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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-25 · 217 added, 225 removed, 155 unchanged (74% of the section changed)

15 unchanged sentences

Comparison of the Results of Operations for the years ended December 31, 2022 and 2021

As a result of COVID-19, we experienced an initial reduction in the volume of sales of our subscriber equipment, received requests for service pricing concessions from certain customers, and were impacted by certain of our customers not being able to pay outstanding balances.

Our revenue is categorized as service revenue and equipment revenue.

1 unchanged sentence

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

During the twelve months ended December 31, 2021, total revenue decreased $4.2 million to $124.3 million from $128.5 million in 2020.

During the twelve months ended December 31, 2022, total revenue increased $24.2 million, or 19%, to $148.5 million from $124.3 million in 2021.

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

5 unchanged sentences

Service Revenue:

Subscriber services

Duplex $ 29,222 20 % $ 31,197 25 %

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Commercial IoT 19,516 13 % 17,951 14 %

Engineering and Other 11,276 9 % 15,722 12 %

Wholesale capacity services 34,913 24 % 8,945 7 %

Engineering and other services 2,747 1 % 2,331 2 %

Total Service Revenue $ 132,068 89 % $ 106,464 85 %

22 unchanged sentences

The numbers reported in the above table are subject to immaterial rounding inherent in calculating averages.

During the twelve months ended December 31, 2021, gross Duplex subscriber additions decreased 21% and SPOT subscriber additions increased 12%.

The decrease in Duplex gross subscriber additions from 2020 to 2021 was impacted by a limited inventory of phones as well as the discontinuation of Sat-Fi2® device sales (discussed further below).

The limited phone inventory restricts the volume of units that can be sold, activated and/or re-activated in a year.

SPOT gross subscriber

activations increased as we continue to see high demand for all of our SPOT devices, partially impacted by changes in consumer behavior resulting from COVID-19, driving more customers to purchase our SPOT products for outdoor recreational activities.

All of our SPOT device types experienced an increase in gross additions during 2021.

Because our Commercial IoT subscribers are able to activate and deactivate their units several times during the year, gross Commercial IoT subscriber additions are not considered to be a meaningful metric.

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 or 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% in 2022 due primarily to a decline in average subscribers of 11% offset by an increase in ARPU of 5%.

The decrease in average subscribers was driven by churn in the subscriber base exceeding gross activations over the last twelve months, including the deactivation of all Sat-Fi2® subscribers (approximately 2,000) in the first quarter of 2021.

As previously disclosed, we continue to see a shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices;

accordingly, 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% in 2021 due primarily to lower ARPU.

ARPU has decreased since the introduction of lower priced service plans in mid-2019.

The portion of our subscriber base on these lower-priced plans has increased over this period and are now fully absorbed into the subscriber base.

Although average subscribers were generally flat year over year, we experienced higher gross activations, lower churn and higher ending subscribers during 2021 compared to 2020.

Commercial IoT service revenue increased 5% in 2021 due to higher ARPU.

The increase in ARPU was due to higher usage and the mix of our subscribers on higher rate plans compared to the prior year period.

Although average subscribers were flat year over year, we experienced higher gross activations and lower churn during 2021.

We replenished our subscriber base during 2021 after the negative impact from COVID-19 in 2020.

Customer behavior has changed, indicating a recovery in demand.

Gross activations have increased 5% and churn was 18% lower since 2020.

Importantly, Commercial IoT equipment device sales increased approximately 40% compared to 2020 (discussed further below), which we believe is another indication that Commercial IoT service revenue is likely to grow in the future.

Engineering and other service revenue decreased $4.4 million in 2021.

This decrease was due primarily to the recognition of $2.9 million of revenue during the fourth quarter of 2020 associated with a contract that was executed in 2007 for the construction of a gateway in Nigeria, upon its termination due to lack of performance by the partner, and our performance of all obligations in accordance with the terms of the contract.

These remaining contract proceeds were previously held in non-current deferred revenue.

The remaining decrease was due to the timing and amount of revenue recognized associated with the completion of certain milestones under the Terms Agreement.

Among other items, the revenue recognized during 2021 included the reimbursement of costs associated with the gateway expansion project previously discussed.

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.

The increase in ARPU is due to adjustments made to certain rate plans to align pricing with our competitors and to better align the value of services offered to our Duplex subscribers.

Higher service prices were offset partially by strengthening of the U.S.

dollar which lowered the revenue recognized from billings denominated in certain foreign currencies.

SPOT service revenue decreased 1% in 2022 due to lower ARPU, offset partially by an increase in average subscribers.

The decrease in ARPU is due to the strengthening of the U.S.

dollar as well as the mix of subscriber rate plans, including the continued popularity of our flex plans.

Our flex plans generally carry lower rates than our traditional prepaid unlimited plans because users can suspend their service plan periodically during their contract term.

Slightly offsetting the decrease in revenue due to lower ARPU were higher average subscribers.

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

Commercial IoT service revenue increased 9% in 2022 due to higher average subscribers and, to a lesser extent, higher ARPU.

During 2022, average subscribers increased 7% and ARPU increased 2%.

Gross subscriber activations have increased 26% 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.

Importantly, during the fourth quarter of 2022, we were able to fulfill many of these back orders, resulting in a greater than 50% increase in gross subscriber activations quarter over quarter.

During 2022, steady growth in our Latin American subscriber base has also contributed to higher revenue;

average subscribers for this region increased 29% and represent 4% of our average subscriber growth in total.

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

Wholesale capacity service revenue increased $26.0 million to $34.9 million during 2022 from $8.9 million during 2021 due to the timing and amount of revenue recognized associated with the Service Agreements.

This increase in revenue was due primarily to consideration received for performance obligations associated with our work to expand and upgrade our gateways around the globe in preparation for the launch of service as well as fees associated with the services that commenced in November 2022.

Engineering and other service revenue increased $0.4 million in 2022.

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 to more than the total increase in Engineering and other service revenue during the year.

Other smaller items offset this increase in revenue year over year.

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 $0.7 million, or 68%, in 2022.

This decrease was driven primarily by lower volume of Sat-Fi2® device sales.

As previously discussed, we have temporarily ceased sales of and services to subscribers for certain Duplex devices, including Sat-Fi2®, as we continue to evaluate opportunities for these devices relative to other product and service offerings.

Revenue from SPOT equipment sales increased $1.3 million, or 15%, in 2021.

We occasionally sell component parts to our equipment manufacturer to use in final products;

these sales fluctuate based on the volume and price of parts that we directly source for the production of our equipment.

Compared to 2020, we sold more component parts to our equipment manufacturer during 2021.

Higher volume of SPOT Trace as well as improved pricing for all products, specifically driven by the amount and timing of promotions, also favorably impacted revenue from SPOT equipment sales.

SPOT equipment sales were impacted by inventory shortages, which delayed the fulfillment of certain orders during the second half of 2021 and has continued into 2022.

Revenue from Commercial IoT equipment sales increased $2.0 million, or 39%, in 2021.

This increase resulted from a higher sales volume of all IoT devices, primarily driven by our SmartOne devices and modules.

Sales were higher than the prior

year despite the same component part shortage issues discussed above, which has resulted in sales orders exceeding available inventory supply.

We believe that the increase in demand during 2021 is an indication of a recovery in Commercial IoT after the oil and gas industry and COVID-related downturns experienced in 2020.

This decrease was due to a lower sales volume of phones and accessories since these devices are no longer being manufactured.

Revenue from SPOT equipment sales decreased $3.5 million, or 38%, in 2022.

This decrease resulted from a lower volume of products sold over the last twelve months.

Two of our core SPOT products were on back order for the vast majority of 2022, which delayed the fulfillment of orders, thereby reducing equipment sales year over year.

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.

Production has resumed, and we are optimistic the remaining back orders will be fulfilled by the end of the first quarter of 2023.

Revenue from Commercial IoT equipment sales increased $3.0 million, or 41%, in 2022 due primarily to growth in demand for our Commercial IoT products and services.

This demand has outpaced available inventory due to supply chain disruptions caused by component part shortages.

While production issues were substantially resolved during the second half of 2022, we continue to be in a back order position.

Once we are able to produce sufficient quantities to meet demand, we expect equipment sales to continue to increase and expect the remaining back orders will be fulfilled by the end of the first quarter of 2023.

Operating Expenses :

Total operating expenses increased 1% to $189.8 million in 2021 from $187.7 million in 2020.

Higher cost of services, cost of subscriber equipment sales as well as reductions in the value of inventory contributed to the increase in total operating expenses.

Lower marketing, general and administrative costs and depreciation, amortization and accretion partially offset these increases.

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

Total operating expenses increased 95% to $369.5 million in 2022 from $189.8 million in 2021 due primarily to reductions in the value of inventory and long-lived assets.

This item and other contributors to the variance in operating expenses are explained in detail below.

Cost of Services

Cost of services increased $6.0 million, or 16%, to $43.4 million in 2022 from $37.4 million in 2021.

The increase in cost of services was driven primarily by lease expense associated with new teleport leases which commenced throughout the second half of 2021.

These leases were executed in connection with the gateway expansion project associated with the Terms Agreement, and the associated cost is being reimbursed to us beginning in December 2021 (as further discussed above in Engineering and other service revenue).

Higher professional fees and licensing costs related to the implementation of a new Enterprise Resource Planning ("ERP") system, which went live in January 2022, also contributed to the increase in expense during 2021.

These increases were offset slightly by lower maintenance costs resulting from revisions to contract terms with certain vendors for gateway and software maintenance.

The increase in cost of services was due to higher personnel costs totaling $3.0 million, which included $0.7 million related to non-recurring bonuses and separation pay.

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 $2.2 million of the total increase.

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

85% of 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 $1.8 million to the total increase.

These increases were offset partially by an employee retention credit received in December 2022.

We received this refund check totaling $1.8 million as a result of our eligibility for the employee retention credit under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") for the first quarter of 2021.

The refund was recorded as a reduction to operating expenses during the fourth quarter of 2022 and was allocated between Cost of Services and MG&A (defined below) totaling $1.3 million and $0.5 million, respectively, based on the employee costs incurred during the eligible period.

Cost of Subscriber Equipment Sales

Cost of subscriber equipment sales increased by $0.3 million, or 2%, to $13.6 million in 2021 from $13.3 million in 2020.

Cost of subscriber equipment sales increased due to higher subscriber equipment sales, offset partially by the reversal of a prior year accrual for potential tariffs.

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 $1.0 million recognized during 2021.

The improved equipment margin during 2021 was impacted by the mix of devices sold during the respective periods, particularly higher sales of Commercial IoT devices.

During 2021, our primary manufacturer's labor costs were reduced, offsetting the impact from higher component part prices;

therefore, there was minimal net impact on the margin generated from SPOT and Commercial IoT product sales.

This trend of lower labor costs was fully absorbed into our product costs during 2021 and is not expected to decrease costs in 2022.

Cost of subscriber equipment sales decreased by $0.5 million, or 4%, to $13.1 million in 2022 from $13.6 million in 2021.

This decrease is generally consistent with the decrease in total revenue from subscriber equipment sales, offset partially by the impact of the 2021 reversal of a prior year accrual for tariffs.

Margin percentages for both SPOT and Commercial IoT narrowed during 2022 compared to 2021 resulting from the mix of products sold during each respective period.

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

During 2021, we recorded a reduction in the value of inventory totaling $1.0 million, including the write-off of certain Sat-Fi2® materials that are not likely to be used in production as well as defective inventory units that are not saleable.

During 2020, we wrote down the value of inventory by $0.7 million following our decision to discontinue production of a second-generation Duplex device, as well as an evaluation of excess or obsolete inventory related to end of life products and technology.

During 2022, we recorded a reduction in the value of inventory totaling $8.6 million.

As disclosed in Note 8:

Fair Value Measurements to our 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 2021, we recorded a reduction in the value of inventory totaling $1.0 million which included the write-off of certain materials that were not likely to be used in production as well as defective inventory units that were not saleable.

Marketing, General and Administrative

Marketing, general and administrative expenses ("MG&A") decreased $0.3 million, or 1%, to $41.4 million in 2021 from $41.7 million in 2020.

This decrease is due primarily to lower credit losses, due in part to higher reserves recorded in 2020 related to specific customer receivable balances that were not expected to be collectible due to financial difficulties resulting from the impact of COVID-19;

during 2021, we successfully recovered a portion of these previously reserved customer balances.

Lower dealer commissions and advertising expense also contributed to the decrease in MG&A expenses.

Offsetting the favorable fluctuations in expenses were higher subscriber acquisition costs, including certain customer appeasement credits that are not expected to recur, as well as higher professional and legal fees for strategic opportunities.

Depreciation, Amortization and Accretion

Depreciation, amortization, and accretion expense decreased $0.6 million to $96.2 million in 2021 compared to $96.8 million in 2020.

During 2018, we placed into service software-related assets associated with our second-generation ground system;

a portion of these assets had a three year life and were fully depreciated in early 2021.

Marketing, general and administrative expenses ("MG&A") increased $2.7 million, or 7%, to $44.1 million in 2022 from $41.4 million in 2021.

The increase was due to higher personnel costs of $5.0 million.

Included in personnel costs are higher stock-based compensation driven by performance grants to certain employees associated with their efforts under the Service Agreements ($4.0 million of the increase), cash bonuses ($0.5 million of the increase) and separation pay ($0.5 million of the increase).

Higher professional and legal fees totaling $0.8 million also increased MG&A expense during the year.

The provision for credit losses increased $0.9 million during 2022;

this increase was due in part to a successful recovery of a previously reserved customer balance during 2021, which reduced expense in 2021 and did not recur in 2022.

These increases 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 $1.2 million to the decrease in MG&A expense.

Also, 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.

As discussed above in Cost of Services, we received a refund check as a result of our eligibility for the employee retention credit under the provisions of the CARES Act;

we recorded a reduction to MG&A totaling $0.5 million during 2022.

Reduction in Value of Long-Lived Assets

During 2022, we recorded a reduction in the value of long-lived assets totaling $166.5 million.

As disclosed in Note 8:

Fair Value Measurements to our 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.

Our first-generation Duplex assets (i.e.

handsets and related ground infrastructure) were not impacted.

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.

Additionally, during 2022, we recorded reductions in the value of intangible and other assets totaling $0.6 million.

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:

Gain on Extinguishment of Debt

We recorded a gain on extinguishment of debt totaling $2.8 million during 2022 related to the November 2022 exchange of a portion of the 2019 Facility Agreement principal balance into Series A Preferred Stock.

This gain was recorded for the portion exchanged for unaffiliated lenders only.

The gain represents the difference between the net carrying amount prior to extinguishment (including unamortized deferred financing costs, debt discounts, and related derivative) and the reacquisition price of the debt.

We recorded a net gain on extinguishment of debt totaling $3.1 million during 2021 related to the following items:

(i) gain on extinguishment of debt of $5.0 million resulting from the Small Business Administration's ("SBA") forgiveness of amounts outstanding under our Paycheck Protection Program ("PPP") loan and (ii) net losses on extinguishment of debt of $1.9 million resulting from the write off of deferred financing costs following unscheduled principal repayments of the 2009 Facility Agreement during 2021.

Similar activity did not occur in 2020.

(i) gain on extinguishment of debt of $5.0 million resulting from the Small Business Administration's forgiveness of amounts outstanding under our Paycheck Protection Program ("PPP") loan and (ii) net losses on extinguishment of debt of $1.9 million resulting from the write off of deferred financing costs following unscheduled principal repayments of the 2009 Facility Agreement during 2021.

Interest Income and Expense

Interest income and expense, net, decreased $4.9 million to expense of $43.5 million for 2021 compared to expense of $48.4 million for 2020.

This decrease was driven by lower gross interest costs totaling $3.5 million as well as an increase to capitalized interest of $1.6 million (which decreases interest expense).

Interest income and expense, net, was also impacted by a decrease in interest income totaling $0.2 million.

Gross interest costs were impacted by lower interest associated with the 2009 Facility Agreement ($7.1 million) and the Loan Agreement with Thermo ($2.9 million);

these items were offset partially by higher interest on the 2019 Facility Agreement ($4.7 million) and imputed interest associated with the significant financing component related to advance payments from a customer ($1.9 million).

Interest costs for the 2009 Facility Agreement were favorably impacted by reductions in the principal balance over the last twelve months, including the final paydown in November 2021, as well as a decrease in the interest rate driven by a reduction in LIBOR.

As previously discussed, we made principal payments of the 2009 Facility Agreement totaling $187.0 million over the last twelve months, which reduced the principal amount outstanding to zero and lowered interest costs.

Lower interest costs for the Loan Agreement with Thermo were driven by Thermo's conversion of the entire principal balance outstanding under the Loan Agreement in February 2020.

Higher costs associated with the 2019 Facility Agreement are due to the rate of PIK interest accrued on the loan.

Derivative (Loss) Gain

We recorded derivative losses of $1.0 million and gains of $2.9 million in 2021 and 2020, respectively.

Interest income and expense, net, decreased $13.3 million to $30.2 million for 2022 compared to $43.5 million for 2021.

This decrease was driven primarily by higher capitalized interest (which decreases interest expense) of $11.5 million and lower gross interest costs of $1.8 million.

The increase in capitalized interest is due to an increase in our construction in progress balance during 2022, associated primarily with the satellite procurement agreement with MDA to construct new satellites to replenish our existing satellite constellation.

Gross interest costs were lower due to lower interest of $7.6 million associated with the 2009 Facility Agreement;

this decrease was offset partially by higher interest of $2.3 million associated with the 2019 Facility Agreement, imputed non-cash interest associated with the significant financing component related to advance payments from Partner under the Service Agreements of $1.9 million, and the accrual of interest associated with our vendor financing totaling $1.3 million.

Other smaller items contributed to the remaining variance during 2022.

Derivative Loss

We recorded derivative losses of $0.8 million and $1.0 million in 2022 and 2021, respectively.

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

During 2022, an increase in the discount rate used in the valuation of the derivative associated with the 2019 Facility Agreement contributed to the derivatives loss.

This impact was offset partially by changes in the probability and timing of prepayments contemplated in the valuation of the derivative associated with our 2019 Facility Agreement.

Additionally, we recorded a gain on the valuation adjustment of the embedded derivative associated with our 2013 8.00% Notes following their conversion during the first quarter of 2022.

The losses recorded during 2021 were due primarily to an increase 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 gains recorded during 2020 were due primarily to a lower discount yield used in the valuation of the embedded derivative associated with our 2019 Facility Agreement.

Fair Value Measurements to our 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 $5.6 million to a loss of $6.3 million in 2021 from a loss of $0.7 million in 2020.

Foreign Currency Loss

Foreign currency loss fluctuated by $0.3 million to a loss of $6.6 million in 2022 from a loss of $6.3 million 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 each reporting period.

During 2021, the foreign currency loss was due primarily to the weakening of the Euro and Brazilian real relative to the U.S.

During 2020, the weakening of the Brazilian real relative to the U.S.

dollar contributed to the foreign currency losses;

these losses were partially offset by the strengthening of the Canadian dollar and the Euro.

Other income (expense) fluctuated to income of $0.4 million in 2021 compared to expense of $3.6 million in 2020.

The primary expense in this line item are the non-operating components of net periodic benefit cost, including activity related to settlement of our pension liability.

In December 2020, we settled a portion of our pension liability due to certain participants;

For 2022 and 2021, the foreign currency losses were due to the strengthening of the U.S.

dollar relative to certain other currencies, such as the Euro;

other currency fluctuations of the Canadian Dollar and the Brazilian Real also impacted the net losses in both periods.

Pension Settlement Loss

In August 2022, we settled the remaining pension liability;

this settlement resulted in a loss of $1.5 million.

We also recorded legal and other adviser costs incurred related to the modification of our 2009 Facility Agreement to non-operating expense under applicable accounting guidance.

These costs decreased $0.9 million from 2020 to 2021.

Income Tax (Benefit) Expense

Income tax (benefit) expense fluctuated by $1.0 million to a benefit of $0.3 million in 2021 from expense of $0.7 million in 2020.

The primary income tax (benefit) expense is related to deferred state tax liabilities associated with net operating loss limitations.

Pensions and Other Employee Benefits to our Consolidated Financial Statements for further discussion.

Similar activity did not occur during 2021.

Income Tax Expense (Benefit)

Income tax expense (benefit) fluctuated by $0.4 million to an expense of $0.1 million in 2022 from a benefit of $0.3 million in 2021.

The primary income tax expense (benefit) is related to deferred state tax liabilities associated with net operating loss limitations.

Comparison of the Results of Operations for the years ended December 31, 2021 and 2020

Discussion of the results of operations for the years ended December 31, 2020 and 2019 can be found in the Globalstar Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 4, 2021.

Discussion of the results of operations for the years ended December 31, 2021 and 2020 can be found in the Globalstar Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 25, 2022.

Liquidity and Capital Resources

Our principal near-term liquidity requirements include funding our operating costs and capital expenditures.

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

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

We expect that our current sources of liquidity over the next twelve months will be sufficient for us to cover our obligations.

We may also access equity and debt capital markets from time to time or refinance our debt obligations to improve the terms of our indebtedness.

As of December 31, 2021, we held cash and cash equivalents of $14.3 million.

As of December 31, 2020, we held cash and cash equivalents of $13.3 million and restricted cash of $54.7 million.

We used the funds received under the Terms Agreement together with cash on hand and in our restricted cash account to pay down the remaining outstanding balance of the 2009 Facility Agreement during 2021.

The total carrying amount of our long-term debt outstanding was $237.9 million at December 31, 2021, compared to $385.4 at December 31, 2020.

At December 31, 2021, there was no current portion of debt outstanding.

At December 31, 2020, the current portion of our debt outstanding was $58.8 million and represented the scheduled payments under the 2009 Facility Agreement and the Paycheck Protection Program PPP Loan due within one year of the balance sheet date.

The $147.5 million decrease in the carrying amount of our total debt balance was due primarily to principal payments of the 2009 Facility Agreement totaling $187.0 million during 2021 (discussed below) as well as the forgiveness of the PPP Loan, totaling $4.9 million (net of less than $0.1 million of deferred financing costs prior to forgiveness).

Offsetting these debt reductions was a higher carrying value of the 2019 Facility Agreement of $38.1 million due to the accrual of PIK interest and the accretion of debt discount as well as $6.4 million related to the amortization of deferred financing costs and write-off of deferred financing costs for the 2009 Facility Agreement.

Our principal near-term liquidity requirements include funding our operating costs;

capital expenditures, including repayment of amounts being financed through MDA, and future amounts expected to be incurred under the satellite procurement agreement;

repayment of the remaining principal balance due under the 2019 Facility Agreement;

and interest and dividends due on any debt or preferred equity instruments outstanding.

Our principal sources of liquidity during 2022 included cash on hand, cash flows from operations and vendor financing.

Our principal sources of liquidity over the next twelve months are expected to included cash on hand, cash flows from operations, prepayments under the Service Agreements (discussed in Recent Developments below) and funds from a debt or equity financing that have not yet been arranged.

With this financing, we expect that our sources of liquidity will be sufficient for us to cover our obligations over the next twelve months and longer term.

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

As of December 31, 2022 and December 31, 2021, we held cash and cash equivalents of $32.1 million and $14.3 million, respectively.

The total carrying amount of our debt and vendor financing outstanding was $191.9 million at December 31, 2022, compared to $237.9 at December 31, 2021.

The $46.0 million decrease in the carrying amount of our debt and vendor financing was due to the November 2022 exchange of $149.4 million principal amount of our 2019 Facility Agreement, a $6.3 million mandatory prepayment of principal in August 2022 of our 2019 Facility Agreement, and a $1.4 million reduction in the principal balance of the 2013 8.00% Notes following their conversion into shares of Globalstar common stock during 2022.

These items were offset by amounts due to MDA under the satellite procurement agreement of $59.8 million during 2022, a higher carrying value of the 2019 Facility Agreement of $51.4 million due to the accrual of PIK interest ($35.2 million), the accretion of debt discount and amortization of deferred financing costs ($5.3 million) and the write off of deferred financing costs associated with the exchange discussed below ($10.9 million).

Recent Developments

On February 27, 2023, Globalstar and Partner agreed to amend the Service Agreements to provide for, among other things, Partner’s prepayment of $252 million to us (the “Prepayment”).

We plan to use the proceeds of the Prepayment to pay amounts currently due and payable, and future amounts due, under our previously disclosed Satellite Procurement Agreement with MDA , as well as launch, insurance and ancillary costs incurred in connection with the construction and launch of these satellites .

The Prepayment replaces our requirement to raise third-party financing for these costs as previously required under the Service Agreements and will be funded on a quarterly basis, subject to certain conditions in the agreement.

The remaining amount of the satellite costs is expected to be funded from our operating cash flows.

The amount of the Prepayment and fees payable thereon will be recouped from amounts payable by our Partner for services provided by us under the Service Agreements.

The Prepayment is expected to be recouped in installments for a period of 16 quarters beginning no later than the third quarter of 2025.

The Prepayment may also be repaid over time through excess cash flow sweeps or voluntary prepayments, as provided under the terms of the prepayment agreement.

For as long as any portion of the Prepayment is outstanding, we will be subject to certain covenants including (i) minimum cash balance of $30 million, (ii) interest coverage and leverage ratios, and (iii) limitations on certain asset transfers, expenditures and investments.

Amounts payable by us in connection with the Prepayment will be guaranteed by Thermo, subject to applicable shareholder approval.

Prior to such shareholder approval, Thermo has agreed to provide support of certain of our obligations under the Service Agreements, the Satellite Procurement Agreement, and certain related contracts directly to Partner.

As conditions precedent to Prepayment funding, we must (i) convert or refinance the remaining loans outstanding under the 2019 Facility Agreement by March 13, 2023 and (ii) grant Partner a first-priority lien in our assets to secure its obligations under the Service Agreements.

Cash Flows for the years ended December 31, 2022, 2021 and 2020

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Effect of exchange rate changes on cash, cash equivalents and restricted cash (22) (132) 52

Net (decrease) increase in cash, cash equivalents and restricted cash $ (53,719) $ 8,895 $ (16,362)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 17,778 $ (53,719) $ 8,895

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 services.

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

Net cash provided by operations includes primarily cash receipts from wholesale capacity services provided to our Partner under the Service Agreements as well as satellite voice and data services provided, and equipment sold, to our subscribers.

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

Net cash provided by operating activities was $63.8 million during 2022 compared to $131.9 million during 2021.

During 2021, the primarily driver for the increase in cash flows provided by operating activities was advance payments received under the Terms Agreement by a customer totaling $111.4 million, which were recorded as deferred revenue (see Note 2:

Revenue in our Consolidated Financial Statements for further discussion).

During 2020, the primarily drivers for the increase in cash flows provided by operating activities were higher net income after adjusting for non-cash items due to lower interest payments and operating expenses.

Partially offsetting higher net income were unfavorable working capital changes due primarily to an increase in accounts receivable and a decrease in deferred revenue, which were both driven by the timing of services delivered under our subscriber and engineering service contracts relative to the timing of cash receipts.

Offsetting these unfavorable items were higher inventory sales as well as fewer inventory purchases and favorable changes in prepaid and other current assets, driven in part by the final installment of $3.7 million received in January 2020 from the 2018 settlement of a business economic loss claim.

This decrease was due primarily to a smaller increase in deferred revenue during 2022 compared to 2021 due to the timing and amount of prepayments made by Partner under the Service Agreements, which were recorded as deferred revenue (see Note 2:

Revenue to our Consolidated Financial Statements for further discussion).

The decrease in operating cash flows was also due to other working capital changes year over year, including the timing of vendor payments and customer receivables, offset partially by higher net income in 2022 after adjusting for noncash items.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $40.0 million during 2022 compared to $45.2 million during 2021.

The nature of our capital expenditures for both 2021 and 2020 primarily relates to network upgrades.

The increase in net cash used in investing activities during 2021 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.

Net cash used in investing activities was $14.5 million during 2020 compared to $11.5 million during 2019.

During both 2020 and 2019, our capital expenditures were related to the procurement and deployment of new antennas for our gateways.

Additionally, in both years, we incurred costs for other initiatives, including our new billing system, which was placed into service in April 2020, as well as product development, including software and other back-office efforts.

The nature of our capital expenditures in both years related primarily to network upgrades associated with the Service Agreements, including the procurement and deployment of new antennas for our gateways, the preparation and launch of our on-ground spare satellite in June 2022, and milestone work under the satellite procurement agreement with MDA which was executed in February 2022.

Cash used in investing decreased from 2021 to 2022 due to lower costs associated with gateway upgrades as that portion of the project nears completion, offset partially by replacement satellite costs.

Cash Flows Provided by (Used in) Financing Activities

Net cash used in financing activities was $6.0 million in 2022 compared to net cash provided by financing activities of $140.3 million in 2021.

Net cash used in financing activities was $6.0 million during 2022 due to an unscheduled principal repayment of the 2019 Facility Agreement in August 2022 totaling $6.3 million.

During 2021, we paid off the remaining principal balance due under the 2009 Facility Agreement of $187.0 million (see further discussion below).

In March 2021, we received $43.7 million in proceeds from the exercise of the warrants issued with our 2019 Facility Agreement and, in December 2021, we received a partial refund of premiums previously paid for the 2009 Facility Agreement of $2.6 million.

Net cash provided by financing activities was $1.2 million in 2020 compared to net cash used in financing activities of $7.9 million in 2019.

In April 2020, we received proceeds of $5.0 million from the PPP Loan (discussed below);

these proceeds were offset by mandatory prepayments of principal on our 2009 Facility Agreement totaling $3.4 million as well as the timing of payments for debt financing costs from our refinancing in 2019 totaling $1.1 million.

Discussion of our cash flows from operating, investing and financing activities for the years ended December 31, 2021 and 2020 can be found in the Globalstar Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 25, 2022.

For further discussion on all of our debt and other financing arrangements, see Note 6:

Long-Term Debt and Other Financing Arrangements in our Consolidated Financial Statements.

2019 Facility Agreement

In November 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").

In November 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 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).

The remaining

loans under the 2019 Facility Agreement bear interest at a rate of 14% per annum to be paid-in-kind (or in cash, at our option).

As of December 31, 2022, the principal amount outstanding under the 2019 Facility Agreement was $143.2 million.

During 2021, we fully paid down the remaining balance of the 2009 Facility Agreement.

As a result of this pay off, the lenders of the 2019 Facility Agreement are now senior lenders.

As previously disclosed, w e provided notice to the agent and remaining lender of our intent to voluntarily prepay all remaining amounts due under the 2019 Facility Agreement by March 13, 2023.

In connection with our Partner's launch of Services on November 15, 2022, to satisfy our obligation to complete the Thermo Debt Conversion (as described in our Current Report on Form 8-K filed September 7, 2022), we entered into an Exchange Agreement dated as of November 15, 2022 (the “Exchange Agreement”) with affiliates of Thermo and certain other lenders (collectively, the “Exchanging Lenders”) providing for the exchange of all the outstanding principal amount of, and accrued and unpaid interest on, the Exchanging Lenders’ loans under the 2019 Facility Agreement for shares of our Series A Preferred Stock.

Pursuant to the terms of the Exchange Agreement, on November 15, 2022, we exchanged a total of $149.4 million of loans under the 2019 Facility Agreement, including all loans held by Thermo.

Our obligations under the 2019 Facility Agreement are guaranteed on a senior secured basis by all of our domestic subsidiaries' assets and are secured by a first priority lien on substantially all of our assets and our domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of our domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.

In anticipation of business strategies related to projected capital expenditures, potential future vendor financing, termination of the Globalstar pension plan, and expected redemption of the 2013 8.00% Notes, we received waivers from our senior lenders in August 2021 and January 2022 to permit such transactions.

As additional consideration for the loan, we issued the lenders warrants to purchase 124.5 million shares of voting common stock at an exercise price of $0.38 per share.

All of these warrants have been exercised resulting in proceeds of $47.3 million.

The 2019 Facility Agreement contains customary events of default and requires us to satisfy various financial and non-financial covenants.

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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.

If we generate Excess Cash Flow in 2022, we will be required to make such prepayments.

These payments would reduce future principal payment obligations.

Long-Term Debt and Other Financing Arrangements in our Consolidated Financial Statements for further discussion of the 2019 Facility Agreement.

8.00% Convertible Senior Notes Issued in 2013

Our 2013 8.00% Notes are convertible into shares of our common stock at a conversion price of $0.69 (as adjusted) per share of common stock.

As of December 31, 2021, the principal amount outstanding of the 2013 8.00% Notes was $1.4 million.

The 2013 8.00% Notes will mature on April 1, 2028, subject to various call and put features.

Interest on the 2013 8.00% Notes is payable semi-annually in arrears on April 1 and October 1 of each year.

We pay interest in cash at a rate of 5.75% per annum and by issuing additional 2013 8.00% Notes at a rate of 2.25% per annum.

A holder of 2013 8.00% Notes has the right to require us to purchase some or all of the 2013 8.00% Notes on April 1, 2023 at a price equal to the principal amount of the 2013 8.00% Notes to be purchased plus accrued and unpaid interest.

The indenture governing the 2013 8.00% Notes provides for customary events of default.

As of December 31, 2021, we were in compliance with the terms of the 2013 8.00% Notes and the Indenture.

Long-Term Debt and Other Financing Arrangements in our Consolidated Financial Statements for further discussion of the 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 accrued interest, totaling $1.5 million.

This redemption is expected to occur in March 2022 and be paid in cash if the holders do not convert their 8.00% Notes prior to the redemption date.

2009 Facility Agreement

In 2009, we entered into a 2009 facility agreement (the "2009 Facility Agreement"), which was amended and restated in July 2013, August 2015, June 2017 and November 2019.

The 2009 Facility Agreement was fully repaid in November 2021 prior to its scheduled maturity in December 2022.

As of December 31, 2021, there was no principal amount outstanding under the 2009 Facility Agreement.

The 2009 Facility Agreement required mandatory prepayments of principal with any Excess Cash Flow (as defined and calculated in the 2009 Facility Agreement) on a semi-annual basis.

During 2021, we were required to pay $4.4 million to our lenders resulting from our Excess Cash Flow calculation as of December 31, 2020.

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.

The amended and restated 2009 Facility Agreement included a requirement that we raise no less than $45.0 million from the sale of equity prior to March 30, 2021.

We fulfilled this requirement with proceeds from the exercise of all the warrants issued to the 2019 Facility Agreement lenders in November 2019.

We received proceeds totaling $47.3 million, of which $3.6 million was received in December 2019 and the remaining $43.7 million was received during 2021.

In April 2021, the proceeds were used towards the principal balance outstanding.

Additionally, in 2021, we received two advance payments of $37.5 million each from a customer under the Terms Agreement.

We used these proceeds to pay a portion of the remaining amount due under the 2009 Facility Agreement.

In November 2021, we repaid the final outstanding amount totaling $60.3 million using cash on hand and restricted cash.

The 2009 Facility Agreement required us to maintain a debt service reserve account, which was pledged to secure all of our obligations under the 2009 Facility Agreement, and was previously classified as restricted cash on our consolidated balance

As a result of the early pay off of the 2009 Facility Agreement, in December 2021, we received a partial refund of premiums previously paid totaling $2.6 million.

Long-Term Debt and Other Financing Arrangements to our Consolidated Financial Statements for further discussion of the 2009 Facility Agreement.

Paycheck Protection Program Loan

As previously discussed, we sought relief under the CARES Act, including receiving a $5.0 million loan under the PPP in April 2020 (the "PPP Loan").

In June 2021, the SBA approved our request for forgiveness of all amounts outstanding, including accrued interest.

As of December 31, 2021, there was no principal amount or interest outstanding under the PPP Loan.

Long-Term Debt and Other Financing Arrangements to our Consolidated Financial Statements for further discussion of the PPP Loan.

Subsequent Event

In February 2022, we entered into the satellite Procurement Agreement (see below in Contractual Obligations and Commitments for further discussion).

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

In August 2022, all deferred payments are expected to become due by which time we intend to complete a senior secured financing.

This financing is intended to provide sufficient proceeds for the construction and launch of the satellites and we expect to refinance our current 2019 Facility Agreement concurrent with or after the financing.

The Company generated Excess Cash Flow for the six-month measurement period ended December 31, 2022 and will be required to pay approximately $2.0 million if the debt remains outstanding on March 16, 2023.

Vendor Financing

In February 2022, we entered into a satellite procurement agreement with MDA.

This agreement (as amended in October 2022 and January 2023) provides for deferrals of milestone payments through March 15, 2023.

We have made $34 million in payments to MDA under this agreement, including $14 million during the fourth quarter 2022 and $20 million in January 2023.

As of December 31, 2022, the amount outstanding under this agreement was $59.8 million.

Interest accrues on the amount outstanding at an annual rate of 7%, which increased to 10.5% on balances outstanding between December 2022 and March 2023.

As discussed above, we expect to pay the deferred milestone payments on or before March 15, 2023 using Prepayment funding from our Partner under the Service Agreements.

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 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.

Series A Preferred Stock

In November 2022, we entered into an exchange agreement with the Exchange Lenders, who are affiliates of Thermo and certain other lenders providing for the exchange of all the outstanding principal amount of, and accrued and unpaid interest on, the Exchanging Lenders’ loans under the 2019 Facility Agreement for shares of Series A Preferred Stock.

Holders of Series A Preferred Stock will be entitled to receive, when, as and if declared by our Board of Directors or a committee thereof, cumulative cash dividends based on the liquidation preference of the Series A Preferred Stock, at a fixed rate equal to 7.00% per annum, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2023.

Contractual Obligations and Commitments

Contractual obligations arising in the normal course of business consist primarily of debt obligations (as discussed above), purchase commitments with vendors related to the procurement, deployment and maintenance of our network (totaling $6.8 million over the next two years), obligations for non-cancellable purchase orders for inventory ($17.3 million which we expect to be fulfilled in the next fifteen months based on current forecasted equipment sales), operating lease obligations (see Note 3:

Leases to our Consolidated Financial Statements for further discussion) and pension obligations (see Note 12:

Pensions and Other Employee Benefits to our Consolidated Financial Statements for further discussion).

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

Globalstar is acquiring the satellites to provide continuous satellite services to the potential customer under the Terms Agreement, as well as services to our current and future customers.

The initial contract price is $327.0 million and we have the option of purchasing additional satellites at a lower cost per unit, subject to certain conditions.

We expect the satellites to be manufactured during the next three years.

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

Contractual obligations arising in the normal course of business consist primarily of debt obligations (as discussed above), purchase commitments with vendors related to the procurement, deployment and maintenance of our network (discussed below), obligations for non-cancellable purchase orders for inventory ($14.0 million which we expect to be fulfilled in the next fifteen months based on current forecasted equipment sales) and operating lease obligations (see Note 3:

Leases to our Consolidated Financial Statements for further discussion).

Satellite Procurement Agreement

We have a satellite procurement agreement with MDA pursuant to which we expect to acquire 17 new satellites that will replenish our existing constellation of satellites and ensure long-term continuity of our mobile satellite services.

The procurement agreement requires MDA to deliver the satellites by 2025, with an expectation that all satellites will be launched by the end of 2025.

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

The current contract price for the new satellites is $327.0 million and we have the option of purchasing additional satellites under the contract.

In addition, MDA will procure a satellite operations control center for $4.9 million.

To date, the parties have accepted milestones totaling $121.0 million, of which $34.0 million has been paid in cash ($14.0 million was paid during 2022 and an additional $20.0 million was paid in January 2023) and $39.6 million remains as vendor financing due on March 15, 2023.

The most recent milestone of $47.4 million was completed in January 2023, as provided in the procurement agreement, and payment is due within the 45-day payment terms pursuant to the procurement agreement.

As discussed above, we expect to pay the outstanding milestone payments using Prepayment funding from our Partner under the Service Agreements.

The satellite procurement agreement with MDA contains customary termination provisions including our right to terminate the contract for convenience at any time, subject to certain conditions.

We plan to enter into additional agreements for launch services and launch insurance for these satellites.

Under the Service Agreements, subject to certain terms and conditions, Partner has agreed to make service payments equal to 95% of the approved capital expenditures under the satellite procurement agreement (to be paid on a straight-line basis over the useful life of the satellites) and certain other costs incurred for the new satellites, as adjusted based on certain provisions, beginning with the Phase 2 Service Period.

Other Network Purchase Commitments

Other purchase commitments with vendors for our network total $4.1 million over the next year.

Commitments and Contingencies to our Consolidated Financial Statements for discussion on our contractual commitments.

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property and equipment;

income taxes;

and derivative instruments.

and income taxes.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

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Revenue Recognition

The complexities or judgements involved in revenue recognition are discussed in detail below by type of revenue.

Unless otherwise disclosed, service revenue is recognized over a period of time (consistent with the customer's receipt and consumption of the benefits of our performance) and revenue from the sale of subscriber equipment is recognized at a point in time (consistent with the transfer of risks and rewards of ownership of the hardware).

Our primary types of revenue include (i) service revenue from two-way voice communication, and one-way and two-way data transmissions between a mobile or fixed device, (ii) subscriber equipment revenue from the sale of fixed and mobile devices as well as other products and accessories, (iii) wholesale capacity service revenue from providing satellite network access and related services utilizing our satellite spectrum and network of satellites and gateways and (iv) service revenue from providing engineering and communication services to certain customers.

The complexities or judgements involved in revenue recognition are discussed below.

If a contract includes more than one performance obligation, such as under the Service Agreements or when subscriber equipment is bundled with services in a multiple-element arrangement, we allocate the transaction price to each performance obligation in proportion to their standalone selling prices at contract inception and recognize them when, or as, each performance obligation is satisfied.

Determination of the relative stand-alone selling prices is complex and involves judgement, as prices may vary based on many factors, such as promotions, customer, volume and/or type of equipment sold.

Service revenue is generally recognized over a period of time (consistent with the customer's receipt and consumption of the benefits of our performance) and revenue from the sale of subscriber equipment is recognized at a point in time (consistent with the transfer of risks and rewards of ownership of the hardware).

We record customer payments received in advance of the corresponding service period as deferred revenue.

We provide Duplex, SPOT and Commercial IoT services directly to customers and indirectly through resellers.

Credits granted to customers are expensed or charged against revenue or accounts receivable over the remaining term of the customer contract.

Subscriber acquisition costs primarily include dealer and internal sales commissions and certain other costs, including but not limited to, promotional costs, cooperative marketing credits and shipping and fulfillment costs.

We capitalize incremental costs to obtain a contract to the extent we expect to recover them;

for our subscriber-driven contracts, these costs include internal and external initial activation commissions.

We also capitalize costs to fulfill a contract to the extent we expect to recover them;

for engineering and support service contracts, these costs may include certain expenses incurred by us prior to the customer benefiting from the service, such as personnel and contractor costs and other operating expenses.

All other subscriber acquisitions costs are expensed at the time of the related sale.

For Duplex service revenue, we recognize revenue for monthly access fees in the period services are rendered.

Under certain annual plans whereby a customer prepays for a predetermined amount of minutes and data, revenue is recognized consistent with the customer's expected pattern of usage, based on historical experience because we believe that this method most accurately depicts the satisfaction of our obligation to the customer.

For annual plans where the customer is charged an annual fee to access our system, we recognize revenue on a straight-line basis over the term of the plan.

We provide certain engineering services to assist customers in developing new applications to operate on our network.

We generally recognize the revenues associated with these services when the performance obligations are performed, the timing of which may involve complex judgements by management.

We assess the timing of the transfer of products or services to a customer as compared to the timing of payments made to us to determine whether a significant financing component exists.

In general, our subscriber-driven contracts are paid monthly or annually and the time between cash collection and performance is less than one year.

For certain engineering services provided pursuant to our previously described Terms Agreement, the length of time between receipt of payment by the customer and the transfer of services by us is greater than twelve months.

Accordingly, the payments made by the customer include a significant financing component.

At times, we sell subscriber equipment through multiple-element arrangement contracts with services.

When we sell subscriber equipment and services in bundled arrangements and determine that we have separate performance obligations, we allocate the bundled contract price among the various performance obligations based on relative stand-alone selling prices at contract inception of the distinct goods or services underlying each performance obligation and recognizes them when, or as, each performance obligation is satisfied.

For certain payments made under the Service Agreements, the length of time between receipt of payment by Partner and the transfer of services by us is greater than twelve months.

Accordingly, these payments made by Partner include a significant financing component.

For Duplex service revenue, we recognize revenue for monthly access fees in the period services are rendered.

For annual plans whereby a customer prepays for a predetermined amount of minutes and data, revenue is recognized consistent with the customer's expected pattern of usage, based on historical experience because we believe that this method most accurately depicts the satisfaction of our obligation to the customer.

For annual plans where the customer is charged an annual fee to access our system, we recognize revenue on a straight-line basis over the term of the plan.

For our subscriber-driven contracts, subscriber acquisition costs primarily include internal sales commissions and initial activation commissions as well as certain other costs, including but not limited to, promotional costs, cooperative marketing credits and shipping and fulfillment costs.

We capitalize incremental costs to obtain a contract to the extent we expect to recover such costs.

All other subscriber acquisitions costs are expensed at the time of the related sale.

For wholesale capacity services, we capitalize costs to fulfill a contract to the extent we expect to recover them and we also capitalize noncash consideration issued to Partner under the Service Agreements.

Costs to fulfill a contract may include certain expenses incurred by us prior to the customer benefiting from the service, such as personnel and contractor costs and other operating expenses.

Under the Service Agreements, we issued Partner the Warrants to purchase shares of Globalstar common stock;

we recorded the Warrants at the estimated fair value of the consideration granted based on a Black-Scholes pricing model.

The fair value of the Warrants was capitalized as a contract asset and will be recognized as a reduction of the transaction price over the estimated term of the Service Agreements.

Property and Equipment

The vast majority of our property and equipment is costs incurred related to the construction of our second-generation constellation and ground station upgrades.

The vast majority of our property and equipment costs are incurred related to the construction of our second-generation constellation, including an agreement executed in 2022 for the purchase of new satellites to replenish our existing satellite constellation, and ground station upgrades.

Accounting for these assets requires us to make complex judgments and estimates.

We capitalize costs associated with the design, manufacture, test and launch of our low earth orbit satellites.

We capitalize costs associated with the design, manufacture and test of our ground stations and other capital assets.

We track capitalized costs associated with our ground stations and other capital assets by fixed asset category and allocate them to each asset as it comes

into service.

For assets that are sold or retired, including satellites that are de-orbited and no longer providing services, we remove the estimated cost and accumulated depreciation.

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Estimating the useful life of our assets is complex and involves judgement.

to the extent the useful life of our significant assets changes, this could impact our operating results.

The estimated useful lives of our assets is based on many factors, including estimated design life, information from our engineering department and our overall strategy for the use of the assets.

A one year reduction in the estimated useful life of our second-generation satellites and ground network would result in an

annual increase to depreciation expense of $5.2 million and $1.1 million, respectively.

We capitalize costs associated with the design, manufacture and test of our ground stations and other capital assets.

We track capitalized costs associated with our ground stations and other capital assets by fixed asset category and allocate them to each asset as it comes into service.

We evaluate the appropriateness of estimated depreciable lives assigned to our property and equipment and revise such lives to the extent warranted by changing facts and circumstances.

If the useful life of our significant assets changes, this change could impact our operating results.

The estimated useful lives of our assets is based on many factors, including estimated design life, information from our engineering department and our overall strategy for the use of the assets.

A one year reduction in the estimated useful life of our second-generation satellites would result in an annual increase to depreciation expense of $5.2 million.

We review the carrying value of our assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable.

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These strategies would be a source of additional positive evidence supporting the realization of deferred tax assets.

Derivative Instruments

We recognize all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values.

We record recognized gains or losses on derivative instruments in the consolidated statements of operations.

We estimate the fair values of our derivative financial instruments using various techniques that are considered to be consistent with the objective of measuring fair values.

In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that embody it and the expected means of settlement.

There are various features embedded in our debt instruments that require bifurcation from the debt host.

For the conversion options and the contingent put features in the 2013 8.00% Notes, we use a Monte Carlo simulation model to determine fair value.

For the mandatory prepayments in the 2019 Facility Agreement, we use a probability weighted discounted cash flow model to determine fair value.

The timing and amount of these cash flows involve significant judgement.

Valuations derived from these models are subject to ongoing internal and external verification and review.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis