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 identify and realize opportunities and to generate the expected revenues and other benefits of the License Agreement, our ability to integrate the licensed technology into our current line of business, the ability of Dr. Jacobs and other new employees to drive innovation and growth, 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, 2022, as filed with the Securities and Exchange Commission (the "SEC") on March 1, 2023 (the "2022 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 2022 Annual Report. Overview Mobile Satellite Services Business Globalstar, Inc. ("we", "us" or the "Company") provides Mobile Satellite Services (“MSS”) including voice and data communications services as well as 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. 24 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, ST100, ST150 and Integrity 150 ("Commercial IoT"); • satellite network access and related services utilizing our satellite spectrum and network of satellites and gateways ("Wholesale Capacity Services"); and • engineering and other communication services using our MSS and terrestrial spectrum licenses ("Engineering and Other"). 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 have pursued and continue to pursue initiatives that we expect will expand our satellite communications business and more effectively utilize our network assets. These initiatives are focused in part on further investment in the development of IoT-enabled devices, including a two-way reference design module that is expected to significantly expand our Commercial IoT offerings. Our Commercial IoT use cases continue to expand. In 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. Recent Developments In August, 2023, we entered into an Intellectual Property License Agreement (the “License Agreement”) with XCOM Labs, Inc. (“Licensor” or “XCOM”). Under the License Agreement, we purchased an exclusive right and license (the “License”) as well as certain Intellectual Property Assets (as defined in the License Agreement) relating to the development and commercialization of XCOM’s key novel technologies for wireless spectrum innovations, including XCOMP, XCOM’s commercially available coordinated multi point radio system. XCOMP delivers substantial capacity gains in dense, complex, challenging wireless environments in sub 7 GHz spectrum. We also gained exclusive access to XCOM’s peer-to-peer connectivity technologies that could have applications across cellular and satellite devices. As part of the License Agreement, certain XCOM employees, including engineering, test, product and R&D professionals who helped develop the licensed technologies, will continue to further commercialize the technology on behalf of Globalstar. Bringing together Globalstar’s terrestrial spectrum and relationships with leading partners around the world with XCOM’s differentiated technology, which is well suited for high-performance applications, creates a significant opportunity to deliver for private network customers with mission-critical needs. Globalstar System Our constellation of Low Earth Orbit ("LEO") satellites includes primarily second-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. 25 Our ground network includes our ground equipment, which uses patented CDMA technology to permit communication to multiple satellites. Our system architecture provides full frequency re-use. This maximizes satellite diversity (which maximizes quality) and network capacity as we can reuse the assigned spectrum in every satellite beam in every satellite. In addition, we have developed a proprietary technology for our SPOT and Commercial IoT services. In February 2022, we entered into a satellite procurement agreement with Macdonald, Dettwiler and Associates Corporation ("MDA") pursuant to which we expect to acquire at least 17 and up to 26 satellites that will replenish our HIBLEO-4 U.S.-licensed system and ensure long-term continuity of our MSS. We have committed to purchase these new satellites for an initial total contract price of $327.0 million and have the option to purchase up to nine 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 second-generation satellites. The satellite procurement agreement requires delivery of the 17 new satellites by 2025. We have also entered into a Launch Services Agreement with Space Exploration Technologies Corp. (“SpaceX”) and certain related ancillary agreements (the “Launch Services Agreements”), providing for the launch of the first set of these satellites. The Launch Services Agreements provide a launch window in 2025. Under the Service Agreements, subject to certain terms and conditions, we will receive payments equal to 95% of the approved capital expenditures under the satellite procurement agreement and Launch Services Agreements (to be paid on a straight-line basis over the useful life of the satellites) beginning with the Phase 2 Service Period. Customers For our subscriber driven revenue, the specialized needs of our global customers span many industries. As of September 30, 2023, we had approximately 773,000 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. Our subscriber count only includes our MSS subscribers. 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 and/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. Our top revenue-generating markets in the United States and Canada are government (including federal, state and local agencies), public safety and disaster relief, oil and gas, recreation and personal telecommunications. In recent years, the number of Commercial IoT devices on our network has increased significantly. In addition to our subscribers, we also provide services under the Service Agreements. Our FCC license allows us to provide service over our network to up to 250 million users in the United States. For the nine months ended September 30, 2023 and 2022, our wholesale capacity customer under the Service Agreements was responsible for 49% and 21%, respectively, of our revenue; no other customer was responsible for more than 10%. 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. 26 Terrestrial Authority for Globalstar's Licensed 2.4 GHz Spectrum We are authorized to provide terrestrial broadband services over the 11.5 MHz portion of our licensed MSS spectrum. We have 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 with the 5G variant of our Band 53 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. We have executed agreements with partners that we believe allow our potential device ecosystem to expand significantly to include the most popular smartphones, laptops, tablets, automated equipment and other IoT modules. Most recently, in September 2022, we announced the Service Agreements, which provide for the enablement of Band 53/n53 use in cellular-enabled devices designated by Partner in connection with the Services, subject to certain terms and conditions; we believe this inclusion significantly enhances the device ecosystem for Band 53/n53. Prior to that, in 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. 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, South Africa and Spain, among others. 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. We believe that our licensed 2.4 GHz band holds physical, regulatory and ecosystem qualities that distinguishes it from other current and anticipated allocations, and that it is well positioned to balance favorable range, capacity and attenuation characteristics. Performance Indicators 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, Commercial IoT, and SPOT; • 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, 2023 and 2022 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, 2023, total revenue increased 53% to $57.7 million from $37.6 million for the same period in 2022. For the nine months ended September 30, 2023, total revenue increased 60% to $171.4 million from $107.2 million for the same period in 2022. See below for a further discussion of the fluctuations in revenue. 27 The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands). Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Service Revenue: Subscriber services Duplex $ 7,978 13 % $ 9,021 24 % $ 20,088 11 % $ 22,103 21 % SPOT 11,350 20 11,753 31 33,703 20 34,544 32 Commercial IoT 6,347 11 4,673 13 16,881 10 14,381 13 Wholesale capacity services 27,517 48 6,972 19 83,406 49 22,640 21 Engineering and other services 451 1 882 2 1,167 1 2,025 2 Total Service Revenue $ 53,643 93 % $ 33,301 89 % $ 155,245 91 % $ 95,693 89 % The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands). Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Equipment Revenue: SPOT $ 1,746 3 % $ 1,558 4 % $ 6,185 3 % $ 4,707 5 % Commercial IoT 2,262 4 2,713 7 9,975 6 6,427 6 Other 32 — 54 — (6) — 371 — Total Equipment Revenue $ 4,040 7 % $ 4,325 11 % $ 16,154 9 % $ 11,505 11 % 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, 2023 2022 2023 2022 Average number of subscribers for the period: Duplex 33,501 41,204 35,143 42,046 SPOT 258,485 276,203 262,818 275,250 Commercial IoT 477,344 444,397 472,812 434,338 Other 376 428 391 13,337 Total 769,706 762,232 771,164 764,971 ARPU (monthly): Duplex $ 79.38 $ 72.98 $ 63.51 $ 58.41 SPOT 14.64 14.18 14.25 13.94 Commercial IoT 4.43 3.51 3.97 3.68 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. 28 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. 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; these subscribers were included in "Other" in the table above. Service Revenue Duplex service revenue decreased $1.0 million, or 12%, and $2.0 million, or 9%, respectively, for the three and nine month periods ended September 30, 2023, compared to the same periods in 2022. For both periods, the decrease in revenue was due primarily to a decrease in average subscribers, offset partially by higher ARPU. The decrease in average subscribers is due to churn exceeding gross activations over the last twelve months as we no longer manufacture and sell Duplex devices, and instead focus our investments on IoT-enabled devices and wholesale capacity services. SPOT service revenue decreased 3% and 2%, respectively, for the three and nine months ended September 30, 2023, compared to the same periods in 2022. For both the three and nine month periods, the decrease in SPOT service revenue was due primarily to fewer average subscribers, offset partially by higher ARPU. Average subscribers were impacted by lower equipment sales, and therefore gross subscriber activations, during 2022 due to supply chain issues that lowered the number of devices available in the sales channel. Higher ARPU was due to the mix of subscriber rate plans during the respective periods. Commercial IoT service revenue increased 36% and 17%, respectively, for the three and nine months ended September 30, 2023, compared to the same periods in 2022. The increases for both periods were due to both higher average subscribers and ARPU. The increase in average subscribers was due to a 26% increase in gross subscriber activations when compared to the preceding twelve month periods. Higher ARPU was due to higher usage as well as product mix. Wholesale capacity service revenue increased $20.5 million and $60.8 million, respectively, for the three and nine months ended September 30, 2023 compared to the same periods in 2022. The increase in revenue during 2023 is due to consideration earned under the Service Agreements following the commencement of service in November 2022. Revenue during 2023 under this arrangement includes recurring service fees as well as consideration for our performance associated with the construction of additional satellites, gateway site improvements, and the achievement of certain milestones and bonuses. For instance, revenue recognized during the third quarter of 2023 reflected approximately $4.4 million for a bonus earned for the maintenance of our global MSS authorizations; the nine months ended September 30, 2023 also included $6.5 million received in connection with the amendment of the Service Agreements in February 2023 as consideration related to performance obligations completed in prior periods. Subscriber Equipment Sales Revenue from SPOT equipment sales increased $0.2 million, or 12%, and $1.5 million, or 31% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. During 2022, due to component part shortages, we experienced production delays resulting in a back order position for most of the year. Starting in the second quarter of 2023, all SPOT products returned to ordinary production levels, contributing to increases in revenue during 2023. Revenue from Commercial IoT equipment sales decreased $0.5 million and increased $3.5 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. During 2022, we experienced intermittent production delays due to component part shortages for certain of our products. These issues have been resolved and all products are being manufactured in the ordinary course of business. Production issues for our SmartOne Solar device were resolved prior to the third quarter of 2022, resulting in a significant volume of equipment sales in the prior year's quarter. Strong demand for this product has continued. For the nine month period, higher volume of both our SmartOne Solar and SmartOne C devices contributed to the increase in revenue. Operating Expenses Total operating expenses decreased for the three and nine months ended September 30, 2023 compared to the same periods in 2022. The main contributors to the variance in operating expenses are explained below. 29 Cost of Services Cost of services increased $2.6 million and $5.2 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. These increases are due to network expansion and upgrade work completed in connection with services provided under the Service Agreements, and a substantial portion of these costs are reimbursed thereunder and this consideration is being recognized as revenue. Lease, maintenance, security, IT and personnel costs have increased in line with this new and improved ground infrastructure. As discussed in Note 2: License Agreement to our condensed consolidated financial statements, in connection with the License Agreement with XCOM, we entered into a Support Services Agreement (the “SSA”). Pursuant to the SSA, XCOM is required to provide services to assist us with certain operations of the business. We prepaid for the initial SSA service period (covering nine months from the License Agreement effective date) in shares of Globalstar common stock. During the third quarter of 2023, we recognized $0.7 million in expense associated primarily with these SSA and other ancillary costs. Cost of Subscriber Equipment Sales Cost of subscriber equipment sales was generally flat and increased $4.3 million for the three and nine months ended September 30, 2023 from the same periods in 2022, respectively. These fluctuations are consistent with the increase in total revenue from subscriber equipment sales. Margin percentages on subscriber equipment narrowed for both the three and nine month periods due to the mix of products sold in each respective period. 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. In September 2022, in connection with the launch of Phase 1 services under the Service Agreements, 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. Similar activity did not recur in 2023. Marketing, General and Administrative MG&A expenses increased $3.5 million and $6.7 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. In connection with the License Agreement (discussed above), during the third quarter of 2023, we incurred $2.9 million in transaction fees, including legal, accounting and other professional fees. Additionally, other legal and professional fees totaling $0.5 million and $2.1 million, respectively, for various efforts, including increased regulatory work, government relations and negotiations of new commercial arrangements, also contributed to the increase in MG&A during 2023 These increased costs are in part due to our preparation for, and participation in, the upcoming World Radio Conference to protect our licensed spectrum rights globally from interference. Higher personnel costs due to merit and headcount increases also contributed to the increase in MG&A expense. For the year to date period, the increase was also impacted by a $1.0 million accrual reversal in 2022 to professional services associated with the 2018 shareholder litigation. Based on our assessment and considering the passage of time, we concluded it was appropriate to release the accrual, which resulted in a decrease in MG&A expense in the first quarter of 2022. Other immaterial items contributed to the remaining increase for the year to date period. Stock-Based Compensation Stock-based compensation expense increased $2.2 million and $6.1 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. The increase for both periods was due primarily to the modification of certain awards as well as restricted stock units granted in connection with the License Agreement. Additionally, we have an annual bonus plan, which is generally paid in the form of Globalstar common stock, designed to reward key employees' efforts to meet and exceed Globalstar's financial performance target for the designated calendar year. Our projected financial performance compared to our target drove the remaining increase in stock-based compensation expense year over year. Reduction in Value of Long-Lived Assets During the third quarter of 2022, we recorded a reduction in the value of long-lived assets totaling $166.0 million. In September 2022, in connection with the launch of Phase 1 services under the Service Agreements, 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 30 and determined that the second-generation Duplex assets (including the gateways (and related technology) capable of providing commercial traffic to support Sat-Fi2®) were no longer part of our overall satellite and ground network. These second-generation Duplex assets no longer provided 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 were 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. Depreciation, Amortization and Accretion Depreciation, amortization and accretion expenses decreased $2.4 million and $6.5 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 following a net reduction in total property and equipment due to the factors discussed in the " Reduction in Value of Long-Lived Assets" section above. Partially offsetting this decrease is depreciation expense from the on-ground spare satellite that was launched and placed into service in June 2022. Other (Expense) Income Loss on Extinguishment of Debt We recorded a loss on extinguishment of debt of $10.4 million during the first quarter of 2023 following the full pay-off of the 2019 Facility Agreement in March 2023. The extinguishment loss was recognized due to the remaining deferred financing costs and debt discount associated with the instrument at the time of repayment. Similar activity did not occur in 2022. Interest Income and Expense Interest income and expense, net, decreased $3.7 million and $13.3 million during the three and nine months ended September 30, 2023, compared to the same periods in 2022, respectively. For these periods, the decreases were due primarily to lower gross interest costs totaling $1.1 million and $6.3 million, respectively, and higher capitalized interest (which decreases interest expense) of $1.9 million and $6.0 million, respectively, due to higher construction in progress. For the three and nine month periods, gross interest costs were lower due to $11.1 million and $26.1 million, respectively, less interest under the 2019 Facility Agreement (as defined below) due to the partial paydown in November 2022 and the final paydown in March 2023. Offsetting this decrease were increases for the three and nine month periods of $7.1 million and $14.3 million, respectively, in interest associated with the 2023 13% Notes (as defined below), which commenced in the second quarter of 2023, as well as interest and the accretion of debt discount associated with the 2023 and 2021 Funding Agreements (as defined below), which also commenced in the second quarter of 2023, and totaled $3.8 million and $6.6 million, respectively. Finally, we incurred higher interest of $1.0 million due to MDA under the vendor financing arrangement during the 2023 compared to the same period in 2022. Other immaterial items contributed to the remaining difference. Foreign Currency Loss 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. We recorded foreign currency losses of $4.2 million and $0.2 million, respectively, during the three and nine months ended September 30, 2023. We recorded foreign currency losses of $9.4 million and $13.3 million, respectively, during the three and nine months ended September 30, 2022. The foreign currency losses were due to the strengthening of the U.S. dollar relative to other currencies. 31 Liquidity and Capital Resources Overview Our principal sources of liquidity include cash on hand, cash flows from operations and proceeds from the funding agreement under the Service Agreements. These liquidity sources are expected to meet our short-term and long-term liquidity needs for funding our operating costs, capital expenditures and financing obligations, including scheduled recoupments under the 2021 Funding Agreement (defined below), interest on our 13% Notes (defined below), and dividends on our perpetual preferred stock. As of September 30, 2023 and December 31, 2022, we held cash and cash equivalents of $64.1 million and $32.1 million, respectively, on our consolidated balance sheet. The principal amount of our debt and vendor financing outstanding was $375.4 million at September 30, 2023, compared to $202.8 million at December 31, 2022. This increase was due to the following: • Issuance of 2023 13% Notes (as defined below) with an aggregate principal amount of $206.0 million (including initial sale of $200.0 million plus PIK interest payment of $6.0 million); • Reclassification of the 2021 Funding Agreement (as defined below) from deferred revenue to debt with an outstanding principal balance as of September 30, 2023 of $81.7 million; and • Issuance of debt under the 2023 Funding Agreement (as defined below) totaling $88.0 million; offset by • Payment of PIK interest of $5.1 million as well as the payoff of the remaining balance of $148.3 million due under the 2019 Facility Agreement (defined below); and • Payoff of the remaining balance of $59.6 million due under the vendor financing arrangement. Cash Flows for the nine months ended September 30, 2023 and 2022 The following table shows our cash flows from operating, investing and financing activities (in thousands): Nine Months Ended September 30, 2023 September 30, 2022 Net cash provided by operating activities $ 68,556 $ 31,705 Net cash used in investing activities (142,385) (25,306) Net cash provided by (used in) financing activities 105,902 (5,886) Effect of exchange rate changes on cash and cash equivalents (19) (68) Net increase in cash, cash equivalents and restricted cash $ 32,054 $ 445 Cash Flows Provided by Operating Activities Net cash provided by operations includes primarily cash received from the performance of wholesale capacity services as well as cash received from subscribers related to the purchase of equipment and satellite voice and data services. We use cash in operating activities primarily for network costs, personnel costs, inventory purchases and other general corporate expenditures. Net cash provided by operating activities during the nine months ended September 30, 2023 was $68.6 million compared to $31.7 million during the same period in 2022. The primary driver for the increase was higher net income after adjusting for noncash items due primarily to higher wholesale capacity service fees under the Service Agreements following service launch in November 2022. (See Note 3: Revenue to our condensed consolidated financial statements for further discussion.) This activity was offset partially by an unfavorable change in working capital due primarily to the timing of recognition of deferred revenue under the Service Agreements. Cash Flows Used in Investing Activities Net cash used in investing activities was $142.4 million for the nine months ended September 30, 2023 compared to $25.3 million for the same period in 2022. The increase is due primarily to payments to MDA totaling $110.5 million and payments of capitalized interest totaling $8.8 million during 2023; we did not make these types of payments during the same period in 2022. 32 Cash Flows Provided by (Used in) Financing Activities Net cash provided by financing activities was $105.9 million during the nine month period ended September 30, 2023 compared to net cash used in financing activities of $5.9 million for the same period in 2022. This fluctuation was due to proceeds from the 2023 13% Notes $190.0 million and the 2023 Funding Agreement of $87.7 million (as discussed in more detail below). The proceeds from the 2023 13% Notes were used to pay the remaining principal amount due under the 2019 Facility Agreement of $148.3 million and financing costs of $8.6 million. The payment of cash dividends totaling $9.3 million was also a use of cash during 2023 that did not occur during the comparable period in 2022. Finally, pursuant to the terms of the 2021 Funding Agreement, the first recoup payment of $6.3 million was made during the third quarter of 2023. During 2022, we made an unscheduled principal repayment of the 2019 Facility Agreement in August 2022 of $6.3 million. Indebtedness For further discussion on all of our debt and other financing arrangements, see Note 6: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements. 2023 Funding Agreement Our previously disclosed Service Agreements provide for, among other things, payment of up to $252 million to us (the “2023 Funding Agreement”) which we will use to fund 50% of amounts due under the 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 2023 Funding Agreement will be funded on a quarterly basis, as needed and subject to certain conditions therein. The remaining amount of the satellite costs is expected to be funded from our operating cash flows. The first payment under the 2023 Funding Agreement was made in April 2023 in an amount of $87.7 million. These proceeds were used to pay amounts owed to MDA for milestones completed as of the payment date. No additional amounts were funded through September 30, 2023. The amount of the Funding Agreement and fees payable thereon are expected to be recouped from amounts payable for services provided by us under the Service Agreements in installments for a period of 16 quarters beginning no later than the third quarter of 2025. For as long as any portion of the 2023 Funding Agreement 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. Thermo has agreed to provide support of certain of our obligations under the 2023 Funding Agreement. Currently, this support agreement is directly between Thermo and Partner, and the parties have agreed to replace it with an agreement between Thermo, us and the Partner. Entry into this guarantee agreement received shareholder approval in June 2023, and it is expected to be effective during the fourth quarter of 2023. 2021 Funding Agreement During 2021, we received payments totaling $94.2 million (the "2021 Funding Agreement"), which were recorded as deferred revenue. This funding is expected to be recouped as services are performed by us over the Phase 1 Service Period, and our repayment obligations are secured by a first-priority lien on substantially all of our assets. Our previously disclosed amendment to this agreement resulted in re-characterizing the previously recorded deferred revenue balance to debt in 2023. During 2023, $12.5 million has been recouped. 2023 13% Notes 33 In March 2023, we completed the sale of $200.0 million in aggregate principal amount of non-convertible 13% Senior Notes due 2029 (the "2023 13% Notes"). The 2023 13% Notes are senior, unsecured obligations of the Company and have a stated maturity of September 15, 2029. The 2023 13% Notes were sold at an issue price of 95% of the principal amount and bear interest at a rate of 13.00% per annum payable semi-annually in arrears. The Company has agreed under the Service Agreements to pay cash interest on the 2023 13% Notes at a rate of 6.5% per annum and paid-in-kind ("PIK") interest at a rate of 6.5% per annum. The 2023 13% Notes may be redeemed at the option of the Company at any time, subject to the conditions of the Indenture. Additionally, in the event of a Change of Control (as such term is defined in the Indenture) or certain other events, holders of the 2023 13% Notes have the right to require the Company to repurchase all or a portion of their 2023 13% Notes at a price (as calculated by the Company) in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and certain tax payments. The Indenture includes customary terms and covenants, including restrictions on the Company’s and the Subsidiary Guarantors’ ability to incur indebtedness, make guarantees, sell equity interests, and customary events of default. 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"). The 2019 Facility Agreement was scheduled to mature in November 2025. The loans under the 2019 Facility Agreement bore interest at a rate of 13.5% per annum. The Service Agreements required us to refinance all loans outstanding under the 2019 Facility Agreement. A portion was refinanced in November 2022 and the remaining portion was refinanced in March 2023. Using a portion of the proceeds from the sale of the 2023 13% Notes, we repaid all of our outstanding obligations under the 2019 Facility Agreement of approximately $148 million. Vendor Financing In February 2022, we entered into a satellite procurement agreement with MDA (see Note 9: Commitments and Contingencies for further discussion). This agreement (as amended in October 2022 and January 2023) provided for deferrals of milestone payments through March 15, 2023. Interest accrued on the amount outstanding at an annual rate of 7%, which increased to 10.5% on balances between December 2022 and March 2023. We have made payments totaling $76.1 million to MDA under this vendor financing arrangement, of which $62.1 million (including $2.5 million of interest) was paid during the first quarter of 2023 to fully repay the outstanding vendor financing balance. Series A Preferred Stock In November 2022, we issued 149,425 shares of 7.0% Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”). The Company recorded the Series A Preferred Stock at fair value of the shares totaling $105.3 million on its consolidated balance sheet. Holders of Series A Preferred Stock are entitled to receive, when, as and if declared by our Board of Directors, 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. The table below reflects the dividends approved by our Board of Directors (amounts in thousands): Payment Period Payment Date Payment Amount November 15, 2022 - December 31, 2022 January 2023 $ 1,337 January 1, 2023 - March 31, 2023 April 2023 2,615 April 1, 2023 - June 30, 2023 June 2023 2,644 July 1, 2023 - September 30, 2023 September 2023 2,673 The shares of Series A Preferred Stock do not possess voting rights, other than certain matters specifically affecting the rights and obligations of the Series A Preferred. Series A Preferred Stock may be redeemed by us, in whole or in part, at any time. The holders of the Series A Preferred Stock do not have any rights to convert or require us to redeem such stock. 34 Off-Balance Sheet Transactions We have no material off-balance sheet transactions. Recently Issued Accounting Pronouncements For a discussion of recently issued accounting guidance and the expected impact that the guidance could have on our condensed consolidated financial statements, see Recently Issued Accounting Pronouncements in Note 1: Basis of Presentation to our condensed consolidated financial statements in Part 1, Item 1 of this Report. Critical Accounting Policies and Estimates There have been no material changes in our Critical Accounting Policies and Estimates from the information provided in the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K.