What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-08 · 78 added, 71 removed, 171 unchanged (47% of the section changed)

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(“SpaceX”) and certain related ancillary agreements (the “Launch Services Agreements”), providing for the launch of the first set of these satellites during 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 (the "Approved Capital Expenditure Payments").

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 commencement of the Phase 2 Service Period (the "Approved Capital Expenditure Payments").

Spectrum and Regulatory Structure

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The Service Agreements generally require us to allocate network capacity to support the Services and Partner to enable Band 53/n53 for use in cellular-enabled devices designated by Partner for use with the Services.

As consideration for the Services provided by us, payments to us include a recurring service fee, payments relating to certain service-related operating expenses and capital expenditures, and potential bonus payments subject to satisfaction of certain licensing, service and related criteria.

We also have an agreement with a government services company to utilize our satellite network for a mission critical service for government applications.

For the three months ended March 31, 2024 and 2023, our wholesale capacity customers were responsible for 56% and 52%, respectively, of our revenue;

except for our wholesale capacity customer under the Service Agreements, no other customer was responsible for more than 10% of our revenue.

As consideration for the Services provided by us, payments to us include a fixed service fee, payments relating to certain service-related operating expenses and capital expenditures, additional fees related to enhanced services, and potential bonus payments subject to satisfaction of certain licensing, service and related criteria.

Wholesale satellite capacity services also include services performed pursuant to an agreement with a government services company to utilize our satellite network for a mission critical service for government applications.

For the six months ended June 30, 2024 and 2023, our wholesale capacity customer under the Service Agreements was responsible for 56% and 49%, respectively, of our revenue;

except for this customer, no other customer was responsible for more than 10% of our revenue.

Communications Products and Services

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• 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 ("Commercial IoT").

As of March 31, 2024, we had approximately 781,000 subscribers worldwide.

As of June 30, 2024, we had approximately 785,000 subscribers worldwide.

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

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Terrestrial Spectrum and Network Solutions

We are authorized to provide terrestrial broadband services over 11.5 MHz of our licensed MSS spectrum at 2483.5 to 2495 MHz throughout the United States of American and its Territories.

We are authorized to provide terrestrial broadband services over 11.5 MHz of our licensed MSS spectrum at 2483.5 to 2495 MHz throughout the United States of America and its Territories.

The Third Generation Partnership Project (“3GPP”) has designated the 11.5 MHz terrestrial band as Band 53 with 5G variant of our Band 53, known as n53.

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The Service Agreements significantly enhance the device ecosystem for Band 53/n53.

We have an Intellectual Property License Agreement (the “License Agreement”) with XCOM Labs, Inc.

(“Licensor” or “XCOM”).

We have an Intellectual Property License Agreement (the “License Agreement”) with Virewirx, Inc.

(formerly 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 XCOM Radio Access Network (XCOM RAN) systems, XCOM’s commercially available coordinated multi-point radio system.

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

Comparison of the Results of Operations for the three months ended March 31, 2024 and 2023

Comparison of the Results of Operations for the three and six months ended June 30, 2024 and 2023

Our revenue is categorized as service revenue and equipment revenue.

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

For the three months ended March 31, 2024, total revenue decreased to $56.5 million from $58.6 million for the same period in 2023.

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

For the three months ended June 30, 2024, total revenue increased 10% to $60.4 million from $55.1 million for the same period in 2023.

For the six months ended June 30, 2024, total revenue increased 3% to $116.9 million from $113.7 million for the same period in 2023.

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

The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands).

Three Months Ended

March 31, 2024 Three Months Ended

March 31, 2023

June 30, 2024 Three Months Ended

June 30, 2023 Six Months Ended

June 30, 2024 Six Months Ended

June 30, 2023

Revenue % of Total

Revenue Revenue % of Total

Service revenue:

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

Three Months Ended March 31,

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

2024 2023 2024 2023

Average number of subscribers for the period:

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Service Revenue

Duplex service revenue decreased $1.0 million, or 17%, for the three month period ended March 31, 2024, compared to the same period in 2023.

This decrease was due to fewer average subscribers resulting from churn exceeding gross activations over the last twelve months as we no longer manufacture and sell Duplex devices in favor of other use cases for our network assets, including wholesale capacity services.

SPOT service revenue decreased 9% for the three months ended March 31, 2024 compared to the same period in 2023.

Average subscribers were impacted by lower equipment sales during 2022 and a portion of 2023, and therefore fewer subscriber activations, due to supply chain issues that reduced the number of devices available in the sales channel.

Production has since fully resumed.

Commercial IoT service revenue increased 24% for the three months ended March 31, 2024 compared to the same period in 2023.

Duplex service revenue decreased $1.4 million, or 22%, and $2.4 million, or 20%, respectively, for the three and six month periods ended June 30, 2024, compared to the same periods in 2023.

For both periods, the decrease in revenue was due to fewer average subscribers resulting from churn exceeding gross activations over the last twelve months as we no longer manufacture and sell Duplex devices in favor of other use cases for our network assets, including wholesale capacity services.

SPOT service revenue decreased 6% and 8%, respectively, for the three and six months ended June 30, 2024, compared to the same periods in 2023.

For both periods, the decrease in revenue was due to fewer average subscribers.

However, gross subscriber additions were up nearly 40% from the first quarter of 2024 to the second quarter of 2024;

this increase is due in part to the seasonality of SPOT subscriber activations and also to the recovery of SPOT device production and subsequent subscriber activations.

Commercial IoT service revenue increased 25% for both the three and six months ended June 30, 2024 compared to the same periods in 2023.

This increase was due to higher average subscribers and ARPU.

During 2023, we had an 8% increase in gross activations, contributing to the growth in average subscribers for the first quarter of 2024.

Lower churn also favorably impacted our subscriber count.

Gross subscriber additions were up 20% from the first quarter of 2024 to the second quarter of 2024 and up 24% compared to the second quarter of 2023.

The increase in ARPU was due to higher usage on the network as well as the mix of subscribers on various rate plans.

Wholesale capacity service revenue increased $1.2 million for the three months ended March 31, 2024 compared to the same period in 2023.

The vast majority of wholesale capacity revenue includes recurring service fees under the Service Agreements.

Wholesale capacity service revenue increased $9.2 million and $10.4 million, respectively, for the three and six months ended June 30, 2024 compared to the same periods in 2023.

The vast majority of wholesale capacity revenue reflects fixed service fees under the Service Agreements, including fees related to enhanced services beginning in 2024.

Additionally, we signed an agreement in the first quarter of 2024 with a government services company to utilize our satellite network for a mission critical service for government applications.

The one-year $2.5 million proof of concept phase commenced in February 2024 and is progressing as planned.

Revenue associated with this contract is currently included in "Wholesale capacity service revenue".

This agreement has a five-year term and, if the project is implemented, contains annual minimum revenue commitments escalating to $20 million during the fifth year, with potential for further upside through the agreement's revenue share arrangement.

The $2.5 million proof of concept phase commenced in February 2024 and is progressing as planned.

Revenue associated with this contract is currently included in "Wholesale capacity service revenue." This agreement has a five-year term and, if the project is implemented, contains annual minimum revenue commitments escalating to $20 million during the fifth year, with potential for further upside through the agreement's revenue share arrangement.

Operating Expenses

Total operating expenses increased 19% to $61.2 million for the three months ended March 31, 2024 from $51.5 million for the same period in 2023.

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

Total operating expenses increased to $61.8 million from $52.5 million and to $123.0 million from $103.9 million for the three and six months ended June 30, 2024 compared to the same periods in 2023.

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

Cost of Services

Cost of services increased $4.9 million for the three months ended March 31, 2024 compared to the same period in 2023.

This increase is due to network expansion in connection with services provided under the Service Agreements;

Cost of services increased $5.9 million and $10.8 million for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively.

These increases are due in part to network expansion in connection with services provided under the Service Agreements;

a substantial portion of network-related costs are reimbursed thereunder and this consideration is recognized as revenue in accordance with the terms of the contract.

In line with our new and upgraded ground infrastructure, gateway and software maintenance costs increased $1.3 million and personnel costs increased $1.9 million during the first quarter of 2024.

In connection with the License Agreement with XCOM, we entered into a Support Services Agreement (the “SSA”).

During the first quarter of 2024, we recognized $1.2 million in expense associated with the SSA and other ancillary costs, of which the majority are noncash.

Marketing, General and Administrative

MG&A expenses increased $1.0 million for the three months ended March 31, 2024 compared to the same period in 2023.

This increase was due primarily to higher legal and professional fees totaling $0.9 million for various efforts, including increased regulatory efforts and negotiations of new commercial arrangements.

Additionally, MG&A costs associated with the SSA (described above) also contributed to this increase.

In line with our new and upgraded ground infrastructure, for the three and six month periods, gateway operating costs, such as maintenance and personnel costs, increased $2.5 million and $6.3 million, respectively.

We do not expect the operating costs that support existing Phase 1 services to increase meaningfully beyond current levels.

In connection with the August 2023 License Agreement with XCOM, we entered into a Support Services Agreement (the “SSA”).

During the three and six months ended June 30, 2024, we recognized $2.1 million and $3.3 million, respectively, in expense associated with the SSA and other ancillary costs, of which the majority were noncash.

Costs to support new product development also contributed to the increase in the three and six months ended June 30, 2024.

Stock-Based Compensation

Stock-based compensation expense increased $5.5 million for the three months ended March 31, 2024 compared to the same period in 2023.

The increase was due primarily to restricted stock units ("RSUs") granted to certain executives in connection with the License Agreement in August 2023.

Stock-based compensation expense increased $6.6 million and $12.1 million for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively.

These increases were due primarily to restricted stock units ("RSUs") granted to certain executives in connection with the License Agreement in August 2023.

We granted 44.5 million RSUs, which are earned over a four-year performance period and vest upon Globalstar common stock trading at various price levels throughout the performance period.

The total fair value of the RSUs was $39.5 million and is being recognized over the derived service period of 2.6 years;

nearly 60% of the compensation cost for these RSU's will be recognized during 2024.

Other (Expense) Income

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Interest Income and Expense

Interest income and expense, net, increased $1.8 million during the three months ended March 31, 2024 compared to the same period in 2023.

This increase was due primarily to higher gross interest costs offset partially by higher capitalized interest (which decreases interest expense) due to a higher construction in progress balance.

Interest costs include cash and PIK interest associated with the 2023 13% Notes, 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, In March 2023, we paid the remaining principal amount outstanding under the 2019 Facility Agreement, resulting in no further interest expense for this debt instrument following the paydown.

Interest income and expense, net, decreased $1.4 million and increased $0.3 million during the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively.

For the three month period, higher capitalized interest (which decreases interest expense) was offset by higher gross interest costs.

For the six month period, higher gross interest costs were offset by higher capitalized interest.

Higher capitalized interest was due to a higher construction in progress balance.

Foreign Currency (Loss) Gain

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 net foreign currency losses of $3.8 million during the three months ended March 31, 2024 compared to net foreign currency gains of $1.9 million during the same period in 2023.

Foreign currency gains result from other currencies strengthening relative to the U.S.

We recorded net foreign currency losses of $4.5 million and $8.3 million, respectively, during the three and six months ended June 30, 2024.

We recorded foreign currency gains of $2.0 million and $3.9 million, respectively, during the three and six months ended June 30, 2023.

Many of our foreign subsidiaries have USD-denominated intercompany payable balances, which impact the foreign currency gains and losses recorded each reporting period.

In this instance, foreign currency gains result from other currencies strengthening relative to the U.S.

inversely, foreign currency losses result from the U.S.

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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.

In addition, we have issued warrants under the Service Agreements and issued warrants to Thermo in connection with its guaranty of the 2023 Funding Agreement (defined below).

In addition, we have issued warrants under the Service Agreements and to Thermo in connection with its guaranty of the 2023 Funding Agreement (defined below).

These warrants could become a source of liquidity if exercised.

As of March 31, 2024 and December 31, 2023, we held cash and cash equivalents of $59.3 million and $56.7 million, respectively.

The principal amount of our debt outstanding was $434.5 million at March 31, 2024, compared to $398.7 million at December 31, 2023.

As of June 30, 2024 and December 31, 2023, we held cash and cash equivalents of $64.3 million and $56.7 million, respectively.

The principal amount of our debt outstanding was $425.8 million at June 30, 2024, compared to $398.7 million at December 31, 2023.

This increase was due to the following:

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• Recoupment under the 2021 Funding Agreement (as defined below) totaling $17.3 million.

Cash Flows for the three months ended March 31, 2024 and 2023

Cash Flows for the six months ended June 30, 2024 and 2023

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

Three Months Ended

2024 March 31,

Six Months Ended

2024 June 30,

Net cash provided by operating activities $ 66,486 $ 42,993

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Effect of exchange rate changes on cash and cash equivalents (682) 73

Net increase (decrease) in cash and cash equivalents $ 2,538 $ (11,595)

Net increase in cash and cash equivalents $ 7,590 $ 33,252

Cash Flows Provided by Operating Activities

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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 three months ended March 31, 2024 was $29.8 million compared to $22.8 million during the same period in 2023.

Favorable working capital changes were due primarily to the timing of recognition of accounts receivable and deferred revenue under the Service Agreements, specifically related to the timing of receipt of quarterly service fees.

Lower net income after adjusting for noncash items was also impacted by higher operating expenses resulting from our network expansion in connection with the Service Agreements.

Net cash provided by operating activities during the six months ended June 30, 2024 was $66.5 million compared to $43.0 million during the same period in 2023.

This improvement was due to favorable working capital changes as a result of the timing of recognition of accounts receivable and deferred revenue under the Service Agreements, specifically related to the timing of receipt and the amount of service fees.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $54.2 million for the three months ended March 31, 2024 compared to $71.6 million for the same period in 2023.

Net cash used in investing activities during both periods included network upgrades associated with the Service Agreements and payments of capitalized interest.

The decrease in payments made to MDA pursuant to our satellite procurement agreement of $14.9 million was the primary driver of the decrease in cash used during 2024.

Net cash used in investing activities was $74.5 million for the six months ended June 30, 2024 compared to $124.6 million for the same period in 2023.

Net cash used in investing activities during both periods primarily included network upgrades associated with the Service Agreements and payments of capitalized interest.

The timing of milestone payments made to our next-generation satellite vendors was the primary driver of the decrease in cash used during 2024.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities was $27.1 million during the three month period ended March 31, 2024 compared to net cash provided by financing activities of $37.1 million for the same period in 2023.

During 2024, we received proceeds from the 2023 Funding Agreement totaling $37.7 million, which were used to pay amounts owed to MDA.

Pursuant to the terms of the 2021 Funding Agreement, a scheduled recoup payment totaling $8.7 million was made during the first quarter of 2024 (these payments began in the third quarter of 2023).

Net cash provided by financing activities was $16.2 million during the six month period ended June 30, 2024 compared to net cash provided by financing activities of $114.8 million for the same period in 2023.

In February 2024 and April 2023, we received proceeds from the 2023 Funding Agreement totaling $37.7 million and $87.7 million, respectively, which were used to pay amounts owed to MDA.

Pursuant to the terms of the 2021 Funding Agreement, scheduled recoupment payments totaling $17.3 million were made during 2024 (these payments began in the third quarter of 2023).

During the first quarter of 2023, we received proceeds from the sale of the 2023 13% Notes, which were used to pay the remaining principal amount due under the 2019 Facility Agreement and financing costs.

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

During 2024, payments under the 2023 Funding Agreement totaled $37.7 million.

The outstanding balance under the 2023 Funding Agreement was $155.0 million as of June 30, 2024.

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.

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Our repayment obligations under the 2023 Funding Agreement are secured by a first-priority lien on substantially all of our assets.

Thermo guaranteed certain of our obligations under the Funding Agreements.

Additionally, Thermo guaranteed certain of our obligations under the Funding Agreements.

As consideration for Thermo's guarantee, we issued to Thermo warrants to purchase 10.0 million shares of our common stock.

During 2021, we received payments totaling $94.2 million (the "2021 Funding Agreement"), which will be recouped as services are performed by us over the Phase 1 Service Period.

During 2024, $8.7 million has been recouped.

The outstanding balance under the 2021 Funding Agreement was $66.8 million as of March 31, 2024.

During 2021, we received payments totaling $94.2 million (the "2021 Funding Agreement"), which are being recouped as services are performed by us over the Phase 1 Service Period with the last recoupment to be made in the first quarter of 2026.

During the first six months June 30, 2024, a total of $17.3 million has been recouped.

The outstanding balance under the 2021 Funding Agreement was $58.2 million as of June 30, 2024.

2023 13% Notes

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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.

We have 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 Indenture includes customary terms and covenants, including restrictions on our ability to incur indebtedness, make guarantees, sell equity interests, and customary events of default.

We have agreed under the Service Agreements to pay cash interest on the 2023 13% Notes at a rate of 6.5% per annum and PIK interest at a rate of 6.5% per annum.

The Indenture includes customary terms and covenants.

The outstanding balance under the 2023 13% Notes was $212.7 million as of June 30, 2024.

Series A Preferred Stock

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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.

During the first quarter of 2024, we paid dividends totaling $2.6 million.

Through June 30, 2024, we paid dividends totaling $5.3 million.

Off-Balance Sheet Transactions

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Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to our market risk during the quarter ended March 31, 2024.

There have been no material changes to our market risk during the quarter ended June 30, 2024.

For a discussion of our

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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-Q

Item 2. Management’s Discussion and Analysis