Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "Report"), other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements, such as the statements regarding our ability to develop and expand our business (including our ability to monetize our spectrum rights), our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes (including regulation related to the use of our spectrum), the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis, business interruptions due to natural disasters, unexpected events or public health crises, including viral pandemics such as the COVID-19 coronavirus, and other statements contained in this Report regarding matters that are not historical facts, involve predictions. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (the "SEC") on February 25, 2022 (the "2021 Annual Report"). We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.
New risk factors emerge from time to time, and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
This "Management's Discussion and Analysis of Financial Condition" should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition" and information included in our 2021 Annual Report.
Overview
Mobile Satellite Services Business
Globalstar, Inc. ("we", "us" or the "Company") provides Mobile Satellite Services (“MSS”) including voice and data communications services globally via satellite. 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.
We currently provide the following communications services:
•two-way voice communication and data transmissions via our GSP-1600 and GSP-1700 phone ("Duplex");
•one-way or two-way communication and data transmissions using mobile devices, including our SPOT family of products, such as SPOT X®, SPOT Gen4™ and SPOT Trace®, that transmit messages and the location of the device ("SPOT");
•one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station, including our commercial IoT products, such as our battery- and solar-powered SmartOne, STX-3 and ST100 ("Commercial IoT"); and
•engineering services to assist certain customers (including our customer under the Terms Agreement (discussed in Note 8: Commitments and Contingencies to our Condensed Consolidated Financial Statements)) in developing new applications to operate on our network, making enhancements to our ground network, and providing other communication services using our MSS and terrestrial spectrum licenses ("Engineering and Other").
Our constellation of Low Earth Orbit ("LEO") satellites includes second-generation satellites and certain first-generation satellites. We designed our satellite network to maximize the probability that at least one satellite is visible from any point on the Earth's surface between the latitudes 70° north and 70° south. We designed our second-generation satellites to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost compared to our first-generation satellites.
Our goal is to provide service levels and call or message success rates equal to or better than our MSS competitors so our products and services are attractive to potential customers. We believe that our system outperforms geostationary (“GEO”) satellites used by some of our competitors. GEO satellite signals must travel approximately 42,000 additional miles on average, which introduces considerable delay and signal degradation to GEO calls.
In February 2022, we entered into a satellite procurement agreement (the "Procurement Agreement") with Macdonald, Dettwiler and Associates Corporation (the "Vendor") pursuant to which we will acquire 17 satellites that will replenish our existing constellation and ensure long-term continuity of our mobile satellite services. We are acquiring the satellites to provide continuous satellite services to the potential customer under the Terms Agreement (defined below), as well as services to our current and future customers. We have committed to purchase these new satellites for a total contract price of $327.0 million and have the option to purchase additional satellites at a lower per unit cost, subject to certain conditions. The technical specifications and design of these new satellites are similar to our current second-generation satellites. Rocket Lab USA, Inc. is the Vendor’s satellite bus subcontractor under the Procurement Agreement. The agreement requires the Vendor to deliver the initial 17 new satellites by 2025, all of which are expected to be launched by the end of 2025. Under the Terms Agreement, the counterparty is required to reimburse 95% of the capital expenditures and certain other costs incurred for the new satellites.
In June 2022, we successfully launched our on-ground spare second-generation satellite. This satellite is expected to remain as an in-orbit spare and will only be raised to its operational orbit at a future date if needed.
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.
We compete aggressively on price. We offer a range of price-competitive products to the industrial, governmental and consumer markets. We expect to retain our position as a cost-effective, high quality leader in the MSS industry.
As technological advancements are made, we continue to explore opportunities to develop new products and provide new services over our network to meet the needs of our existing and prospective customers. We are currently pursuing initiatives that we expect will expand our satellite communications business and more effectively utilize the capacity of our network assets. These initiatives include evaluating our product and service offerings in light of the shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices. To align our business model with this evolution, we have temporarily ceased sales of and services to subscribers for certain Duplex devices, such as Sat-Fi2®. We are currently evaluating opportunities for these devices relative to other product and service offerings as well as the capacity required to support these devices relative to other possible uses for the capacity. Integrated with this assessment is the development of a two-way reference design module to expand our Commercial IoT offerings, which is among our other current initiatives.
Our Commercial IoT use cases continue to expand. In June 2022, we introduced the Realm Enablement Suite, an innovative portfolio of satellite asset tracking hardware and software solutions featuring a powerful application enablement platform for processing smart data at the edge. With Realm, partners can accelerate new solutions to market with smart
applications that generate an advanced level of telematics data. Realm Enablement Suite introduces Integrity 150, the first solar-powered, deployment-ready satellite asset tracking device with an application enablement platform; ST150M satellite modem module that drastically simplifies product development; and Realm application enablement platform, offering tools and an extensive library for quickly accessing and developing smart applications at the edge for vertical-specific solutions. We also continue to expand deployments that support environmentally friendly initiatives. Recent deployments include remote monitoring of fluid levels and tanks, which replaces the need for motor vehicles to access these assets, as well as asset monitoring solutions for solar lighting and other renewable energy sources.
Customers
The specialized needs of our global customers span many industries. As of June 30, 2022, we had approximately 762,000 subscribers worldwide, principally within the following markets: recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; animal tracking and transportation. In response to Russia's invasion of Ukraine, during the first quarter of 2022, we disconnected satellite services to gateways in Russia that were operated by an independent gateway operator. Accordingly, approximately 25,000 subscribers that previously received satellite services through these gateways were removed from our subscriber count. Our system is able to offer our customers cost-effective communications solutions completely independent of cellular coverage. Although traditional users of wireless telephony and broadband data services have access to these services in developed locations, our customers often operate, travel or live in remote regions or regions with under-developed telecommunications infrastructure where these services are not readily available or are not provided on a reliable basis.
Spectrum and Regulatory Structure
We benefit from a worldwide allocation of radio frequency spectrum in the international radio frequency tables administered by the International Telecommunications Union ("ITU"). Access to this globally harmonized spectrum enables us to design satellites, networks and terrestrial infrastructure enhancements more cost effectively because the products and services can be deployed and sold worldwide. In addition, this broad spectrum assignment enhances our ability to capitalize on existing and emerging wireless and broadband applications.
Terrestrial Authority for Globalstar's Licensed 2.4GHz Spectrum
In August 2017, the FCC modified our MSS licenses, granting us authority to provide terrestrial broadband services over the 11.5 MHz portion of our licensed MSS spectrum. Specifically, the FCC modified our space station authorization and our blanket mobile earth station license to permit a terrestrial network using 11.5 MHz of our licensed mobile-satellite service spectrum.
In December 2018, we successfully completed the Third Generation Partnership Project (“3GPP”) standardization process for the 11.5 MHz of our licensed MSS spectrum terrestrially authorized by the FCC. The 3GPP designated the band as Band 53. Additionally, in March 2020, we announced that the 3GPP approved the 5G variant of our Band 53, which is known as n53. This new band class provides a pathway for our terrestrial spectrum to be integrated into handset and infrastructure ecosystems. Additional follow-on 3GPP specifications and approvals are expected in the future. During 2019, we executed a spectrum manager lease agreement with Nokia in order to permit Nokia to utilize Band 53 within its equipment domestically and have such equipment type-certified for sale and deployment.
In February 2021, Qualcomm Technologies announced its new Snapdragon X65 modem-RF System, which includes support for Band n53. By having global 5G band support for n53 in Qualcomm Technologies’ 5G solutions, our potential device ecosystem expands significantly to include the most popular smartphones, laptops, tablets, automated equipment and other IoT modules.
We believe our MSS spectrum position provides potential for harmonized terrestrial authority across many international regulatory domains and have been seeking approvals in various international jurisdictions. To date, we have received additional terrestrial authorizations in various countries, including Brazil, Canada, and South Africa, among others. We expect this global effort to continue for the foreseeable future while we seek additional terrestrial approvals to internationally harmonize our S-band spectrum across the entire 16.5 MHz authority for terrestrial mobile broadband services.
We expect our terrestrial authority will allow future partners to develop high-density dedicated networks using the TD-LTE and 5G protocols for private networks as well as the densification of cellular networks. We believe that our offering has competitive advantages over other conventional commercial spectrum allocations. Such other allocations must meet minimum population coverage requirements, which effectively prohibit the exclusive use of most carrier spectrum for dedicated small cell deployments. In addition, low frequency carrier spectrum is not physically well suited to high-density small cell topologies, and mmWave spectrum is subject to range and attenuation limitations. We believe that our licensed 2.4 GHz band holds physical,
regulatory and ecosystem qualities that distinguishes it from other current and anticipated allocations, and that it is well positioned to balance favorable range, capacity and attenuation characteristics.
Performance Indicators
Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our earnings and cash flows. These key performance indicators include:
•total revenue, which is an indicator of our overall business growth;
•subscriber growth and churn rate, which are both indicators of the satisfaction of our customers;
•average monthly revenue per user, or ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-value customers. We calculate ARPU separately for each type of our subscriber-driven revenue, including Duplex, SPOT and Commercial IoT;
•operating income and adjusted EBITDA, both of which are indicators of our financial performance; and
•capital expenditures, which are an indicator of future revenue growth potential and cash requirements.
Comparison of the Results of Operations for the three and six months ended June 30, 2022 and 2021
Revenue
Our revenue is categorized as service revenue and equipment revenue. We provide services to customers using technology from our satellite and ground network. Equipment revenue is generated from the sale of devices that work over our network. For the three months ended June 30, 2022, total revenue increased 21% to $36.8 million from $30.3 million for the same period in 2021. For the six months ended June 30, 2022, total revenue increased 22% to $69.6 million from $57.2 million for the same period in 2021. See below for a further discussion of the fluctuations in revenue.
The following table sets forth amounts and percentages of our revenue by type of service (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, 2022 | | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2022 | | Six Months Ended
June 30, 2021 |
| | Revenue | | % of Total
Revenue | | Revenue | | % of Total
Revenue | | Revenue | | % of Total
Revenue | | Revenue | | % of Total
Revenue |
| Service Revenue: | | | | | | | | | | | | | | |
| Duplex | $ | 6,936 | | | 19 | % | | $ | 7,243 | | | 24 | % | | $ | 13,082 | | | 19 | % | | $ | 13,898 | | | 24 | % |
| SPOT | 11,536 | | | 31 | | | 11,139 | | | 37 | | | 22,791 | | | 33 | | | 22,123 | | | 39 | |
| Commercial IoT | 5,038 | | | 14 | | | 4,504 | | | 15 | | | 9,708 | | | 14 | | | 8,985 | | | 16 | |
| Engineering and other | 9,538 | | | 26 | | | 2,731 | | | 9 | | | 16,811 | | | 24 | | | 3,697 | | | 6 | |
| Total Service Revenue | $ | 33,048 | | | 90 | % | | $ | 25,617 | | | 85 | % | | $ | 62,392 | | | 90 | % | | $ | 48,703 | | | 85 | % |
The following table sets forth amounts and percentages of our revenue generated from equipment sales (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, 2022 | | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2022 | | Six Months Ended
June 30, 2021 |
| | Revenue | | % of Total
Revenue | | Revenue | | % of Total
Revenue | | Revenue | | % of Total
Revenue | | Revenue | | % of Total
Revenue |
| Equipment Revenue: | | | | | | | | | | | | | | |
| Duplex | $ | 143 | | | — | % | | $ | 331 | | | 1 | % | | $ | 273 | | | — | % | | $ | 624 | | | 1 | % |
| SPOT | 1,674 | | | 5 | | | 2,230 | | | 7 | | | 3,149 | | | 5 | | | 4,145 | | | 7 | |
| Commercial IoT | 1,908 | | | 5 | | | 2,090 | | | 7 | | | 3,714 | | | 5 | | | 3,611 | | | 7 | |
| Other | 27 | | | — | | | 11 | | | — | | | 44 | | | — | | | 125 | | | — | |
| Total Equipment Revenue | $ | 3,752 | | | 10 | % | | $ | 4,662 | | | 15 | % | | $ | 7,180 | | | 10 | % | | $ | 8,505 | | | 15 | % |
The following table sets forth our average number of subscribers and ARPU by type of revenue.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Average number of subscribers for the period: | | | | | | | |
| Duplex | 42,723 | | | 44,160 | | | 43,295 | | | 45,913 | |
| SPOT | 277,815 | | | 264,508 | | | 276,633 | | | 265,127 | |
| Commercial IoT | 433,578 | | | 409,346 | | | 431,652 | | | 408,043 | |
| Other | 437 | | | 27,603 | | | 13,340 | | | 27,595 | |
| Total | 754,553 | | | 745,617 | | | 764,920 | | | 746,678 | |
| | | | | | | |
| ARPU (monthly): | | | | | | | |
| Duplex | $ | 54.12 | | | $ | 54.67 | | | $ | 50.36 | | | $ | 50.45 | |
| SPOT | 13.84 | | | 14.04 | | | 13.73 | | | 13.91 | |
| Commercial IoT | 3.87 | | | 3.67 | | | 3.75 | | | 3.67 | |
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.
Engineering and other service revenue includes revenue generated primarily from certain governmental and engineering service contracts which are not subscriber driven. Accordingly, we do not present ARPU for engineering and other service revenue in the table above.
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 4% and 6%, respectively, for the three and six months ended June 30, 2022 due primarily to a decrease in average subscribers of 3% and 6%, respectively. The decrease in average subscribers is due to fewer gross subscriber activations over the last twelve months. In line with the shift in demand across the MSS industry from full Duplex voice and data services to IoT-enabled devices, we expect the decline in our Duplex subscriber base to continue as we focus our investments on IoT-enabled devices and services.
SPOT service revenue increased 4% and 3%, respectively, for the three and six months ended June 30, 2022 due primarily to an increase in average subscribers of 5% and 4%, respectively. Lower churn during 2022 has positively contributed to the increase in average subscribers, while gross activations are down slightly compared to the prior twelve month period. Supply chain disruptions over the past few quarters (discussed further below) have reduced equipment sales, and therefore activations, during 2022. However, we have recently experienced growth in our Latin American subscriber base; average subscribers for this region increased 13% and 3% for the three and six month periods respectively, and represents 10% and 3% of our average subscriber growth in total over the same periods. ARPU decreased by 1% for both the three and six months ended June 30, 2022 due to the mix of subscriber rate plans, including the continued popularity of our flex plans which carry lower rates than our traditional prepaid unlimited plans.
Commercial IoT service revenue increased 12% and 8%, respectively, for the three and six months ended June 30, 2022 due to a 6% increase in average subscribers for both periods. The increase in average subscribers is driven by higher gross subscriber activations of 25% and lower churn over the last twelve months. Despite supply chain issues causing significant production delays in 2022, Commercial IoT equipment sales increased over the last twelve months compared to the prior year period (discussed further below), which contributed to higher subscriber activations. Similar to SPOT, we have recently experienced steady growth in our Latin American subscriber base; average subscribers for this region increased 63% and 55% for the three and six month periods, respectively, and represent 9% and 7% of our average subscriber growth in total. For the three and six month periods, ARPU increased 6% and 2%, respectively, driven by the favorable mix of subscribers on various rate plans.
Engineering and other service revenue increased $6.8 million and $13.1 million for the three and six months ended June 30, 2022 compared to the same periods in 2021. Fluctuations in engineering and other service revenue are due primarily to the timing and amount of revenue recognized associated with the Terms Agreement. The increase in revenue recognized during 2022 is due primarily to consideration received for performance obligations associated with our work to expand and upgrade our gateways around the globe and under the satellite procurement agreement. 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 $0.2 million and $0.4 million for the three and six months ended June 30, 2022 compared to the same periods in 2021. These decreases were driven primarily by a lower sales volume of phones and accessories due to a lack of available inventory since these devices are no longer being manufactured.
Revenue from SPOT equipment sales decreased $0.6 million and $1.0 million for the three and six months ended June 30, 2022 compared to the same periods in 2021. These decreases resulted from a lower sales volume. Two of our core SPOT products are on back order due to inventory shortages, which delayed the fulfillment of orders during the first half of 2022. We continue to see demand exceeding supply resulting from supply chain disruptions caused by component part shortages. We are actively working to address this issue and expect production to resume in the third quarter of 2022.
Revenue from Commercial IoT equipment sales decreased $0.2 million and increased $0.1 million for the three and six months ended June 30, 2022 compared to the same periods in 2021. IoT equipment sales continue to be negatively impacted by component part shortages, which has impacted our ability to produce inventory at sufficient quantities to fulfill sales orders. This situation has resulted in significant back orders of two of our most profitable products. We expect these production issues to be resolved during the third quarter of 2022. Despite these challenges, sales volume of our SmartOne Solar was up 11% year over year and up 10% over the last twelve months.
Operating Expenses
Total operating expenses increased to $48.2 million from $46.3 million and increased to $94.6 million from $92.5 million, respectively, for the three and six months ended June 30, 2022 compared to the same periods in 2021. For both the three and six month periods, higher cost of services and a reduction in value of long-lived assets were offset by a reduction in the value of inventory. For the six month period, lower management, general and administrative ("MG&A") costs partially offset the increases noted above. The main contributors to the variance in operating expenses are explained in further detail below.
Cost of Services
Cost of services increased $1.6 million and $3.3 million for the three and six months ended June 30, 2022 compared to the same periods in 2021. For the three and six month periods, personnel costs increased $0.4 million and $1.3 million, respectively; the year to date variance included $0.7 million related to annual cash bonuses and non-recurring separation pay during the first quarter of 2022. Higher lease expense associated with new teleport leases (including associated occupancy costs, such as utilities and other building services), which commenced throughout the second half of 2021, contributed to $0.5 million and $1.0 million, respectively, of the total increase. These leases were executed in connection with the gateway expansion project associated with the Terms Agreement; these lease and related costs are being reimbursed to us, and this consideration is being recognized as revenue (as further discussed above in Engineering and other service revenue). Higher professional fees and licensing costs related to our implementation of a new enterprise resource planning ("ERP") system, which went live in January 2022, as well as other costs for information technology security and maintenance contributed $0.3 million and $0.8 million, respectively, to the total increase.
Cost of Subscriber Equipment Sales
Cost of subscriber equipment sales increased $0.2 million and decreased $0.1 million for the three and six months ended June 30, 2022 from the same periods in 2021. These fluctuations are generally consistent with the fluctuations in total revenue from subscriber equipment sales, and were also impacted by the reversal of a prior year accrual for tariffs during the second quarter 2021. Pursuant to regulatory developments, we reversed this accrual for potential tariffs owed on imports from China made prior to a ruling by the U.S Customs and Border Protection in September 2019 that we no longer believe will be due, resulting in an expense reduction of $0.9 million.
Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory
During the second quarter of 2021, we recorded a reduction in the value of inventory totaling $0.8 million. We wrote off certain Sat-Fi2 materials that are not likely to be used in production as well as defective inventory units that are not saleable. Similar activity did not occur at a significant level in 2022.
Marketing, General and Administrative
MG&A expenses were flat for the three month period and decreased $0.7 million for the six month period ended June 30, 2022, compared to the same periods in 2021. MG&A expense for both periods was impacted by certain non-recurring items, including lower subscriber acquisition costs of $0.5 million and $0.9 million, respectively, which was due primarily to the one-time deactivation of all Sat-Fi2 subscribers during the first half of 2021. Additionally, during 2021, we terminated our dealer program and reduced advertising spend for Duplex products and services; these items contributed $0.5 million and $1.0 million, respectively, to the decrease in MG&A expense for the three and six month periods. Finally, during the first quarter of 2022, we reversed a $1.0 million accrual related to professional services associated with the 2018 shareholder litigation based on our assessment of the likelihood of payment. Offsetting these decreases was an increase in personnel costs totaling $0.4 million and $1.6 million, for the three and six month periods; of which $0.3 million and $1.2 million, respectively were related to annual cash bonuses and non-recurring separation pay. Other smaller items contributed to the remaining variance in expense for both periods.
Reduction in Value of Long-Lived Assets
During the second quarter of 2022, we recorded a reduction in the value of intangible and other assets totaling $0.5 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
Gain on extinguishment of debt for the three and six months ended June 30, 2021 was $2.7 million. In June 2021, the Small Business Administration ("SBA") approved our request for forgiveness of amounts outstanding under the Paycheck Protection Program ("PPP") loan. Accordingly, we recorded a gain on extinguishment of debt totaling $5.0 million during the second quarter of 2021. Offsetting this gain was a $2.3 million write-off of a portion of remaining deferred financing costs resulting from unscheduled principal repayments of the First Lien Facility Agreement during the second quarter of 2021. Similar activity did not occur in 2022.
Interest Income and Expense
Interest income and expense, net, decreased $3.6 million and $5.6 million during the three and six months ended June 30, 2022, compared to the same periods in 2021. The decrease for both periods was primarily driven by higher capitalized interest (which decreases interest expense) of $3.9 million and $4.8 million, respectively. Lower gross interest costs totaling $1.0 million also contributed to the decrease in expense for the six month period.
Gross interest costs were generally flat for the three month periods and down $1.0 million for the six month period. For the three month period, lower interest of $2.2 million associated with the 2009 Facility Agreement was offset by higher interest of $1.3 million on the 2019 Facility Agreement and imputed interest associated with the significant financing component related to advance payments from the customer under the Terms Agreement of $0.8 million. For the six month period, lower interest of $5.6 million associated with the 2009 Facility Agreement was offset by higher interest of $2.6 million on the 2019 Facility Agreement and imputed interest associated with the significant financing component related to advance payments from the customer under the Terms Agreement of $1.8 million.
Derivative Loss
We recorded derivative losses of $1.2 million and $1.3 million for the three months ended June 30, 2022 and 2021, respectively. We recorded derivative losses of $1.7 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively. We recognize derivative gains or losses due to the change in the value of certain embedded features within our debt instruments that require standalone derivative accounting. The losses recorded during the three and six months ended June 30, 2022 were impacted primarily by an increase in the discount rate used in the valuation of the derivative associated with our 2019 Facility Agreement. For the six month period, the loss was offset partially by a gain on the valuation adjustment of the embedded derivative associated with our 2013 8.00% Notes. During the first quarter of 2022, the remaining holders of our 2013 8.00% Notes converted the principal balance into shares of Globalstar common stock. As a result of these conversions, we marked-to-market the embedded derivative and recorded a net gain due to a decrease in our stock price and a shorter term to maturity.
The losses recorded during the three and six months ended June 30, 2021 were primarily impacted by increases 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 7: Fair Value Measurements to our condensed consolidated financial statements for further discussion of the computation of the fair value of our derivatives.
Foreign Currency (Loss) Gain
Foreign currency (loss) gain fluctuated by $11.5 million to a loss of $7.1 million for the three months ended June 30, 2022 from a gain of $4.4 million for the same period in 2021. Foreign currency (loss) gain fluctuated by $4.0 million to a loss of $3.9 million for the six months ended June 30, 2022 from a gain of $0.1 million for the same period in 2021. Changes in foreign currency gains and losses are driven by the remeasurement of financial statement items, which are denominated in various currencies, at the end of each reporting period. For the three months ended June 30, 2022, the foreign currency loss was due to the weakening of the Canadian dollar, the Euro and the Brazilian real relative to the U.S. dollar. For the three months ended June 30, 2021, the foreign currency gain was due to the strengthening of the Canadian dollar, Euro and Brazilian real relative to the U.S. dollar. For the six months ended June 30, 2022, the foreign currency loss was due to the weakening of the Canadian dollar and the Euro real relative to the U.S. dollar. For the six months ended June 30, 2021, the foreign currency gain was due to the strengthening of the Canadian dollar and Brazilian real relative to the U.S. dollar largely offset by the weakening of the Euro relative to the U.S. dollar.
Liquidity and Capital Resources
Overview
Our principal near-term liquidity requirements include funding our operating costs, capital expenditures, and repayment of amounts being financed through our satellite vendor under the Procurement Agreement. Our principal sources of liquidity include cash on hand, cash flows from operations, and vendor financing. We also expect sources of liquidity to include funds from other debt or equity financings that have not yet been arranged; we are actively pursuing a new debt financing arrangement to repay and fund amounts due under the Procurement Agreement. With this financing, we expect that our current sources of liquidity over the next twelve months will be sufficient for us to cover our obligations. Beyond the next twelve months, our liquidity requirements also include paying our debt service obligations.
As of June 30, 2022 and December 31, 2021, we held cash and cash equivalents of $13.1 million and $14.3 million, respectively, on our condensed consolidated balance sheet.
The total carrying amount of our debt outstanding was $257.5 million at June 30, 2022, compared to $237.9 million at December 31, 2021.
The $19.5 million increase in carrying value of our debt was due to a higher carrying value of the 2019 Facility Agreement of $20.9 million due to the accrual of PIK interest and the accretion of debt discount offset by a reduction in the remaining principal balance of the 2013 8.00% Notes totaling $1.4 million, which were converted into shares of Globalstar common stock during the first quarter of 2022.
Cash Flows for the six months ended June 30, 2022 and 2021
The following table shows our cash flows from operating, investing and financing activities (in thousands):
| | | | | | | | | | | |
| | Six Months Ended |
| | June 30,
2022 | | June 30,
2021 |
| Net cash provided by operating activities | $ | 20,771 | | | $ | 55,920 | |
| Net cash used in investing activities | (22,392) | | | (11,998) | |
| Net cash provided by (used in) financing activities | 449 | | | (45,228) | |
| Effect of exchange rate changes on cash and cash equivalents | 9 | | | (9) | |
| Net decrease in cash and cash equivalents | $ | (1,163) | | | $ | (1,315) | |
Cash Flows Provided by Operating Activities
Net cash provided by operations includes primarily cash receipts from subscribers related to the purchase of equipment and satellite voice and data services as well as cash received from the performance of engineering and other service contracts. We use cash in operating activities primarily for personnel costs, inventory purchases and other general corporate expenditures. Net cash provided by operating activities during the six months ended June 30, 2022 was $20.8 million compared to $55.9 million during the same period in 2021. The primary driver for the decrease was due to unfavorable working capital changes offset partially by higher net income after adjusting for noncash items. During 2021, working capital changes were favorably impacted by prepayments made by the customer to the Terms Agreement totaling $51.6 million, which were recorded as deferred revenue (see Note 2: Revenue to our condensed consolidated financial statements for further discussion). The timing of vendor payments also impacted the change in working capital to a lesser extent.
Cash Flows Used in Investing Activities
Net cash used in investing activities was $22.4 million for the six months ended June 30, 2022 compared to $12.0 million for the same period in 2021. Net cash used in investing activities during both periods was related primarily to network upgrades associated with the Terms Agreement, including higher costs associated with the procurement and deployment of new antennas for our gateways and the preparation and launch of our on-ground spare satellite, which occurred in June 2022. Cash used in investing activities increased in 2022 due primarily to costs to support the spare satellite launch, offset partially by lower costs associated with gateway upgrades as that portion of the project nears completion. Purchases of intangible assets related to our MSS and terrestrial spectrum licensing initiatives were also uses of cash during both periods.
Cash Flows Provided by (Used in) Financing Activities
Net cash used in financing activities was $45.2 million during the six month period ended June 30, 2021, including principal payments of the 2009 Facility Agreement totaling $89.2 million and $43.7 million received in proceeds from the exercise of the warrants issued with our 2019 Facility Agreement. There were no meaningful cash flows from financing activities during the first six months of 2022.
Indebtedness
For further discussion on all of our debt and other financing arrangements, see Note 5: Long-Term Debt and Other Financing Arrangements to our condensed consolidated financial statements.
2019 Facility Agreement
In 2019, we entered into a $199.0 million facility agreement with Thermo, an affiliate of EchoStar Corporation and certain other unaffiliated lenders (the "2019 Facility Agreement"). The 2019 Facility Agreement is scheduled to mature in November 2025. The loans under the 2019 Facility Agreement bear interest at a blended rate of 13.5% per annum to be paid-in-kind (or in cash at our option, subject to restrictions in the Facility Agreement). As of June 30, 2022, the principal amount outstanding under the 2019 Facility Agreement was $282.0 million. As of June 30, 2022, we were in compliance with all the covenants of the 2019 Facility Agreement, except as it relates to capital expenditures. In August 2022, we received a waiver letter from our lenders increasing permitted capital expenditures for 2022.
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 expect to make a prepayment of approximately $6.0 million in August 2022.
8.00% Convertible Senior Notes Issued in 2013
In May 2013, we issued $54.6 million aggregate principal amount of its 2013 8.00% Notes. In February 2022, we notified the holders of the 8.00% Notes of our intention to redeem all of the outstanding amount of principal and interest in March 2022. Prior to our intended redemption of the 8.00% Notes in March 2022, the holders converted the remaining principal amount outstanding into 2.3 million shares of Globalstar common stock at a conversion price of $0.69 (as adjusted) per share of common stock. The 2013 8.00% Notes were scheduled to mature on April 1, 2028, subject to various call and put features. Interest on the 2013 8.00% Notes was payable semi-annually in arrears on April 1 and October 1 of each year. We paid interest in cash at a rate of 5.75% per annum and issued additional 2013 8.00% Notes at a rate of 2.25% per annum.
Vendor Financing
In February 2022, we entered into a satellite procurement agreement (see Note 8: Commitments and Contingencies to our condensed consolidated financial statements for further discussion). This agreement provides for payment deferrals of milestone payments from February 2022 through August 2022 at a 0% interest rate. Deferred payments are due in August 2022 under the terms of the agreement. We intend to seek an extension of the maturity date while we pursue a new debt financing for the funding of the construction and launch costs for these satellites.
Off-Balance Sheet Transactions
We have no material off-balance sheet transactions.
Recently Issued Accounting Pronouncements
We review recently issued accounting guidance as new standards are issued. Certain accounting standards issued or effective may be applicable to us; however, we have not identified any standards that will have a material impact on our condensed consolidated financial statements.