BLACKSKY TECHNOLOGY INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled "Special Note Regarding Forward Looking Statements," the following discussion and analysis contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in the section titled "Risk Factors" under Part I, Item IA of our Annual Report on Form 10-K. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "BlackSky", "the Company", "we", "us" and "our" refer to the business and operations of Legacy BlackSky and its consolidated subsidiaries prior to the Merger and toBlackSky Technology Inc. and its consolidated subsidiaries, following the closing of the Merger. General Overview OnSeptember 9, 2021 , Osprey consummated the Merger with Legacy BlackSky. Immediately following the Merger, Osprey changed its name to "BlackSky Technology Inc. " LegacyBlackSky survived the Merger and is now a wholly owned subsidiary ofBlackSky . As a special purpose acquisition company, Osprey had no pre-Merger operations other than to identify and consummate a merger. Therefore,BlackSky's operations post-Merger are attributable to those of Legacy BlackSky and its subsidiaries, and references to "BlackSky" or the "Company" should be read to includeBlackSky's wholly owned subsidiaries. References in this report to Company actions, assets/liabilities, or contracts may be references to actions taken, assets/liabilities held, or contracts entered into by one or more Company current subsidiaries; however the Company has distinguished between the actions taken by Legacy BlackSky or Osprey for certain time based, historical transactions.
The Company's results of operations and statements of assets and liabilities may not be comparable between periods as a result of the Merger.
Company Overview
We own and operate one of the industry's leading high-performance low earth
orbit ("LEO") small satellite constellations. Our constellation is optimized to
cost-efficiently capture imagery at high revisit rates where and when our
customers need it. The orbital configuration of our constellation is designed to
collect data on the most critical and strategic locations on Earth where we
believe approximately 90% of the global GDP occurs. With fourteen satellites in
orbit as of June 30, 2022 , our constellation is able to image certain locations
every hour, from dawn to dusk, providing our customers with insights and
situational awareness throughout the day. Our satellites are designed with agile
pointing capabilities that enable our customers to task our constellation on
demand to collect specific locations of interest. Our tasking methodology
employs proprietary artificial intelligence ("AI")-enabled software to
efficiently collect images of the most important strategic and economic assets
and areas of interest to our customers. We believe that our focus on critical
strategies and economic infrastructure and the AI-enabled tasking of our
constellation differentiates us from our competitors, who are dedicated
primarily to mapping the entirety of the Earth every day and who, therefore,
require hundreds of satellites to support their mission. Our focused approach
enables us to deliver highly targeted and actionable intelligence with a smaller
constellation that has the added benefit of greater operating and capital
efficiencies.
Our Spectra AI software platform can, among other things, source millions of
observations a day from our proprietary satellite constellation and from
multiple external data sources including imaging, radar and radio frequency
satellites, environmental sensors, asset tracking sensors, Internet-of-Things
("IoT") connected devices, internet-enabled narrative sources, and a variety of
geotemporal data feeds. Spectra AI employs advanced, proprietary AI and machine
learning ("ML") techniques to process, analyze, and transform these data feeds
into alerts, information, and insights. Customers can access Spectra AI's data
and analytics through easy-to-use web services or through platform application
programming interfaces.
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Our next generation satellites ("Gen-3"), expected to be operational during
2023, are designed to improve our imaging resolution even further and include
advanced sensing technology for a broad set of imaging conditions, including
nighttime, low-light, and a variety of weather conditions. We believe these
advancements will expand the diversity and certainty of our analytics to
continue to ensure our relevance to our customers. We believe the combination of
our high-revisit, on-demand tasking small satellite constellation, our Spectra
AI platform, and low constellation cost is disrupting the market for geospatial
imagery and space-based data and analytics.
Our operating strategy is to continue to enhance the capabilities of our
satellite constellation, to increase the number of third-party data sources
processed by Spectra AI, and to expand our analytics offerings in order to
increase the value we deliver to our customers. Our two operating assets-our
satellite constellation and our Spectra AI software platform-are mutually
reinforcing: as we capture ever more information about the world's most
important strategic and economic assets and locations, our proprietary database
expands and increases its utility; enabling us to better detect, understand, and
predict changes that matter most to our customers. Our business has a natural
and powerful "flywheel" effect: the more data we collect and analyze, the more
valuable the insights we can deliver to our customers.
Our current customer base and end market mix are weighted towards U.S. and
international defense and intelligence customers and markets. We believe there
are significant opportunities to expand our imagery and software analytical
services, as well as our engineering and systems integration offerings, to
customers both domestically and internationally. In addition, our products and
services can benefit customers in a variety of commercial markets including, but
not limited to, energy and utilities, insurance, commodities, mining,
manufacturing, maritime and supply chain logistics, financial services,
agriculture, environmental monitoring, disaster and risk management, engineering
and construction, and consumer behavior.
We offer a variety of pricing and utilization options for our imagery and
software analytical service offerings, including usage-based pricing,
subscriptions and transactional licenses. These options provide customers
flexible options to utilize our imagery and software analytical services in a
manner that best suits their business needs. We offer a range of pricing tiers
that enables the customer to manage collection priorities, where during critical
events they can pay a premium to prioritize their monitoring and collection
requirements. At other times, customers can select lower priority collections to
allow for more economical utilization. We currently derive revenue from variable
and fixed pricing plans that allow our customers to choose what matters most to
them-platform licensing-levels, priority for imagery tasking, and whether to
apply analytics or monitoring capabilities overtop the imaging service.
Components of Operating Results
Revenue
Our revenue is generated by selling imagery and software analytics services through our Spectra AI platform and by providing engineering and systems integration services to strategic customers on a project basis.
•Imagery and Software Analytical Services Revenue
•Imagery: We offer our customers high-revisit, on-demand high resolution electro
optical satellite imaging services. Through our Spectra AI platform, customers
can directly task our proprietary satellite constellation to collect and deliver
imagery over specific locations, sites, and regions that are critical to their
operations. We offer customers several service level options that include basic
plans for on-demand tasking or multi-year assured access programs, where
customers can secure priority access and imaging capacity at a premium over a
region of interest on a take or pay basis.
•Data, Software, and Analytics: Our analytics services are also offered on a
consumption or subscription basis and provide customers with access to our site
monitoring, event monitoring and global data services. We leverage our
proprietary AI and ML algorithms to analyze data coming from both our
proprietary sensor network and third-party space based and terrestrial sources
in real-time to provide data, insights, and analytics for our customers. We
provide services related to object, change and anomaly detection, site
monitoring, and enhanced analytics through which we can detect key pattern of
life changes in critical locations. These critical locations can include
strategic locations and infrastructure such as ports, airports, and construction
sites; retail activity;
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commodities stockpiles; and other sites that contain critical commodities and
supply chain information.
We continue to enhance and integrate our offerings by performing capability
development for customers while retaining the intellectual property rights. We
provide technology enabled professional service solutions to support
customer-specific software development requests, integration, testing, and
training in order to embed our imagery and software analytical services into the
customers organizational processes. We also provide software systems engineering
development to support the efforts of certain customers to manage mass
quantities of data.
We expect continued imagery and software analytical services revenue growth in
the year ending December 31, 2022 , as compared to the prior year as a result of
increases in our satellite capacity and sales orders driven by stronger customer
demand.
•Engineering and Systems Integration Revenue-We develop and deliver advanced
launch vehicle, satellite and payload systems for specific strategic customers
that desire to leverage our capabilities in mission systems engineering and
operations, ground station operations, software, analytics and systems
development. These systems are sold to government customers under fixed price
contracts and are often bundled with our imagery services offerings. In certain
cases, we retain rights to intellectual property for developed technology of
certain systems, and this paid effort offsets some of our product development
effort.
We expect engineering and systems integration revenue growth as we continue to
provide customers with unique engineering solutions and deliver critical design
reviews.
Costs and Expenses
Our costs and expenses are incurred from the following categories:
•Imagery and software analytical services costs primarily include internal aerospace and geospatial software development labor, third-party data and imagery, internal labor to support the ground stations and space operations, and cloud computing and hosting services. Costs are expensed as incurred except for incremental costs to obtain a contract, primarily sales commissions, which are capitalized and amortized to selling, general and administrative expenses on a systematic basis consistent with the transfer of goods and services. Expense related to stock-based payments is classified in the unaudited condensed consolidated statements of operations and comprehensive loss based upon the classification of each employees' cash compensation. We recognize stock-based compensation expense for those employees whose work supports the imagery and software analytical service costs we provide to customers, under imagery and software analytical service costs, excluding depreciation and amortization. •Engineering and systems integration costs primarily include the cost of internal labor for design, integration, and engineering in support of long-term development contracts for launch vehicle, satellite, and payload systems. We also incur subcontract direct materials and external labor costs to build and test specific components, such as the communications system, payload demands, and sensor integration. We recognize stock-based compensation expense for those employees who provide engineering and systems integration support to customers, under engineering and systems integration costs, excluding depreciation and amortization.
Operating Expenses
Our operating expenses are incurred from the following categories:
•Selling, general, and administrative expense consists of salaries and benefit
costs, development costs, professional fees, and other expenses which includes
other personnel-related costs, stock-based compensation expenses for those
employees who generally support our business and operations, and occupancy
costs. Our development costs include internal labor costs to develop critical
real-time software and geospatial analytic solutions and solution enhancements,
including mapping, analysis, site target monitoring, and news feeds.
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•Research and development expense consists of employees' salaries, taxes, and
benefits costs incurred for data science modeling and algorithm development
related to our Spectra AI platform, and for the unique and strategic development
efforts to support our long-term strategy. In addition, we began employing and
classifying third-party vendors who fulfill our unique and strategic projects as
research and development expense. We intend to continue to invest appropriate
resources in research and development efforts, as we believe that investment is
critical to maintaining our competitive position.
•Depreciation expense is related to property and equipment which mainly consists
of operational satellites. Amortization expense is related to intangible assets
which mainly consists of customer relationships.
Results of Operations for the Three and Six Months Ended
The following table provides the components of results of operations for the three and six months endedJune 30, 2022 and 2021. Period to period comparisons are not necessarily indicative of future results. Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2022 2021 Change Change 2022 2021 Change Change (dollars in thousands) Revenue
Imagery & software analytical
160.8 % $ 23,122 $ 11,116 $ 12,006 108.0 %
services
Engineering & systems 1,752 2,247 (495) (22.0) % 5,876 3,543 2,333 65.8 % integration Total revenue 15,102 7,365 7,737 105.1 % 28,998 14,659 14,339 97.8 % Costs and expenses Imagery & software analytical service costs, excluding 5,350 4,171 1,179 28.3 % 11,257 8,550 2,707 31.7 % depreciation and amortization Engineering & systems integration costs, excluding 4,436 2,237 2,199 98.3 % 9,484 3,367 6,117 181.7 % depreciation and amortization Selling, general and 17,739 8,827 8,912 101.0 % 40,275 17,305 22,970 132.7 % administrative Research and development 106 - 106 NM 252 28 224 800.0 % Depreciation and amortization 9,177 3,537 5,640 159.5 % 16,568 6,301 10,267 162.9 % Satellite impairment loss - 18,407 (18,407) NM - 18,407 (18,407) NM Operating loss (21,706) (29,814) 8,108 27.2 % (48,838) (39,299) (9,539) (24.3) % (Loss) gain on derivatives (4,646) (967) (3,679) (380.5) % 3,494 (14,975) 18,469 123.3 % Income on equity method 1,213 767 446 58.1 % 1,470 963 507 52.6 % investment Interest income 178 - 178 NM 178 - 178 NM Interest expense (1,275) (1,270) (5) (0.4) % (2,530) (2,438) (92) (3.8) % Other expense, net (42) (3,279) 3,237 98.7 % (40) (147,370) 147,330 100.0 % Loss before income taxes (26,278) (34,563) 8,285 24.0 % (46,266) (203,119) 156,853 77.2 % Income tax (expense) benefit - - - - % - - - - % Loss from continuing (26,278) (34,563) 8,285 24.0 % (46,266) (203,119) 156,853 77.2 % operations Discontinued operations: Loss from discontinued - (1,022) 1,022 NM - (1,022) 1,022 NM operations Income tax (expense) benefit - - - - % - - - - % Loss from discontinued operations, net of income - (1,022) 1,022 NM - (1,022) 1,022 NM taxes Net loss$ (26,278) $ (35,585) $ 9,307 26.2 %$ (46,266) $ (204,141) $ 157,875 77.3 %
•NM - Fluctuation in terms of percentage change is not meaningful.
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Revenue
Three Months Ended June 30, $ % Six Months Ended June 30, $ %
2022 2021 Change Change 2022 2021 Change Change
(dollars in thousands)
Imagery & software
160.8 % $ 23,122 $ 11,116 $ 12,006 108.0 %
analytical revenue
% of total revenue 88.4 % 69.5 % 79.7 % 75.8 %
Engineering & systems 1,752 2,247 (495) (22.0) % 5,876 3,543 2,333 65.8 %
integration revenue
% of total revenue 11.6 % 30.5 % 20.3 % 24.2 %
Total revenue $ 15,102 $ 7,365 $ 7,737 105.1 % $ 28,998 $ 14,659 $ 14,339 97.8 %
Imagery and Software Analytical Services Revenue
Imagery and software analytical services revenue significantly increased for the three and six months endedJune 30, 2022 , as compared to the same period in 2021, primarily driven by increased imagery and monitoring and analytical orders from existing customers and several firm-fixed price subscription contracts with new domestic and international customers. In the three and six months endedJune 30, 2022 , we were awarded a subscription contract to deliver advanced high frequency imagery services with an initial contract value of$85.8 million , over a five-year base period, with future year options that, if exercised, would increase the contract value to over$1.0 billion and increase the contract term up to ten years. This contract is expected to have a material impact to future revenue. In the three and six months endedJune 30, 2022 , we were awarded a multi-million dollar contract to provide on-demand satellite monitoring & analytics for an international government, which significantly contributed to the increased revenue in the quarter endedJune 30, 2022 compared to the same period in 2021. In addition, monitoring and analytics revenue also increased primarily from fulfillment of renewed firm fixed price contract for economic activity monitoring. Expansion of our constellation after placing seven satellites into orbit in 2021, and the growing capabilities of our constellation also contributed to meeting increased customer demand for imagery, monitoring and analytical orders.
Engineering and Systems Integration Revenue
Engineering and systems integration revenue increased for the six months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to an increase in the percentage completion of two contracts, driven by achievement of critical design milestones and delivery of major components of the contract requirements. Engineering and systems integration revenue decreased for the three months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to an unfavorable one-time cumulative revenue adjustment of$1.4 million resulting from an increased estimate to complete on critical engineering and equipment costs on two contracts. 37
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Costs and Expenses
Three Months Ended June 30, $ % Six Months Ended June 30, $ %
2022 2021 Change Change 2022 2021 Change Change
(dollars in thousands)
Imagery & software
analytical service costs, $ 5,350 $ 4,171 $ 1,179 28.3 % $ 11,257 $ 8,550 $ 2,707 31.7 %
excluding depreciation and
amortization
Engineering & systems
integration costs, 4,436 2,237 2,199 98.3 % 9,484 3,367 6,117 181.7 %
excluding depreciation and
amortization
Total costs $ 9,786 $ 6,408 $ 3,378 52.7 % $ 20,741 $ 11,917 $ 8,824 74.0 %
Imagery and Software Analytical Service Costs
Imagery and software analytical service costs increased for the three and six months endedJune 30, 2022 , as compared to the same period in 2021, primarily driven by data sourced from different sensors such as synthetic aperture radar, third-party service costs such as, increased hosting costs due to increased data volumes and maintaining the growth of our satellite and ground stations networks, and third-party subcontractor costs to meet specific needs of new customer programs. Additionally, we recorded$0.3 million and$1.1 million , respectively, of stock-based compensation expense during the three and six months endedJune 30, 2022 primarily related to vesting of restricted stock units ("RSUs") triggered by the successful completion of the Merger.
Engineering and Systems Integration Costs
Engineering and systems integration costs increased for the three and six months endedJune 30, 2022 , as compared to the same period in 2021, primarily attributable to non-recurring engineering design costs and material procurement costs incurred for customer contracts associated with the Gen-3 satellites. The increase was also due to an increase in the estimate to complete on two contracts, which, given the accounting treatment for customer supported projects, immediately increased engineering and systems integration costs by$4.6 million for the six months endedJune 30, 2022 as compared to the prior period. For the three and six months endedJune 30, 2022 , excluding the immediate forward loss related to these projects of$2.7 million and$3.7 million , respectively, engineering and systems integration costs would have been$1.7 million and$5.8 million , respectively. 38
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Selling, General, and Administrative
Three Months Ended June 30, $ % Six Months Ended June 30, $ %
2022 2021 Change Change 2022 2021 Change Change
(dollars in thousands)
Stock-based compensation
898.9 % $ 11,956 $ 772 $ 11,184 NM
expense
Salaries and benefit costs 8,705 5,219 3,486 66.8 % 16,606 9,920 6,686 67.4 % Development costs 235 160 75 46.9 % 253 314 (61) (19.4) % Professional fees 1,201 1,060 141 13.3 % 2,519 2,230 289 13.0 % Information technology, recruiting, and other 941 727 214 29.4 % 2,615 1,732 883 51.0 % administrative expenses Selling and marketing 2,105 857 1,248 145.6 % 2,619 1,239 1,380 111.4 % Rent expense 670 488 182 37.3 % 1,224 994 230 23.1 % Insurance 1,245 52 1,193 NM 2,483 104 2,379 NM Selling, general and administrative$ 17,739 $ 8,827 $ 8,912 101.0 %$ 40,275 $ 17,305 $ 22,970 132.7 %
•NM - Fluctuation in terms of percentage change is not meaningful.
Selling, general, and administrative expense increased during the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, primarily driven by several factors. For the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , stock-based compensation expense increased approximately$11.2 million related to vesting of RSUs, of which a significant portion vested 180 days following the closing of the Merger. Salaries and payroll-related benefits increased significantly due to headcount growth in software engineers, executive and administrative functions. In addition, our public company insurance costs increased as a result of the Merger. For the three months endedJune 30, 2022 as compared to the same period in 2021, stock-based compensation expense increased approximately$2.4 million from the prior year related to the vesting of RSUs, of which a significant portion was not recognized until the third quarter of 2021 when the Merger was completed. The following is our forecast for total RSU expense as ofJune 30, 2022 , which, in addition to the amounts recognized in selling, general, and administrative expenses, includes the portion that will be capitalized or classified in imagery and software analytical service costs and engineering and systems integration costs: (in thousands) For the remainder of 2022 $ 6,377 For the years ending December 31, 2023 7,266 2024 3,085 2025 2,016 2026 164$ 18,908 39
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Research and Development
Three Months Ended June 30, $ % Six Months Ended June 30, $ %
2022 2021 Change Change 2022 2021 Change Change
(dollars in thousands)
Research and development $ 106 $ - $ 106 NM $ 252 $ 28 $ 224 800.0 %
•NM - Fluctuation in terms of percentage change is not meaningful.
Research and development expense increased for the three and six months endedJune 30, 2022 as compared to the same periods in 2021. Much of our ongoing development efforts are either charged to engineering and systems integration costs or development costs in selling, general and administrative expenses, The increase was driven by contracting third-party vendors who fulfill our unique and strategic projects as research and development expense.
Depreciation and Amortization
Three Months Ended June 30, $ % Six Months Ended June 30, $ %
2022 2021 Change Change 2022 2021 Change Change
(dollars in thousands)
Depreciation of satellites
182.6 % $ 15,768 $ 5,378 $ 10,390 193.2 %
Depreciation of all other 371 129 242 187.6 % 519 243 276 113.6 %
property and equipment
Amortization 140 342 (202) (59.1) % 281 680 (399) (58.7) %
Depreciation and
amortization $ 9,177 $ 3,537 $ 5,640 159.5 % $ 16,568 $ 6,301 $ 10,267 162.9 %
Depreciation expense from satellites increased for the three and six months
ended June 30, 2022 as compared to the same periods in 2021. The increases were
driven by six satellites placed in service in the second half of 2021 and two
satellites placed in service in the first half of 2022.
Depreciation expense from all other property and equipment increased for the
three and six months ended June 30, 2022 , as compared to the same periods in
2021, primarily driven by capitalization of software in 2022 and additional
computer equipment that was placed into service.
Amortization expense decreased for the three and six months ended June 30, 2022 ,
as compared to the same periods in 2021, primarily as a result of in-process
research and development from a prior acquisition being fully amortized in 2021.
Satellite Impairment Loss
We recorded a satellite impairment loss for the three and six months endedJune 30, 2021 resulting from the loss of two of our satellites, which occurred onMay 15, 2021 when a rocket carrying those satellites suffered a failure during flight. This resulted in an impairment loss of$18.4 million , the full carrying value of the satellites, recorded to earnings during the three and six months endedJune 30, 2021 . The$18.4 million loss included satellite procurement, launch, shipping, launch support, and other associated costs. There were no satellite impairment losses in the three and six months endedJune 30, 2022 . 40
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Non-Operating Expenses
Three Months Ended June 30, $ % Six Months Ended June 30, $ %
2022 2021 Change Change 2022 2021 Change Change
(dollars in thousands)
(Loss) gain on $ (4,646) $ (967) $ (3,679) (380.5) % $ 3,494 $ (14,975) $ 18,469 123.3 %
derivatives
Income on equity method 1,213 767 446 58.1 % 1,470 963 507 52.6 %
investment
Interest income 178 - 178 NM 178 - 178 NM
Interest expense (1,275) (1,270) (5) (0.4) % (2,530) (2,438) (92) (3.8) %
Other expense, net (42) (3,279) 3,237 98.7 % (40) (147,370) 147,330 100.0 %
•NM - Fluctuation in terms of percentage change is not meaningful.
(Loss) gain on derivatives
Fluctuations in our equity warrants and other equity instruments that we classify as derivative liabilities and measure at fair value are significantly driven by our common stock price; these instruments generated a loss during the three months endedJune 30, 2022 and a gain during the six months endedJune 30, 2022 .
During the three and six months ended
Income on equity method investment
The fluctuations in earnings from our equity method investment is directly related to the operating performance of our joint venture LeoStella and was consistent year over year.
Interest income
Interest income increased during the three and six months ended
Interest expense
Interest expense was consistent year over year.
Other expense, net
Other expenses were significantly higher during the three and six months endedJune 30, 2021 as compared to the same periods in 2022, primarily due to an initial loss of$99.7 million upon issuances of the Bridge Notes and Bridge Notes Rights Offering executed in the first half of 2021 as the fair value of these notes and the accompanying Legacy BlackSky common shares and Class A common stock warrants that were granted to certain investors was in excess of the proceeds received. We also incurred$47.7 million in debt issuance costs related to the Bridge Notes and the modification of existing debt arrangements. We expensed the debt issuance costs because the Bridge Notes were carried in the unaudited condensed consolidated balance sheets at fair value. Upon consummation of the Merger, the Bridge Notes and associated warrant liabilities were converted to equity and extinguished. We do not expect similar charges in future periods.
Included in other expense, net for the three and six months ended
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, management utilizes certain non-GAAP performance measures, Adjusted EBITDA, and free cash flow for purposes of evaluating our ongoing operations
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and for internal planning and forecasting purposes. Our management and board of
directors believe that these non-GAAP operating measures, when reviewed
collectively with our GAAP financial information, provide useful supplemental
information to investors in assessing our operating performance.
Adjusted EBITDA
Adjusted EBITDA is defined as net income or loss attributable to us before
interest income, interest expense, income tax expense or benefit, depreciation
and amortization, as well as significant non-cash and/or non-recurring expenses
as our management believes these items are not useful in evaluating our core
operating performance. These items include, but are not limited to, realized
loss on conversion of Bridge Notes, stock-based compensation expense, unrealized
(gain) loss on certain warrants/shares classified as derivative liabilities,
satellite impairment loss, (gain) loss on debt extinguishment, loss from
discontinued operations, net of income taxes, severance, income on equity method
investment, transaction-related legal settlements, and transaction costs
associated with equity instruments accounted for as derivative liabilities. We
have presented Adjusted EBITDA because it is a key measure used by our
management and board of directors to understand and evaluate our operating
performance, generate future operating plans and make strategic decisions
regarding the allocation of capital. In particular, we believe that the
exclusion of certain items in calculating Adjusted EBITDA can produce a useful
measure for period-to-period comparisons of our business. Accordingly, we
believe that Adjusted EBITDA provides useful information in understanding and
evaluating our operating results. In addition, we believe that Adjusted EBITDA
provides additional information for investors to use in evaluating our ongoing
operating results and trends. This non-GAAP measure provides investors with
incremental information for the evaluation of our performance after isolation of
certain items deemed unrelated to our core business operations.
Adjusted EBITDA is presented as a supplemental measure to our GAAP measures of
performance. When evaluating Adjusted EBITDA, you should be aware that we may
incur future expenses similar to those excluded when calculating this measure.
In addition, our presentation of this measure should not be construed as an
inference that our future results will be unaffected by unusual or non-recurring
items. Furthermore, our computation of Adjusted EBITDA may not be directly
comparable to similarly titled measures computed by other companies, as the
nature of the adjustments that other companies may include or exclude when
calculating Adjusted EBITDA may differ from the adjustments reflected in our
measure. Because of these limitations, Adjusted EBITDA should not be considered
in isolation, nor should this measure be viewed as a substitute for the most
directly comparable GAAP measure, which is net loss. We compensate for the
limitations of non-GAAP measures by relying primarily on our GAAP results. You
should review the reconciliation of our net loss to Adjusted EBITDA below and
not rely on any single financial measure to evaluate our performance.
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The table below reconciles our net loss to Adjusted EBITDA for the three and six
months ended June 30, 2022 and 2021:
Three Months Ended June 30, 2021 Six Months Ended June 30,
2022 2021 2022 2021
(in thousands)
Net loss $ (26,278) $ (35,585) $ (46,266) $ (204,141)
Interest income (178) - (178) -
Interest expense 1,275 1,270 2,530 2,438
Depreciation and amortization 9,177 3,537 16,568 6,301
Loss on issuance of Bridge Notes, including
debt issuance costs expensed for debt carried - 3,288 - 147,387
at fair value
Stock-based compensation expense 2,986 264 13,226 772
Loss (gain) on derivatives 4,646 967 (3,494) 14,975
Satellite impairment loss - 18,407 - 18,407
Loss from discontinued operations, net of - 1,022 - 1,022
income taxes
Severance 705 - 705 -
Income on equity method investment (1,213) (767) (1,470) (963)
Forgiveness of non-trade receivable 75 - 75 -
Adjusted EBITDA $ (8,805) $ (7,597) $ (18,304) $ (13,802)
Free Cash Flow
We define free cash flow as cash flows used in, or provided by, operating
activities-continuing operations plus cash flows used in, or provided by,
operating activities-discontinued operations less purchase of property and
equipment and satellite procurement work in process. We have presented free cash
flow because it is used by our management and board of directors as an indicator
of the amount of cash we generate or use and to evaluate our ability to satisfy
current and future obligations and to fund future business opportunities.
Accordingly, we believe that free cash flow provides useful information to
investors and others, enhancing the overall understanding of our ability to
satisfy our financial obligations and pursue business opportunities, and
allowing for greater transparency with respect to a key financial metric used by
our management in their financial and operational decision-making.
Free cash flow is not defined by GAAP and should not be considered in isolation
of, or as an alternative to, measures prepared in accordance with GAAP. There
are a number of limitations related to the use of free cash flow rather than net
cash from (used in) operating activities, which is the most directly comparable
GAAP equivalent. Some of these limitations are:
•free cash flow is not a measure of cash available for discretionary
expenditures since we have certain non-discretionary obligations such as debt
repayments or capital lease obligations that are not deducted from the measure;
and
•other companies, including companies in our industry, may calculate free cash flow differently, which reduces its usefulness as a comparative measure.
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The table below reconciles our net cash used in operating activities to free
cash flow for the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, 2022
2022 2021
(in thousands)
Net cash used in operating activities $ (27,789) $ (21,112)
Purchase of property and equipment (5,289) (207)
Satellite procurement work in process (20,208) (11,205)
Free cash flow $
(53,286)
Net cash used in investing activities$ (68,958) $ (11,419) Net cash (used in) provided by financing activities (4,012) 53,817
Liquidity and Capital Resources
As ofJune 30, 2022 , our existing sources of liquidity included cash and cash equivalents and short-term investments. Our cash and cash equivalents excluding restricted cash totaled$64.8 million and$165.6 million as ofJune 30, 2022 andDecember 31, 2021 , respectively, and our short-term investments totaled$43.8 million and$0 as ofJune 30, 2022 andDecember 31, 2021 , respectively. We have incurred losses and generated negative cash flows from operations since our inception inSeptember 2014 . As ofJune 30, 2022 , we had an accumulated deficit of$517.2 million . Our short-term liquidity as ofJune 30, 2022 was comprised of the following: (in thousands) Cash and cash equivalents$ 64,827 Restricted cash(1) 2,518 Short-term investments(2) 43,833$ 111,178 (1) Restricted cash expires byMarch 31, 2023 . (2) Short-term investments are included in cash flows from investing activities in the unaudited condensed consolidated statements of cash flows. We expect cash and cash equivalents and cash generated from operating activities to be sufficient to meet our working capital and capital expenditure needs for the foreseeable future. Our future long-term capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support solution development efforts, the expansion of sales and marketing activities, the ongoing investments in technology infrastructure, the introduction of new and enhanced solutions, and the continuing market acceptance of our solutions. From time to time, we may seek additional equity or debt financing to fund capital expenditures, strategic initiatives or investments and our ongoing operations. We do not have a line of credit or access to immediate funds and we are not subject to any financial or minimum cash metrics. If we decide, or are required, to seek additional financing from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected.
Funding Requirements
We expect our expenses to increase as we continue to invest in sales, marketing
and products to increase our market share. We will also continue to incur
capital expenditures as we procure and launch satellites to increase image
collection capacity, as well as investing in our Gen-3 satellites and Spectra AI
software platform to significantly expand our product capabilities in the
future.
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Short-term liquidity requirements
As of June 30, 2022 , our current assets were approximately $124.4 million ,
consisting primarily of cash and cash equivalents, restricted cash, short-term
investments, trade receivables, prepaid expenses and other current assets, and
contract assets.
As of June 30, 2022 , our current liabilities were approximately $23.2 million ,
consisting primarily of accounts payable and accrued liabilities, contract
liabilities, and other non-recurring current liabilities. Accordingly, we have
sufficient cash and working capital to fund our short-term liquidity
requirements.
Long-Term Liquidity Requirements
We anticipate that our most significant long-term liquidity and capital needs will relate to continued funding of operations, satellite development capital expenditures, launch capital expenditures, and ongoing investments in our Spectra AI platform and internal infrastructure that will enable us to scale the business efficiently and securely. We believe our current cash position, as well as a growing customer backlog, will be sufficient to cover forecasted capital needs and operating expenditures for the foreseeable future. Macroeconomic conditions and credit markets could also impact the availability and, or, the cost of potential future debt or equity financing.
Cash Flow Analysis
The following table provides a summary of cash flow data for the six months
ended
Six Months Ended June 30, $
2022 2021 Change
(in thousands)
Net cash used in operating activities $ (27,789) $ (21,112) $ (6,677)
Net cash used in investing activities(1) (68,958) (11,419) (57,539)
Net cash (used in) provided by financing activities (4,012) 53,817 (57,829)
Net (decrease) increase in cash, cash equivalents, and (100,759) 21,286 (122,045)
restricted cash
Cash, cash equivalents, and restricted cash - beginning of 168,104 10,573 157,531
year
Cash, cash equivalents, and restricted cash - end of period
(1) Includes purchase of
Operating activities For the six months endedJune 30, 2022 , net cash used in operating activities was approximately$27.8 million . The contributor to the increase in cash used during the six months endedJune 30, 2022 was the operating loss, adjusted for depreciation, amortization and stock-based compensation expense in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . The operating loss increase in the six months endedJune 30, 2022 was primarily due to increased salaries and payroll-related benefits for headcount growth across the organization. Investing activities We continue to have significant cash outflows for satellite procurement and launch related services. In the six months endedJune 30, 2022 , net cash used in investing activities increased approximately$57.5 million , of which$43.8 million is the result of our investment in corporate debt and governmental securities, and the remainder is primarily cash paid for the procurement of satellites and other launch-related costs. We continue to fund the acquisition of property and equipment, which includes the internally developed capitalized software, as we add innovative new services and tools to our Spectra AI software platform. 45
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Financing activities
The most significant impact in the change in cash flows from financing
activities in the six months ended
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements and related notes requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Management has based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a description of our significant accounting policies see Note 2-"Basis of Presentation and Summary of Significant Accounting Policies," of the notes to the unaudited condensed consolidated financial statements. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the unaudited condensed consolidated financial statements. Management believes the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our unaudited condensed consolidated financial statements.
Revenue Recognition
The recognition and measurement of revenue requires the use of judgments and estimates. Specifically, judgment is used in interpreting complex arrangements with nonstandard terms and conditions and determining when all criteria for revenue recognition have been met.
We primarily generate revenue from the sale of imagery, data, software, and analytics, including professional services, and engineering and systems integration from long-term construction contracts.
Identifying the performance obligations contained in a contract, determining transaction price, allocating transaction price, and determining when performance obligations are satisfied can require the application of significant judgment, as further discussed below.
Identifying the performance obligations in a contract
We execute contracts for a single promise or multiple promises. Specifically, our firm fixed price contracts typically include multiple promises which are accounted for as separate performance obligations. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit or loss recorded in each period.
Classification of Revenue
We classify revenue as imagery and software analytical services, and engineering and systems integration in our unaudited condensed consolidated statements of operations and comprehensive loss based on the predominant attributes of the performance obligations.
Determination of and Allocation of Transaction Price
Each customer purchase order sets forth the transaction price for the products
and services purchased under the arrangement. For contracts with multiple
performance obligations, we evaluate whether the stated selling prices for the
products or services represent their standalone selling prices. When it is
necessary to allocate the transaction price to multiple performance obligations,
management typically uses the expected cost plus a reasonable profit margin to
estimate the standalone selling price of each product or service. We also sell
standard products or services with observable standalone revenue transactions.
In these situations, the observable standalone revenue transactions are used to
determine the standalone selling price.
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Determination of when Performance Obligations are Satisfied
Imagery revenue is recognized at the point-in-time the customer receives access
to the imagery, or ratably over the subscription period. In certain firm fixed
price contracts that contain imagery where it is probable we will receive the
full contract amount or the customer prepays for future services which may
expire unused, our accounting policy for unexercised performance obligations is
to recognize the estimated unused amount as revenue over time in proportion to
the historical pattern of rights exercised by the customer. The unrecognized
amount is recorded within contract liabilities on our unaudited condensed
consolidated balance sheets. Software analytical services revenue derived from
data, software, and analytics, including professional service solutions, is
recognized from the rendering of services over time on a cost-plus-fixed-fee,
firm fixed price, or a time and materials basis, or at the point-in-time the
customer receives access to an analytic product. Engineering & systems
integration revenue is primarily generated from fixed price long-term
engineering and integration construction contracts. Due to the long-term nature
of these contracts, we generally recognize revenue over time using a
cost-to-cost measure of progress because it best depicts the transfer of control
to the customer as we incur costs on the contracts. Under the
percentage-of-completion cost-to-cost measure of progress, the extent of
progress towards completion is measured based on the ratio of costs incurred to
date to the total estimated costs to complete the performance obligation(s). The
estimation of total estimated costs at completion is subject to many variables
and requires judgment. We recognize changes in contract estimates on a
cumulative catch-up basis in the period in which the changes are identified.
Such changes in contract estimates can result in the recognition of revenue in a
current period for performance obligations which were satisfied or partially
satisfied in a prior period. If at any time, the estimate of contract
profitability indicates a probable anticipated loss on the contract, we
recognize the total loss as and when known.
Equity Valuations
As there was not a market for Legacy BlackSky equity, valuations of LegacyBlackSky equity instruments required the application of significant estimates, assumptions, and judgments. These valuations impacted various amounts and accounting conclusions reflected in our unaudited condensed consolidated financial statements, inclusive of the recognition of equity-based compensation, debt discounts when debt issuances were accompanied by the issuance of equity (e.g., warrants), and the evaluation of whether beneficial conversion features existed within our convertible financial instruments. The following discussion provides additional details regarding the significant estimates, assumptions, and judgments that impacted the determination of the fair values of equity-based compensation awards, warrants, and the preferred stock and common stock that comprised our capital structure prior to the Merger. The following discussion also explains why these estimates, assumptions, and judgments could be subject to uncertainties and future variability.
Equity-Based Compensation
LegacyBlackSky issued equity and equity-based awards under our 2014 Plan and the 2011 Plan. Awards issued as of the year endedDecember 31, 2020 include stock options and restricted stock awards ("RSAs"). Subsequent toDecember 31, 2020 , we also issued RSUs. Awards under these Plans were approved by the board of directors, and awards that have been canceled, forfeited, or expired are available for issuance in connection withBlackSky's 2021 Equity Incentive Plan. For purposes of recognizing equity-based compensation related to RSAs, RSUs, and stock options granted to employees, management estimates the grant date fair values of such awards to measure the costs to be recognized for services received. For awards with time-based vesting conditions, we recognize compensation costs based upon the straight-line amortization of the grant date fair value of the awards over the requisite service period. When equity-based compensation awards include a performance condition, no compensation is recognized until the performance condition is deemed probable to occur; we then recognize compensation costs based on the accelerated attribution method, which accounts for awards with discrete vesting dates as if they were a separate award. We now estimate the grant date fair value of RSAs and RSUs based upon the trading price of our Class A common stock. Our historical approach to estimating the fair value of Legacy BlackSky's Class A common stock is subsequently described in the discussion of "Preferred Stock and Common Stock Valuations." We estimated the fair value of Legacy BlackSky's stock options using the Black-Scholes option-pricing model, as subsequently described. 47 -------------------------------------------------------------------------------- Table of Contents Stock Option and Class A Common Stock Warrant Valuations LegacyBlackSky used the Black-Scholes option-pricing model to value all options and Class A common stock warrants. Estimating the fair value of stock options using the Black-Scholes option-pricing model requires the application of significant assumptions, such as the fair value of our Class A common stock, the estimated term of the options, risk-free interest rates, the expected volatility of the price of our Class A common stock, and an expected dividend yield. Each of these assumptions is subjective, requires significant judgement, and is based upon management's best estimates. If any of these assumptions were to change significantly in the future, equity-based compensation related to future awards may differ significantly, as compared with awards previously granted.
We have largely moved towards granting RSAs and RSUs to certain employees. We use the following inputs under Black-Scholes as follows:
Fair Value of Class A Common Stock-Refer to the subsequent discussion of "Preferred Stock and Common Stock Valuation" for a detailed discussion of the valuation techniques and assumptions applied to value the Class A common stock prior to the Merger. Subsequent to the Merger, our Class A common stock has been valued based upon our trading price. Expected Dividend Yield-The Black-Scholes valuation model requires an expected dividend yield as an input. The dividend yield is based on historical experience and expected future changes. We currently have no plans to pay dividends on our Class A common stock and, accordingly, have assumed no dividend yield upon valuation of our stock options.
Expected Volatility-As there was no observable volatility with respect to our Legacy BlackSky Class A common stock, the expected volatility of our Legacy BlackSky and BlackSky Class A common stock was estimated based upon the historical share price volatility of guideline comparable companies.
Risk-free Interest Rate-The yield on actively traded, non-inflation indexedU.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants. Expected Term-For options granted in 2021, since there is not a history of option exercises as a public company, we considered the option vesting terms and contractual period, as well as the demographics of the holders, in estimating the expected term. For options granted prior to 2021, the expected term was the estimated duration to a liquidation event based on a weighted average consideration of the most likely exit prospects for that stage of development. LegacyBlackSky was privately funded and, accordingly, the lack of marketability was factored into the expected term of options granted. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises.
Private Placement Warrants and Sponsor
We classify the Private Placement Warrants and SponsorEarn-Out Shares as long-term liabilities in our unaudited condensed consolidated balance sheets as ofJune 30, 2022 . Each liability was initially recorded at fair value on the date of the Merger. The Private Placement Warrants are recorded at fair value using a Black-Scholes option pricing model and the SponsorEarn-Out Shares are recorded at fair value using a Monte Carlo simulation model. These liabilities are re-measured to fair value at each subsequent reporting date and recorded to (loss) gain on derivatives on our unaudited condensed consolidated statements of operations and comprehensive loss. We will continue to adjust the liability for changes in fair value until the financial instruments are exercised, redeemed, cancelled or released. The fair value models require inputs including, but not limited to, the fair value of our Class A common stock, the risk-free interest rate, expected term, expected dividend yield and expected volatility. The fair value of our Class A common stock is the closing stock price on the NYSE as of the measurement date. The risk-free interest rate assumption is determined by usingU.S. Treasury rates for the same period as the expected terms of the financial instruments. The dividend yield assumption is based on the dividends expected to be paid over the expected life of the financial instruments. We have historically been a private company and lacked sufficient company-specific historical and implied volatility information. Therefore, the expected stock volatility is based on the historical volatility of a publicly traded set of peer companies. Changes in these assumptions can materially affect the estimate of the fair value of these instruments and ultimately the change in fair value. 48
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