dollar, the Euro and the Brazilian real relative to the U.S.

For the three months ended June 30, 2021, the foreign currency gain was due to the strengthening of the Canadian dollar, Euro and Brazilian real relative to the U.S.

For the six months ended June 30, 2022, the foreign currency loss was due to the weakening of the Canadian dollar and the Euro real relative to the U.S.

For the six months ended June 30, 2021, the foreign currency gain was due to the strengthening of the Canadian dollar and Brazilian real relative to the U.S.

dollar largely offset by the weakening of the Euro relative to the U.S.

For all periods presented, the foreign currency losses were due to the strengthening of the U.S.

dollar relative to other currencies.

Pension Settlement Loss

In August 2022, we settled the remaining pension liability;

this settlement resulted in a loss of $1.5 million.

Pensions and Other Employee Benefits to our condensed consolidated financial statements for further discussion.

Liquidity and Capital Resources

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Our principal sources of liquidity include cash on hand, cash flows from operations, and vendor financing.

Another source of liquidity may include proceeds from the exercise of warrants that may be issued under the Service Agreements.

We also expect sources of liquidity to include funds from other debt or equity financings that have not yet been arranged;

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Beyond the next twelve months, our liquidity requirements also include paying our debt service obligations.

As of June 30, 2022 and December 31, 2021, we held cash and cash equivalents of $13.1 million and $14.3 million, respectively, on our condensed consolidated balance sheet.

The total carrying amount of our debt outstanding was $257.5 million at June 30, 2022, compared to $237.9 million at December 31, 2021.

The $19.5 million increase in carrying value of our debt was due to a higher carrying value of the 2019 Facility Agreement of $20.9 million due to the accrual of PIK interest and the accretion of debt discount offset by a reduction in the remaining principal balance of the 2013 8.00% Notes totaling $1.4 million, which were converted into shares of Globalstar common stock during the first quarter of 2022.

Cash Flows for the six months ended June 30, 2022 and 2021

Additionally, under the Service Agreements, we are also required to maintain minimum liquidity of $10.0 million.

As of September 30, 2022 and December 31, 2021, we held cash and cash equivalents of $14.7 million and $14.3 million, respectively, on our consolidated balance sheet.

The total carrying amount of our debt and vendor financing outstanding was $325.9 million at September 30, 2022, compared to $237.9 million at December 31, 2021.

The $88.0 million increase in carrying value of our debt and vendor financing was due to draws under the Procurement Agreement of $63.8 million during 2022, a higher carrying value of the 2019 Facility Agreement of $25.6 million due to the accrual of PIK interest and the accretion of debt discount, offset by a mandatory prepayment of principal in August 2022 (see further discussion below);

offsetting these increases was a reduction in the remaining principal balance of the 2013 8.00% Notes totaling $1.4 million, which were converted into shares of Globalstar common stock during the first quarter of 2022.

Cash Flows for the nine months ended September 30, 2022 and 2021

The following table shows our cash flows from operating, investing and financing activities (in thousands):

Six Months Ended

2022 June 30,

Nine Months Ended

September 30,

2022 September 30,

Net cash provided by operating activities $ 31,705 $ 107,166

Net cash used in investing activities (25,306) (30,033)

Net cash provided by (used in) financing activities 449 (45,228)

Net cash used in financing activities (5,886) (82,725)

Effect of exchange rate changes on cash and cash equivalents (68) (57)

Net decrease in cash and cash equivalents $ (1,163) $ (1,315)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 445 $ (5,649)

Cash Flows Provided by Operating Activities

Net cash provided by operations includes primarily cash receipts from subscribers related to the purchase of equipment and satellite voice and data services as well as cash received from the performance of engineering and other service contracts.

We use cash in operating activities primarily for personnel costs, inventory purchases and other general corporate expenditures.

Net cash provided by operating activities during the six months ended June 30, 2022 was $20.8 million compared to $55.9 million during the same period in 2021.

Net cash provided by operating activities during the nine months ended September 30, 2022 was $31.7 million compared to $107.2 million during the same period in 2021.

The primary driver for the decrease was due to unfavorable working capital changes offset partially by higher net income after adjusting for noncash items.

During 2021, working capital changes were favorably impacted by prepayments made by the customer to the Terms Agreement totaling $51.6 million, which were recorded as deferred revenue (see Note 2:

During 2021, working capital changes were favorably impacted by prepayments made by the customer to the Service Agreements totaling $95.5 million, which were recorded as deferred revenue (see Note 2:

Revenue to our condensed consolidated financial statements for further discussion).

The timing of vendor payments also impacted the change in working capital to a lesser extent.

The timing of vendor payments and customer receivables also impacted the change in working capital.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $22.4 million for the six months ended June 30, 2022 compared to $12.0 million for the same period in 2021.

Net cash used in investing activities during both periods was related primarily to network upgrades associated with the Terms Agreement, including higher costs associated with the procurement and deployment of new antennas for our gateways and the preparation and launch of our on-ground spare satellite, which occurred in June 2022.

Cash used in investing activities increased in 2022 due primarily to costs to support the spare satellite launch, offset partially by lower costs associated with gateway upgrades as that portion of the project nears completion.

Purchases of intangible assets related to our MSS and terrestrial spectrum licensing initiatives were also uses of cash during both periods.

Cash Flows Provided by (Used in) Financing Activities

Net cash used in financing activities was $45.2 million during the six month period ended June 30, 2021, including principal payments of the 2009 Facility Agreement totaling $89.2 million and $43.7 million received in proceeds from the exercise of the warrants issued with our 2019 Facility Agreement.

There were no meaningful cash flows from financing activities during the first six months of 2022.

Net cash used in investing activities was $25.3 million for the nine months ended September 30, 2022 compared to $30.0 million for the same period in 2021.

Net cash used in investing activities during both periods included network upgrades associated with the Service Agreements, such as costs associated with the procurement and deployment of new antennas for our gateways and the preparation and launch of our on-ground spare satellite, which occurred in June 2022.

Cash used in investing activities decreased in 2022 due to lower costs associated with gateway upgrades as that portion of the project nears completion.

Cash Flows Used in Financing Activities

Net cash used in financing activities was $5.9 million during the nine month period ended September 30, 2022, due primarily to an unscheduled principal repayment of the 2019 Facility Agreement in August 2022, totaling $6.3 million.

Net cash used in financing activities was $82.7 million during the nine month period ended September 30, 2021, including principal payments of the 2009 Facility Agreement totaling $126.7 million offset by $43.7 million received in proceeds from the exercise of the warrants issued with our 2019 Facility Agreement.

For further discussion on all of our debt and other financing arrangements, see Note 5:

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The loans under the 2019 Facility Agreement bear interest at a blended rate of 13.5% per annum to be paid-in-kind (or in cash at our option, subject to restrictions in the Facility Agreement).

As of June 30, 2022, the principal amount outstanding under the 2019 Facility Agreement was $282.0 million.

As of June 30, 2022, we were in compliance with all the covenants of the 2019 Facility Agreement, except as it relates to capital expenditures.

In August 2022, we received a waiver letter from our lenders increasing permitted capital expenditures for 2022.

As of September 30, 2022, the principal amount outstanding under the 2019 Facility Agreement was $285.3 million.

As of September 30, 2022, we were in compliance with all the covenants of the 2019 Facility Agreement.

The 2019 Facility Agreement requires mandatory prepayments of principal with any Excess Cash Flow (as defined and calculated in the 2019 Facility Agreement) on a semi-annual basis.

We generated excess cash flow for the six-month measurement period ended June 30, 2022 and expect to make a prepayment of approximately $6.0 million in August 2022.

We generated excess cash flow for the six-month

measurement period ended June 30, 2022 and were required to pay $6.3 million to our lenders in August 2022.

This payment reduced future principal payment obligations.

As discussed further in Note 8:

Commitments and Contingencies to our Condensed Consolidated Financial Statements, the Service Agreements require us to refinance all loans outstanding under the 2019 Facility Agreement;

of which the portion held by Thermo to be refinanced upon commencement of Services and the remaining portion to be refinanced within 90 days of the commencement of Services.

Vendor Financing

In February 2022, we entered into a Procurement Agreement (see Note 8:

Commitments and Contingencies to our Condensed Consolidated Financial Statements for further discussion).

As of September 30, 2022, the amount outstanding under this agreement was $63.8 million.

This agreement provided for deferrals of milestone payments from February 2022 through August 2022 at a 0% interest rate.

On October 28, 2022, we executed an amendment to extend the payment deferral date and allow for other related changes in terms, including two $7.0 million payments (one of which was made on October 31, 2022 and the second is required to be made in November 2022) and interest that will accrue on the amount outstanding at an annual rate of 7%.

All remaining amounts outstanding are required to be paid in December 2022.

Concurrently, the Company continues to pursue debt financing for the funding of the construction and launch costs for these satellites (discussed below).

New Satellite Construction Financing

As discussed in Note 4:

Property and Equipment and Note 8:

Commitments and Contingencies to our Condensed Consolidated Financial Statements, we entered into a contract with MDA to construct new satellites.

Under the Service Agreements, we are required to raise additional debt capital for the construction and launch of the new satellites and target to complete such financing during the fourth quarter of 2022.

8.00% Convertible Senior Notes Issued in 2013

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We paid interest in cash at a rate of 5.75% per annum and issued additional 2013 8.00% Notes at a rate of 2.25% per annum.

Vendor Financing

In February 2022, we entered into a satellite procurement agreement (see Note 8:

Commitments and Contingencies to our condensed consolidated financial statements for further discussion).

This agreement provides for payment deferrals of milestone payments from February 2022 through August 2022 at a 0% interest rate.

Deferred payments are due in August 2022 under the terms of the agreement.

We intend to seek an extension of the maturity date while we pursue a new debt financing for the funding of the construction and launch costs for these satellites.

Off-Balance Sheet Transactions

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What changed 10-Q

Item 2. Management’s Discussion and Analysis