Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except as otherwise noted or where the context requires otherwise, references in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to AST SpaceMobile, Inc. and references to our “management” or our “management team” refer to our officers and directors.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022, including our audited consolidated financial statements and related notes contained therein. Unless otherwise indicated, all references to “dollars” and “$” in this Annual Report are to, and all monetary amounts in this Annual Report are presented in, U.S. dollars.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” for the purposes of federal securities laws that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part I, Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2022. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are building the first space-based Cellular Broadband network designed to be accessible by standard unmodified, off-the-shelf mobile phones or 2G/3G/4G LTE/5G devices using low band and middle band spectrum controlled by Mobile Network Operators (“MNOs”). Our SpaceMobile Service is being designed to provide cost-effective, high-speed Cellular Broadband services to end-users who are out of terrestrial cellular coverage. The SpaceMobile Service currently is planned to be provided by a constellation of high-powered, large phased-array satellites in Low Earth Orbit (“LEO”). The mobile traffic will be transmitted by the SpaceMobile constellation and connected via high throughput Q/V-band links to in-country gateways which are collocated with the MNO’s core cellular network infrastructure. We anticipate that users will be able to connect to the SpaceMobile Service as if they were using a local cell tower.
We intend to work with MNOs to offer the SpaceMobile Service to the MNOs’ end-user customers. Our vision is that users will not need to subscribe to the SpaceMobile Service directly through us, nor will they need to purchase any new or additional equipment. Instead, users will be able to access the SpaceMobile Service when prompted on their mobile device that they are no longer within range of the land-based facilities of the MNO operator or will be able to purchase a plan directly with their existing mobile provider. We generally seek to use a revenue-sharing business model in our agreements with MNOs.
The SpaceMobile Service is expected to be highly attractive to MNOs as it will enable them to improve their service offering without significant incremental capital investments. The SpaceMobile Service is expected to enable MNOs to augment and extend their coverage without building towers or other land-based infrastructure, including where it is not cost-justified or is difficult due to geographical challenges, such as mountainous or rugged terrain. As a result of the incremental coverage created by the planned SpaceMobile Service, we believe that our MNO partners will have the opportunity to increase subscribers’ average revenue per unit (“ARPU”).
On April 1, 2019, we launched our first test satellite, BW1, which was used to validate our satellite to cellular architecture and was capable of managing communications delays from LEO and the effects of doppler in a satellite to ground cellular environment using the 4G-LTE protocol.
We launched our BlueWalker 3 (“BW3”) test satellite on September 10, 2022. On November 14, 2022, we announced the completion of the deployment of the communication phased array antenna of the BW3 test satellite in orbit. On April 25, 2023, we
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announced that we had successfully completed two-way voice calls directly to standard unmodified smartphones using the BW3 test satellite. In addition to test calls, initial compatibility tests were performed on a variety of smartphones and devices, exchanging SIM and network information directly to the BW3 test satellite, a necessary capability to provide broadband connectivity from space. Additional testing and measurements on the uplink and downlink confirm the ability to support cellular broadband speeds and 4G LTE / 5G waveforms. These initial test calls have validated our patented systems and architecture to establish cellular connections with unmodified cellular devices. Accordingly, we have determined that the BW3 test satellite was ready for its intended use as of April 25, 2023. We intend to continue testing the BW3 test satellite, including further testing with cellular service providers and devices. As of March 31, 2023, we incurred approximately $92.5 million of capitalized costs (including launch cost and non-recurring engineering costs) related to the assembly, testing and deployment of the BW3 test satellite, respectively.
We are also currently designing and assembling our constellation of BlueBird (“BB”) satellites. We are leveraging skills, know-how and technological expertise derived from the design and assembly of our BW3 test satellite in the development of our BB satellite platform. We are currently assembling the first generation of commercial BB satellites (“Block 1 BB satellites”). We expect the Block 1 BB satellites will be of similar size and weight to the BW3 test satellite and have design improvements for enhanced power efficiency and throughput designed to increase capacity. We currently expect to launch five Block 1 BB satellites during the first quarter of 2024 and have entered into a Launch Services Agreement with SpaceX for the launch of the first five BB Block 1 satellites. The exact timing of the launch, which is expected to carry five Block 1 BB satellites, is contingent on a number of factors, including satisfactory and timely completion of assembly and testing of five Block 1 BB satellites and other factors, many of which are beyond our control. Following the launch, deployment and testing of five Block 1 BB satellites, we currently plan to initiate a limited, noncontinuous SpaceMobile Service in targeted geographical areas and seek to generate revenue from such service. Prior to initiating such service, we will need to obtain regulatory approvals in each jurisdiction where we would provide such service and would need to enter into definitive agreements with MNOs relating to the offering of such service in each jurisdiction.
We believe the deployment of Block 1 BB satellites and subsequent initiation of limited noncontinuous SpaceMobile Service will help to demonstrate the advantages of a satellite-based Cellular Broadband service in the marketplace. This market activity may commence while we continue the development and testing of the next generation of the BB satellites.
Our next generation of BB satellites (“Block 2 BB satellites”) are expected to derive greater performance through the introduction of our own AST5000 Application Specific Integrated Circuit (“ASIC”) chip, which will provide materially greater throughput capacity, require less power and offer a lower overall unit cost. We expect that the Block 2 BB satellites will also benefit from the advantages of a larger aperture array which provides greater spectrum reuse, enhanced signal strength and increased capacity, thereby reducing the necessary number of satellites to achieve service as compared to smaller apertures. We expect to launch Block 2 BB satellites beginning in 2024 following the launch and deployment of our Block 1 BB satellites.
We are developing a phased satellite deployment plan and corresponding commercial launch plan of the SpaceMobile Service based on targeted geographical areas to provide the SpaceMobile Service to the most commercially attractive MNO markets. This prioritization of coverage is designed to minimize the capital required to initiate and operate commercial service that generates cash flows from operating activities sooner. We expect that such a successful commercial service would enable us to attract additional capital to continue to assemble and launch additional BB satellites to expand our capacity and geographic coverage area, although there can be no assurance that such capital would be available on terms acceptable to us.
We plan to achieve substantial service in the selected, targeted geographical areas with the launch and operation of 25 BB satellites and achieve substantial service in all targeted geographical areas to meet our long term business goals with the launch and operation of approximately 95 BB satellites. We anticipate launching and deploying additional satellites beyond the initial 95 satellites in order to enhance coverage and system capacity in response to incremental market demand.
Our current plan is subject to numerous uncertainties, many of which are beyond our control, including satisfactory and timely completion of assembly and testing of the satellites, availability of launch windows by the launch providers, our ability to raise capital, proposed orbits and resulting satellite coverage, launch costs, ability to enter into agreements with MNOs, regulatory approvals, and other factors. We may adopt a strategy for commercial launch of the SpaceMobile Service, including the nature and type of services offered and the geographic areas where we may launch such services, that may differ materially from our current plan.
The SpaceMobile Service has not been launched and therefore has not yet generated any revenue. After we begin to launch and deploy our Block 1 BB satellites we currently plan to initiate a limited, noncontinuous SpaceMobile Service in targeted geographical areas and seek to generate revenue from such service. Prior to initiating such service, we will need to obtain regulatory approvals in each jurisdiction where we would provide such service and would need to enter into definitive agreements with the MNOs relating to the offering of such service in each jurisdiction.
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We are continuing to make investments to industrialize the assembly, integration, and testing processes for the future production of the BB satellites. We are hiring, and expect to continue hiring, assembly, integration, and testing employees necessary for the production of the BB satellites and engineers that will be required to test and integrate the BB satellites. We are also actively engaged with the third-party vendors to secure supply of components and materials for production of the BB satellites. Furthermore, we are continuing to expand our research and development ("R&D") efforts for the development of electronics and subsystems required for BB satellites and cellular and ground infrastructure and gateways.
We are an early stage and emerging growth company and, as such, we are subject to all of the risks associated with early stage and emerging growth companies. Please refer to Risk Factors contained in Part I, “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Impact of COVID-19 and Global Macroeconomic Conditions
We continue to closely monitor the impact of COVID-19 and macroeconomic conditions, including heightened inflation, slower growth or recession, changes to fiscal and monetary policies, higher interest rates, volatility in the capital markets, and supply chain challenges, on all aspects of our business across geographies, including how it has and may continue to impact our operations, workforce, suppliers and our ability to raise additional capital to fund operating and capital expenditures. Changes in the prices of satellite materials due to inflation, supply chain challenges, and other macroeconomic factors may affect our capital costs estimates to build and launch the satellite constellation and adversely affect our financial condition. The extent of impact of these factors on our business will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time. To date, these factors have not had a material impact to our technology development efforts or results of our operations. However, if macroeconomic conditions deteriorate or there are unforeseen developments with respect to COVID-19, our results of operations and financial condition may be adversely affected.
Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations
Our historical financial performance has been, and we expect our financial performance in the future to be driven by our ability to execute on our strategy. Our future results of operations could differ materially from the historical results of operations as we begin depreciating the BW3 test satellite, continue to make capital investments in our assembly, integrating and testing (“AIT”) facilities, procure satellite materials and increase the headcount to support assembly and testing of the five Block 1 BB satellites, complete the ASIC development, set up ground infrastructure in preparation for commercial services, and continue the research and development for design and development of Block 2 BB satellite.
Components of Results of Operations
Revenues
To date, we have not generated any revenues from our SpaceMobile Service. All revenues during the three months ended March 31, 2022 were generated from the development and manufacture of satellite technology, and ancillary sales and services globally by our former subsidiary, Nano. Nano also sold individual satellite parts, subsystems, and software to be configured to customers’ satellites, and entered into “rideshare” type agreements whereby Nano provided hosted payload services using customers’ payloads integrated with Nano-owned satellite buses for scheduled launches. Following the completion of the sale of Nano on September 6, 2022, we no longer generate revenue and do not expect to generate revenue in future periods until we launch the SpaceMobile Service.
Cost of Sales
Cost of sales during the three months ended March 31, 2022 consisted of the costs of various materials used and services performed, including employee costs and overhead costs to fulfill Nano’s sales contracts. Following the completion of the sale of Nano on September 6, 2022, we do not expect to generate revenue and incur associated cost of sales in future periods until we launch the SpaceMobile Service.
Engineering Services
Engineering costs are charged to expense as incurred. Engineering costs consist primarily of the cost of employees and consultants involved in the design, development, integration and testing of our satellites, managing our network, ground infrastructure, and satellite operations centers, travel expenses of engineering staff, and general expenses related to AIT facilities and engineering development centers.
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General and Administrative Costs
General and administrative costs include the costs of insurance, cost of non-engineering personnel and personnel related expenses, software licensing and subscriptions, office and facilities expenses, investor relations, and professional services, including public relations, accounting and legal fees.
Research and Development Costs
R&D costs consist principally of non-recurring development activities in which we typically engage third-party vendors and are largely driven by the achievement of milestones that trigger payments. R&D costs are expected to fluctuate quarter over quarter depending on achievement of milestones.
Depreciation and Amortization
Depreciation and amortization expense includes amounts related to property and equipment as well as definite lived intangible assets. We expect depreciation and amortization expense to increase significantly as we begin depreciating the BW3 test satellite as of April 25, 2023 over its expected remaining useful life of approximately 16 months.
Gain (Loss) on Remeasurement of Warrant Liabilities
Public Warrants and Private Placement Warrants issued by us are accounted for as liability-classified instruments at their initial fair value on the date of issuance. They are remeasured on each balance sheet date and changes in the estimated fair value are recognized as an unrealized gain or loss in the unaudited condensed consolidated statements of operations.
Other Income (Expense), Net
Other income (expense), net primarily consists of interest earned on cash and cash equivalents held by us in interest bearing demand deposit accounts, net of any interest expense, and other non-operating expense and income, including foreign exchange gains or losses.
Income Tax Expense
AST LLC is treated as a partnership for U.S. federal and state income tax purposes. Accordingly, all income, losses, and other tax attributes pass through to the members’ income tax returns, and no U.S. federal and state and local provision for income taxes has been recorded for AST LLC in the unaudited condensed consolidated financial statements. Certain foreign wholly-owned entities are taxed as corporations in the jurisdictions in which they operate, and accruals for such taxes are included in the unaudited condensed consolidated financial statements.
Noncontrolling Interest
Noncontrolling interest primarily represents the equity interest in AST LLC held by members other than the Company. As of March 31, 2023, noncontrolling interest in AST LLC was approximately 64.5%. For the three months ended March 31, 2022, and up to September 6, 2022, noncontrolling interest also included approximately 49% equity interests in our former subsidiary, Nano, held by equityholders other than the Company. On September 6, 2022, the noncontrolling interest in Nano was eliminated in connection with the sale of the Company’s 51% interest in Nano. We attributed a portion of net income or loss generated at AST LLC and Nano to the noncontrolling interest based on their ownership interests.
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Results of Operations
We report our results of operations under one operating segment. The following table sets forth a summary of our unaudited condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 (in thousands) and the discussion that follows compares the three months ended March 31, 2023 to the three months ended March 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
(unaudited) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
Revenues |
$ |
- |
|
|
$ |
2,394 |
|
|
$ |
(2,394 |
) |
|
|
(100 |
) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of items shown separately below) |
|
- |
|
|
|
1,986 |
|
|
|
(1,986 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
- |
|
|
|
408 |
|
|
|
(408 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Engineering services |
|
16,483 |
|
|
|
11,740 |
|
|
|
4,743 |
|
|
|
40 |
|
|
General and administrative costs |
|
9,857 |
|
|
|
11,619 |
|
|
|
(1,762 |
) |
|
|
(15 |
) |
|
Research and development costs |
|
16,381 |
|
|
|
8,281 |
|
|
|
8,100 |
|
|
|
98 |
|
|
Depreciation and amortization |
|
1,733 |
|
|
|
1,100 |
|
|
|
633 |
|
|
|
58 |
|
|
Total operating expenses |
|
44,454 |
|
|
|
32,740 |
|
|
|
11,714 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on remeasurement of warrant liabilities |
|
7,498 |
|
|
|
(5,482 |
) |
|
|
12,980 |
|
|
|
237 |
|
|
Other income (expense), net |
|
(8,144 |
) |
|
|
15 |
|
|
|
(8,159 |
) |
|
|
(54,393 |
) |
|
Total other income (expense), net |
|
(646 |
) |
|
|
(5,467 |
) |
|
|
4,821 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense |
|
(45,100 |
) |
|
|
(37,799 |
) |
|
|
(7,301 |
) |
|
|
(19 |
) |
|
Income tax expense |
|
(116 |
) |
|
|
(104 |
) |
|
|
(12 |
) |
|
|
12 |
|
|
Net loss before allocation to noncontrolling interest |
|
(45,216 |
) |
|
|
(37,903 |
) |
|
|
(7,313 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest |
|
(28,898 |
) |
|
|
(27,182 |
) |
|
|
(1,716 |
) |
|
|
(6 |
) |
|
Net loss attributable to common stockholders |
$ |
(16,318 |
) |
|
$ |
(10,721 |
) |
|
$ |
(5,597 |
) |
|
|
(52 |
) |
% |
Revenues
All revenues during the three months ended March 31, 2022 were generated from the development and manufacture of satellite technology, and ancillary sales and services globally by our former subsidiary, Nano. Following the completion of the sale of Nano on September 6, 2022, we no longer generate revenue and do not expect to generate revenue in future periods until we launch the SpaceMobile Service.
Cost of Sales
Cost of sales during the three months ended March 31, 2022 consisted of the costs of various materials used and services performed, including employee costs and overhead costs to fulfill Nano’s sales contracts. Following the completion of the sale of Nano on September 6, 2022, we do not expect to generate revenue and incur associated cost of sales in future periods until we launch the SpaceMobile Service.
Engineering Services
Total engineering services costs increased by $4.7 million, or 40%, to $16.5 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The increase was primarily attributable to a $1.8 million increase in payroll and employee related costs due to increased headcount, an increase of $1.5 million in AIT facilities and engineering development centers costs including managing mission operations and ground infrastructure, and an increase of $1.4 million in travel and other miscellaneous costs.
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General and Administrative Costs
Total general and administrative costs decreased by ($1.8) million, or (15%), to $9.9 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The decrease was primarily driven by elimination of costs related to Nano as Nano is no longer consolidated following its sale in September 2022.
Research and Development Costs
Total R&D costs increased by $8.1 million, or 98% to $16.4 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. R&D costs during the three months ended March 31, 2023 primarily relate to design and development of various subsystems of BB satellites and ASIC development. R&D costs during the three months ended March 31, 2022 primarily relate to development of the BW3 test satellite and ASIC development. The increase in R&D costs was primarily due to achievement of certain milestones associated with various radio frequency development programs, design and development of certain satellite subsystems for BB satellites, and ASIC development program.
Depreciation and Amortization
Total depreciation and amortization expense increased by $0.6 million, or 58%, to $1.7 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The increase was primarily due to the purchase of additional fixed assets and leasehold improvements during the period. We expect depreciation expense to increase due to the depreciation of BW3 commencing on April 25, 2023, which we expect will result in additional monthly depreciation expense of approximately $5.6 million over its remaining useful life of approximately 16 months.
Changes in Fair Value of Warrant Liabilities
Decrease in fair value of warrant liabilities resulted in a gain of $7.5 million for the three months ended March 31, 2023 as compared to the loss of ($5.5) million for the three months ended March 31, 2022.
Other Income (Expense), net
Total other income (expense), net was ($8.1) million for the three months ended March 31, 2023, as compared to income of $0.1 million for the three months ended March 31, 2022. Other income (expense), net for the three months ended March 31, 2023 primarily included a $10.0 million estimated liability payable to Rakuten in accordance with the Rakuten Agreement (as defined herein) and $0.2 million of foreign exchange loss offset by $2.1 million of interest income, net of interest expense, from the cash and cash equivalents held at financial institutions.
Income Tax Expense
The provision for income taxes was $0.1 million for the three months ended March 31, 2023 and 2022. The consolidated effective tax rate for the three months ended March 31, 2023 and March 31, 2022 was (0.26)% and (0.28)%, respectively. The low effective tax rate is driven by the loss attributable to the noncontrolling interest and the valuation allowance. Refer to Note 11: Income Taxes in the accompanying notes to the unaudited condensed consolidated financial statements for further information.
Net Loss attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest was $28.9 million for the three months ended March 31, 2023 as compared to $27.2 million in the three months ended March 31, 2022. This increase in net loss correlates with the increase in net loss generated at AST LLC given the noncontrolling interest represents a portion of such net loss.
Liquidity and Capital Resources
We do not expect to generate revenue in future periods until we launch the SpaceMobile Service. Accordingly, our current sources of liquidity are cash and cash equivalents on hand and access to equity programs currently in place, which consist of an Equity Line of Credit (as defined herein) and the ATM Equity Program (as defined herein). As of March 31, 2023, we had $185.7 million of cash and cash equivalents on hand, which included $0.7 million of restricted cash on hand. We believe our cash and cash equivalents on hand, together with our ability to raise capital through access to the Equity Line of Credit and the ATM Equity Program, will be sufficient to meet our current working capital needs, planned operating expenses and capital expenditures for a period of 12 months from the date of this Quarterly Report on Form 10-Q.
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The design, assembly, integration testing and launch of satellites and related ground infrastructure is capital intensive. We currently estimate the capital expenditure required for the design, assembly and launch of our first 5 Block 1 BB satellites to be between approximately $100.0 million and $110.0 million. We currently believe that the average capital expenditure required for the design, assembly and launch of a Block 2 BB satellite to be approximately $16.0 million to $18.0 million. The cost of the satellite configuration has increased from prior estimates due to the impacts of inflation, supply chain disruptions, design changes, and increase in the cost of electronic components, launch costs and other aspects of our design and assembly activities.
We believe we need to launch and operate 25 BB satellites (5 Block 1 BB satellites and 20 Block 2 BB satellites) in order to provide coverage to the most commercially attractive MNO markets. We currently estimate we will need to raise approximately $550.0 million to $650.0 million to fund operating and capital expenditures necessary to design, assemble and launch 20 Block 2 BB satellites and operate a constellation of 25 BB satellites to continue to provide SpaceMobile service.
We require capital to fund our operating and capital expenditures. We intend to seek to raise additional capital prior to the commencement of the commercial services through the issuance of equity, equity related or debt securities, secured loan facilities, including through our existing Equity Line of Credit and the ATM Equity Program and/or through obtaining credit from government and financial institutions and/or commercial partners. Our ability to access the capital markets during this period of volatility may require us to modify our current expectations. The additional capital will be necessary to fund ongoing operations, continue research, development and design efforts, improve infrastructure, and launch satellites. If we successfully raise additional capital, we may accelerate certain development programs and other investments to enable us to achieve our goal of global coverage more rapidly. There can be no assurance that additional funds will be available to us on favorable terms or at all. If we cannot raise additional funds when needed, our financial condition, results of operations, business and prospects may be materially and adversely affected.
We have contractual obligations, including non-cancellable operating leases, with terms expiring through November 2033. During the three months ended March 31, 2023 we received control of a leased property which increased the total required minimum lease payments by $9.9 million as compared to the total lease payments as of December 31, 2022 described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Also, as of March 31, 2023, we had contractual commitments with third parties in the aggregate amount of $101.0 million related to R&D programs, capital improvements, future launch payments and procurement of BB satellite components. We expect these commitments will continue to increase as we complete the supply chain and electronics development in preparation for the production and launch of the BB satellites.
Common Stock Purchase Agreement
On May 6, 2022, we entered into the Common Stock Purchase Agreement (the “Common Stock Purchase Agreement” or “Equity Line of Credit”) with B. Riley Principal Capital, LLC (“B. Riley”) to sell, at our sole discretion, to B. Riley up to $75.0 million of shares of our Class A Common Stock at 97% of the volume weighted average price ("VWAP") of the Class A Common Stock calculated in accordance with the Common Stock Purchase Agreement, over a period of 24 months subject to certain limitations and conditions contained in the Common Stock Purchase Agreement. Sales and timing of any sales of Class A Common Stock are solely at our election, and we are under no obligation to sell any securities to B. Riley under the Common Stock Purchase Agreement. We plan to raise capital, as and when needed, under the Common Stock Purchase Agreement at our sole discretion. Proceeds from the sale of our Class A Common Stock under the Common Stock Purchase Agreement were and will continue to be used for general corporate purposes.
Equity Distribution Agreement
On September 8, 2022, we entered into an Equity Distribution Agreement (the “Sales Agreement” or “ATM Equity Program”) with Evercore Group L.L.C. and B. Riley Securities, Inc. (collectively, the “agents”) to sell shares of our Class A Common Stock having an aggregate sales price of up to $150.0 million through an “at the market offering” program under which the agents will act as sales agents. The agents are entitled to total compensation at a commission rate of up to 3.0% of the gross sales price per share sold. We plan to raise capital, as and when needed, under the Sales Agreement at our sole discretion. Proceeds from the sale of our Class A Common Stock under the Sales Agreement were and will continue to be used for general corporate purposes.
Texas Financing Agreement
In December 2021, concurrent with the purchase of real property and equipment in Midland, Texas, our wholly owned subsidiary, AST & Science Texas, LLC (“AST Texas”), entered into a new Credit Agreement providing for a $5.0 million term loan secured by the property. Borrowings under the term loan bear interest at a fixed rate equal to 4.20% per annum until December 7, 2026, and from December 8, 2026 until December 8, 2028 at a fixed rate per annum equal to 4.20% plus adjustment if the index rate as defined
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in the Credit Agreement is greater than 4.20%, subject to a maximum interest rate of 4.90% per annum. Refer to Note 6: Debt in the accompanying notes to the unaudited condensed consolidated financial statements for further information.
The Credit Agreement contains certain customary events of default, and certain covenants that limit AST Texas’ ability to, among other things, create liens on collateral, consolidate, merge, sell, or otherwise dispose of all or substantially all of their assets; and enter into certain transactions with their affiliates. If AST Texas fails to perform its obligations under these and other covenants, or should any event of default occur, the term loan may be terminated and any outstanding borrowings, together with unpaid accrued interest, could be declared immediately due and payable, and the lender will be authorized to take possession of the collateral.
Rakuten
On February 4, 2020, we entered into a commercial agreement with Rakuten, for our development of exclusive network capabilities in Japan compatible with the mobile network of Rakuten and its affiliates, which agreement was amended and restated as of December 15, 2020 (the “Rakuten Agreement”).
The Rakuten Agreement includes key performance indicators (“KPIs”) associated with the number of satellites launched, timing and coverage of our SpaceMobile Service in Japan in a phased manner that we must meet. If we do not meet the applicable KPIs for the last two phases noted in the Rakuten Agreement by June 2023, or if AST LLC becomes subject to any bankruptcy proceeding or becomes insolvent, we are required to pay Rakuten an amount of $10.0 million. If we are unable to make such payment, the amount shall convert into a promissory note with 8.0% interest per annum payable in 12 quarterly installments over a three year term, which can be prepaid at our election.
We do not expect to meet the applicable KPIs by June 2023 and are required to pay $10.0 million on June 30, 2023. Accordingly, we have recognized an estimated liability of $10.0 million as of March 31, 2023. No payments have been made to date between us and Rakuten under the Rakuten Agreement. The term of the Rakuten Agreement shall remain in effect until we fulfill our obligations under the Rakuten Agreement.
Cash Flows
Historical Cash Flows
The following table summarizes our sources and uses of cash for the three months ended March 31, 2023 and 2022 (in thousands) (unaudited):
|
|
|
|
|
|
|
|
|
Three Months ended March 31, |
|
|
(unaudited) |
|
|
2023 |
|
|
2022 |
|
Cash, cash equivalents and restricted cash |
$ |
185,696 |
|
|
$ |
255,110 |
|
Cash used in operating activities |
$ |
(37,733 |
) |
|
$ |
(47,508 |
) |
Cash used in investing activities |
|
(15,388 |
) |
|
|
(21,567 |
) |
Cash provided by financing activities |
|
36 |
|
|
|
130 |
|
Operating activities
Cash used in operating activities was $37.7 million for the three months ended March 31, 2023 as compared to cash used in operating activities of $47.5 million for the three months ended March 31, 2022. The $9.8 million decrease in cash used in operating activities was attributable to $14.8 million of launch deposits paid during the three months ended March 31, 2022 offset by an increase in operating expenses to support expanded operations and an increase in research and development efforts.
Investing activities
Cash used in investing activities was $15.4 million for the three months ended March 31, 2023, as compared to cash used in investing activities of $21.6 million for the three months ended March 31, 2022. The $6.2 million decrease in cash used in investing activities was primarily attributable to a $16.8 million decrease in BW3 related costs due to its completion and launch in 2022 offset by a $10.6 million increase in property and equipment costs including procurement of BB satellite materials for assembly of five Block 1 BB satellites.
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Financing activities
Cash provided by financing activities was $36 thousand and $130 thousand during the three months ended March 31, 2023 and 2022, respectively. Cash provided by financing activities for the three months ended March 31, 2023 was related to the issuance of incentive units under our employee stock plan offset by repayment of debt.
Impact of inflation
While inflation may impact our capital and operating expenditures, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future, including by heightened levels of inflation experienced globally as a consequence of the rapidly changing market and economic conditions.
Funding Requirements
We believe our existing cash and cash equivalents and access to the Equity Line of Credit and ATM Equity Program will be sufficient to meet anticipated cash requirements for 12 months from the date hereof. However, our forecast of the period of time through which our financial resources will be adequate to support operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could expend capital resources sooner than we expect.
Future capital requirements will depend on many factors, including:
•Establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality, products and services to support our satellite development;
•Technological or manufacturing difficulties, design issues or other unforeseen matters;
•Negotiation of launch agreements (including launch costs), launch delays or failures, deployment failures or in-orbit satellite failures;
•Timing of the launch of our satellites and subsequent initiation of service in various markets, delays in which will result in increased operating expenses;
•Addressing any competing technological and market developments;
•Seeking and obtaining market access approvals; and
•Attracting, hiring, and retaining qualified personnel.
Until such time, if ever, as we can generate substantial revenues to support our cost structure, we expect to finance cash needs through a combination of equity offerings, debt financings, commercial and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of stockholders will be, or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through commercial agreements, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies and/or future revenue streams, or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Also, our ability to raise necessary financing could be impacted by recent geopolitical events, higher interest rate regime and inflationary economic conditions and their effects on the market conditions. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our commercialization efforts or grant rights to develop and market other services even if we would otherwise prefer to develop and market these services ourselves or potentially discontinue operations.
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Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Preparation of the financial statements requires our management to make judgments, estimates and assumptions that impact the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our unaudited condensed consolidated financial statements. For a discussion of our critical accounting policies, see “Critical Accounting Policies” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2023.
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