BlackSky Technology (BKSY) - 2022 Q1 - Quarterly Report

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This section highlights that the Quarterly Report contains forward-looking statements subject to substantial risks and uncertainties, with actual results potentially differing materially - The report contains forward-looking statements that involve substantial risks and uncertainties, and actual results could differ materially[8][9] - Key factors influencing future outcomes include the ability to retain key employees, grow distribution channels, integrate data, add new satellites, invest in R&D, penetrate international markets, and compete effectively[8] PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements, management's discussion, market risk, and controls ITEM 1. FINANCIAL STATEMENTS This section provides BlackSky Technology Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Balance Sheets (Unaudited) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :---------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Total Assets | $287,308 | $305,763 | $(18,455) | | Total Liabilities | $120,412 | $126,143 | $(5,731) | | Total Stockholders' Equity | $166,896 | $179,620 | $(12,724) | | Cash and Cash Equivalents | $135,886 | $165,586 | $(29,700) | | Accounts Receivable, net | $5,491 | $2,629 | $2,862 | | Satellite procurement work in process | $51,846 | $40,102 | $11,744 | Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Total Revenue | $13,896 | $7,294 | $6,602 | 90.5% | | Operating Loss | $(27,132) | $(9,485) | $(17,647) | (186.1)% | | Gain (loss) on derivatives | $8,140 | $(14,008) | $22,148 | 158.1% | | Net Loss | $(19,988) | $(168,556) | $148,568 | 88.1% | | Basic and Diluted Loss per Share of Common Stock | $(0.17) | $(0.70) | $0.53 | 75.7% | Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) | Metric | As of January 1, 2022 (in thousands) | As of March 31, 2022 (in thousands) | Change (in thousands) | | :----------------------------------- | :----------------------------------- | :---------------------------------- | :-------------------- | | Total Stockholders' Equity | $179,620 | $166,896 | $(12,724) | | Net Loss | — | $(19,988) | $(19,988) | | Stock-based compensation | — | $10,862 | $10,862 | Condensed Consolidated Statements of Cash Flows (Unaudited) Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net cash used in operating activities | $(12,676) | $(10,583) | $(2,093) | | Net cash used in investing activities | $(13,425) | $(7,519) | $(5,906) | | Net cash (used in) provided by financing activities | $(3,599) | $57,791 | $(61,390) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(29,700) | $39,689 | $(69,389) | | Cash, cash equivalents, and restricted cash – end of period | $138,404 | $50,262 | $88,142 | Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Organization and Business This note describes BlackSky Technology Inc.'s formation through a merger, its operations as a geospatial intelligence provider, and its equity investments - BlackSky Technology Inc. completed a merger with Legacy BlackSky on September 9, 2021, and is now a leading provider of real-time geospatial intelligence[31] - The company operates a constellation of 12 satellites (as of March 31, 2022) and the Spectra AI software platform, which uses AI/ML to process data into actionable insights[31] - BlackSky holds equity method investments in LeoStella LLC (50% for satellite manufacturing) and X-Bow Launch Systems Inc. (15.1% for space technology)[31] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note outlines the financial statements' preparation under GAAP, consolidation policies, significant accounting estimates, and fair value measurement hierarchy - Financial statements are prepared under GAAP, consolidating wholly-owned subsidiaries and including equity method investments[32] - Significant estimates are made for revenue recognition, accounts receivable, asset valuation, equity warrants, fair value, goodwill, income taxes, and stock-based compensation[35] - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs reflecting company assumptions)[37][38][39] Note 3. Accounting Standards Updates ("ASU") This note details the adoption and evaluation of various Accounting Standards Updates, including ASU 2021-04, ASU 2016-02, ASU 2016-13, and ASU 2019-12 - Adopted ASU 2021-04 (Equity-Classified Written Call Options) on January 1, 2022, with no expected impact unless future modifications occur[53] - Evaluating ASU 2016-02 (Leases), effective for BlackSky after December 15, 2021, which is expected to have a material impact on the balance sheet by requiring operating lease recognition[54] - Will adopt ASU 2016-13 (Credit Losses) on January 1, 2023, and ASU 2019-12 (Income Taxes) for fiscal years beginning after December 15, 2021, with potential impacts still under evaluation[56] Note 4. Revenue This note provides a breakdown of revenue by type and customer segment, along with remaining performance obligations Revenue by Type | Revenue Type | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Imagery | $3,610 | $1,464 | $2,146 | 146.6% | | Data, software and analytics | $6,162 | $4,534 | $1,628 | 35.9% | | Engineering & integration | $4,124 | $1,296 | $2,828 | 218.2% | | Total Revenue | $13,896 | $7,294 | $6,602 | 90.5% | Revenue by Customer Segment | Customer Segment | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | U.S. federal government and agencies | $11,063 | $6,119 | | International government | $2,745 | $1,175 | | Commercial and other | $88 | $0 | - As of March 31, 2022, remaining performance obligations totaled $24.7 million, with $20.1 million expected to be recognized in the nine months ending December 31, 2022[63] Note 5. Contract Assets and Liabilities This note details the company's contract assets and liabilities, including changes and adjustments related to revenue recognition Contract Assets and Liabilities | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Total contract assets - current | $2,865 | $1,678 | $1,187 | | Total contract liabilities - current | $9,528 | $11,266 | $(1,738) | | Total contract liabilities - long-term | $3,000 | $568 | $2,432 | - A $1.2 million unfavorable cumulative adjustment to revenue was recognized in Q1 2022 due to estimated cost increases on two engineering and systems integration contracts[44] Note 6. Equity Method Investments This note outlines BlackSky's equity method investments in LeoStella LLC and X-Bow Launch Systems Inc., including financial details and transactions - BlackSky holds a 50% equity method investment in LeoStella LLC and a 15.1% interest in X-Bow Launch Systems Inc[31][69] - Payments to LeoStella for satellite manufacturing and software development totaled $9.7 million for the three months ended March 31, 2022[69] Equity Method Investees Financial Summary | Metric (Equity Method Investees) | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------- | :---------------------------- | :------------------------------- | | Total Assets | $60,982 | $66,450 | | Total Liabilities | $34,644 | $40,318 | | Revenue (3 months ended Mar 31) | $16,733 | $6,384 | | Net Income (3 months ended Mar 31) | $101 | $668 | Note 7. Property and Equipment - net This note provides a summary of property and equipment, net, including satellites and accumulated depreciation, and details depreciation expense Property and Equipment – net | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Total Property and Equipment – net | $67,102 | $70,551 | $(3,449) | | Satellites | $93,709 | $93,709 | $0 | | Accumulated Depreciation | $(34,674) | $(27,460) | $(7,214) | - Depreciation expense for the three months ended March 31, 2022, was $7.3 million, up from $2.4 million in 2021, mainly due to six satellites becoming operational in H2 2021[72] Note 8. Debt and Other Financing This note details the company's debt obligations, including outstanding balances, unamortized costs, and historical financing events like Bridge Notes Long-term Debt, net | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Outstanding balance (Long-term debt, net) | $71,909 | $71,408 | | Unamortized debt issuance cost | $(2,217) | $(2,718) | - The company's primary debt is from related parties (Intelsat and Seahawk) with interest rates ranging from 4% to 10% and a maturity date of October 31, 2024[79][80] - Legacy BlackSky issued $58.6 million in Bridge Notes in 2021, which converted to Class A common stock upon the Merger, leading to a $96.5 million loss on issuance and $47.6 million in expensed debt issuance costs in Q1 2021[76][85] Note 9. Warrants This note provides details on the company's public, private placement, and equity-classified warrants, including their classification, fair value, and valuation methodology Warrants Summary | Warrant Type | Number of Shares (in thousands) | Exercise Price | Expiration Date | Classification | Fair Value at March 31, 2022 (in thousands) | | :--------------------------- | :------------------------------ | :------------- | :-------------- | :------------- | :------------------------------------------ | | Public Warrants | 15,813 | $11.50 | 9/9/2026 | Liability | $4,428 | | Private Placement Warrants | 4,163 | $11.50 | 9/9/2026 | Liability | $1,332 | | Private Placement Warrants | 4,163 | $20.00 | 9/9/2026 | Liability | $749 | - The company also has 1.8 million equity-classified Class A common stock warrants with an exercise price of $0.11 and expiration dates from June 27, 2028, to October 31, 2029[83] - Derivative liabilities (warrants and sponsor shares) are measured at fair value upon issuance and re-valued at each reporting period, with changes recognized as unrealized gain or loss[83] Note 10. Other (Expense) Income This note details the components of other income (expense), net, highlighting the significant non-recurring losses from Bridge Note issuances in the prior year Other Income (Expense), Net | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Other income (expense), net | $2 | $(144,091) | $144,093 | | Loss on issuance of Bridge Notes tranche one | — | $(84,291) | $84,291 | | Loss on issuance of Bridge Notes tranche two | — | $(12,185) | $12,185 | | Debt issuance costs expensed for debt carried at fair value | — | $(47,623) | $47,623 | - The significant expense in Q1 2021 was due to non-recurring losses on Bridge Note issuances and related debt issuance costs, which were extinguished upon the Merger[85][148] Note 11. Stockholders' Equity This note provides information on the company's Class A common stock, reserved shares for various equity instruments, and the classification and fair value of Sponsor Earn-Out Shares - As of March 31, 2022, BlackSky had 120.5 million shares of Class A common stock issued and 117.9 million outstanding, with 300.0 million authorized[86] Reserved Shares | Reserved Shares (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------- | :------------- | :---------------- | | Common stock warrants (equity) | 1,770 | 1,770 | | Stock options outstanding | 4,607 | 5,022 | | Restricted stock units outstanding | 7,106 | 10,959 | | Public Warrants (liability) | 15,813 | 15,813 | | Private Placement Warrants (liability) | 8,325 | 8,325 | | Shares available for future grant | 141,873 | 140,951 | | Total class A common stock reserved | 179,494 | 182,840 | - Approximately 2.4 million Sponsor Earn-Out Shares are classified as derivative liabilities, with a fair value of $2.3 million as of March 31, 2022, subject to stock price-based release and forfeiture provisions[89] Note 12. Net Loss Per Share of Class A Common Stock This note presents the calculation of basic and diluted net loss per share of Class A common stock, including the impact of potentially dilutive securities Net Loss Per Share of Class A Common Stock | Metric | Three Months Ended March 31, 2022 (in thousands, except per share) | Three Months Ended March 31, 2021 (in thousands, except per share) | Change (per share) | | :---------------------------------------------- | :----------------------------------------------------------------- | :----------------------------------------------------------------- | :----------------- | | Net loss available to common stockholders | $(19,988) | $(168,556) | $148,568 | | Basic and diluted net loss per share | $(0.17) | $(0.70) | $0.53 | | Shares used in the computation of basic and diluted net loss per share | 115,479 | 242,289 | (126,810) | - Potentially dilutive securities (warrants, RSUs, stock options) were excluded from diluted EPS calculations because their effect would have been anti-dilutive[91] Note 13. Stock-Based Compensation This note details the company's stock-based compensation expense by category and provides information on unrecognized compensation costs for stock options and RSUs Stock-Based Compensation Expense | Expense Category | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :--------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Imagery & software analytical service costs | $801 | $0 | $801 | | Engineering & systems integration costs | $120 | $0 | $120 | | Selling, general and administrative | $9,319 | $508 | $8,811 | | Total stock-based compensation expense | $10,240 | $508 | $9,732 | - The significant increase in stock-based compensation expense in Q1 2022 was primarily due to the vesting of RSUs triggered by the successful execution of the Merger[95][140] - As of March 31, 2022, unrecognized compensation costs totaled $3.8 million for stock options (over 3.5 years) and $24.7 million for RSUs (over 2.3 years)[99][103] Note 14. Related Party Transactions This note outlines transactions and balances with related parties, including debt issuers and joint ventures Related Party Transactions and Balances | Related Party | Nature of Relationship | Amount Due to Related Party as of March 31, 2022 (in thousands) | Amount Due to Related Party as of December 31, 2021 (in thousands) | Payments in the three months ended March 31, 2022 (in thousands) | Payments in the three months ended March 31, 2021 (in thousands) | | :------------ | :--------------------- | :-------------------------------------------------------------- | :--------------------------------------------------------------- | :--------------------------------------------------------------- | :--------------------------------------------------------------- | | Seahawk | Debt Issuer | $19,977 | $19,977 | — | — | | Intelsat | Debt Issuer | $54,149 | $54,149 | — | — | | LeoStella | Joint Venture | $3,951 | $8,381 | $9,697 | $7,362 | - Interest due to related parties amounted to $1.2 million as of March 31, 2022[106] Note 15. Fair Value of Financial Instruments This note provides a fair value hierarchy for financial liabilities, specifically public warrants, private placement warrants, and sponsor shares, and details changes in Level 3 liabilities Fair Value of Financial Liabilities | Liabilities (in thousands) | March 31, 2022 (Level 1) | March 31, 2022 (Level 3) | December 31, 2021 (Level 1) | December 31, 2021 (Level 3) | | :------------------------- | :----------------------- | :----------------------- | :-------------------------- | :-------------------------- | | Public Warrants | $4,428 | — | $8,697 | — | | Private Placement Warrants | — | $2,081 | — | $3,496 | | Sponsor Shares | — | $2,277 | — | $4,732 | Changes in Level 3 Liabilities | Level 3 Liabilities (in thousands) | Balance, January 1, 2022 | Gain from changes in fair value | Balance, March 31, 2022 | | :--------------------------------- | :----------------------- | :------------------------------ | :---------------------- | | Sponsor Shares | $4,732 | $(2,455) | $2,277 | | Private Placement Warrants | $3,496 | $(1,415) | $2,081 | Note 16. Commitments and Contingencies This note addresses legal proceedings, tax obligations, and contractual commitments, including multi-launch services and satellite purchase agreements - No material legal proceedings are pending or threatened as of March 31, 2022[110] - A $0.74 million liability for estimated indirect tax obligations has been recognized as of March 31, 2022[111] - Commitments include $4.3 million for multi-launch services (2 launches, up to 4 satellites) and a $4.2 million satellite purchase contract with LeoStella, which was reduced by $3.6 million post-quarter[112][113] Note 17. Concentrations, Risks, and Uncertainties This note discusses concentrations of credit risk, significant customer revenue, and the company's policy on accounts receivable collectability - All cash and cash equivalents are maintained with one financial institution, posing a concentration of credit risk[114] - For Q1 2022, $8.0 million in revenue came from customers representing 10% or more of consolidated revenue, and $11.1 million came from the U.S. federal government and agencies[114] - The company extends credit without collateral and evaluates accounts receivable for collectability, with no significant reserve for uncollectible accounts[114] Note 18. Subsequent Events This note confirms that no events requiring adjustments or disclosures occurred between the reporting date and the report's issuance - No events requiring adjustments or disclosures occurred between March 31, 2022, and May 11, 2022[115] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on BlackSky's financial condition and operational results for the three months ended March 31, 2022, compared to 2021 General Overview This section provides a general overview of BlackSky Technology Inc., highlighting its formation through a merger and the resulting impact on financial comparability - BlackSky Technology Inc. was formed via a merger with Legacy BlackSky on September 9, 2021, impacting the comparability of financial results between periods[118] Company Overview This section describes BlackSky's core business, including its satellite constellation, Spectra AI platform, next-generation satellite plans, and operating strategy - BlackSky operates a constellation of 12 LEO satellites for high-revisit imagery of critical global locations, differentiated by AI-enabled tasking[119] - The Spectra AI software platform processes millions of observations daily using AI/ML to provide data, insights, and analytics from various sensor networks[119] - Next-generation Gen-3 satellites, expected in 2023, will improve imaging resolution and include short-wave infrared technology for enhanced capabilities[121] - The company's operating strategy is to enhance satellite capabilities, increase third-party data sources for Spectra AI, and expand analytics offerings, targeting defense, intelligence, and commercial markets[121] Components of Operating Results Revenue This section outlines BlackSky's revenue streams, including Imagery and Software Analytical Services and Engineering and Systems Integration, and anticipated growth drivers - Revenue is generated from Imagery and Software Analytical Services (on-demand satellite imaging, AI/ML-driven data, software, and analytics) and Engineering and Systems Integration (advanced systems for government customers)[122][123][124][126] - Imagery services include basic on-demand tasking and multi-year assured access programs with priority access[123] - Data, software, and analytics services leverage AI/ML for object, change, and anomaly detection, site monitoring, and enhanced analytics[124] - The company anticipates continued revenue growth in imagery and software analytical services due to increased satellite capacity and sales orders, and in engineering and systems integration from unique solutions and design reviews[126] Cost and Expenses This section details the components of BlackSky's operating costs and expenses, including service costs, SG&A, R&D, and depreciation and amortization - Imagery and software analytical service costs include internal labor, third-party data, ground station support, and cloud computing[127] - Engineering and systems integration costs cover internal labor for product design, integration, and external materials/labor for components of launch vehicle, satellite, and payload systems[128] - Selling, general, and administrative expenses encompass salaries, benefits, development costs, professional fees, and stock-based compensation for general support staff[128] - Research and development expenses are for data science modeling, algorithm development for Spectra AI, and design/development/testing of Gen-3 satellites[128][129] - Depreciation and amortization relate to operational satellites and intangible assets like customer relationships[130] Results of Operations for the Three Months Ended March 31, 2022 and 2021 Revenue This section provides a summary of key financial metrics for the three months ended March 31, 2022 and 2021, including total revenue, operating loss, and net loss Key Financial Metrics | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Total Revenue | $13,896 | $7,294 | $6,602 | 90.5% | | Operating Loss | $(27,132) | $(9,485) | $(17,647) | (186.1)% | | Gain (loss) on derivatives | $8,140 | $(14,008) | $22,148 | 158.1% | | Other income (expense), net | $2 | $(144,091) | $144,093 | 100.0% | | Net Loss | $(19,988) | $(168,556) | $148,568 | 88.1% | Imagery and Software Analytical Services Revenue This section discusses the increase in imagery and software analytical services revenue, attributing it to new and existing customer orders and satellite constellation expansion - Imagery and software analytical services revenue increased by 62.9% due to increased imagery and monitoring & analytical orders from new and existing customers[134] - A multi-million dollar contract with an international government for on-demand satellite imagery was a significant contributor to revenue growth[134] - Expansion of the satellite constellation in 2021 and enhanced capabilities supported the increased demand for imagery[134] Engineering and Systems Integration Revenue This section explains the substantial increase in engineering and systems integration revenue, driven by higher percentage completion on two contracts and achievement of critical design milestones - Engineering and systems integration revenue increased by 218.2% due to higher percentage completion on two contracts[135] - Growth was driven by achieving critical design milestones and delivering major components of contract requirements[135] Costs and Expenses This section provides a summary of the company's total costs for imagery and software analytical services and engineering and systems integration Total Costs | Cost Category | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Imagery & software analytical service costs | $5,907 | $4,379 | $1,528 | 34.9% | | Engineering & systems integration costs | $5,048 | $1,130 | $3,918 | 346.7% | | Total costs | $10,955 | $5,509 | $5,446 | 98.9% | Imagery and Software Analytical Service Costs This section details the increase in imagery and software analytical service costs, driven by enhanced content, third-party services, and subcontractor expenses, including stock-based compensation - Costs increased by 34.9% due to enhanced analytic content, higher third-party service costs (hosting), and subcontractor costs to support demand and network growth[137] - $0.8 million of stock-based compensation expense was recorded, primarily from RSU vesting after the Merger[137] Engineering and Systems Integration Costs This section explains the significant increase in engineering and systems integration costs, primarily due to non-recurring engineering design and material procurement for Gen-3 satellite contracts - Costs increased by 346.7% primarily due to non-recurring engineering design and material procurement for Gen-3 satellite customer contracts[138] - The increase was partially offset by a $1.0 million addition to the forward loss liability for two customer contracts[138] Selling, General, and Administrative This section details the increase in selling, general, and administrative expenses, primarily driven by stock-based compensation, headcount growth, and higher public company insurance costs Selling, General, and Administrative Expenses | SG&A Component | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Stock-based compensation expense | $9,319 | $508 | $8,811 | NM | | Salaries and benefit costs | $7,901 | $4,701 | $3,200 | 68.1% | | Insurance | $1,238 | $52 | $1,186 | NM | | Total Selling, general and administrative | $22,536 | $8,478 | $14,058 | 165.8% | - The increase was primarily driven by an $8.8 million rise in stock-based compensation from RSU vesting after the Merger, headcount growth, and higher public company insurance costs[140] Research and Development This section discusses the increase in research and development expenses, attributed to contracting third-party vendors for unique and strategic projects Research and Development Expenses | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :--------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Research and development | $146 | $28 | $118 | 421.4% | - The increase was driven by contracting and classifying third-party vendors for unique and strategic projects as R&D expense[141] Depreciation and Amortization This section details the changes in depreciation and amortization expenses, primarily due to six satellites becoming operational in the second half of 2021 Depreciation and Amortization Expenses | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Depreciation | $7,251 | $2,426 | $4,825 | 198.9% | | Amortization | $140 | $338 | $(198) | (58.5)% | | Depreciation and amortization | $7,391 | $2,764 | $4,627 | 167.4% | - The increase in depreciation was primarily due to six satellites placed in service in the second half of 2021[142] Non-Operating Expenses This section summarizes the company's non-operating expenses, including gain/loss on derivatives, income on equity method investment, interest expense, and other income/expense Non-Operating Expenses Summary | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | % Change | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Gain (loss) on derivatives | $8,140 | $(14,008) | $22,148 | 158.1% | | Income on equity method investment | $257 | $196 | $61 | 31.1% | | Interest expense | $(1,255) | $(1,168) | $(87) | (7.4)% | | Other income (expense), net | $2 | $(144,091) | $144,093 | 100.0% | Gain (loss) on derivatives This section explains the gain on derivatives in Q1 2022, contrasting it with the prior year's loss, primarily due to fair value fluctuations of liability-classified warrants and pre-merger sponsor shares - A gain of $8.14 million on derivatives in Q1 2022, compared to a $14.01 million loss in Q1 2021, was primarily driven by fluctuations in the fair value of liability-classified warrants and pre-merger sponsor shares, influenced by common stock price[145] Income on equity method investment This section notes the increase in income from equity method investments, consistent with LeoStella's operating performance - Income on equity method investment increased by 31.1% to $0.26 million, consistent with LeoStella's operating performance[146] Interest expense This section states that interest expense remained consistent year-over-year in Q1 2022 - Interest expense was consistent year-over-year, at approximately $1.26 million in Q1 2022[147] Other income (expense), net This section highlights the significant improvement in other income (expense), net, primarily due to the absence of non-recurring losses from Bridge Note issuances in the prior year - Other income (expense), net, improved significantly from a $144.09 million expense in Q1 2021 to $2 thousand in Q1 2022[148] - The Q1 2021 expense was primarily due to a $96.5 million loss on Bridge Note issuances and $47.6 million in expensed debt issuance costs, which were non-recurring and extinguished upon the Merger[148] Non-GAAP Financial Measures Adjusted EBITDA This section defines Adjusted EBITDA as a non-GAAP measure used by management to evaluate core operating performance by excluding non-cash and non-recurring expenses Adjusted EBITDA Reconciliation | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------------------------------------------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net loss | $(19,988) | $(168,556) | $148,568 | | Loss on issuance of Bridge Notes, including debt issuance costs expensed for debt carried at fair value | — | $144,099 | $(144,099) | | Stock-based compensation expense | $10,240 | $508 | $9,732 | | (Gain) loss on derivatives | $(8,140) | $14,008 | $(22,148) | | Depreciation and amortization | $7,391 | $2,764 | $4,627 | | Interest expense | $1,255 | $1,168 | $87 | | Income on equity method investment | $(257) | $(196) | $(61) | | Adjusted EBITDA | $(9,499) | $(6,205) | $(3,294) | - Adjusted EBITDA is used by management to evaluate core operating performance by excluding non-cash and non-recurring expenses[150][152] Free Cash Flow This section defines Free Cash Flow as a non-GAAP measure used to assess cash generation, ability to satisfy obligations, and fund future business opportunities Free Cash Flow Reconciliation | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :------------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net cash used in operating activities | $(12,676) | $(10,583) | $(2,093) | | Purchase of property and equipment | $(1,926) | $(17) | $(1,909) | | Satellite procurement work in process | $(11,499) | $(7,502) | $(3,997) | | Free cash flow | $(26,101) | $(18,102) | $(7,999) | - Free cash flow is used to assess cash generation, ability to satisfy obligations, and fund future business opportunities[154] Liquidity and Capital Resources Funding Requirements This section outlines the company's anticipated funding requirements for increased expenses, capital expenditures, and notes a recent contract modification - Expenses are expected to increase due to investments in sales, marketing, product development, and public company operations[158] - Capital expenditures will continue for satellite procurement, launches, and Gen-3 satellite development[158] - A post-quarter contract modification reduced remaining commitments by $3.6 million[158] Short-term liquidity requirements This section assesses the company's short-term liquidity, indicating sufficient cash and working capital to meet immediate needs Short-term Liquidity (as of March 31, 2022) | Metric (as of March 31, 2022) | Amount (in millions) | | :---------------------------- | :------------------- | | Current Assets | $151.8 | | Current Liabilities | $31.6 | - The company has sufficient cash and working capital to fund short-term liquidity requirements[160] Long-Term Liquidity Requirements This section discusses the company's long-term liquidity needs, including funding operations, satellite development, and platform investments, with anticipated coverage from merger cash - Long-term liquidity needs include funding operations, satellite development, launch capital expenditures, and investments in the Spectra AI platform and infrastructure[161] - Cash from the Merger is expected to cover forecasted long-term capital and operating needs[161] - Future funding may involve debt or equity, potentially with restrictive terms or market availability risks[161] Cash Flow Analysis Operating activities This section analyzes the increase in net cash used in operating activities, primarily due to a higher operating loss adjusted for non-cash expenses and increased salaries - Net cash used in operating activities increased to $12.68 million in Q1 2022, primarily due to a higher operating loss adjusted for non-cash expenses, driven by increased salaries and benefits from headcount growth[163] Investing activities This section details the increase in net cash used in investing activities, mainly attributed to higher cash payments for satellite procurement and launch-related costs - Net cash used in investing activities increased by $5.9 million to $13.43 million, mainly due to higher cash paid for satellite procurement and launch-related costs[165] Financing activities This section explains the shift in financing activities from providing cash in Q1 2021 to using cash in Q1 2022, primarily due to the absence of prior period loan proceeds - Financing activities shifted from providing $57.79 million in Q1 2021 to using $3.60 million in Q1 2022, primarily due to the absence of $58.1 million in loan proceeds from Bridge Notes received in the prior period[166] Critical Accounting Policies and Estimates Revenue Recognition This section highlights the significant judgment required for revenue recognition, particularly in identifying performance obligations, determining transaction price, and allocating it for complex contracts - Revenue recognition requires significant judgment in identifying performance obligations, determining transaction price, and allocating it, especially for complex contracts[168][170][171] - Imagery revenue is recognized at a point-in-time or ratably, while software analytical services are recognized over time or at a point-in-time[172] - Engineering & systems integration revenue is recognized over time using the cost-to-cost method, with changes in estimates recognized on a cumulative catch-up basis[172] Equity Valuations This section discusses the historical challenges in equity valuations for Legacy BlackSky due to the lack of a public market and the post-Merger valuation approach - Prior to the Merger, Legacy BlackSky's equity valuations for compensation, debt discounts, and conversion features required significant estimates due to the lack of a public market[173] - Valuations historically used market and income approaches; post-Merger, Class A common stock is valued at its NYSE trading price[176][177] Equity-Based Compensation This section outlines the accounting for equity-based compensation, including valuation methods for RSAs, RSUs, and stock options, and their amortization - Compensation costs for RSAs, RSUs, and stock options are based on grant date fair values, amortized straight-line for time-based vesting, and using accelerated attribution for performance-based awards once probable[174] - Post-Merger, RSAs and RSUs are valued at Class A common stock trading price, and stock options use the Black-Scholes model[176][177] Stock Option and Class A Common Stock Warrant Valuations This section details the valuation methodology for stock options and Class A common stock warrants, emphasizing the subjective assumptions used in the Black-Scholes model - The Black-Scholes model is used for valuing stock options and Class A common stock warrants, relying on subjective assumptions like fair value of common stock, expected term, risk-free rate, volatility, and dividend yield[177] - Post-Merger, Class A common stock fair value is based on NYSE trading price; expected volatility is based on comparable public companies[177] Private Placement Warrants and Sponsor Earn-Out Shares This section describes the classification and re-measurement of Private Placement Warrants and Sponsor Earn-Out Shares as long-term derivative liabilities, and the valuation models used - Private Placement Warrants and Sponsor Earn-Out Shares are classified as long-term derivative liabilities and re-measured at fair value each period, impacting gain/loss on derivatives[178] - Valuation models (Black-Scholes for warrants, Monte Carlo for Sponsor Shares) use inputs like Class A common stock price, risk-free rate, expected term, dividend yield, and peer company volatility[178][180] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that market risk disclosures are not applicable for the company - Quantitative and qualitative disclosures about market risk are not applicable to the company[181] ITEM 4. CONTROLS AND PROCEDURES As of March 31, 2022, BlackSky's management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2022, at a reasonable assurance level - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of March 31, 2022[182] - Controls are recognized to provide reasonable assurance, not absolute assurance, of achieving objectives[183] Changes in Internal Control Over Financial Reporting This section states that no material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[184] PART II. OTHER INFORMATION This part contains other information required by Form 10-Q, including legal proceedings, risk factors, equity sales, defaults, mine safety, exhibits, and signatures ITEM 1. LEGAL PROCEEDINGS BlackSky may be involved in ordinary course legal claims and proceedings, the outcomes of which are inherently uncertain, with no material pending or threatened actions as of March 31, 2022 - The company may be involved in ordinary course legal proceedings, but as of March 31, 2022, no material pending or threatened actions were identified[187] ITEM 1A. RISK FACTORS For a comprehensive discussion of risk factors relating to BlackSky's business, readers are directed to the "Risk Factors" section in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - Readers are referred to the "Risk Factors" section in the Annual Report on Form 10-K for a comprehensive discussion of business risks[188] - Identified risk factors could materially affect operations or financial condition, and new risks may emerge[188] ITEM 6. EXHIBITS This section lists the exhibits filed with the report, including the 2022 Executive Incentive Compensation Plan and certifications from the CEO and CFO - The report includes certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act) and the 2022 Executive Incentive Compensation Plan as exhibits[194] SIGNATURES The report is duly signed on behalf of BlackSky Technology Inc. by Brian E. O'Toole, CEO, and Johan Broekhuysen, CFO, as of May 11, 2022 - The report was signed by Brian E. O'Toole (CEO) and Johan Broekhuysen (CFO) on May 11, 2022[198]