Globalstar, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "Report"), other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all forward-looking statements contain these identifying words. 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), 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. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (the "SEC") on February 25, 2022 (the "2021 Annual Report"). We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances. New risk factors emerge from time to time, and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. This "Management's Discussion and Analysis of Financial Condition" should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition" and information included in our 2021 Annual Report. 22 Overview Mobile Satellite Services Business Globalstar, Inc. ("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. In addition to supporting Internet of Things ("IoT") data transmissions in a variety of applications, we provide reliable connectivity in areas not served or underserved by terrestrial wireless and wireline networks and in circumstances where terrestrial networks are not operational due to natural or man-made disasters. By providing wireless communications services across the globe, we meet our customers' increasing desire for connectivity. 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 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. The technical specifications and design of these new satellites are similar to our current second-generation satellites. Rocket Lab USA, Inc. is the Vendor’s satellite bus subcontractor under the Procurement Agreement. 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 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. 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"); • 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"); • satellite network access and related services utilizing our satellite spectrum and network of satellites and gateways under our agreement with Partner ("Wholesale Capacity Services"); and • engineering and other communication services using our MSS and terrestrial spectrum licenses ("Engineering and Other"). 23 We compete aggressively on price. We offer a range of price-competitive products to the industrial, governmental and consumer markets. We expect to retain our position as a cost-effective, high quality leader in the MSS industry. As technological advancements are made, we continue to explore opportunities to develop new products and provide new services over our network to meet the needs of our existing and prospective customers. We are currently pursuing initiatives that we expect will expand our satellite communications business and more effectively utilize the capacity of our network assets. 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. 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. 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. 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. Customers 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; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; animal tracking and transportation. In response to Russia's invasion of Ukraine, during the first quarter of 2022, we disconnected satellite services to gateways in Russia that were operated by an independent gateway operator. Accordingly, approximately 25,000 subscribers that previously received satellite services through these gateways were removed from our subscriber count. Our system is able to offer our customers cost-effective communications solutions completely independent of cellular coverage. 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. 24 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 We benefit from a worldwide allocation of radio frequency spectrum in the international radio frequency tables administered by the International Telecommunications Union ("ITU"). Access to this globally harmonized spectrum enables us to design satellites, networks and terrestrial infrastructure enhancements more cost effectively because the products and services can be deployed and sold worldwide. In addition, this broad spectrum assignment enhances our ability to capitalize on existing and emerging wireless and broadband applications. Terrestrial Authority for Globalstar's Licensed 2.4GHz Spectrum In August 2017, the FCC modified our MSS licenses, granting us authority to provide terrestrial broadband services over the 11.5 MHz portion of our licensed MSS spectrum. Specifically, the FCC modified our space station authorization and our blanket mobile earth station license to permit a terrestrial network using 11.5 MHz of our licensed mobile-satellite service spectrum. In December 2018, we successfully completed the Third Generation Partnership Project (“3GPP”) standardization process for the 11.5 MHz of our licensed MSS spectrum terrestrially authorized by the FCC. The 3GPP designated the band as Band 53. Additionally, in March 2020, we announced that the 3GPP approved the 5G variant of our Band 53, which is known as n53. This new band class provides a pathway for our terrestrial spectrum to be integrated into handset and infrastructure ecosystems. Additional follow-on 3GPP specifications and approvals are expected in the future. During 2019, we executed a spectrum manager lease agreement with Nokia in order to permit Nokia to utilize Band 53 within its equipment domestically and have such equipment type-certified for sale and deployment. In February 2021, Qualcomm Technologies announced its new Snapdragon X65 modem-RF System, which includes support for Band n53. 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. To date, we have received additional terrestrial authorizations in various countries, including Brazil, Canada, and South Africa, among others. We expect this global effort to continue for the foreseeable future while we seek additional terrestrial approvals to internationally harmonize our S-band spectrum across the entire 16.5 MHz authority for terrestrial mobile broadband services. We expect our terrestrial authority will allow future partners to develop high-density dedicated networks using the TD-LTE and 5G protocols for private networks as well as the densification of cellular networks. We believe that our offering has competitive advantages over other conventional commercial spectrum allocations. Such other allocations must meet minimum population coverage requirements, which effectively prohibit the exclusive use of most carrier spectrum for dedicated small cell deployments. 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. 25 Performance Indicators Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality 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 subscriber-driven revenue, including Duplex, SPOT and Commercial IoT; • operating income and adjusted EBITDA, both of which are 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 three and nine months ended September 30, 2022 and 2021 Revenue Our revenue is categorized as service revenue and equipment revenue. We provide services to customers using technology from our satellite and ground network. Equipment revenue is generated from the sale of devices that work over our network. 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. 26 The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands). Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Service Revenue: Subscriber services Duplex $ 9,021 24 % $ 9,632 30 % $ 22,103 21 % $ 23,530 26 % SPOT 11,753 31 11,873 35 34,544 32 33,996 38 Commercial IoT 4,673 13 4,458 14 14,381 13 13,443 15 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 % Note 1: 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 September 30, 2022 Three Months Ended September 30, 2021 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Equipment Revenue: Duplex $ 15 — % $ 265 1 % $ 288 — % $ 889 1 % SPOT 1,558 4 2,619 8 4,707 5 6,764 8 Commercial IoT 2,713 7 1,841 6 6,427 6 5,452 6 Other 39 — 41 — 83 — 166 — Total Equipment Revenue $ 4,325 11 % $ 4,766 15 % $ 11,505 11 % $ 13,271 15 % 27 The following table sets forth our average number of subscribers and ARPU by type of revenue. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Average number of subscribers for the period: Duplex 41,204 45,004 42,046 46,531 SPOT 276,203 271,843 275,250 268,506 Commercial IoT 444,397 410,630 434,338 410,374 Other 428 26,848 13,337 26,732 Total 762,232 754,325 764,971 752,143 ARPU (monthly): Duplex $ 72.98 $ 71.34 $ 58.41 $ 56.19 SPOT 14.18 14.56 13.94 14.07 Commercial IoT 3.51 3.62 3.68 3.64 The numbers reported in the above table are subject to immaterial rounding inherent in calculating averages. 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. 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 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 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. 28 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. 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 Procurement Agreement. 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 $0.3 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 $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 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 $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. 29 Cost of Services 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 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 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. 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 in 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 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 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 $0.8 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. Reduction in Value of Long-Lived Assets 30 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. We determined that attainment of such licenses was no longer probable based on discussions with regulators and other circumstances. Other (Expense) Income (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. 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 $3.8 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 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. 31 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. See Note 7: 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 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 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. See Note 10: Pensions and Other Employee Benefits to our condensed consolidated financial statements for further discussion. Liquidity and Capital Resources Overview Our principal near-term liquidity requirements include funding our operating costs, capital expenditures, and repayment of amounts being financed through our satellite vendor under the Procurement Agreement. 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; we are actively pursuing a new debt financing arrangement to repay and fund amounts due under the Procurement Agreement. With this financing, we expect that our current sources of liquidity over the next twelve months will be sufficient for us to cover our obligations. Beyond the next twelve months, our liquidity requirements also include paying our debt service obligations. 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. 32 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): Nine Months Ended September 30, 2022 September 30, 2021 Net cash provided by operating activities $ 31,705 $ 107,166 Net cash used in investing activities (25,306) (30,033) Net cash used in financing activities (5,886) (82,725) Effect of exchange rate changes on cash and cash equivalents (68) (57) 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 wholesale capacity services. 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 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 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 and customer receivables also impacted the change in working capital. Cash Flows Used in Investing Activities 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. Indebtedness For further discussion on all of our debt and other financing arrangements, see Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements. 2019 Facility Agreement In 2019, we entered into a $199.0 million facility agreement with Thermo, an affiliate of EchoStar Corporation and certain other unaffiliated lenders (the "2019 Facility Agreement"). The 2019 Facility Agreement is scheduled to mature in November 2025. 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 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 33 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 In May 2013, we issued $54.6 million aggregate principal amount of its 2013 8.00% Notes. In February 2022, we notified the holders of the 8.00% Notes of our intention to redeem all of the outstanding amount of principal and interest in March 2022. Prior to our intended redemption of the 8.00% Notes in March 2022, the holders converted the remaining principal amount outstanding into 2.3 million shares of Globalstar common stock at a conversion price of $0.69 (as adjusted) per share of common stock. The 2013 8.00% Notes were scheduled to mature on April 1, 2028, subject to various call and put features. Interest on the 2013 8.00% Notes was payable semi-annually in arrears on April 1 and October 1 of each year. 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. Off-Balance Sheet Transactions We have no material off-balance sheet transactions. Recently Issued Accounting Pronouncements We review recently issued accounting guidance as new standards are issued. Certain accounting standards issued or effective may be applicable to us; however, we have not identified any standards that will have a material impact on our condensed consolidated financial statements. 34