Globalstar, Inc. (GSAT) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and applicable notes to our Consolidated Financial Statements and other information included elsewhere in this Report, including risk factors disclosed in Part I, Item IA. Risk Factors. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Report.

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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 years ended December 31, 2022 and 2021

Revenue:

Our revenue is categorized as service revenue and equipment revenue. We provide services to customers using technology from our satellite and ground network. Equipment revenue is generated from the sale of devices that work over our network. 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.

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

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

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

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

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

Wholesale capacity service revenue includes revenue generated from satellite network access and related services under the Service Agreements, and engineering and other service revenue includes revenue generated primarily from certain governmental and engineering service contracts; neither of these service revenue items is subscriber driven. Accordingly, we do not present ARPU for wholesale capacity service revenue 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 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.

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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 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 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 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.

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Cost of Subscriber Equipment Sales

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. 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 in 2021. 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 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") 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

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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 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 $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. See Note 8: Fair Value Measurements to our Consolidated Financial Statements for further discussion of the computation of the fair value of our derivatives.

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. 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. See Note 12: 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.

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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, 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.

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Liquidity and Capital Resources

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.

Overview

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

Cash Flows Provided by Operating Activities

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. 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 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.

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.

Indebtedness

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 is scheduled to mature in November 2025. The remaining

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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. As previously disclosed, we 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.

The 2019 Facility Agreement contains customary events of default and requires us to satisfy various financial and non-financial covenants. The compliance calculations of the financial covenants of the 2019 Facility Agreement permit us to include certain cash funds we receive from the issuance of our common stock and/or subordinated indebtedness. We refer to these funds as "Equity Cure Contributions". If we violate any covenants and are unable to obtain a sufficient Equity Cure Contribution or obtain a waiver, we would be in default under the 2019 Facility Agreement, and the lenders could accelerate payment of the indebtedness. As of December 31, 2022, we were in compliance with all the covenants of the 2019 Facility Agreement.

The 2019 Facility Agreement requires mandatory prepayments of principal with any Excess Cash Flow (as defined and calculated in the 2019 Facility Agreement) on a semi-annual basis. We generated Excess Cash Flow for the six-month measurement period ended June 30, 2022 and were required to pay $6.3 million to our lenders in August 2022. This payment reduced future principal payment obligations. 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.

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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 (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.

See Note 9: Commitments and Contingencies to our Consolidated Financial Statements for discussion on our contractual commitments.

Recently Issued Accounting Pronouncements

For a discussion of recent accounting guidance and the expected impact that the guidance could have on our Consolidated Financial Statements, see Note 1: Summary of Significant Accounting Policies in our Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. Note 1: Summary of Significant Accounting Policies in our Consolidated Financial Statements contains a description of the accounting policies used in the preparation of our financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will have on our financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition; property and equipment; and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different assumptions and conditions.

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We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting policies and estimates used in the preparation of our Consolidated Financial Statements. In addition, there are other items within our Consolidated Financial Statements that require estimates but are not deemed critical as defined in this paragraph.

Revenue Recognition

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 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 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 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

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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. We recognize a loss from an in-orbit failure of a satellite equal to its net book value, if any, in the period it is determined that the satellite is not recoverable.

Estimating the useful life of our assets is complex and involves judgement. 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. If indicators of impairment exist, we compare future undiscounted cash flows to the carrying value of the asset group. If an asset is not recoverable, its carrying value would be adjusted down to fair value and an impairment loss would be recorded. Key assumptions in our impairment tests include projected future cash flows, the timing of network upgrades and current discount rates. Additionally, from time to time, we perform profitability analyses to determine if investments in certain products and/or services remain viable. In the event we determine to no longer support a product or service, or that an asset is not expected to generate future benefit, the asset may be abandoned and an impairment loss may be recorded.

Income Taxes

We use the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. We recognize the effect of a change in tax rates as income or expense in the period that the rate is enacted; however, as we have a full valuation allowance on our deferred tax assets, there is no impact to the consolidated statements of operations and balance sheets.

GAAP requires us to assess whether it is more likely than not that we will be able to realize some or all of our deferred tax assets. If we cannot determine that deferred tax assets are more likely than not to be recoverable, GAAP requires us to provide a valuation allowance against those assets. This assessment takes into account factors including: (a) the nature, frequency, and severity of current and cumulative financial reporting losses; (b) sources of estimated future taxable income; and (c) tax planning strategies. We must weigh heavily a pattern of recent financial reporting losses as a source of negative evidence when determining our ability to realize deferred tax assets. Projections of estimated future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profitable operations and can be reasonably estimated. Otherwise, GAAP requires that we consider projections inherently subjective and generally insufficient to overcome negative evidence that includes cumulative losses in recent years. If necessary and available, we would implement tax planning strategies to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence supporting the realization of deferred tax assets.