UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission File Number: 001-41336
STARRY GROUP HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
87-4759355 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
38 Chauncy Street, Suite 200 Boston, MA |
02111 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (617) 861-8300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Class A common stock, par value $0.0001 per share
Warrants to purchase 1.2415 shares of Class A common stock, each at an exercise price of $9.13 per 1.2415 shares of Class A common stock |
|
STRY
STRY WS |
|
The New York Stock Exchange
The New York Stock Exchange
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☒ |
|
Smaller reporting company |
|
☒ |
|
|
|
|
Emerging growth company |
|
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 11, 2022, the registrant had 157,535,415 shares of Class A common stock, $0.0001 par value per share, outstanding and 9,268,335 shares of Class X common stock, $0.0001 par value per share, outstanding.
Table of Contents
|
|
Page |
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|
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PART I. |
1 |
|
|
|
|
Item 1. |
1 |
|
|
1 |
|
|
2 |
|
|
Unaudited Condensed Consolidated Statement of Stockholders' Equity (Deficit) and Temporary Equity |
3 |
|
4 |
|
|
Notes to Unaudited Condensed Consolidated Financial Statements |
5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
Item 3. |
39 |
|
Item 4. |
39 |
|
|
|
|
PART II. |
41 |
|
|
|
|
Item 1. |
41 |
|
Item 1A. |
41 |
|
Item 2 |
42 |
|
Item 3 |
42 |
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Item 4 |
42 |
|
Item 5 |
42 |
|
Item 6. |
43 |
|
47 |
||
i
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding the financial position, business strategy and the plans and objectives of management for our future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “would” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, including those described under the sections in this Quarterly Report on Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. These forward-looking statements are subject to numerous risks, including, without limitation, the following:
ii
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
iii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Starry Group Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except share and per share data)
|
|
June 30, |
|
|
December 31, |
|
||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
99,682 |
|
|
$ |
29,384 |
|
Accounts receivable, net |
|
|
439 |
|
|
|
380 |
|
Deferred costs |
|
|
— |
|
|
|
7,049 |
|
Prepaid expenses and other current assets |
|
|
10,576 |
|
|
|
7,079 |
|
Total current assets |
|
|
110,697 |
|
|
|
43,892 |
|
Property and equipment, net |
|
|
149,485 |
|
|
|
129,019 |
|
Intangible assets |
|
|
48,463 |
|
|
|
48,463 |
|
Restricted cash and other assets |
|
|
2,510 |
|
|
|
1,860 |
|
Total assets |
|
$ |
311,155 |
|
|
$ |
223,234 |
|
Liabilities, redeemable shares and stockholders’ equity (deficit) |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
6,679 |
|
|
$ |
6,832 |
|
Unearned revenue |
|
|
2,577 |
|
|
|
1,630 |
|
Current portion of debt |
|
|
1,861 |
|
|
|
1,504 |
|
Accrued expenses and other current liabilities |
|
|
23,881 |
|
|
|
23,177 |
|
Total current liabilities |
|
|
34,998 |
|
|
|
33,143 |
|
Debt, net of current portion |
|
|
219,669 |
|
|
|
191,596 |
|
Earnout liabilities |
|
|
9,321 |
|
|
|
— |
|
Warrant liabilities |
|
|
8,468 |
|
|
|
14,773 |
|
Asset retirement obligations |
|
|
2,903 |
|
|
|
2,387 |
|
Other liabilities |
|
|
19,084 |
|
|
|
12,412 |
|
Total liabilities |
|
|
294,443 |
|
|
|
254,311 |
|
|
|
|
|
|
|
|||
Redeemable shares (Note 15) |
|
|
10,579 |
|
|
|
— |
|
Stockholders’ equity (deficit): |
|
|
|
|
|
|
||
Convertible preferred stock (Note 5) |
|
|
— |
|
|
|
453,184 |
|
Old Starry common stock; $0.001 par value; 0 and 150,024,203 shares authorized and |
|
|
— |
|
|
|
4 |
|
Class A common stock; $0.0001 par value; 800,000,000 shares authorized; |
|
|
16 |
|
|
|
— |
|
Class X common stock; $0.0001 par value; 50,000,000 shares authorized; |
|
|
1 |
|
|
|
— |
|
Additional paid-in capital |
|
|
597,427 |
|
|
|
17,106 |
|
Accumulated deficit |
|
|
(591,311 |
) |
|
|
(501,371 |
) |
Total stockholders’ equity (deficit) |
|
|
6,133 |
|
|
|
(31,077 |
) |
Total liabilities, redeemable shares and stockholders’ equity (deficit) |
|
$ |
311,155 |
|
|
$ |
223,234 |
|
The accompanying notes are an integral part of these consolidated financial statements
1
Starry Group Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
(Dollar amounts in thousands, except share and per share data)
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenues |
|
$ |
7,754 |
|
|
$ |
5,091 |
|
|
$ |
15,124 |
|
|
$ |
9,614 |
|
Cost of revenues |
|
|
(20,725 |
) |
|
|
(13,318 |
) |
|
|
(38,916 |
) |
|
|
(25,822 |
) |
Gross loss |
|
|
(12,971 |
) |
|
|
(8,227 |
) |
|
|
(23,792 |
) |
|
|
(16,208 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
(25,128 |
) |
|
|
(16,028 |
) |
|
|
(50,218 |
) |
|
|
(30,238 |
) |
Research and development |
|
|
(7,810 |
) |
|
|
(6,476 |
) |
|
|
(16,037 |
) |
|
|
(12,418 |
) |
Total operating expenses |
|
|
(32,938 |
) |
|
|
(22,504 |
) |
|
|
(66,255 |
) |
|
|
(42,656 |
) |
Loss from operations |
|
|
(45,909 |
) |
|
|
(30,731 |
) |
|
|
(90,047 |
) |
|
|
(58,864 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
(8,038 |
) |
|
|
(4,926 |
) |
|
|
(15,568 |
) |
|
|
(12,581 |
) |
Other income (expense), net |
|
|
17,640 |
|
|
|
(2,897 |
) |
|
|
15,675 |
|
|
|
(8,155 |
) |
Total other income (expense) |
|
|
9,602 |
|
|
|
(7,823 |
) |
|
|
107 |
|
|
|
(20,736 |
) |
Net loss |
|
$ |
(36,307 |
) |
|
$ |
(38,554 |
) |
|
$ |
(89,940 |
) |
|
$ |
(79,600 |
) |
Net loss per share of common stock, basic and diluted (Note 13) |
|
$ |
(0.22 |
) |
|
$ |
(1.06 |
) |
|
$ |
(0.88 |
) |
|
$ |
(2.19 |
) |
Weighted-average shares outstanding, basic and diluted |
|
|
162,423,594 |
|
|
|
36,410,177 |
|
|
|
102,357,494 |
|
|
|
36,325,426 |
|
The accompanying notes are an integral part of these consolidated financial statements
2
Starry Group Holdings, Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) and Temporary Equity
(Dollar amounts in thousands, except share data)
|
Three Months Ended June 30, 2022 and 2021 |
|
||||||||||||||||||||||||||||
|
Convertible Preferred Stock |
|
Class A Common Stock |
|
Class X Common Stock |
|
Additional |
|
Accumulated |
|
Stockholders’ |
|
Temporary Equity |
|
||||||||||||||||
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Paid-In |
|
Deficit |
|
Equity (Deficit) |
|
Redeemable Shares |
|
||||||||||
Balance at March 31, 2022 |
|
— |
|
$ |
— |
|
|
152,926,661 |
|
$ |
16 |
|
|
9,268,335 |
|
$ |
1 |
|
$ |
596,146 |
|
$ |
(555,004 |
) |
$ |
41,159 |
|
$ |
10,579 |
|
Issuance of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
467,215 |
|
|
— |
|
|
— |
|
|
— |
|
|
289 |
|
|
— |
|
$ |
289 |
|
|
— |
|
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
992 |
|
|
— |
|
$ |
992 |
|
|
— |
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(36,307 |
) |
$ |
(36,307 |
) |
|
— |
|
Balance at June 30, 2022 |
|
— |
|
$ |
— |
|
|
153,393,876 |
|
$ |
16 |
|
|
9,268,335 |
|
$ |
1 |
|
$ |
597,427 |
|
$ |
(591,311 |
) |
$ |
6,133 |
|
$ |
10,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Balance at March 31, 2021 |
|
91,628,997 |
|
$ |
453,184 |
|
|
36,327,947 |
|
$ |
4 |
|
|
— |
|
$ |
— |
|
$ |
21,711 |
|
$ |
(375,872 |
) |
$ |
99,027 |
|
$ |
— |
|
Issuance of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
135,173 |
|
|
— |
|
|
— |
|
|
— |
|
|
116 |
|
|
— |
|
$ |
116 |
|
|
— |
|
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
358 |
|
|
— |
|
$ |
358 |
|
|
— |
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(38,554 |
) |
$ |
(38,554 |
) |
|
— |
|
Balance at June 30, 2021 |
|
91,628,997 |
|
$ |
453,184 |
|
|
36,463,120 |
|
$ |
4 |
|
|
— |
|
$ |
— |
|
$ |
22,185 |
|
$ |
(414,426 |
) |
$ |
60,947 |
|
$ |
— |
|
|
Six Months Ended June 30, 2022 and 2021 |
|
||||||||||||||||||||||||||||
|
Convertible Preferred Stock |
|
Class A Common Stock |
|
Class X Common Stock |
|
Additional |
|
Accumulated |
|
Stockholders’ |
|
Temporary Equity |
|
||||||||||||||||
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Paid-In |
|
Deficit |
|
Equity (Deficit) |
|
Redeemable Shares |
|
||||||||||
Balance at December 31, 2021 |
|
497,770,570 |
|
$ |
453,184 |
|
|
201,972,619 |
|
$ |
14 |
|
|
— |
|
$ |
— |
|
$ |
17,096 |
|
$ |
(501,371 |
) |
$ |
(31,077 |
) |
$ |
— |
|
Retroactive application of Business Combination (see Note 1) |
|
(406,141,573 |
) |
|
— |
|
|
(164,793,746 |
) |
|
(10 |
) |
|
— |
|
|
— |
|
|
10 |
|
|
— |
|
|
— |
|
|
— |
|
Adjusted balance, beginning of period |
|
91,628,997 |
|
$ |
453,184 |
|
|
37,178,873 |
|
$ |
4 |
|
|
— |
|
$ |
— |
|
$ |
17,106 |
|
$ |
(501,371 |
) |
$ |
(31,077 |
) |
$ |
— |
|
Conversion of legacy common stock to Class X common stock in connection with the Business Combination |
|
— |
|
|
— |
|
|
(9,268,335 |
) |
|
(1 |
) |
|
9,268,335 |
|
|
1 |
|
|
— |
|
|
— |
|
$ |
— |
|
|
— |
|
Issuance of Series Z convertible |
|
4,133,333 |
|
|
31,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
$ |
31,000 |
|
|
— |
|
Conversion of convertible preferred stock into common stock in connection with the Business Combination |
|
(95,762,330 |
) |
|
(484,184 |
) |
|
95,762,330 |
|
|
10 |
|
|
— |
|
|
— |
|
|
484,174 |
|
|
— |
|
$ |
— |
|
|
— |
|
Issuance of common stock upon exercise of warrants in connection with the Business Combination |
|
— |
|
|
— |
|
|
6,758,512 |
|
|
1 |
|
|
— |
|
|
— |
|
|
12,548 |
|
|
— |
|
$ |
12,549 |
|
|
— |
|
Business Combination transaction, net of transaction costs and assumed liabilities |
|
— |
|
|
— |
|
|
22,132,385 |
|
|
2 |
|
|
— |
|
|
— |
|
|
110,930 |
|
|
— |
|
$ |
110,932 |
|
|
— |
|
Sponsor Earnout Shares liability (see Note 9) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(26,095 |
) |
|
— |
|
$ |
(26,095 |
) |
|
— |
|
Reclassification of redeemable shares from permanent equity to temporary equity (see Note 15) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,579 |
) |
|
— |
|
$ |
(10,579 |
) |
|
10,579 |
|
Recognition of distribution to non-redeeming shareholders (see Note 5) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,888 |
|
|
— |
|
$ |
3,888 |
|
|
— |
|
Issuance of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
830,111 |
|
|
— |
|
|
— |
|
|
— |
|
|
756 |
|
|
— |
|
$ |
756 |
|
|
— |
|
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,699 |
|
|
— |
|
$ |
4,699 |
|
|
— |
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(89,940 |
) |
$ |
(89,940 |
) |
|
— |
|
Balance at June 30, 2022 |
|
— |
|
$ |
— |
|
|
153,393,876 |
|
$ |
16 |
|
|
9,268,335 |
|
$ |
1 |
|
$ |
597,427 |
|
$ |
(591,311 |
) |
$ |
6,133 |
|
$ |
10,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Balance at December 31, 2020 |
|
395,904,883 |
|
$ |
287,750 |
|
|
196,415,008 |
|
$ |
9 |
|
|
— |
|
$ |
— |
|
$ |
21,384 |
|
$ |
(334,826 |
) |
$ |
(25,683 |
) |
$ |
— |
|
Retroactive application of Business Combination (see Note 1) |
|
(323,027,196 |
) |
|
— |
|
|
(160,259,173 |
) |
|
(5 |
) |
|
— |
|
|
— |
|
|
5 |
|
|
— |
|
$ |
— |
|
|
— |
|
Adjusted balance, beginning of period |
|
72,877,686 |
|
$ |
287,750 |
|
|
36,155,835 |
|
$ |
4 |
|
|
— |
|
$ |
— |
|
$ |
21,389 |
|
$ |
(334,826 |
) |
$ |
(25,683 |
) |
$ |
— |
|
Issuance of common stock upon exercise of stock options |
|
— |
|
|
— |
|
|
307,285 |
|
|
— |
|
|
— |
|
|
— |
|
|
218 |
|
|
— |
|
$ |
218 |
|
|
— |
|
Issuance of Series E convertible preferred stock, net of issuance costs of $150 |
|
13,148,484 |
|
|
119,850 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
$ |
119,850 |
|
|
— |
|
Conversion of convertible notes payable to Series E convertible preferred stock |
|
5,602,827 |
|
|
45,584 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
$ |
45,584 |
|
|
— |
|
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
578 |
|
|
— |
|
$ |
578 |
|
|
— |
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(79,600 |
) |
$ |
(79,600 |
) |
|
— |
|
Balance at June 30, 2021 |
|
91,628,997 |
|
$ |
453,184 |
|
|
36,463,120 |
|
$ |
4 |
|
|
— |
|
$ |
— |
|
$ |
22,185 |
|
$ |
(414,426 |
) |
$ |
60,947 |
|
$ |
— |
|
The accompanying notes are an integral part of these consolidated financial statements
3
Starry Group Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands, except share data)
|
|
Six Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
(89,940 |
) |
|
$ |
(79,600 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization expense |
|
|
19,645 |
|
|
|
12,973 |
|
Paid-in-kind interest on term loans, convertible notes payable and strategic |
|
|
12,070 |
|
|
|
8,369 |
|
Amortization of debt discount and deferred charges |
|
|
3,402 |
|
|
|
3,150 |
|
Conversion of debt discount |
|
|
— |
|
|
|
971 |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
2,361 |
|
Fair value adjustment of derivative liabilities |
|
|
(19,559 |
) |
|
|
5,796 |
|
Recognition of distribution to non-redeeming shareholders |
|
|
3,888 |
|
|
|
— |
|
Loss on disposal of property and equipment |
|
|
1,434 |
|
|
|
1,223 |
|
Share-based compensation |
|
|
4,699 |
|
|
|
578 |
|
Transaction costs allocated to warrants and earnout liability instruments |
|
|
314 |
|
|
|
— |
|
Accretion of asset retirement obligations |
|
|
144 |
|
|
|
89 |
|
Provision for doubtful accounts |
|
|
24 |
|
|
|
2 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(84 |
) |
|
|
(106 |
) |
Prepaid expenses and other current assets |
|
|
(3,494 |
) |
|
|
(2,141 |
) |
Deferred cost |
|
|
— |
|
|
|
(453 |
) |
Other assets |
|
|
(649 |
) |
|
|
(14 |
) |
Accounts payable |
|
|
(246 |
) |
|
|
(770 |
) |
Unearned revenue |
|
|
947 |
|
|
|
541 |
|
Accrued expenses and other current liabilities |
|
|
1,885 |
|
|
|
1,473 |
|
Other liabilities |
|
|
4 |
|
|
|
2,000 |
|
Net cash used in operating activities |
|
|
(65,516 |
) |
|
|
(43,558 |
) |
Investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
(37,584 |
) |
|
|
(29,985 |
) |
Net cash used in investing activities |
|
|
(37,584 |
) |
|
|
(29,985 |
) |
Financing activities: |
|
|
|
|
|
|
||
Proceeds from Business Combination, net of transaction costs |
|
|
160,539 |
|
|
|
— |
|
Repayment of note assumed in the Business Combination |
|
|
(1,200 |
) |
|
|
— |
|
Proceeds from the issuance of convertible notes payable and beneficial conversion |
|
|
— |
|
|
|
11,000 |
|
Proceeds from Strategic Partner Arrangement |
|
|
3,932 |
|
|
|
1,994 |
|
Proceeds from exercise of common stock options |
|
|
756 |
|
|
|
218 |
|
Proceeds from the issuance of Series E Preferred Stock, net of issuance costs |
|
|
— |
|
|
|
119,850 |
|
Proceeds from the issuance of term loans, net of issuance costs |
|
|
10,000 |
|
|
|
— |
|
Payments of third-party issuance costs in connection with Term Loans |
|
|
(47 |
) |
|
|
— |
|
Repayments of capital lease obligations |
|
|
(582 |
) |
|
|
(373 |
) |
Net cash provided by financing activities |
|
|
173,398 |
|
|
|
132,689 |
|
Net increase (decrease) in cash and cash equivalents and restricted cash: |
|
|
70,298 |
|
|
|
59,146 |
|
Cash and cash equivalents and restricted cash, beginning of period |
|
|
30,762 |
|
|
|
26,831 |
|
Cash and cash equivalents and restricted cash, end of period |
|
$ |
101,060 |
|
|
$ |
85,977 |
|
The accompanying notes are an integral part of these consolidated financial statements
4
Starry Group Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
Note 1. Description of business
Starry Group Holdings, Inc. (“Starry Group” and, together with its subsidiaries, "Starry" or “the Company”) was incorporated in Delaware on September 17, 2021 as a wholly owned subsidiary of Starry, Inc. ("Old Starry"). Starry Group was formed for the purpose of effectuating the transactions contemplated by the Agreement and Plan of Merger, dated as of October 6, 2021 (as amended, the "Merger Agreement"), by and among FirstMark Horizon Acquisition Corp. ("FirstMark"), Sirius Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of FirstMark ("Merger Sub"), Old Starry and Starry Group.
The Company is in the telecommunications industry and invests in the future of fixed wireless technology. The Company delivers high-quality and affordable broadband access using innovative, proprietary wideband hybrid fiber wireless technology. Active phased arrays are used to amplify wireless signals and optimize service from multiple antennas deployed throughout a region. By using a fixed wireless network, reliance on municipal infrastructure is reduced, extensive installation times are bypassed, and network deployment is increased in comparison to its fiber competitors. Services are provided to customers in the Boston, Los Angeles, New York City, Denver, Washington, D.C. and Columbus metropolitan areas.
Business Combination
Merger Agreement Waiver
On March 28, 2022, the parties to the Merger Agreement entered into a Merger Agreement Waiver (the “Merger Agreement Waiver”), pursuant to which they agreed to waive certain closing conditions. Subsequent to waiving such closing conditions, the business combination was effected in two steps:
(a) on March 28, 2022 (the "SPAC Merger Effective Time"), FirstMark merged with and into Starry Group (the "SPAC Merger"), with Starry Group surviving the SPAC Merger as a publicly traded entity and sole owner of Merger Sub; and
(b) on March 29, 2022 (the "Acquisition Merger Effective Date"), Merger Sub merged with and into Old Starry (the "Acquisition Merger", and, together with the SPAC Merger and all other transactions contemplated by the Merger Agreement, the "Business Combination"), with Old Starry surviving the Acquisition Merger as a wholly owned subsidiary of Starry Group.
Upon consummation of the Business Combination on March 29, 2022, the Company received gross proceeds of $36,282 (consisting of $37 of cash held by FirstMark and $36,245 from the trust account). In addition, 4,921,551 shares of FirstMark common stock held by public stockholders converted to Class A common stock on a 1-for-1 basis. The Company also issued common stock warrants in exchange of FirstMark public and private warrants (see Note 9).
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination is primarily based on Old Starry stockholders comprising a relative majority of the voting power of Starry and board composition, Old Starry operations prior to the Business Combination comprising the only ongoing operations of Starry, and Old Starry senior management comprising a majority of the senior management of Starry. Under this method of accounting, FirstMark was treated as the “acquired” company for financial reporting purposes. Accordingly, the financial statements of Starry represent a continuation of the financial statements of Old Starry with the Business Combination being treated as the equivalent of Starry issuing stock for the net assets of FirstMark, accompanied by a recapitalization. The net assets of FirstMark are stated at historical costs, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are presented as those of Starry. Share information for all periods prior to the Business Combination has been retroactively adjusted using the exchange ratio for the equivalent number of shares outstanding immediately after the Business Combination to effect the reverse recapitalization.
PIPE Subscription Agreements
On March 29, 2022, the PIPE investors purchased an aggregate of 14,533,334 shares of Class A common stock at $7.50 per share, resulting in aggregate proceeds of $109,000.
Series Z Subscription Agreements
On March 29, 2022, the Series Z investors purchased an aggregate of 4,133,333 shares of Series Z Preferred Stock at $7.50 per share, resulting in aggregate proceeds of $31,000.
5
Recapitalization
On the closing date of the Acquisition Merger and immediately prior to the effective time of the Acquisition Merger, (a) each then-outstanding share of Starry Preferred Stock (excluding the Series Z Preferred Stock, par value $0.001 per share) automatically converted into a number of shares of Old Starry common stock, par value $0.001 per share, on a 1-for-1 basis; and (b) each then-outstanding and unexercised warrant of Starry (the “Starry Warrants” - see Note 9) were automatically exercised in exchange for shares of Old Starry common stock (collectively, the "Conversion").
At the effective time of the Acquisition Merger, pursuant to the Acquisition Merger: (a) each then-outstanding share of Old Starry common stock, including shares of Old Starry common stock resulting from the Conversion, were canceled and automatically converted into (i) with respect to the Company's Chief Executive Officer and founder, 9,268,335 shares of Class X common stock, par value $0.0001 per share and (ii) with respect to any other persons who held Old Starry common stock, the number of shares of Class A common stock, par value $0.0001 per share, equal to the exchange ratio of 0.1841; (b) each share of Series Z Preferred Stock automatically converted into Class A common stock on a one-to-one basis; (c) each outstanding and unexercised option to acquire shares of Old Starry common stock (an “Old Starry Option”) was converted into an option to acquire shares of Class A common stock (a “Starry Option”), on the same terms and conditions as were applicable to such Old Starry Option, based on the 0.1841 exchange ratio; and (d) each outstanding award of restricted stock units of Old Starry (an “Old Starry RSU Award”) was converted into an award covering shares of Class A common stock (a “Starry RSU Award”), on the same terms and conditions as were applicable to such Old Starry RSU Award, based on the 0.1841 exchange ratio.
The following summarizes the shares of Class A common stock and Class X common stock issued and outstanding immediately after the Business Combination as of March 29, 2022:
Starry equity holders (1) |
|
|
140,062,611 |
|
|
|
86 |
% |
FirstMark founder shares (2) (3) |
|
|
2,677,500 |
|
|
|
2 |
% |
FirstMark public stockholders (3) |
|
|
4,921,551 |
|
|
|
3 |
% |
PIPE Investors (3) |
|
|
14,533,334 |
|
|
|
9 |
% |
Starry common stock immediately after the Business Combination |
|
|
162,194,996 |
|
|
|
100 |
% |
(1) Excludes 45,918,159 shares of Class A common stock underlying outstanding stock options and restricted stock units.
(2) Excludes 4,128,113 Earnout Shares subject to forfeiture if certain performance-based vesting conditions are not met (see Note 9).
(3) The FirstMark founder shares, FirstMark public stockholders and PIPE investors are presented combined in the Condensed Consolidated Statements of Stockholders’ Equity (Deficit) on the line item "Business Combination transaction, net of transaction costs and assumed liabilities".
In connection with the Business Combination, the Company raised $176,282 of gross proceeds including $36,282 of cash received from FirstMark and $140,000 of cash received in connection with the PIPE financing and Series Z Preferred Stock financing.
The Company incurred $17,532 of transaction costs (net of $967 transaction costs incurred and paid by FirstMark prior to the close of the Business Combination for a total of $18,499 combined company transaction costs), consisting of banking, legal, and other professional fees, of which $17,218 was netted out of proceeds and recorded in additional paid-in capital ("APIC") and the remaining $314 was allocated to warrants and earnout liability instruments. The Company also incurred $0 and $2,973 in one-time incentive payment transaction costs and legal expenses that were recorded in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2022, respectively.
In aggregate the amount recorded in APIC was $110,930 as shown below:
6
Cash - FirstMark trust and cash |
|
$ |
36,282 |
|
Cash - PIPE investors (including Series Z) |
|
|
140,000 |
|
Gross proceeds |
|
|
176,282 |
|
Less: transaction costs paid during the period |
|
|
(15,743 |
) |
Net proceeds from the Business Combination |
|
|
160,539 |
|
Less: Series Z Preferred Stock (1) |
|
|
(31,000 |
) |
Less: warrant liabilities issued |
|
|
(15,697 |
) |
Less: repayment of note assumed in the Business Combination |
|
|
(1,200 |
) |
Less: net transaction costs reclassed to equity, including accrued transaction costs at June 30, 2022 |
|
|
(1,475 |
) |
Less: issuance of non-redemption shares |
|
|
(42 |
) |
Less: net liabilities assumed from the Business Combination |
|
|
(195 |
) |
Business Combination, net of transaction costs and assumed liabilities on the Statement of Changes in Stockholders' Equity (Deficit) |
|
$ |
110,930 |
|
(1) The conversion of Series Z Preferred Stock is reflected separately from the Business Combination on the Statement of Changes in Stockholders' Equity.
Going concern: Pursuant to the Financial Accounting Standards Board (the “FASB”) codification Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, the Company is required to assess its ability to continue as a going concern for a period of one year from the date of the issuance of the consolidated financial statements.
Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date.
These condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The Company is an early-stage growth company and has generated losses and negative cash flows from operating activities since inception. The Company requires additional capital investment to execute the strategic business plan to grow its subscriber base in existing markets from already-deployed network assets and launch services in new markets. Management plans to raise additional capital through a combination of potential options, including but not limited to, equity and debt financings.
Additional equity financing may not be available, and if it is available, it may not be on terms favorable to the Company and could be dilutive to current stockholders. Debt financing, if available, may involve restrictive covenants and dilutive financing instruments.
The inherent uncertainties described above may impact the Company’s ability to remain in compliance with this covenant over the next twelve months. If the Company breaches its financial covenant and fails to secure a waiver or forbearance from the third-party lender, such breach or failure could accelerate the repayment of the outstanding borrowing under the Starry Credit Agreement or the exercise of other rights or remedies the third-party lender may have under applicable law. No assurance can be provided that a waiver or forbearance will be granted or the outstanding borrowing under the Starry Credit Agreement will be successfully refinanced on terms that are acceptable to the Company.
The Company’s ability to access capital when needed is not assured and, if capital is not available to the Company when, and in the amounts needed, the Company could be required to delay, scale back or abandon some or all of its expansion efforts and other operations, which could materially harm the Company’s business, financial condition and results of operations. Because of this uncertainty, there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that these consolidated financial statements are issued, and therefore, whether we realize our assets and settle our liabilities in the normal course of business and at the amounts stated in the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, nor do they include adjustments to reflect the future effects of the recoverability or classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 2. Basis of presentation and summary of significant accounting policies
Basis of presentation and principles of consolidation: The accompanying condensed consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021 and related notes, together with management's discussion and analysis of financial condition and
7
results of operations, contained in the Company's Annual Report on Form 10-K ("Annual Report") filed with the Securities and Exchange Commission ("SEC") on March 31, 2022 (except with respect to the audited financial statements included therein and superseded by the audited financial statements included in the Company's 424(b)(3) prospectus, dated June 15, 2022, as filed with the SEC on June 16, 2022).
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information, pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, except for as described below, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2021 contained in the Company's Annual Report on Form 10-K and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position as of June 30, 2022 and December 31, 2021, results of operations and changes in stockholders' equity (deficit) for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 2022 and 2021. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.
During the six months ended June 30, 2022, the Company reevaluated its major asset classes of property and equipment resulting in the reclassification of site acquisition costs to distribution system.
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Accounting Policies: Other than the policies outlined throughout the notes to the accompanying unaudited condensed consolidated financial statements, there have been no significant changes from the significant accounting policies and estimates disclosed in the Company's Annual Report filed with the SEC on March 31, 2022 (except with respect to the audited financial statements included therein and superseded by the audited financial statements included in the Company's 424(b)(3) prospectus, dated June 15, 2022, as filed with the SEC on June 16, 2022).
Emerging Growth Company: Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time the Company is no longer considered to be an emerging growth company. At times, the Company may elect to early adopt a new or revised standard.
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses during the reporting period. The Company’s most significant estimates and judgments involve the valuation of share-based compensation, warrants, earnout shares and derivative liabilities, the assessment of asset retirement obligations, internal labor capitalization, and impairment assessments. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from management’s estimates if these results differ from historical experience or other assumptions prove not to be substantially accurate, even if such assumptions are reasonable when made.
Uncertainty of the coronavirus pandemic: On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, quarantines in certain areas and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted to, amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic.
As the coronavirus pandemic continues to evolve, the Company believes the extent of the impact to its business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the coronavirus pandemic, the pandemic’s impact on the U.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond the Company’s knowledge and control, and as a result, at
8
this time the Company is unable to predict the cumulative impact, both in terms of severity and duration, that the coronavirus pandemic will have on its business, operating results, cash flows and financial condition, but it could be material if the current circumstances continue to exist for a prolonged period of time. Although we have made our best estimates based upon current information, actual results could materially differ from the estimates and assumptions developed by management. Accordingly, it is reasonably possible that the estimates made in these consolidated financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, and if so, the Company may be subject to future impairment losses related to long-lived assets as well as changes to recorded reserves and valuations.
Warrants: The Company applies relevant accounting guidance for warrants to purchase the Company’s common stock based on the nature of the relationship with the counterparty. For warrants issued to investors or lenders in exchange for cash or other financial assets, the Company follows guidance issued within ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”), to assist in the determination of whether the warrants should be classified as liabilities or equity. Warrants that are determined to require liability classification are measured at fair value upon issuance and are subsequently re-measured to their then fair value at each subsequent reporting period, with changes in fair value recorded in current earnings. Warrants that are determined to require equity classification are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified.
For warrants issued to nonemployees for goods or services, the Company follows guidance issued within ASC 718 to determine whether the share-based payments are equity or liability classified, and are measured at fair value on the grant date. The related expense is recognized in the same period and in the same manner as if the Company had paid cash for the goods or services.
Earnout shares: For shares of the Company's common stock subject to forfeiture due to earnout arrangements, or Earnout Shares (see Note 9), the Company follows guidance issued within ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”), to assist in the determination of whether the Earnout Shares should be classified as liabilities or equity. Earnout Shares that are determined to require liability classification are measured at fair value upon issuance and are subsequently re-measured to their then fair value at each subsequent reporting period, with changes in fair value recorded in current earnings.
Fair value measurements: ASC 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company can access at the measurement date.
Level 2: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC 820:
The Company believes its valuation methods are appropriate and consistent with those used by other market participants, however the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
9
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, term loans, warrant liabilities and earnout liabilities. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of those instruments. Due to the variable rate nature of the Company’s term loans, the fair value of debt approximates the carrying value of debt.
Liabilities measured at fair value on a recurring basis consisted of the following as of June 30, 2022 and December 31, 2021:
|
|
June 30, 2022 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Balance |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrant Liabilities - Public Warrants |
|
$ |
5,658 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,658 |
|
Warrant Liabilities - Private Warrants |
|
|
— |
|
|
|
2,810 |
|
|
|
— |
|
|
|
2,810 |
|
Other Liabilities - Junior Debt Exchange |
|
|
— |
|
|
|
— |
|
|
|
5,616 |
|
|
|
5,616 |
|
Earnout Liability - Sponsor Earnout Shares |
|
|
— |
|
|
|
— |
|
|
|
9,321 |
|
|
|
9,321 |
|
Total Liabilities: |
|
$ |
5,658 |
|
|
$ |
2,810 |
|
|
$ |
14,937 |
|
|
$ |
23,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
December 31, 2021 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Balance |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrant Liabilities - Starry Warrants |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
14,773 |
|
|
$ |
14,773 |
|
Total Liabilities: |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
14,773 |
|
|
$ |
14,773 |
|
The warrant liability for the Public Warrants (see Note 9) as of June 30, 2022 is included within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Private Warrants (see Note 9) are included within Level 2 of the fair value hierarchy as the Company determined that the Private Warrants are economically equivalent to the Public Warrants and estimated the fair value of the Private Placement Warrants based on the quoted market price of the Public Warrants.
The fair value of the Junior Debt Exchange (see Note 15) was estimated using the Black-Scholes option pricing model for a European put option. The key inputs used in the determination of the fair value included current stock price, volatility and expected term. The initial recognition of the fair value of $1,986 was recorded in other liabilities on the condensed consolidated balance sheet and other income (expense), net on the condensed consolidated statements of operations as the incremental fair value received by the Optionholders (as defined in Note 15) was deemed to be a non-pro rata distribution.
As of June 30, 2022 the fair value of the Junior Debt Exchange was $5,616, compared to $1,986 and $0 as of March 31, 2022 and December 31, 2021. Such fair value increases were $3,630 and $5,616, respectively, for the three and six months ended June 30, 2022 and were recorded in other income (expense), net on the condensed consolidated statements of operations. The Company measured the fair value of the Junior Debt Exchange on June 30, 2022 with the following assumptions:
|
|
As of |
|
|
Common stock fair value |
|
$ |
4.12 |
|
Exercise price |
|
$ |
8.75 |
|
Term (in years) |
|
|
1.65 |
|
Volatility |
|
|
60.00 |
% |
Risk-free interest rate |
|
|
2.88 |
% |
Expected dividends |
|
|
0 |
% |
For the valuation of the earnout liability, the fair value was estimated using a Monte-Carlo Simulation in which the fair value was based on the simulated stock price of the Company over the term of the sponsor earnout period. The key inputs used in the determination of the fair value included current stock price, volatility, and expected term. The initial fair value was recorded in APIC within the condensed consolidated statement of stockholders' equity (deficit) upon consummation of the Business Combination on March 29, 2022 and the subsequent fair value adjustments were recorded to other income (expense), net on the condensed consolidated statements of operations for the three and six months ended June 30, 2022.
As of June 30, 2022 the fair value of the earnout liability was $9,321, compared to $20,881 and $26,095 as of March 31, 2022 and March 29, 2022. Such fair value reductions of the earnout liability were $11,560 and $16,774, respectively, for the three and six
10
months ended June 30, 2022 and were recorded in other income (expense), net on the condensed consolidated statements of operations. The Company re-measured the earnout liability to its estimated fair value as of June 30, 2022 using the Monte-Carlo Simulation with the following assumptions:
|
|
As of |
|
|
Common stock fair value |
|
$ |
4.12 |
|
Term (in years) |
|
|
4.75 |
|
Volatility |
|
|
60.00 |
% |
Risk-free interest rate |
|
|
2.99 |
% |
Expected dividends |
|
|
0 |
% |
The Company previously presented the fair value measurement of the warrant liability for Starry Warrants (see Note 9) as of December 31, 2021 as a Level 3 measurement, relying on unobservable inputs reflecting the Company’s own assumptions. Level 3 measurements, which are not based on quoted prices in active markets, introduce a higher degree of subjectivity and may be more sensitive to fluctuations in stock price, volatility rates, and U.S. Treasury Bond rates.
Immediately prior to the settlement of such Starry Warrants in connection with the consummation of the Business Combination, the Company re-measured the warrant liability for Starry Warrants as of March 29, 2022 (the settlement date) and recognized a gain from the fair value adjustment of $2,224 as a component of other income (expense), net on the condensed consolidated statement of operations for the six months ended June 30, 2022.
As of March 29, 2022 and December 31, 2021 the fair value of the warrant liability for Starry Warrants was $12,549 and $14,773, respectively. The Company re-measured the warrant liability to its estimated fair value as of March 29, 2022 and December 31, 2021 using the Black-Scholes option pricing model with the following assumptions:
|
|
As of |
|
|
As of |
|
||
Exercise price |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
Common stock fair value (pre-exchange) |
|
$ |
1.77 |
|
|
$ |
1.81 |
|
Term (in years) |
|
|
9.5 |
|
|
|
9.8 |
|
Volatility |
|
|
27.57 |
% |
|
|
27.56 |
% |
Risk-free interest rate |
|
|
2.41 |
% |
|
|
1.52 |
% |
Expected dividends |
|
|
0 |
% |
|
|
0 |
% |
Upon settlement of such Starry Warrants and issuance of common stock in connection with the consummation of the Business Combination on March 29, 2022, the Company reclassified the warrant liability for Starry Warrants of $12,549 to APIC.
There were no transfers between Level 1 and Level 2 in the periods reported. Except for the aforementioned settlement of Starry Warrants, there were no transfers into or out of Level 3 in the periods reported.
Recent accounting pronouncements issued, not yet adopted:
In February 2016, the FASB issued a new accounting standard, ASC 842, Leases (“ASC 842”), to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheets. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASC 842 is effective for the annual period beginning January 1, 2022, and interim periods within the annual period beginning January 1, 2023, with early adoption permitted.
The Company is currently evaluating the impact the new guidance will have on its financial position and results of operations but expects to recognize lease liabilities and right of use assets at the time of adoption. The extent of the increase to assets and liabilities associated with these amounts remains to be determined pending the Company’s review of its existing lease contracts and service contracts which may contain embedded leases. The Company is currently assessing the potential impact to the financial statements. The Company is continuing to monitor potential changes to ASC 842 that have been proposed by the FASB and will assess any necessary changes to the implementation process as the guidance is updated.
11
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”), which, together with subsequent amendments, amends the requirement on the measurement and recognition of expected credit losses for financial assets held to replace the incurred loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for the Company beginning January 1, 2023, with early adoption permitted. The Company is currently in the process of evaluating the effects of this pronouncement on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance removes certain settlement conditions that are required for contracts to qualify for equity classification, eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. ASU 2020-06 is effective for the Company beginning January 1, 2024, with early adoption permitted. The Company is currently evaluating the effects of this pronouncement on the Company’s consolidated financial statements and the potential impact on the consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements (“ASU 2020-10”), which clarifies and improves the consistency of the Codification by updating various disclosure requirements to align with the SEC’s regulations and ensure all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. ASU 2020-10 is effective for annual periods beginning January 1, 2022, and interim periods within the annual period beginning January 1, 2023, with early adoption permitted. The Company is currently evaluating the effects of this pronouncement on the Company’s consolidated financial statements and the potential impact on the consolidated financial statements.
Note 3. Revenue recognition
The Company assesses the contract term as the period in which the parties to the contract have presently enforceable rights and obligations. The contract term can differ from the stated term in contracts that include certain termination or renewal rights, depending on whether there are penalties associated with those rights. Although customers are typically billed in advance for a month of service, the majority of the Company’s contracts (with residential customers) allow either party to cancel at any time without penalty and customers are entitled to a pro rata refund for services not yet rendered. However, in some instances the Company enters into non-cancellable and non-refundable contracts with commercial customers.
Nature of services: Revenues related to internet and related support services are recognized over time as the customer consumes the benefits of the services the Company performs. The Company stands ready to provide access to the service throughout the contract term. The timing of revenue recognition is based on a time-based measure of progress as the Company provides access to the service evenly over the course of the subscription period. The installation activities performed and essential customer premise equipment (“CPE”) required for delivering such service to the customer are not accounted for as distinct performance obligations, but rather components of the internet service offering because the installation activities and CPE are highly interdependent on such services. Based on the dependencies between such internet services, installation activities and CPE the revenues relating to the Company’s performance obligations are bundled and recognized over time.
Transaction price: The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. Revenue from sales is recorded based on the transaction price, which includes estimates of variable consideration. The amount of variable consideration included in the transaction price is constrained and is included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The constraint arises when the Company believes such service level guarantees are not met or when a customer has rights to a refund for such services provided.
The Company’s contracts with customers may include service level agreements that entitle the customer to receive service credits, and in certain cases, service refunds, when defined service levels are not met. These arrangements represent a form of variable consideration, which is considered in the calculation of the transaction price. The Company estimates the amount of variable consideration at the expected value based on its assessment of legal enforceability, anticipated performance and a review of specific transactions, historical experience and market and economic conditions. The Company historically has not experienced any significant incidents affecting the defined levels of reliability and performance as required by the contracts.
The Company has elected the practical expedient that permits an entity not to recognize a significant financing component if the time between the transfer of a good or service and payment is one year or less. The Company does not enter into contracts in which
12
the period between payment by the customer and the transfer of the promised goods or services to the customer is greater than 12 months. In addition, the Company excludes from revenue sales taxes and other government-assessed and imposed taxes on revenue-generating activities that are invoiced to customers, whenever applicable.
For individual customers who receive subsidized internet services through the EBB program, the transaction price includes the amounts due from the customer as well as the subsidy amount due from the government.
Gift card incentives: The Company uses marketing incentives to solicit potential subscriber interest in the Company’s services, primarily through the issuance of gift cards. Such promotional gift cards represent consideration paid to potential customers in anticipation of a contract. As such, the Company recognizes an asset upon issuance of the gift card that is recognized as a reduction in revenue as the expected services are transferred to the customer over the estimated life of the customer. As of June 30, 2022 and December 31, 2021, the Company recorded $826 and $252, respectively, of such assets in other assets on the consolidated balance sheets and $0.1 million was recognized as a reduction in revenue for both the three and six months ended June 30, 2022 and no amount was recognized for the three and six months ended June 30, 2021.
Unearned revenue: The timing of revenue recognition may not align with the right to invoice the customer. The Company records accounts receivable when it has the unconditional right to issue an invoice and receive payment, regardless of whether revenue has been recognized. If revenue has not yet been recognized, a contract or deposit liability (unearned revenue) is recorded.
Unearned Revenue |
|
|
|
|
Balance, December 31, 2021 |
|
$ |
1,630 |
|
Change, net |
|
|
947 |
|
Balance, June 30, 2022 |
|
$ |
2,577 |
|
Note 4. Debt
At June 30, 2022 and December 31, 2021, the carrying value of debt was as follows:
|
|
As of |
|
|||||
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Gross term loans |
|
$ |
224,545 |
|
|
$ |
202,671 |
|
Strategic Partner Arrangement (see Note 12) |
|
|
9,355 |
|
|
|
5,227 |
|
Capital lease obligations |
|
|
3,071 |
|
|
|
2,221 |
|
|
|
|
236,971 |
|
|
|
210,119 |
|
Less unamortized debt discount on term loans |
|
|
(15,441 |
) |
|
|
(17,019 |
) |
Less current portion of debt |
|
|
(1,861 |
) |
|
|
(1,504 |
) |
Debt, net of current portion |
|
$ |
219,669 |
|
|
$ |
191,596 |
|
Starry Credit Agreement: In February 2019, the Company entered into a credit agreement with a lender to provide for a total of $50,000, in the form of two separate term loan tranches of $27,500 and $22,500, respectively (as amended and restated from time to time, the "Starry Credit Agreement"). The Company drew the first tranche of $27,500 in February 2019 (the "Tranche A Loan") and the second tranche of $22,500 in June 2019 (the "Delayed Draw Tranche A Loan"). In December 2019, the Company amended and restated the Starry Credit Agreement with a syndicate of lenders, with the new lenders providing for an additional term loan tranche of $75,000 (the "Tranche B Loan"), which was immediately drawn by the Company.
On October 6, 2021, the Company entered into the fifth amendment (the "Fifth Amendment") to the Starry Credit Agreement with lenders to provide for a total of $40,000 in term loans which the Company immediately drew upon in full (the “Tranche C Loan”) and up to an additional $10,000 in delayed draw loans which the Company fully drew upon in January 2022 (the “Delayed Draw Tranche C Loan”) (together, the “Tranche C Loans” and collectively with the Tranche A Loan, Delayed Draw Tranche A Loan and Tranche B Loan, the "Term Loans").
The Term Loans incur interest at a rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a floor of 2.0%, plus an applicable margin of 9.0% (with the interest rate capped at 13.25% per annum) and such interest is accrued on a quarterly basis. Such interest rates were 11.0% as of June 30, 2022 and December 31, 2021. As allowed in the Starry Credit Agreement, the Company has elected to pay the interest accrued on an in-kind basis by increasing the principal balance outstanding. For the three months ended June 30, 2022 and 2021, the Company incurred $6,065, and $4,139, respectively, of paid-in-kind interest on the Term Loans. For the six months ended June 30, 2022 and 2021, the Company incurred $11,874 and $8,124, respectively, of paid-in-kind interest on the
13
Term Loans. Paid-in-kind interest is reflected as a component of the carrying value of the Term Loans as the payment of such interest would occur upon the settlement of the Term Loans.
The principal balance is payable in its entirety at maturity in February 2024. The Company may prepay the Term Loans, in whole or in part, at any time, subject to a premium. In addition, the lenders can require prepayment in certain circumstances, including a change of control, also subject to a premium. As of June 30, 2022, the premium for such prepayment is 5% of the principal if prepaid prior to maturity. A change of control is defined as the acquisition of direct or indirect ownership by a person other than existing stockholders of the Company of fifty percent or more of the voting or equity value of the Company.
The Term Loans are senior to all other debt and have a first priority lien on substantially all of the Company’s assets. The Term Loans contain customary conditions related to borrowing, events of default and covenants, including certain non-financial covenants and covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire stock, and make investments, in each case subject to certain exceptions. There is a financial covenant with respect to the Term Loans that requires the Company to maintain a minimum cash balance of $15,000 at all times. Upon the occurrence of an event of default, in addition to the lenders being able to declare amounts outstanding under the Term Loans due and payable the lenders can elect to increase the interest rate by 2.0% per annum.
The Company assessed the embedded features of the Term Loans, including the accelerated repayment (redemption) features and the default rate of interest feature, noting that these features met the definition of a derivative under ASC 815 and were not clearly and closely related to the debt host instrument. The Company is required to remeasure these derivative features to their then fair value at each subsequent reporting period. Based on the probability of prepayment prior to maturity, the repayment feature was ascribed a fair value of $11,464 and $10,412, respectively, as of June 30, 2022 and December 31, 2021, and recorded in other liabilities on the consolidated balance sheets (the "Prepayment Penalty"). The change in fair value of the Prepayment Penalty is based on management’s assumption of the estimated probability that the accelerated repayment would be triggered prior to maturity. As of June 30, 2022, such probability was deemed to be 100% before maturity of the debt. The change in fair value of $0 and $1,052 for the three and six months ended June 30, 2022, respectively, was recorded in other income (expense) on the condensed consolidated statements of operations.
The Company amortizes debt discounts over the term of the Starry Credit Agreement using the effective interest method (based on an effective interest rate of 16.9%, 11.2%, 14.2% and 19.1%, respectively). The amortization recorded for the three and six months ended June 30, 2022 was $1,776 and $3,402, respectively, and is included within interest expense in the condensed consolidated statements of operations. The remaining unamortized debt discount at June 30, 2022 and December 31, 2021 is $15,441 and $17,019, respectively, and is reflected net against debt, net of current portion on the condensed consolidated balance sheets.
2020 Convertible notes payable: During the year ended December 31, 2020, the Company issued convertible notes payable (the “2020 Notes”) in exchange for cash totaling $31,243. Such notes incurred interest at 3.0% per annum and had a maturity date of June 4, 2021. One current shareholder who is a related party contributed $2,349 of the 2020 Notes balance.
January 2021 Convertible notes payable: In January 2021, the Company issued convertible notes payable (the "2021 Notes") in exchange for cash totaling $11,000. The 2021 Notes bore interest at 3.0% per annum with a maturity date of October 29, 2021. The 2021 Notes were only prepayable with the consent of the holder and are an unsecured obligation of the Company. The 2021 Notes included the following embedded features:
14
The Company assessed the embedded features within the 2021 Notes as detailed above and determined that the automatic conversion feature upon the next equity financing and the redemption upon a corporate transaction (in both cases, when settled in shares at a conversion price less than $1.57 per share) met the definition of a derivative that would require separate accounting from the 2021 Notes. In estimating the fair value of these bifurcated embedded features, the Company concluded that such fair value was de minimis at issuance of the 2021 Notes. The automatic conversion feature upon maturity was assessed to contain a beneficial conversion feature that was recognized at its intrinsic value at the issuance date as a component of APIC and as a debt discount to the 2021 Notes totaling $2,791. Two current shareholders who were related parties contributed $3,000 and $5,000, respectively, of the $11,000 2021 Notes balance.
The total amortization recorded for the 2021 Notes for the six months ended June 30, 2022 and 2021 was $0 and $1,750, respectively, and is included within interest expense in the condensed consolidated statements of operations. For the six months ended June 30, 2022 and 2021, the Company incurred $0 and $246, respectively, of paid-in-kind interest as a component of the carrying value of the 2021 Notes.
On March 31, 2021, the Company completed the initial closing of a new equity financing for its Series E Preferred Stock. As a result of the closing, both the 2020 Notes and 2021 Notes, including accrued cash and paid-in-kind interest, converted to shares of Series E-1 and Series E-2 Preferred Stock respectively (see Note 5). The conversion of the 2020 Notes was treated as a conversion in accordance with the original terms of the 2020 Notes, and as such, carrying value of the 2020 Notes was reclassified to Series E-1 Preferred Stock. The conversion of the 2021 Notes was treated as an extinguishment of the 2021 Notes, with the Series E-2 Preferred Stock being recorded at its fair value (the reacquisition price of the 2021 Notes) and the Company recording a charge to the capital account of $2,791 representing the additional value provided to the holders of the 2021 Notes upon settlement. The Company recorded a loss on extinguishment of $2,361 reflected in the other income (expense), net on the condensed consolidated statement of operations for the six months ended June 30, 2021.
As a result of the 2020 Notes converting into shares of Series E Preferred Stock, the carrying value of the debt discount on the 2020 Notes was reversed and recognized as interest expense in the amount of $971 for the six months ending June 30, 2021.
Note 5. Stockholders’ equity (deficit)
Convertible preferred stock (prior to the Business Combination)
Prior to the Acquisition Merger, the Company had authorized the issuance of 505,746,770 shares of convertible preferred stock, of which 53,030,270 shares were designated as Series Seed Preferred Stock, 91,549,300 shares were designated as Series A Preferred Stock, 55,452,865 shares were designated as Series B Preferred Stock, 108,459,871 shares were designated as Series C Preferred Stock, 87,412,587 shares were designated as Series D Preferred Stock, 104,841,877 shares were designated as Series E Preferred Stock (collectively, the "Old Starry Preferred Stock") and 5,000,000 shares were designated as Series Z Preferred Stock (together with "Old Starry Preferred Stock", the "Convertible Preferred Stock").
On March 31, 2021, the Company completed a Series E Preferred Stock financing round whereby it issued shares of Series E-1 Preferred Stock, Series E-2 Preferred Stock, and Series E-3 Preferred Stock. The 2020 Notes had a carrying value of $31,752 and were converted into 22,204,490 shares of Series E-1 Preferred Stock, at a price per share of $1.43. The 2021 Notes had a carrying value of $13,832 and were converted into 8,232,627 shares of Series E-2 Preferred Stock, at a price per share of $1.34. The Company issued 71,428,570 shares of Series E-3 Preferred Stock at a purchase price of $1.68 per share, in exchange for gross cash proceeds of $120,000 and incurred issuance costs of $150.
15
On March 29, 2022, the Company issued 4,133,333 shares of Series Z Preferred Stock at a purchase price of $7.50 per share, in exchange for gross cash proceeds of $31,000 in connection with the consummation of the Business Combination. Pursuant to the Merger Agreement, such shares of Series Z Preferred Stock converted into shares of Class A common stock on a 1-for-1 basis and all outstanding shares of Old Starry Preferred Stock converted into shares of Class A common stock at an exchange ratio of 0.1841 (the "Acquisition Merger Exchange Ratio").
In connection with the Business Combination, the Convertible Preferred Stock was retroactively adjusted. As of June 30, 2022, there is no Convertible Preferred Stock authorized, issued or outstanding. The following table summarizes details of Convertible Preferred Stock authorized, issued and outstanding immediately prior to the Business Combination.
Convertible Preferred Stock |
|
Par Value |
|
|
Authorized (1) |
|
|
Issued and Outstanding (1) |
|
|
Carrying Value |
|
||||
Series Seed |
|
$ |
0.001 |
|
|
|
9,761,747 |
|
|
|
9,761,745 |
|
|
$ |
6,990 |
|
Series A |
|
|
0.001 |
|
|
|
16,852,283 |
|
|
|
16,852,283 |
|
|
|
25,946 |
|
Series B |
|
|
0.001 |
|
|
|
10,207,696 |
|
|
|
10,207,696 |
|
|
|
29,910 |
|
Series C |
|
|
0.001 |
|
|
|
19,965,160 |
|
|
|
19,965,160 |
|
|
|
99,989 |
|
Series D |
|
|
0.001 |
|
|
|
16,090,802 |
|
|
|
16,090,802 |
|
|
|
124,915 |
|
Series E |
|
|
0.001 |
|
|
|
19,299,164 |
|
|
|
18,751,311 |
|
|
|
165,434 |
|
Series Z |
|
|
0.001 |
|
|
|
5,000,000 |
|
|
|
4,133,333 |
|
|
|
31,000 |
|
|
|
|
|
|
|
97,176,852 |
|
|
|
95,762,330 |
|
|
$ |
484,184 |
|
|
(1) Shares of Old Starry Preferred Stock authorized, issued and outstanding have been adjusted to reflect the exchange of Old Starry common stock for Class A common stock at an exchange of 0.1841 as a result of the Business Combination (see Note 1).
Preferred stock (subsequent to the Business Combination)
The Company has authorized 10,000,000 shares of preferred stock (the "Preferred Stock"), par value $0.0001, of which none are issued and outstanding at June 30, 2022. Shares of Preferred Stock may be issued from time to time by the board of directors in one or more series, and in connection with the creation of any such series, by adopting a resolution or resolutions providing for the issuance of the shares thereof and by filing a certificate of designation, to determine and fix the number of shares of such series and such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, and to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series as shall be stated and expressed in such resolutions.
Class A common stock
The Company has authorized 800,000,000 shares of Class A common stock, par value $0.0001, of which 153,393,876 are issued and outstanding at June 30, 2022. Holders of such shares are entitled to one vote for each share of Class A common stock. Such shares confer upon holders the right to receive the payment of dividends when, as and if declared by the Board of Directors, subject to applicable laws and the rights and preferences of any holders of any outstanding series of Preferred Stock.
Class X common stock
The Company has authorized 50,000,000 shares of Class X common stock, par value $0.0001, of which 9,268,335 are issued and outstanding at June 30, 2022 and held solely by the Company's Chief Executive Officer and founder. The holder of such shares is entitled to twenty votes for each share of Class X common stock, until the Sunset Date (defined below), and one vote for each share of Class X common stock from and after the Sunset Date. Such shares confer upon the holder the right to receive the payment of dividends when, as and if declared by the Board of Directors, subject to applicable laws and the rights and preferences of any holders of any outstanding series of Preferred Stock.
Each share of Class X common stock will:
16
Non-redemption agreements
Pursuant to the non-redemption agreements entered into with certain accredited investors (the "Non-Redeeming Shareholders") dated March 9, 2022, the Non-Redeeming Shareholders agreed to not redeem a certain number of shares of FirstMark Class A common stock. In connection with these agreements, the Company issued 422,108 shares of additional Class A common stock to the Non-Redeeming Shareholders subsequent to the close of the Business Combination (the "Non-Redemption Shares"). The Company evaluated the Non-Redeeming Shareholders' right to receive the additional shares of Class A common stock and concluded that the Non-Redemption Shares represented a non-pro rata distribution to the Non-Redeeming Shareholders. As a result, the Company recorded $3,888 in other income (expense), net on the condensed consolidated statements of operations and APIC on the condensed consolidated statement of stockholders' equity (deficit).
Note 6. Share-based compensation expense
The Company maintains the Starry, Inc. Amended and Restated 2014 Stock Option and Grant Plan (the “Starry Stock Plan”). The Starry Stock Plan provides our employees (including the named executive officers), consultants, directors and other key persons and those of our any subsidiary the opportunity to participate in the equity appreciation of our business through the receipt of stock options to purchase shares of our common stock, restricted stock and restricted stock units. We believe that such awards encourage a sense of proprietorship and stimulate interest in our development and financial success. The Starry Stock Plan is no longer available for use for the grant of future awards, but will continue to govern the terms of awards that were previously granted and that remain outstanding.
In connection with the Business Combination, the Board of Directors adopted the Starry Group Holdings, Inc. 2022 Equity Incentive Plan ("Equity Incentive Plan"), under which the Company may grant cash and equity incentive awards to directors, employees (including named executive officers) and consultants. The Equity Incentive Plan became effective on March 29, 2022 and replaced the Starry Stock Plan, allowing the Company to grant up to 22,775,288 shares of Class A common stock.
The Board of Directors also adopted the Starry Group Holdings, Inc. 2022 Employee Stock Purchase Plan (the “ESPP”) in connection with the Business Combination, under which employees (including named executive officers) may purchase common stock through payroll deductions of up to 20% of their eligible compensation. The ESPP became effective on March 29, 2022 with no activity for the six months ended June 30, 2022.
During the six months ended June 30, 2022, pursuant to the Equity Incentive Plan, the Company granted 8,934,371 restricted stock units ("RSUs") which will vest over a period of four years (the "service-based RSUs"). The estimated grant date fair value of the service-based RSUs granted during the six months ended June 30, 2022 totaled $36,708. As of June 30, 2022, there was approximately $36,670 of unrecognized share-based compensation expense related to the service-based RSUs, which is expected to be recognized over a weighted-average period of 3.8 years.
In May 2021 and September 2021, pursuant to the Starry Stock Plan, the Company granted 736,315 and 82,697 shares of RSUs (the "2021 RSUs"), respectively, to employees in exchange for employment services. The 2021 RSUs have a service condition of 4 years and performance condition that is linked to the occurrence of a liquidity event. The liquidity event requirement was to be satisfied on the first to occur of: (1) the day following the expiration of the lock up period that is in effect following a listing event (defined below), provided that a termination event has not occurred prior to such time and (2) the consummation of a sale event. A listing event was defined as (i) an initial public offering or direct listing of any class of common stock of the Company or any parent or subsidiary or successor of the Company formed for the purpose of effecting such transaction or (ii) a merger (or similar transaction) with a special purpose acquisition company, the result of which is that any class of common stock of the Company or the parent or successor entity of the Company is listed on the New York Stock Exchange, the Nasdaq Stock Market or other securities exchange. The grant-date fair value of the RSUs was $1.47 per share. Due to the consummation of the Business Combination on March 29, 2022, the Company has recognized $4,034 of share-based compensation expense for RSUs since the listing event occurred and the satisfaction of the liquidity event will be achieved solely based on the passage of time (i.e., the expiration of the lock up period). As of June 30, 2022, there was approximately $2,638 of unrecognized share-based compensation expense related to the 2021 RSUs, which is expected to be recognized over a weighted-average period of 1.1 years.
During the six months ended June 30, 2022 and 2021, the Company granted 0 and 5,141,000 options, respectively, to certain employees which will vest over a period of four years. The estimated grant date fair value of the options granted during the six months ended June 30, 2022 and 2021 totaled $0 and $1,927, respectively.
17
Share-based compensation expense related to stock options for the six months ended June 30, 2022 and 2021 was $627 and $578, respectively, and is included within research and development expense and selling, general and administrative expense on the accompanying condensed consolidated statements of operations. As of June 30, 2022, there was approximately $2,750 of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted-average period of 2.5 years.
Note 7. Property and equipment
Property and equipment consisted of the following at June 30, 2022 and December 31, 2021:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Distribution system |
|
$ |
170,406 |
|
|
$ |
145,357 |
|
Asset retirement obligation |
|
|
2,387 |
|
|
|
2,015 |
|
Construction in progress |
|
|
38,847 |
|
|
|
28,493 |
|
Equipment |
|
|
7,722 |
|
|
|
6,051 |
|
Vehicles |
|
|
4,207 |
|
|
|
3,943 |
|
Furniture and fixtures |
|
|
1,335 |
|
|
|
1,267 |
|
Software |
|
|
3,290 |
|
|
|
1,452 |
|
Leasehold improvements |
|
|
870 |
|
|
|
691 |
|
|
|
|
229,064 |
|
|
|
189,269 |
|
Less: accumulated depreciation |
|
|
(79,579 |
) |
|
|
(60,250 |
) |
Property and equipment, net |
|
$ |
149,485 |
|
|
$ |
129,019 |
|
Depreciation expense for the six months ended June 30, 2022 and 2021 totaled approximately $19,645 and $12,973 respectively, and is included within cost of revenues, selling, general and administrative, and research and development expense on the accompanying condensed consolidated statements of operations.
Note 8. Asset retirement obligations
The following table summarizes changes in the Company’s asset retirement obligations for the six months ended June 30, 2022:
Balance, January 1, 2022 |
|
$ |
2,387 |
|
New asset retirement obligations |
|
|
372 |
|
Accretion expense |
|
|
144 |
|
Balance, June 30, 2022 |
|
$ |
2,903 |
|
Accretion expense associated with asset retirement obligations for the six months ended June 30, 2022 and 2021 totaled approximately $144 and $89, respectively, and is included within selling, general and administrative expense on the accompanying condensed consolidated statements of operations.
Note 9. Warrants and earnout shares
Common stock warrants
Pursuant to the FirstMark initial public offering ("IPO"), FirstMark sold 41,400,000 units, which includes the full exercise by the underwriters of their over-allotment option in the amount of 5,400,000 units, at a purchase price of $10.00 per unit. Each unit consisted of one share of FirstMark Class A common stock and of one FirstMark warrant (“Public Warrants”). Each Public Warrant entitles the holder to purchase one share of Common Stock at a price of $11.50 per share. Simultaneously with the closing of the FirstMark IPO on October 8, 2020, FirstMark consummated the sale of 6,853,333 private placement warrants (the “Private Warrants”) to the Sponsor at a price of $1.50 per Private Warrant to FirstMark Horizon Sponsor LLC (the "Sponsor"), generating gross proceeds of $10,300,000. Together, the Public Warrants and Private Placement Warrants are referred to as the "Common Stock Warrants."
Public Warrants may only be exercised for a whole number of shares. No fractional warrants will be issued upon separation of the Units and only whole warrants will trade. The Public Warrants became exercisable 12 months from the closing of the Initial Public Offering. The Public and Private Warrants will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. As a result of the Business Combination, both the 13,800,000 Public Warrants and 6,853,333 Private Warrants are redeemable for shares of Class A common stock subject to the below.
18
The Company will not be obligated to deliver any shares of Common Stock pursuant to the exercise of a Common Stock Warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration.
The Company has agreed to maintain a current prospectus relating to those shares of Class A common stock until the warrants expire or are redeemed, as specified in the warrant agreement; provided that if shares of the Class A common stock are at the time of any exercise of a Public Warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, but it will use its commercially reasonable efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Public Warrants
Redemption of warrants when the price per share of Class A common stock equals or exceeds $18.00 ("Reference Value"). Once the Public Warrants become exercisable, the Company may redeem the Public Warrants:
The last of the redemption criterion discussed above was established to prevent a redemption call unless there is at the time of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the warrants, each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the shares of Class A common stock may fall below the $18.00 redemption trigger price (as adjusted for adjustments to the number of shares issuable upon exercise price for a warrant) as well as the $11.50 (for whole shares) warrant exercise price after the redemption notice is issued.
Redemption of warrants when the price per share of Class A common stock equals or exceeds $10.00. Commencing ninety days after the warrants become exercisable, the Company may redeem the outstanding Public Warrants:
The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for the issuance of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants.
19
On April 25, 2022, the Company issued a notice (the “Warrant Adjustment Notice”) to holders of the Public Warrants, notifying holders of the following adjustments (the “Warrant Adjustments”), effective after the close of trading on April 22, 2022:
The Warrant Adjustments were required as a result of (i) Starry Group issuing shares of its Class A common stock and securities exchangeable for shares of Class A common stock at an issue price of $7.50 per share for capital raising purposes in connection with the closing the Business Combination, (ii) the aggregate gross proceeds from such issuances representing more than 60% of the total equity proceeds upon completion of the Business Combination (net of redemptions) and (iii) the volume-weighted average trading price of the Class A common stock during the 20 trading day period starting on the trading day prior to the day on which the Business Combination was consummated (such price, the “Market Value”) being below $9.20 per share. The Market Value was determined to be $7.94 per share.
Private Warrants
The Private Warrants are identical to the Public Warrants underlying the units sold in the IPO, except that the Private Warrants and the shares of Class A common stock issuable upon the exercise of the Private Warrants were not transferable, assignable or saleable until 30 days after the completion of the Business Combination. Additionally, the Private Warrants are exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Company evaluated the Private Warrants and the Public Warrants and concluded that they do not meet the criteria to be classified within stockholders' equity. The Private Warrants and the Public Warrants both contain settlement provisions that preclude them from meeting the derivative exception of being indexed to the Company's stock. As such, the Company has recorded these warrants as liabilities on the condensed consolidated balance sheet at fair value (see Note 2), with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations at each reporting date. Upon consummation of the Business Combination on March 29, 2022 the combined fair value of both the Public Warrants and Private Warrants was $15,697 and was recorded in APIC (see Note 1). The remeasurement of such warrants as of June 30, 2022 resulted in decreases of $9,707 and $7,229 in fair value for the three and six months ended June 30, 2022 which the Company recorded in other income (expense), net on the condensed consolidated statements of operations.
Starry Warrants
In connection with entering into the Starry Credit Agreement in February 2019, Old Starry issued the lender warrants to purchase 15,025,563 shares of Old Starry's non-voting common stock. In addition, in connection with Old Starry entering into the Starry Credit Agreement in December 2019, Old Starry issued the new participating lenders warrants to purchase 17,625,662 shares of Old Starry's non-voting common stock. As the Company concluded the warrants were classified in stockholders’ equity, the Company allocated approximately $6,175 and $8,307 in value to the warrant issuances, respectively, on a relative fair value basis and recorded this allocated value as an increase to additional-paid-in capital and as a component of the discount recorded against the outstanding debt (the “2019 Equity Warrants”). On October 6, 2021, certain lenders who held 3,525,132 of such warrants entered into a convertible note subscription agreement in connection with the Merger Agreement, which provided the lenders an exchange right to net cash settle the outstanding warrants. The Company re-assessed the classification of such warrants due to the exchange right and recorded a reclassification of $6,345 from additional-paid-in capital to warrant liabilities as of December 31, 2021 (the “2019 Liability Warrants”, and together with the remaining 2019 Equity Warrants, the “2019 Warrants”).
In conjunction with the Fifth Amendment, Old Starry entered into a warrant purchase agreement as of October 6, 2021. Old Starry issued to the lenders warrants to purchase 11,509,673 shares of Old Starry's non-voting common stock valued at $6,733 (“Initial Tranche C Warrants”) and contingently issuable warrants to purchase 2,896,992 shares of Old Starry's non-voting common stock valued at $1,695 (“Delayed Draw Tranche C Warrants”) (together, the “Tranche C Warrants”, and collectively with the 2019 Warrants, the “Starry Warrants”). The Company concluded the Tranche C Warrants were liability classified and recorded the fair value as an increase to warrant liabilities and as a component of the discount recorded against the outstanding debt (for the Initial Tranche C Warrants) and deferred costs (for the Delayed Draw Tranche C Warrants) as the Delayed Draw Tranche C Loan was not
20
outstanding as of December 31, 2021. On January 11, 2022, the Delayed Draw Tranche C Warrants were reclassified from deferred costs to a component of the discount recorded against the outstanding debt upon the draw down of the Delayed Draw Tranche C Loan.
On March 29, 2022, such Starry Warrants were net exercised in connection with the Business Combination (see Note 1). Immediately prior to being net exercised, the liability-classified Starry Warrants were adjusted to fair value prior to reclassification to APIC (see Note 2).
Earnout Shares
Following the Business Combination, 4,128,113 shares of Class A common stock held by certain former equity holders of FirstMark are subject to vesting and forfeiture conditions (the "Earnout Shares"). Of the 4,128,113 Earnout Shares, 2,224,167 shares will vest at such time as a $12.50 stock price level is achieved, 951,973 shares will vest at such time as a $15.00 stock price level is achieved and 951,973 shares will vest at such time as a $17.50 stock price level is achieved, in each case, on or before the fifth anniversary of the consummation of the Business Combination. The "stock price level" will be considered achieved only (a) when the closing price of a share of Class A common stock on the NYSE is greater than or equal to the applicable price for any 20 trading days within a 30 trading day period or (b) the price per share of Class A common stock paid in certain change of control transactions following the consummation of the Business Combination is greater than or equal to the applicable price. Earnout Shares subject to vesting pursuant to the above terms that do not vest in accordance with such terms shall be forfeited and cancelled for no consideration. The Earnout Shares are not redeemable. The Earnout Shares will be considered outstanding for legal purposes prior to the achievement of the vesting conditions but will not be considered outstanding for accounting purposes until such vesting conditions are achieved. As the vesting event has not yet been achieved, these shares of Class A common stock are treated as contingently recallable and have been excluded from the denominator for the purposes of calculating basic and diluted net loss per share (see Note 13).
The Company evaluated the Earnout Shares and concluded that they do not meet the criteria to be classified within stockholders' equity. The Earnout Shares contain settlement provisions that preclude them from meeting the derivative exception of being indexed to the Company's stock. As such, the Company has recorded these Earnout Shares as liabilities on the condensed consolidated balance sheet at fair value (see Note 2), with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations at each reporting date.
Note 10. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following at June 30, 2022 and December 31, 2021:
|
|
June 30, |
|
|
December 31, |
|
||
Accrued compensation and benefits |
|
$ |
5,004 |
|
|
$ |
4,773 |
|
Accrued sales and use tax |
|
|
7,101 |
|
|
|
5,860 |
|
Accrued purchases of property and equipment |
|
|
4,304 |
|
|
|
3,339 |
|
Accrued transaction costs |
|
|
813 |
|
|
|
3,693 |
|
Other |
|
|
6,659 |
|
|
|
5,512 |
|
Total |
|
$ |
23,881 |
|
|
$ |
23,177 |
|
Note 11. Income taxes
During the six months ended June 30, 2022 and 2021, the Company recorded no income tax provision for federal or state income taxes. The Company maintained a full valuation allowance on its net deferred tax assets for the six months ended June 30, 2022 and 2021, due to uncertainty regarding future taxable income.
Note 12. Commitments and contingencies
2020 Strategic Partner Arrangement: In June 2020, the Company entered into a 10-year arrangement with AEPV (the "Strategic Partner Arrangement") to jointly deploy a fixed wireless broadband network in a new market. AEPV has agreed to fund the equipment necessary to deliver the service in exchange for a revenue sharing arrangement whereby they will be entitled to a percentage of revenue earned by the Company in the new market. Pursuant to the arrangement, the Company will sell in exchange for cash consideration the equipment to AEPV and lease the equipment back. The seller-financing portion of the transaction created a form of continuing involvement which precludes sale-leaseback accounting until the related amounts due are paid in full. Accordingly, the Company accounted for the sale-leaseback as a financing transaction with AEPV, with the equipment remaining on the Company's books at its then carrying value, the net cash proceeds received being reflected as a financing obligation, and the expected future
21
payments under the revenue sharing agreement to the third party being treated as debt service applied to interest and principal over the initial 10-year term. The discount rate is calculated based on expected future payments under the revenue sharing agreement. AEPV has the right to terminate the arrangement for any reason no earlier than June 2023. In the event of an early termination, the Company is required to repurchase the equipment at a repurchase price equal to the net book value of the equipment as reflected on the third party’s balance sheet at the time of termination. The Company has made an accounting policy election to use the prospective method to account for changes in actual or estimated cash flows related to the debt service.
As of June 30, 2022, the financing obligation was $9,355, of which $679 and $8,676 was included in the current and non-current portion of debt, respectively, on the condensed consolidated balance sheet. As of June 30, 2022, $223 of reimbursable expenses is owed by the third party and is included in prepaid expenses and other current assets on the condensed consolidated balance sheet.
Operating leases: The Company has operating leases for its corporate offices and other facilities, roof rights, equipment leases and fiber networks under various non-cancelable agreements. Total rent expense for the six months ended June 30, 2022 and 2021 was $8,281 and $4,467, respectively.
Purchase Commitments: The Company entered into non-cancelable purchase commitments with various contract manufacturers during the six months ended June 30, 2022 to purchase items to be installed in the Company’s distribution system. As of June 30, 2022, these purchase commitments totaled $42,390.
Advance deposit payments: The Company’s contractual commitments include an advance deposit payment received from a customer for the build out of a network in an underserved location. In the event the Company does not fulfill the obligation to construct the network such deposit is required to be refunded to the customer. As of June 30, 2022 and December 31, 2021, such deposit payment totaled $2,000 and was recorded in other liabilities.
Legal Proceedings: The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters. Management believes that the outcome of such legal proceedings, legal actions and claims will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
Note 13. Net loss per share
The Company has two classes of common stock authorized: Class A common stock and Class X common stock. The rights of the holders of Class A and Class X common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class X common stock is entitled to twenty votes per share. Each share of Class X common stock is convertible into one share of Class A common stock at the option of the holder at any time or automatically upon certain events described in the Company’s amended and restated certificate of incorporation. The Company allocates undistributed earnings attributable to common stock between the common stock classes on a one‑to‑one basis when computing net loss per share. As a result, basic and diluted net income per share of Class A common stock and per share of Class X common stock are equivalent.
The following table sets forth the computation of the basic and diluted net loss per share:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(36,307 |
) |
|
$ |
(38,554 |
) |
|
$ |
(89,940 |
) |
|
$ |
(79,600 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding, basic and diluted |
|
|
162,423,594 |
|
|
|
36,410,177 |
|
|
|
102,357,494 |
|
|
|
36,325,426 |
|
Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Class A common stock |
|
$ |
(0.22 |
) |
|
$ |
(1.06 |
) |
|
$ |
(0.88 |
) |
|
$ |
(2.19 |
) |
Class X common stock |
|
$ |
(0.22 |
) |
|
$ |
(1.06 |
) |
|
$ |
(0.88 |
) |
|
$ |
(2.19 |
) |
The Company’s potential dilutive securities, which include stock options, RSUs, convertible preferred stock, Earnout Shares and vested warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same.
22
The weighted-average common shares and thus the net loss per share calculations and potentially dilutive security amounts for all periods prior to the Business Combination have been retrospectively adjusted to the equivalent number of shares outstanding immediately after the Business Combination to effect the reverse recapitalization. Historically reported weighted average shares outstanding have been multiplied by the exchange ratio of approximately 0.1841 (see Note 1).
Note 14. Supplemental cash flow information
The following tables provides a reconciliation of cash, cash equivalents and restricted cash reported in the condensed consolidated balance sheets as of June 30, 2022 and 2021:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash and cash equivalents |
|
$ |
99,682 |
|
|
$ |
84,820 |
|
Restricted cash |
|
|
— |
|
|
|
30 |
|
Restricted cash included in restricted cash and other assets |
|
|
1,378 |
|
|
|
1,127 |
|
Total cash, cash equivalents and restricted cash shown in the |
|
$ |
101,060 |
|
|
$ |
85,977 |
|
The following table provides supplemental cash flow information for the six months ended June 30, 2022 and 2021:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash paid for interest |
|
$ |
121 |
|
|
$ |
67 |
|
Cash paid for taxes |
|
$ |
— |
|
|
$ |
— |
|
The following table provides supplemental disclosures of noncash investing and financing activities for the six months ended June 30, 2022 and 2021:
|
|
Six Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Purchases of property and equipment included within accounts payable |
|
$ |
13,147 |
|
|
$ |
9,855 |
|
Unpaid deferred transaction costs included within accounts payable |
|
$ |
813 |
|
|
$ |
— |
|
Property and equipment acquired through capital lease obligations |
|
$ |
1,432 |
|
|
$ |
386 |
|
Asset retirement obligations associated with deployed equipment |
|
$ |
372 |
|
|
$ |
370 |
|
Conversion of convertible notes to Series E Preferred Stock |
|
$ |
— |
|
|
$ |
45,584 |
|
Note 15. Redeemable shares
On March 31, 2022, the Company entered into an agreement with certain debt holders who are also shareholders (the "Optionholders") of 1,209,029 shares of Class A common stock (the "Shares") that grants and conveys to the Optionholders the option, in their sole discretion, to participate in a refinancing in full (the "Refinancing") of the outstanding Term Loans, by providing new senior secured term loans and/or notes (including convertible notes), in each case on a first lien and/or junior lien basis as agreed upon by the parties (and such term loans and/or notes, the "New Debt"), to the Company and/or any of its subsidiaries as the borrower(s) in respect of such refinancing indebtedness (the "New Financing"). For the avoidance of doubt, nothing in the agreement requires the Company to enter into any Refinancing.
The agreement also grants and conveys to each Optionholder the following exchange rights:
New Debt Exchange
In connection with a Refinancing, the Optionholders have the option, in their sole discretion, to exchange all or a portion of their Shares at an agreed value of $8.75 (as appropriately adjusted for any stock split, stock dividend, recapitalization or similar transaction
23
affecting such shares) per share (for the avoidance of doubt, irrespective of the price of which the Class A common stock is trading on the New York Stock Exchange) for an equal principal amount of New Debt (the "New Debt Exchange").
In the event that (i) an Optionholder has exercised the New Debt Exchange but the other financing sources or the administrative agent for the New Financing choose not to permit such Optionholder from participating in the New Financing for any reason, (ii) an Optionholder has elected not to exercise the New Debt Exchange or has exercised the New Debt Exchange for only a portion of its Shares for New Debt or (iii) the terms and conditions of such New Financing are not reasonable satisfactory to such Optionholder, then such Optionholder may require the Company to purchase from such Optionholder all or any portion of its Shares that are not exchange for New Debt at an agreed value of $8.75 (as appropriately adjusted for any stock split, stock dividend, recapitalization or similar transaction affecting such shares) per share (for the avoidance of doubt, irrespective of the price of which the Class A common stock is trading on the New York Stock Exchange). Such repurchase shall be effected substantially concurrently with or prior to consummation of the Refinancing.
In the event any Optionholder does not elect to either (i) exchange any portion of its Shares for New Debt or (ii) require that the Company purchase from such Optionholder any portion of its Shares, in each case in connection with a Refinancing, then the agreement shall terminate and be of no further force and effect as of the consummation of such Refinancing.
Junior Debt Exchange
Prior to the consummation of any Refinancing, the Optionholders have the option, in their sole discretion, to exchange all or any portion of such Shares at an agreed value of $8.75 (as appropriately adjusted for any stock split, stock dividend, recapitalization or similar transaction affecting such shares) per share (for the avoidance of doubt, irrespective of the price of which the Class A common stock is trading on the New York Stock Exchange) for an equal principal amount of unsubordinated unsecured term loans or notes under a new debt facility (the "Junior Debt") and not, for the avoidance of doubt, issued or incurred under the Starry Credit Agreement (the "Junior Debt Exchange"). Any Junior Debt shall mature on the earliest of the maturity date of the Starry Credit Agreement, the acceleration of the Term Loans in accordance with the Starry Credit Agreement, or the consummation of a Refinancing, and shall bear interest at a rate equal to Term Secured Overnight Financing Rate ("SOFR") plus 1.00%. The aggregate principal amount of Junior Debt shall not exceed $15,000 and Starry, Inc. will be the borrower.
In connection with any Refinancing subsequent to the incurrence or issuance of any Junior Debt, the Company grants and conveys to each Optionholder the irrevocable option, in such Optionholder's sole discretion, to exchange all or any portion of the principal amount of its Junior Debt on a dollar-for-dollar basis for an equal principal amount of New Debt.
The Company assessed the embedded conversion features within such Shares and determined that the Junior Debt Exchange, which provides the Optionholders with the right to force a cash redemption prior to any Refinancing event, met the definition of a derivative under ASC 815 and would require separate accounting from the Shares. The Company estimated the fair value of the Junior Debt Exchange based on a Black-Scholes option pricing model (see Note 2) and recorded $5,616 in other liabilities on the condensed consolidated balance sheet as of June 30, 2022 with the offset recorded in other income (expense), net on the condensed consolidated statement of operations for the six months ended June 30, 2022.
With respect to the Junior Debt Exchange, the embedded conversion right where the Optionholders could force a cash redemption of such Shares, such Shares were required to be reclassified from permanent equity to temporary equity at the redemption value of $8.75 per Share as of March 31, 2022. As a result, the redemption value of $10,579 was recorded in APIC on the condensed consolidated statement of stockholders' equity (deficit). Subsequent measurements, if applicable, will be recorded through APIC.
With respect to the New Debt Exchange, the Company concluded it did not meet the definition of a derivative and would not require separate accounting from the Shares because the Refinancing event that would trigger a cash redemption is within the Company's control.
Note 16. Subsequent events
The Company evaluated all events or transactions that occurred after June 30, 2022 through August 12, 2022, the date the condensed consolidated financial statements were available to be issued.
Executive RSUs
On July 1, 2022, the Company granted 1,247,001 RSUs to certain executives with a total fair value of $5,474 based on the Company's Class A common stock market price of $4.39 on the grant date. Such RSUs vest over a four year service period.
24
Common Stock Purchase Agreement
On August 8, 2022, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”), each with CF Principal Investments LLC (“CFPI”), an entity affiliated with Cantor Fitzgerald & Co. relating to a committed equity facility (the “Facility”). Pursuant to the Purchase Agreement, the Company has the right from time to time, at its option, to sell to CFPI up to the lesser of (i) $100.0 million (the “Total Commitment”) in aggregate gross purchase price of newly issued shares of the Company’s Class A common stock, par value $0.0001 per share (the “Common Stock”), and (ii) the Exchange Cap, defined as 33,344,035 shares of common stock, which is equal to 19.99% of the voting power or number of shares of the Company’s total capital stock issued and outstanding immediately prior to the execution of the Purchase Agreement, subject to certain conditions and limitations set forth in the Purchase Agreement.
Sales of Common Stock to CFPI under the Purchase Agreement, and the timing of any sales, will be determined by the Company from time to time in its sole discretion and will depend on a variety of factors, including, among other things, market conditions and the trading price of the Common Stock. The net proceeds from any sales under the Purchase Agreement will depend on the frequency with, and prices at, which the shares of Common Stock are sold to CFPI. The Company expects to use the proceeds from any sales under the Purchase Agreement for working capital and general corporate purposes.
As consideration for CFPI’s commitment to purchase shares of Common Stock at the Company’s direction upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company has agreed to issue shares of Common Stock in an amount equal to $1.0 million based on the closing price of the Common Stock on the New York Stock Exchange on the Upfront Determination Date (as defined in the Purchase Agreement).
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with (1) the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2022. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A, “Risk Factors” and other factors set forth in other parts of this Quarterly Report on Form 10-Q and set forth in our other SEC filings, including our Annual Report on Form 10-K filed with the SEC on March 31, 2022. Unless the context otherwise requires, “we,” “us,” “our,” “Starry Group” and the “Company” refer to Starry, Inc. and its subsidiaries prior to the consummation of the Business Combination and to Starry Group Holdings, Inc. and its subsidiaries following the consummation of the Business Combination.
Overview
We developed a unique and innovative solution to provide last mile fixed broadband using a proprietary fixed wireless technology stack operating in licensed spectrum. We design and build our own fixed wireless equipment, cloud- based network control plane, and billing and operations support systems to run our network and provide our service. We deploy this technology across a variety of markets to provide a robust and competitively-priced broadband service to customers. The integration of our own technology and service delivery allows us to efficiently deploy new competitive broadband networks to connect communities across the country with a tailored cost structure and a focus on the customer experience.
Since our inception, we have developed the technology, optimized the unit economics, acquired spectrum and deployed our network and acquired subscribers in the Boston, Los Angeles, New York City, Denver, Washington, D.C. and Columbus metropolitan areas.
Business Combination and Public Company Costs
On October 6, 2021, we entered into the Agreement and Plan of Merger, dated as of October 6, 2021 (as amended, the “Merger Agreement”) with FirstMark Horizon Acquisition Corp. (“FirstMark”), Sirius Merger Sub, Inc. (“Merger Sub”) and Starry, Inc. (“Starry”). Pursuant to the Merger Agreement,: (a) on March 28, 2022, FirstMark merged with and into Starry Group, with Starry Group surviving the merger as a publicly traded entity and became the sole owner of Merger Sub, and (b) on March 29, 2022, Merger Sub merged with and into Starry, with Starry surviving the merger as a wholly owned subsidiary of Starry Group (collectively, together with all other transactions contemplated by the Merger Agreement, the “Business Combination”).
Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination is accounted for as a reverse recapitalization in accordance with the United States generally accepted accounting principles (“GAAP”). Under this method of accounting, FirstMark is treated as the acquired company and Starry is treated as the accounting acquirer and the Business Combination is treated as the equivalent of Starry issuing stock for the net assets of FirstMark, accompanied by a recapitalization. The net assets of FirstMark are stated at historical cost, with no goodwill or other intangible assets recorded. The financial statements of the combined entity represent the continuation of the consolidated financial statements of Starry in many respects and the financial statements of the combined entity represent the continuation of the consolidated financial statements of Starry in many respects.
The most significant change in our reported financial position and results was an increase in cash from gross proceeds of approximately $176.3 million, including $109.0 million from the sale of the private investment in public equity ("PIPE") shares, $36.3 million from the contribution of cash held in FirstMark’s trust account from its initial public offering, and $31.0 million from the sale of the Series Z Preferred Stock shares consummated substantially simultaneously with the Business Combination. Such gross proceeds were offset by $18.5 million of direct and incremental combined company transaction costs consisting of banking, legal and other professional fees. See “Note 1 — Description of business” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
As a consequence of the Business Combination, we became an SEC-registered and NYSE-listed company, which has required and will continue to require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.
26
Additionally, we expect our capital expenditures will increase significantly in connection with our ongoing activities, with a commensurate increase in our operating expenses, as we:
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.
Network Deployment
We have deployed our fixed wireless network in six markets to date, covering approximately 5.7 million households by the end of the second quarter of 2022. The number of markets that we anticipate launching per year is variable and depends on our capital allocation strategy; the competitive environment for internet services nationally, regionally, and locally at a point in time; government obligations, including our obligations under the Rural Digital Opportunity Fund ("RDOF") and any additional subsidy programs in which we might participate; new partnerships and other factors. We anticipate launching our network in one to six or more markets per year over the near to medium term.
The deployment of fixed wireless networks involves installing our base stations on tall vertical assets, which are connected to the internet through backhaul connections to the base stations, routed through a point-of-presence in the market. These networks serve the end customer locations, at which we install a transceiver to receive the signal, and a Wi-Fi router in the premises to deliver the service. We then use these networks to provide service to our customers for a fee. The speed and scale of these deployments impact the universe of customers that we can serve, and therefore our revenues.
In order to effectively manage supply chain to help meet product demand, we had $3.7 million in prepaid inventory parts and equipment as of June 30, 2022 recorded in prepaid expenses and other current assets on the condensed consolidated balance sheet.
Customer Demand
We currently sell a stand-alone broadband product for a flat monthly fee. Broadband demand continues to grow, and broadband plays an essential role in society — it is used for education, work, healthcare, and entertainment. Consumer demand for broadband is incredibly robust — it has become a necessity — and we expect it to continue to grow into the future. However, to the extent consumer sentiment towards broadband services changes, it would impact our customer penetration and therefore our revenues.
Customer Acquisition
We acquire customers through three primary sales strategies. First, for larger apartment and condominium buildings, we enter into simple access agreements with the building owners or associations, as applicable, giving us permission to install our transceiver and use the buildings' wiring to provide the service to their residents. Then, we sell the service directly to the residents. We use a variety of marketing techniques for these sales and acquisition efforts, including in person events, email, and traditional mail. Second, for small apartment and condominium buildings and single-family homes we sell the service directly to the consumer through digital marketing channels, email, traditional mail, and outdoor media. We then obtain permission from the resident to install our transceiver at the building or single-family home as part of the account creation process. Third, for apartment and condominium buildings of various sizes, we enter into bulk billing agreements where the building owner, association, or other third party (e.g., a management company or short-term rental company) purchases the service for a specified number of units at the building and pays us directly for such services. We use a variety of marketing techniques for these sales and acquisition efforts, including in person meetings and email. To the extent that these efforts are unsuccessful, it would impact our customer penetration and therefore our revenue.
27
Seasonality and Housing Trends
Our customers today are all residential subscribers, and the majority of our customers in the future will continue to be residential subscribers. There are some seasonal trends that affect our customer acquisition activities, and they can vary by market. We expect these season variations to offset as we expand to additional markets, thereby minimizing their impact. Examples include markets with larger college and university student populations, which tend to move in and move out of residences within the same time frame. In addition, consumers naturally consider their broadband provider at the time at which they move to a new residence. To the extent that the velocity of moving changes over time, it would impact our subscriber acquisition and revenues.
Incumbent Competition
We compete with several large incumbent fixed wireline providers, which can vary by market. In some instances, we also compete with mobile providers to the extent that an individual consumer considers a mobile service a substitute for a fixed service. We have built our business to allow us to compete effectively with very low penetration rates in any market, and by offering very competitive pricing. In any market, an incumbent provider may engage in promotional activities or price competition, which would impact our subscriber acquisition and revenues.
Key Components of Statements of Operations
Revenues
We deliver high speed and competitively priced broadband service and related support on a subscription basis to our customers in the Boston, Los Angeles, New York City, Denver, Washington, D.C. and Columbus markets using innovative and proprietary wireless technology. Our subscription rate for such services is a per-month fixed price without data caps. Most of our customers are month-to-month individual subscribers who do not have long-term contracts with us, but a small number are building owners or property management companies who have a commercial arrangement with us whereby they compensate us directly for providing our internet services in their buildings.
We expect our revenues to continue to increase as we acquire new subscribers in existing markets and new markets we plan to enter, and as we introduce new products and services.
Cost of revenues
Cost of revenues includes, but is not limited to, costs incurred supporting national network service costs, fiber backhaul costs, site rent and utilities, customer care and national operations personnel, freight charges, deployed equipment costs, associated depreciation, vehicle-related expenses, repairs and maintenance costs and unabsorbed direct labor associated with our equipment assembly operation among other costs.
We expect our cost of revenues to continue to increase in absolute dollar terms for the foreseeable future as we continue to grow in our existing markets and expand into new markets.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of personnel costs that include salaries and wages, commissions, payroll taxes, employee benefits, and certain employee expenses along with software and equipment expenses, recruiting expenses, professional fees, depreciation, facilities related expenses, marketing expenses, and other fees.
We expect our selling, general and administrative expenses to increase in absolute dollar terms for the foreseeable future as we scale headcount to keep pace with the growth of our business, and as a result of operating as a public company, including the incremental costs associated with SEC compliance, legal, audit, insurance and investor relations activities and other administrative and professional services, including one-time transaction related expenses.
Research and development expenses
Research and development activities help to increase our network capacity over time and further improve our unit economics by reducing the cost of network elements.
Research and development expenses include, but are not limited to, costs incurred in performing engineering and prototype manufacturing activities relating to our products and services, including salaries, benefits, facilities, rent, software, depreciation,
28
research-related overhead expenses, contracted services, license fees, and other external costs. Such expenses are critical to supporting our innovative low-cost hardware and cloud-based software solutions, including increasing capacity and decreasing cost over time.
We expect our research and development expenses to increase in absolute dollar terms for the foreseeable future as we invest in new technologies to achieve our operational and commercial goals of expanding our capacity and lowering costs.
Interest expense
Interest expense consists primarily of interest (both cash and non-cash) incurred on our debt obligations.
Other income (expense), net
Other income (expense), net consists primarily of the fair value adjustments related to our derivative liabilities, earnout liabilities, warrant liabilities and losses on extinguishment of debt, partially offset by interest income earned on our interest-bearing accounts.
Results of Operations
Comparison of the three months ended June 30, 2022 and 2021
The following table summarizes our results of operations on a consolidated basis for the three months ended June 30, 2022 and 2021 (in thousands, except shares and per share data):
|
|
Three Months Ended June 30, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
Revenues |
|
$ |
7,754 |
|
|
$ |
5,091 |
|
|
$ |
2,663 |
|
|
|
52.3 |
% |
Cost of revenues |
|
|
(20,725 |
) |
|
|
(13,318 |
) |
|
|
(7,407 |
) |
|
|
55.6 |
% |
Gross loss |
|
|
(12,971 |
) |
|
|
(8,227 |
) |
|
|
(4,744 |
) |
|
|
57.7 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
(25,128 |
) |
|
|
(16,028 |
) |
|
|
(9,100 |
) |
|
|
56.8 |
% |
Research and development |
|
|
(7,810 |
) |
|
|
(6,476 |
) |
|
|
(1,334 |
) |
|
|
20.6 |
% |
Total operating expenses |
|
|
(32,938 |
) |
|
|
(22,504 |
) |
|
|
(10,434 |
) |
|
|
46.4 |
% |
Loss from operations |
|
|
(45,909 |
) |
|
|
(30,731 |
) |
|
|
(15,178 |
) |
|
|
49.4 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
(8,038 |
) |
|
|
(4,926 |
) |
|
|
(3,112 |
) |
|
|
63.2 |
% |
Other income (expense), net |
|
|
17,640 |
|
|
|
(2,897 |
) |
|
|
20,537 |
|
|
|
708.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total other income (expense) |
|
|
9,602 |
|
|
|
(7,823 |
) |
|
|
17,425 |
|
|
|
222.7 |
% |
Net loss |
|
|
(36,307 |
) |
|
|
(38,554 |
) |
|
|
2,247 |
|
|
|
(5.8 |
)% |
Net loss per share of common stock, basic and diluted |
|
$ |
(0.22 |
) |
|
$ |
(1.06 |
) |
|
$ |
0.84 |
|
|
|
(79.2 |
)% |
Weighted-average shares outstanding, basic and diluted |
|
|
162,423,594 |
|
|
|
36,410,177 |
|
|
|
126,013,418 |
|
|
|
346.1 |
% |
Revenues
Revenues grew by $2.7 million, or 52.3%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, as a result of an increase in our customer relationships from 47,786 to 80,950, partially offset by a decline in ARPU. The increase in our customer relationships is primarily driven by customer acquisition on our deployed network and incremental network expansion.
Cost of revenues
Cost of revenues increased by $7.4 million, or 55.6%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to an increase of $3.2 million in deployed equipment depreciation related to our network expansion, with the remainder predominantly due to headcount related expenses and network service costs.
29
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $9.1 million, or 56.8%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily driven by increases of $3.5 million in headcount related expenses, $1.1 million in legal and accounting professional services primarily associated with transaction-related costs and public company costs, $1.3 million in business insurance and $1.1 million in software subscription expenses.
Research and development expenses
Research and development expenses increased by $1.3 million, or 20.6%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily driven by increases of $0.9 million in headcount related expenses to support the development of our network and development of next generation equipment.
Interest expense
Interest expense increased by $3.1 million, or 63.2%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily driven by an increase in paid-in-kind interest expense of $1.9 million incurred on the Starry Credit Agreement (as defined below) and amortization of debt discounts of $1.0 million.
Other income (expense), net
Total other income (expense), net increased by $20.5 million to other income of $17.6 million for the three months ended June 30, 2022, compared to other expense of $2.9 million for the three months ended June 30, 2021, primarily driven by the fair value adjustments related to derivative liabilities. Such adjustments for the three months ended June 30, 2022 included a $11.6 million gain on change in fair value of Earnout Shares and a $9.7 million gain on change in fair value of Common Stock Warrants, partially offset by a $3.6 million loss on change in fair value of the Junior Debt Exchange. See "Note 2 — Basis of presentation and summary of significant accounting policies" and “Note 4 — Warrants and earnout shares” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Net Loss
Net loss decreased by $2.2 million, or 5.8%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily driven by the factors described above.
Comparison of the six months ended June 30, 2022 and 2021
The following table summarizes our results of operations on a consolidated basis for the six months ended June 30, 2022 and 2021 (in thousands, except shares and per share data):
|
|
Six Months Ended June 30, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
Revenues |
|
$ |
15,124 |
|
|
$ |
9,614 |
|
|
$ |
5,510 |
|
|
|
57.3 |
% |
Cost of revenues |
|
|
(38,916 |
) |
|
|
(25,822 |
) |
|
|
(13,094 |
) |
|
|
50.7 |
% |
Gross loss |
|
|
(23,792 |
) |
|
|
(16,208 |
) |
|
|
(7,584 |
) |
|
|
46.8 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
(50,218 |
) |
|
|
(30,238 |
) |
|
|
(19,980 |
) |
|
|
66.1 |
% |
Research and development |
|
|
(16,037 |
) |
|
|
(12,418 |
) |
|
|
(3,619 |
) |
|
|
29.1 |
% |
Total operating expenses |
|
|
(66,255 |
) |
|
|
(42,656 |
) |
|
|
(23,599 |
) |
|
|
55.3 |
% |
Loss from operations |
|
|
(90,047 |
) |
|
|
(58,864 |
) |
|
|
(31,183 |
) |
|
|
53.0 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
(15,568 |
) |
|
|
(12,581 |
) |
|
|
(2,987 |
) |
|
|
23.7 |
% |
Other income (expense), net |
|
|
15,675 |
|
|
|
(8,155 |
) |
|
|
23,830 |
|
|
|
292.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total other income (expense) |
|
|
107 |
|
|
|
(20,736 |
) |
|
|
20,843 |
|
|
|
100.5 |
% |
Net loss |
|
|
(89,940 |
) |
|
|
(79,600 |
) |
|
|
(10,340 |
) |
|
|
13.0 |
% |
Net loss per share of common stock, basic and diluted |
|
$ |
(0.88 |
) |
|
$ |
(2.19 |
) |
|
$ |
1.31 |
|
|
|
(59.8 |
)% |
Weighted-average shares outstanding, basic and diluted |
|
|
102,357,494 |
|
|
|
36,325,426 |
|
|
|
66,032,069 |
|
|
|
181.8 |
% |
30
Revenues
Revenues grew by $5.5 million, or 57.3%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, as a result of an increase in our customer relationships from 47,786 to 80,950, partially offset by a decline in ARPU. The increase in our customer relationships is primarily driven by customer acquisition on our deployed network and incremental network expansion.
Cost of revenues
Cost of revenues increased by $13.1 million, or 50.7%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to an increase of $6.2 million in deployed equipment depreciation related to our network expansion, with the remainder predominantly due to headcount related expenses and network service costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $20.0 million, or 66.1%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by increases of $10.4 million in headcount related expenses including $2.7 million in one-time deal incentive payments related to the Business Combination and $2.9 million in stock-based compensation predominantly due to RSUs for which the related performance condition was met upon consummation of the Business Combination, $2.2 million in legal and accounting professional services primarily associated with transaction-related costs and public company costs, $1.4 million in business insurance and $2.2 million in software subscription expenses.
Research and development expenses
Research and development expenses increased by $3.6 million, or 29.1%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily driven by increases of $2.9 million in headcount related expenses to support the development of our network and development of next generation equipment, including $1.3 million in stock-based compensation predominantly due to RSUs for which the related performance condition was met upon consummation of the Business Combination.
Interest expense
Interest expense increased by $3.0 million, or 23.7%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily driven by an increase in paid-in-kind interest expense of $3.7 million incurred on the Starry Credit Agreement (as defined below) and amortization of debt discounts of $2.0 million, partially offset by a decrease in amortization of $2.7 million and interest expense of $0.2 million related to the beneficial conversion feature on the 2020 Notes and the 2021 Notes (each as defined in “Note 4 — Debt” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) that settled in the first quarter 2021.
Other income (expense), net
Total other income (expense), net increased by $23.8 million to other income of $15.7 million for the six months ended June 30, 2022, compared to other expense of $8.2 million for the six months ended June 30, 2021, primarily driven by the $2.4 million loss on extinguishment of debt during the six months ended June 30, 2021 with no corresponding debt extinguishment during the six months ended June 30, 2022, the recognition of $3.9 million in distributions to Non-Redeeming Shareholders, and the fair value adjustments related to derivative liabilities. Such adjustments for the six months ended June 30, 2022 included a $16.8 million gain on change in fair value of Earnout Shares, a $2.2 million gain on change in fair value of liability-classified Starry Warrants and a $7.2 million gain on change in fair value of Common Stock Warrants, partially offset by a $5.6 million loss on the recognition and change in fair value of the Junior Debt Exchange and a $1.0 million loss on change in fair value of the Prepayment Penalty. See "Note 2 — Basis of presentation and summary of significant accounting policies" and “Note 4 — Warrants and earnout shares” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Net Loss
Net loss increased by $10.3 million, or 13.0%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily driven by the factors described above.
31
Key Business Metrics and Non-GAAP Financial Measures
We use the following metrics to evaluate our performance, identify trends, formulate financial projections, and make strategic decisions. We believe that these metrics provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team.
The following tables summarize our key business metrics and non-GAAP financial measures for the periods indicated:
|
|
As of June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Addressable Households |
|
|
9,691,029 |
|
|
|
9,691,029 |
|
Homes Serviceable |
|
|
5,650,103 |
|
|
|
4,724,080 |
|
Customer Relationships |
|
|
80,950 |
|
|
|
47,786 |
|
Penetration of Homes Serviceable |
|
|
1.43 |
% |
|
|
1.01 |
% |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenue (000s) |
|
$ |
7,754 |
|
|
$ |
5,091 |
|
|
$ |
15,124 |
|
|
$ |
9,614 |
|
Average Revenue Per User (“ARPU”) |
|
$ |
33.96 |
|
|
$ |
38.00 |
|
|
$ |
34.96 |
|
|
$ |
38.95 |
|
Net Loss (000s) |
|
$ |
(36,307 |
) |
|
$ |
(38,554 |
) |
|
$ |
(89,940 |
) |
|
$ |
(79,600 |
) |
Net Loss margin |
|
|
(468 |
)% |
|
|
(757 |
)% |
|
|
(595 |
)% |
|
|
(828 |
)% |
Adjusted EBITDA (000s) |
|
$ |
(33,850 |
) |
|
$ |
(23,493 |
) |
|
$ |
(61,662 |
) |
|
$ |
(45,311 |
) |
Adjusted EBITDA margin |
|
|
(437 |
)% |
|
|
(461 |
)% |
|
|
(408 |
)% |
|
|
(471 |
)% |
Addressable Households
Addressable Households are the estimated total number of households within our service territory that we could serve in the markets where we intend to deploy or have deployed a network, assuming the network was fully built and we could serve every household. We calculate the Addressable Households by counting the total households within our spectrum license areas meeting a specified threshold of household density. Addressable Households grows as we begin to execute plans to expand our network in new markets or in new parts of existing markets, and will follow a growth trend as we expand the network. Growth in Addressable Households precedes growth in Homes Serviceable.
Addressable Households remained unchanged from June 30, 2021 to June 30, 2022 because we did not add new markets during the period and continued to expand within the existing markets we serve by deploying incremental network assets.
Homes Serviceable
Homes Serviceable are the estimated households that we could serve using the network that we have deployed in our markets at a given date. This is a subset of the Addressable Households and reflects the size of the network we have deployed as well as the households that we can technologically and commercially serve. Homes Serviceable is a count of all of the households that fall within the coverage area of our deployed network, and will grow as we continue to deploy our network in existing markets and as we deploy in new markets as we expand our Addressable Households.
Homes Serviceable as of June 30, 2022 increased by 0.9 million, or 19.6%, in comparison to June 30, 2021. This increase was primarily due to the deployment of incremental network assets within the markets that we serve.
Customer Relationships
Customer Relationships include customers who have signed up for a service and all units that are billed under our bulk billing arrangements where a building owner, association, or other third-party is invoiced for a specific number of units within multiple dwelling unit buildings. Customer Relationships include Starry internet service, currently our only service, and will include unique relationships for small and medium size business service, voice service, and potentially other services in the future. Such relationships also include pending customers that have signed up for service that has not yet been installed.
Customer Relationships increased by 33.2 thousand, or 69.4%, as of June 30, 2022 in comparison to June 30, 2021. This increase was primarily due to new customers signing up for our services and to a lesser extent driven by additional bulk billing arrangements for such services sold to third parties who manage or own multifamily dwelling unit buildings.
32
Penetration of Homes Serviceable
Penetration of Homes Serviceable is the ratio of the total number of Customer Relationships to the total number of Homes Serviceable and represents the percentage of households that can receive service with which we have developed a Customer Relationship. Penetration of Homes Serviceable grows as markets mature, but may fluctuate depending on the pace of our network expansion if growth in the denominator (Homes Serviceable) significantly outpaces the numerator (Customer Relationships).
Average revenue per user (“ARPU”)
We use ARPU to evaluate and monitor the amount of revenue generated by customers and analyze growth patterns. ARPU values represent total revenue divided by the average number of customer relationships at the beginning and end of each period, divided by the number of months in the period.
We believe ARPU is useful to investors in evaluating our operating performance. ARPU and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of ARPU may not be directly comparable to similarly titled measures reported by other companies.
ARPU decreased by $4.0, or 10.6%, and $4.0, or 10.2%, for the three and six months ended June 30, 2022, respectively, in comparison to the three and six months ended June 30, 2021 primarily due to the use of customer promotional plans to increase penetration in the markets that we serve.
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA is a non-GAAP financial measure and is defined as Net Loss, adjusted to exclude interest, tax, depreciation and amortization expense, unusual or non-recurring items, non-cash items and other items that are not indicative of ongoing operations (including one-time transaction related expenses, stock-based compensation expenses, loss on extinguishment of debt, the fair value adjustment of derivative liabilities and recognition of distributions to non-redeeming shareholders). We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue. Adjusted EBITDA and Adjusted EBITDA margin are frequently used by management, research analysts, investors and other interested parties to evaluate companies. We believe that these measures are helpful in highlighting trends in our operating results because they exclude the impact of items that are outside the control of management or not reflective of our ongoing operations and performance.
Adjusted EBITDA and Adjusted EBITDA margin are measures not defined under GAAP. They have limitations in that they exclude certain types of expenses and do not reflect changes in working capital needs. Furthermore, other companies may calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly entitled measures differently, limiting their usefulness as comparative measures.
Adjusted EBITDA and Adjusted EBITDA margin are presented here as supplemental measures only.
You are encouraged to evaluate each adjustment. For a historical reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to their most directly comparable GAAP measures, Net Loss and Net Loss margin, please refer to the table below.
33
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||||||||||||||
($ in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||||||||
Net Loss ($) and Net Loss margin (%) |
|
$ |
(36,307 |
) |
(468%) |
|
|
$ |
(38,554 |
) |
(757%) |
|
|
$ |
(89,940 |
) |
(595%) |
|
|
$ |
(79,600 |
) |
(828%) |
|
||||
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Add: Interest expense, net |
|
|
8,033 |
|
104% |
|
|
|
4,927 |
|
97% |
|
|
|
15,563 |
|
103% |
|
|
|
12,581 |
|
131% |
|
||||
Add: Depreciation and amortization expense |
|
|
10,313 |
|
133% |
|
|
|
6,878 |
|
135% |
|
|
|
19,645 |
|
130% |
|
|
|
12,973 |
|
135% |
|
||||
Add: Non-recurring transaction related expenses (1) |
|
|
755 |
|
10% |
|
|
|
— |
|
|
— |
|
|
|
4,042 |
|
27% |
|
|
|
— |
|
|
— |
|
||
(Subtract)/Add: (Gain)/loss on fair value adjustment of derivative liabilities |
|
|
(17,636 |
) |
(227)% |
|
|
|
2,898 |
|
57% |
|
|
|
(19,559 |
) |
(129)% |
|
|
|
5,796 |
|
60% |
|
||||
Add: Recognition of distribution to non-redeeming shareholders |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
3,888 |
|
26% |
|
|
|
— |
|
|
— |
|
|
Add: Loss on extinguishment of debt |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
2,361 |
|
25% |
|
|
Add: Stock-based compensation |
|
|
992 |
|
13% |
|
|
|
358 |
|
7% |
|
|
|
4,699 |
|
31% |
|
|
|
578 |
|
6% |
|
||||
Adjusted EBITDA ($) and Adjusted EBITDA margin (%) |
|
$ |
(33,850 |
) |
(437%) |
|
|
$ |
(23,493 |
) |
(461%) |
|
|
$ |
(61,662 |
) |
(408%) |
|
|
$ |
(45,311 |
) |
(471%) |
|
||||
(1) We add back expenses that are related to transactions that occurred during the period that are expected to be non-recurring, including mergers and acquisitions and financings. Generally such expenses are included within selling, general and administrative expense in the condensed consolidated statements of operations. For the six months ended June 30, 2022, such transactions comprised of the Business Combination, the sale of the PIPE shares, the sale of the Series Z Preferred Stock shares, the registration for resale of both Class A common stock and private placement warrants as well as other financing costs.
Liquidity and Capital Resources
Overview
We are an early-stage growth company and have generated losses and negative cash flows from operating activities since inception. Our principal sources of liquidity have been generated through a combination of cash flows from borrowings and the issuances of equity. We expect that our primary ongoing requirements for cash will be used to execute on our strategic initiatives through (i) investing in our technology, (ii) expanding our domestic footprint and (iii) hiring personnel. We require additional capital investment to execute the strategic business plan to grow our subscriber base in existing markets from already-deployed network assets and launch services in new markets. Management plans to raise additional capital through a combination of potential options, including but not limited to, equity and debt financings.
Additional equity financing may not be available on favorable terms and could be dilutive to current stockholders. Debt financing, if available, may involve restrictive covenants and dilutive financing instruments.
Our ability to access capital when needed is not assured and, if capital is not available to us when, and in the amounts needed, we could be required to delay, scale back or abandon some or all of our expansion efforts and other operations, which could materially harm our business, financial condition and results of operations. Because of this uncertainty, there is substantial doubt about our ability to continue as a going concern for at least one year from the date that the unaudited condensed consolidated financial statements were issued.
In March 2022, the Business Combination was consummated, resulting in gross proceeds of $36.3 million, the sale of the PIPE shares was consummated, resulting in gross proceeds of $109.0 million, and the sale of the Series Z Preferred Stock shares was consummated, resulting in gross proceeds of $31.0 million. Total direct and incremental transaction costs were approximately $18.5 million.
As of June 30, 2022 our principal sources of liquidity were cash and cash equivalents of $99.7 million and consist of checking and interest-bearing accounts, of which $15.0 million cannot be accessed in accordance with the Starry Credit Agreement.
Starry Credit Agreement
In February 2019, we entered into a credit agreement among Old Starry, Starry Spectrum Holdings LLC, Starry (MA), Inc., Starry Spectrum LLC, Testco LLC, Widmo Holdings LLC and Vibrant Composites Inc., as borrowers, the lenders party thereto from time to time and ArrowMark Agency Services, LLC, as administrative agent, as amended, restated, amended and restated,
34
supplemented or otherwise modified from time to time (the “Starry Credit Agreement”) to provide a total of $50 million in two separate loan tranches, $27.5 million and $22.5 million, and drew on the full amount of each tranche in February 2019 and June 2019, respectively. In December 2019, we amended the Starry Credit Agreement with a syndicate of lenders, providing for an additional loan tranche of $75 million, which we immediately drew upon in full (collectively, the “2019 Term Loans”).
In June 2021, we entered into a Third Amendment and Waiver to the Starry Credit Agreement (the “Third Amendment and Waiver”). The Third Amendment and Waiver amended and restated two affirmative covenants that we were not in compliance with as of December 31, 2020, including extending the time period in which we are required to deliver audited financial statements without a “going concern” or like qualification, exception or emphasis and extending the time period in which we are required to deliver a budget for fiscal year 2021. The non-compliance with covenants is an event of default which would have required the outstanding long-term debt balance to be payable upon demand. In addition to the amendment and restatement, the Third Amendment and Waiver waived any events of default in existence on the Third Amendment and Waiver effective date. The lender retained all other covenant requirements.
In conjunction with entering into the Starry Credit Agreement, we issued warrants to the lender in two tranches in February 2019 and December 2019 of 17.6 million and 15.0 million, respectively.
In October 2021, we entered into the Fifth Amendment to the Starry Credit Agreement (the "Fifth Amendment") with a syndicate of lenders, providing for an additional tranche of $40.0 million which we immediately drew upon in full (“Tranche C Term Loan”) and up to an additional $10.0 million in delayed draw loans which we fully drew upon in January 2022 (“Delayed Draw Tranche C Loan”) (collectively, with the Tranche C Term Loan and 2019 Term Loans, the “Term Loans”).
In conjunction with entering into the Tranche C Term Loan, we entered into a Warrant Purchase Agreement as of October 6, 2021 (the “Warrant Purchase Agreement”), and issued to the lenders warrants to purchase 11.5 million shares of Old Starry's non-voting common stock (the “Initial Tranche C Warrants”). Warrants to purchase an additional 2.9 million shares of Old Starry's non-voting common stock were contingently issuable subject to our drawing down on the Delayed Draw Tranche C Loan (the “Delayed Draw Tranche C Warrants,” and together with the Initial Tranche C Warrants, the “Tranche C Warrants”). Upon issuance of such warrants, 25% immediately vested and became exercisable. As the Business Combination closed prior to April 15, 2022, the Tranche C Warrants are exercisable solely with respect to the 25% of the warrant shares that vested immediately upon issuance, whereas the remaining 75% of unvested warrants were forfeited. We determined the fair value per share of Old Starry's non-voting common stock underlying the Tranche C Warrants to be $1.81 per the terms of the Business Combination.
The loans incur interest at a rate equal to the London Interbank Offered Rate ("LIBOR"), subject to a floor of 2.0% plus an applicable margin of 9.0%, capped at 13.25% annually. Pursuant to the Starry Credit Agreement, we elected to pay the accrued interest on an in-kind basis by increasing the principal balance outstanding, payable in its entirety at maturity in February 2024. Outstanding borrowings plus accrued paid-in-kind interest were $224.5 million as of June 30, 2022. As of June 30, 2022, we had deferred financing costs and discounts on warrants on these loans in the amount of $1.9 million and $13.5 million, respectively.
On March 26, 2022, we entered into a Seventh Amendment to the Credit Agreement (the "Seventh Amendment"). The Seventh Amendment amended and restated an affirmative covenant requiring us to provide annual audited financial statements without a “going concern” or like qualification, exception or emphasis. In addition, the Seventh Amendment redefined the term “Change in Control” to exclude the aforementioned Business Combination with respect to contemplating the prepayment penalty. As a result of such amendments, we were in compliance with all bank covenants as of December 31, 2021. Without such amendments we would have been in default and the outstanding long-term debt balance would be payable upon demand. The lender retained all other covenant requirements. As of June 30, 2022, the Company was in compliance with the financial covenants required by the Starry Credit Agreement (see Note 4).
Capital lease obligations
Throughout the period we entered into capital leases for vehicles and equipment with various vendors with payments due monthly extending through 2025. As of June 30, 2022, we owed $3.1 million under such lease obligations.
Strategic partner arrangement
In June 2020, we entered into a 10-year arrangement with AEPV (the "Strategic Partner Arrangement") to jointly deploy a fixed wireless broadband network in a new market. AEPV has agreed to fund the equipment necessary to deliver the service in exchange for a revenue sharing arrangement whereby they will be entitled to a percentage of revenue earned by us in the new market. Pursuant to the arrangement, we will sell in exchange for cash consideration the equipment to AEPV and lease the equipment back. The seller-financing portion of the transaction created a form of continuing involvement which precludes sale-leaseback accounting until the
35
related amounts due are paid in full. Accordingly, we accounted for the sale-leaseback as a financing transaction with AEPV, with the equipment remaining on our books at its then carrying value, the net cash proceeds received being reflected as a financing obligation, and the expected future payments under the revenue sharing agreement to the third party being treated as debt service applied to interest and principal over the initial 10-year term. The discount rate is calculated based on expected future payments under the revenue sharing agreement. AEPV has the right to terminate the arrangement for any reason no earlier than June 2023. In the event of an early termination, we are required to repurchase the equipment at a repurchase price equal to the net book value of the equipment as reflected on the third party’s balance sheet at the time of termination. We have made an accounting policy election to use the prospective method to account for changes in actual or estimated cash flows related to the debt service. See “Note 12 — Commitments and contingencies” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Purchase commitments
Throughout the period we entered into non-cancelable purchase commitments with various contract manufacturers to purchase materials and associated support to maintain and improve our existing distribution system as well as build out new networks and distribution systems. As of June 30, 2022, we had non-cancelable commitments totaling $42.4 million.
Convertible notes payable
In March 2021, we closed on an issuance of Starry Series E Preferred Stock (inclusive of Starry Series E-1 Preferred Stock, Starry Series E-2 Preferred Stock and Starry Series E-3 Preferred Stock), generating cash proceeds, net of issuance costs, of approximately $119.9 million and converted all $42.8 million of our outstanding convertible notes payable into shares of Series E-1 Preferred Stock and Series E-2 Preferred Stock.
Short term liquidity requirements
As a growth company, the net losses we have incurred since inception are in accordance with our strategy and forecast. We will continue to incur net losses in accordance with our operating plan as we continue to expand our platform development to improve our existing technology and expand into new markets.
We incurred a net loss of $89.9 million and $79.6 million for the six months ended June 30, 2022 and 2021. As of June 30, 2022, our current assets were $110.7 million, consisting primarily of cash and cash equivalents of $99.7 million, which are primarily deposited with financial institutions, and our current liabilities were $35.0 million, consisting of accounts payable totaling $6.7 million, accrued expenses and other current liabilities totaling $23.9 million, unearned revenue totaling $2.6 million, and the current portion of our debt totaling $1.9 million.
Long term liquidity requirements
As a result of the consummation of the Business Combination, the sale of the PIPE shares and the sale of the Series Z Preferred Stock shares, we successfully raised gross proceeds of $36.2 million, $109.0 million and $31.0 million, respectively. However, our existing capital resources may be insufficient to meet our long-term liquidity requirements. We may be required to raise additional capital to meet our long-term liquidity requirements through either further equity or debt financing. If we raise funds by issuing equity securities, dilution to existing stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of existing holders of our common stock, as applicable. If we raise funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, as applicable. The terms of additional debt securities or borrowings could impose significant restrictions on our operations. The credit market and financial services industry have in the past, and may in the future, experience periods of upheaval that could impact the availability and cost of equity and debt financing.
36
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing activities, and financing activities for the periods indicated and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto:
|
|
Six Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Net cash provided by (used in) |
|
|
|
|
|
|
||
Operating activities |
|
$ |
(65,516 |
) |
|
$ |
(43,558 |
) |
Investing activities |
|
|
(37,584 |
) |
|
|
(29,985 |
) |
Financing activities |
|
|
173,398 |
|
|
|
132,689 |
|
Net change in cash and cash equivalents |
|
$ |
70,298 |
|
|
$ |
59,146 |
|
Net cash used in operating activities
For the six months ended June 30, 2022, cash flows used in operating activities was $65.5 million. Such cash used primarily related to our net loss of $89.9 million, adjusted for non-cash expenses of $26.1 million, and changes in our working capital accounts of $1.2 million. The adjustments for non-cash expenses primarily include (i) $19.6 million in depreciation, (ii) paid-in-kind interest on the Term Loans, the 2020 Notes, the 2021 Notes and the Strategic Partner Arrangement of $12.1 million, (iii) amortization of debt discount of $3.4 million, (iv) $4.7 million in share-based compensation expense, (v) loss on disposal of property and equipment of $1.4 million, (vi) $0.3 million in transaction costs allocated to derivative liabilities, (vii) accretion of asset retirement obligations of $0.1 million and (viii) $3.9 million in distributions to non-redeeming shareholders, offset by fair value adjustments to derivative liabilities of $19.6 million. The changes in our working capital accounts primarily include (i) $3.5 million increase in prepaid expenses and other current assets, (ii) $0.6 million increase in other assets, (iii) $0.1 million increase in accounts receivable, and (iv) $0.2 million decrease in accounts payable, partially offset by increases of (i) $1.9 million in accrued expenses and other current liabilities and (ii) $0.9 million in unearned revenue.
For the six months ended June 30, 2021, cash flows used in operating activities was $43.6 million. Such cash used primarily related to our net loss of $79.6 million, adjusted for non-cash expenses of $35.5 million, and changes in our working capital accounts of $0.5 million. The adjustments for non-cash expenses primarily include (i) $13.0 million in depreciation, (ii) paid-in-kind interest on the Term Loans, the 2020 Notes, the 2021 Notes and the Strategic Partner Arrangement of $8.4 million, (iii) amortization of debt discount of $3.2 million, (iv) conversion of the convertible debt discount of $1.0 million, (v) loss on extinguishment of debt of $2.4 million, (vi) fair value adjustment of the derivative liability of $5.8 million, (vii) loss on disposal of property and equipment of $1.2 million and (viii) $0.6 million in share-based compensation expense. The changes in our working capital accounts primarily include increases of (i) $2.0 million in other liabilities, (ii) $1.5 million in accrued expenses and other current liabilities and (iii) $0.5 million in unearned revenue, partially offset by (i) $2.1 million increase in prepaid expenses and other current assets, (ii) $0.5 million increase in deferred costs, (iii) $0.1 million increase in accounts receivable, and (iv) $0.8 million decrease in accounts payable.
Net cash used in investing activities
Net cash used in investing activities during the six months ended June 30, 2022 totaled $37.6 million, related to capital expenditures for our distribution system.
Net cash used in investing activities during the six months ended June 30, 2021 totaled $30.0 million, related to capital expenditures for our distribution system.
Net cash provided by financing activities
Net cash provided by financing activities during the six months ended June 30, 2022 totaled $173.4 million, which was primarily driven by $160.5 million in proceeds from the Business Combination, net of transaction costs, $10.0 million in proceeds from the issuance of Term Loans, net of issuance costs, $3.9 million in proceeds from the Strategic Partner Arrangement and $0.8 million in proceeds from the exercise of stock options, offset by $1.2 million in repayments of notes assumed in the Business Combination, $0.6 million in repayments of capital lease obligations and less than $0.1 million in payments of third-party issuance costs.
Net cash provided by financing activities during the six months ended June 30, 2021 totaled $132.7 million, which was driven primarily by the proceeds raised from the issuance of Starry Series E Preferred Stock (inclusive of Starry Series E-1 Preferred Stock,
37
Starry Series E-2 Preferred Stock and Starry Series E-3 Preferred Stock), net of issuance costs, of $119.9 million, issuance of $11.0 million of the 2021 Notes, proceeds from the Strategic Partner Arrangement of $2.0 million and exercise of stock options of $0.2 million, offset by repayments of capital lease obligations of $0.4 million.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date, as well as the reported expenses incurred during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to our unaudited condensed consolidated financial statements.
Other than policies outlined throughout the notes to the unaudited condensed consolidated financial statements contained elsewhere in this Quarterly Report, and as described below, there have been no significant changes from the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K filed with the SEC on March 31, 2022.
Earnout shares
Following the Business Combination, 4,128,113 shares of Class A common stock held by certain former equity holders of FirstMark are subject to vesting and forfeiture conditions. Earnout Shares subject to vesting that do not vest in accordance with such terms shall be forfeited and cancelled for no consideration. The Earnout Shares are not redeemable. The Earnout Shares will be considered outstanding for legal purposes prior to the achievement of the vesting conditions but will not be considered outstanding for accounting purposes until such vesting conditions are achieved. See "Note 9 — Warrants and earnout shares" in the notes to our unaudited condensed consolidated financial statements for more information regarding such Earnout Shares.
The Company evaluated the Earnout Shares and concluded that they do not meet the criteria to be classified within stockholders' equity. The Earnout Shares contain settlement provisions that preclude them from meeting the derivative exception of being indexed to the Company's stock. As such, the Company has recorded these Earnout Shares as liabilities on the condensed consolidated balance sheet at fair value, with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations at each reporting date.
The fair value of the Earnout Shares was derived utilizing a Monte Carlo Simulation Method (“MCSM”) to assess the likelihood of a triggering event occurring in the specified time frame. Under each scenario, the occurrence of a triggering event is tracked. If one of the thresholds is reached, then the underlying fair value of the common stock at the time of the trigger event is utilized to determine the fair value of the Earnout Shares that would be issued. The mean value of the shares estimated over the course of numerous iterations are calculated to arrive at the fair value of the Earnout shares. The MCSM utilizes a number of inputs which include the trading price and volatility of the underlying common stock, the expected term and risk-free interest rates. The determination of the fair value of these financial instruments is complex and highly judgmental due to the significant estimation required. In particular, the fair value estimate was sensitive to certain assumptions, such as the trading price and volatility of the underlying common stock.
Redeemable shares
On March 31, 2022, the Company entered into an agreement with certain debt holders who are also shareholders of 1,209,029 shares of Class A common stock. The Company assessed the embedded conversion features and determined that the Junior Debt Exchange met the definition of a derivative under ASC 815 and would require separate accounting from the redeemable shares. As of June 30, 2022, the Company estimated the fair value of the Junior Debt Exchange based on a Black-Scholes option pricing model for a European put option and recorded $5,616 in other liabilities on the condensed consolidated balance sheet with the offset recorded in other income (expense), net on the condensed consolidated statements of operations. The key inputs used in the determination of the fair value included current stock price, volatility and expected term. See "Note 2 — Basis of presentation and summary of significant accounting policies" and "Note 15 — Redeemable shares" in the notes to our unaudited condensed consolidated financial statements for more information regarding the valuation of the Junior Debt Exchange and the redeemable shares.
New and Recently Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations.
38
See “Note 2 — Basis of presentation and summary of significant accounting policies — Recent accounting pronouncements issued, not yet adopted” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements, the timing of their adoption and our assessment, to the extent we made one, of their potential impact on our financial condition and results of operations.
JOBS Act Accounting Election
Section 107 of the JOBS Act allows emerging growth companies to take advantage of the extended transition period for complying with new or revised accounting standards. Under Section 107, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Any decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We have elected to use the extended transition period available under the JOBS Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
Interest Rate Risk
We hold cash and cash equivalents, including restricted cash, for working capital purposes. As of June 30, 2022, we had a cash balance of $99.7 million (excluding restricted cash), consisting of checking and interest-bearing accounts, which are not significantly affected by changes in the general level of U.S. interest rates due to the short-term holding period of such balances. As a result, we do not have material exposure to interest rate risk with respect to cash and cash equivalents as these are all highly liquid investments with a maturity date of 90 days or less at the time of purchase.
As of June 30, 2022, outstanding borrowings plus accrued paid-in-kind interest pursuant to the Starry Credit Agreement were $224.5 million, which incur interest at a rate equal to LIBOR, subject to a floor of 2.0% plus an applicable margin of 9.0%, capped at 13.25% annually. An immediate 10% change in LIBOR would not have a material impact on our debt-related obligations, financial position or results of operations.
Inflation Risk
Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results.
Item 4. Controls and Procedures.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, due to the material weakness described below and referred to in Part II, Item 1A. of this report, our disclosure controls and procedures were not effective as of June 30, 2022. Notwithstanding the material weaknesses, our
39
management has concluded that the financial statements included elsewhere in this report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.
Material Weaknesses
In connection with the audits of our audited consolidated financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2022, we identified material weaknesses in our internal control over financial reporting. The material weaknesses relate to (i) the lack of maintaining a sufficient complement of accounting and financial reporting resources commensurate with our financial reporting requirements, (ii) the lack of maintaining an effective risk assessment process, which led to improperly designed controls, (iii) the lack of maintaining appropriate control activities to support the appropriate segregation of duties over the review of account reconciliations, manual journal entries and rights over access administrative controls and (iv) the failure to document, thoroughly communicate and monitor control processes and relevant accounting policies and procedures.
Remediation Activities
We have engaged a third-party consultant to assist us in the process of designing and implementing measures to improve our internal control over financial reporting to remediate these material weaknesses. Our remediation efforts are focused on (i) hiring of personnel with technical accounting and financial reporting experience; (ii) implementation of improved accounting and financial reporting processes; and (iii) implementation of systems to improve the completeness, timeliness and accuracy of our financial reporting. We believe the measures described above should remediate the material weaknesses identified and strengthen our internal control over financial reporting. The remediation initiatives outlined above are estimated to take place over the next 12 to 18 months. While we continue the challenging and costly process to implement our plan to remediate the material weaknesses, we cannot predict the success of such plan or the outcome of our assessment of this plan until the remediation initiatives have been completed and have been operating effectively for a sufficient period of time. We can give no assurance that these measures will remediate the deficiencies in internal control or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that may lead to a restatement of our financial statements or cause us to fail to meet our reporting obligations.
Changes in internal control over financial reporting
Other than as described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal or regulatory proceedings arising in the ordinary course of our business, including intellectual property claims and commercial contract disputes. In addition, with respect to employees and others, we face and could in the future face a wide variety of claims, including discrimination (for example, based on gender, age, race or religious affiliation), sexual harassment, privacy, labor and employment, Employee Retirement Income Security Act and disability claims. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and could require significant management time and corporate resources to defend, could result in significant media coverage and negative publicity, and could be harmful to our reputation and our brand. Although the outcome of these and other claims cannot be predicted with certainty, we are not currently a party to any litigation or regulatory proceeding that we expect to have a material adverse effect on our business, results of operations, financial condition or cash flows.
Item 1A. Risk Factors.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 that was filed with the SEC on March 31, 2022. However, we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
42
Item 6. Exhibits.
Furnish the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter).
Exhibit |
|
|
Incorporated by Reference |
Filed/Furnished Herewith |
|||
Number |
|
Exhibit Description |
Form |
File No. |
Exhibit |
Filing Date |
|
2.1† |
|
S-4 |
333-260847 |
2.1 |
February 9, 2022 |
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation of Starry Group Holdings, Inc. |
10-K |
001-41336 |
3.1 |
March 31, 2022 |
|
3.2 |
|
10-K |
001-41336 |
3.2 |
March 31, 2022 |
|
|
4.1 |
|
8-K |
001-39585 |
4.1 |
October 8, 2020 |
|
|
4.2 |
|
10-K |
001-41336 |
4.2 |
March 31, 2022 |
|
|
4.3 |
|
10-K |
001-41336 |
4.3 |
March 31, 2022 |
|
|
4.4 |
|
8-K |
001-41336 |
4.1 |
April 25, 2022 |
|
|
10.1# |
|
10-K |
001-41336 |
10.1 |
March 31, 2022 |
|
|
10.2 |
|
S-4 |
333-260847 |
10.3 |
February 9, 2022 |
|
|
10.3 |
|
8-K |
001-41336 |
10.2 |
March 29, 2022 |
|
|
10.4 |
|
S-4 |
333-260847 |
10.4 |
February 9, 2022 |
|
|
10.5 |
|
10-K |
001-41336 |
10.5 |
March 31, 2022 |
|
|
10.6 |
|
8-K |
001-41336 |
10.5 |
March 29, 2022 |
|
|
10.7 |
|
S-4 |
333-260847 |
10.6 |
February 9, 2022 |
|
|
10.8 |
|
8-K |
001-41336 |
10.4 |
March 29,2022 |
|
|
43
10.9 |
|
10-K |
001-41336 |
10.9 |
March 31, 2022 |
|
|
10.10 |
|
8-K |
001-41336 |
10.1 |
March 29, 2022 |
|
|
10.11 |
|
10-K |
001-41336 |
10.11 |
March 31, 2022 |
|
|
10.12 |
|
10-K |
001-41336 |
10.12 |
March 31, 2022 |
|
|
10.13 |
|
Sixth Amendment to Credit Agreement, dated as of January 13, 2022 |
10-K |
001-41336 |
10.13 |
March 31, 2022 |
|
10.14 |
|
Seventh Amendment to Credit Agreement, dated as of March 26, 2022 |
10-K |
001-41336 |
10.14 |
March 31, 2022 |
|
10.15 |
|
8-K |
001-41336 |
10.1 |
August 8, 2022 |
|
|
10.16 |
|
8-K |
001-41336 |
10.2 |
August 8, 2022 |
|
|
10.17# |
|
Starry, Inc. Amended and Restated 2014 Stock Option and Grant Plan. |
S-4 |
333-260847 |
10.9 |
December 20, 2021 |
|
10.18# |
|
March 2021 Amendment to the Amended and Restated 2014 Stock Option and Grant Plan. |
S-4 |
333-260847 |
10.10 |
December 20, 2021 |
|
10.19# |
|
S-4 |
333-260847 |
10.11 |
December 20, 2021 |
|
|
10.20# |
|
S-4 |
333-260847 |
10.12 |
December 20, 2021 |
|
|
10.21# |
|
S-4 |
333-260847 |
10.13 |
December 20, 2021 |
|
|
10.22# |
|
10-K |
001-41336 |
10.20 |
March 31, 2022 |
|
|
10.23# |
|
Starry Group Holdings, Inc. 2022 Employee Stock Purchase Plan. |
10-K |
001-41336 |
10.21 |
March 31, 2022 |
|
10.24# |
|
8-K |
001-41336 |
10.3 |
August 8, 2022 |
|
|
10.25†+ |
|
S-4 |
333-260847 |
10.14 |
December 20, 2021 |
|
|
10.26†+ |
|
S-4 |
333-260847 |
10.15 |
December 20, 2021 |
|
44
10.27†+ |
|
S-4 |
333-260847 |
10.16 |
December 20, 2021 |
|
|
10.28†+ |
|
Strategic Alliance Agreement, dated March 30, 2021, by and between Starry, Inc. and QSI, Inc. |
S-4 |
333-260847 |
10.17 |
December 20, 2021 |
|
10.29†+ |
|
S-4 |
333-260847 |
10.18 |
December 20, 2021 |
|
|
10.30†+ |
|
Master Services Agreement, dated December 8, 2021 between Starry, Inc. and Abside Networks, Inc. |
S-4 |
333-260847 |
10.19 |
January 14, 2022 |
|
10.31†+ |
|
S-4 |
333-260847 |
10.20 |
January 14, 2022 |
|
|
10.32# |
|
10-K |
001-41336 |
10.29 |
March 31, 2022 |
|
|
10.33# |
|
10-K |
001-41336 |
10.30 |
March 31, 2022 |
|
|
10.34# |
|
10-K |
001-41336 |
10.31 |
March 31, 2022 |
|
|
10.35# |
|
Separation Agreement by and between Gregg Bien and Starry, Inc., dated September 3, 2020. |
10-K |
001-41336 |
10.32 |
March 31, 2022 |
|
10.36# |
|
|
|
|
|
* |
|
31.1 |
|
|
|
|
|
* |
|
31.2 |
|
|
|
|
|
* |
|
32.1 |
|
|
|
|
|
** |
|
32.2 |
|
|
|
|
|
** |
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
45
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
|
* Filed herewith.
** Furnished herewith.
# Indicates management contract or compensatory plan.
† Certain of the exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5).
+ Certain portions of this exhibit (indicated by “[***]”) have been omitted pursuant to Regulation S-K, Item (601)(b)(10).
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Starry Group Holdings, Inc. |
|
|
|
|
|
Date: August 12, 2022 |
|
By: |
/s/ Chaitanya Kanojia |
|
|
|
Chaitanya Kanojia |
|
|
|
Chief Executive Officer |
|
|
|
|
Date: August 12, 2022 |
|
By: |
/s/ Komal Misra |
|
|
|
Komal Misra |
|
|
|
Chief Financial Officer |
47
Exhibit 10.36
Starry Group Holdings, Inc.
Non-Employee Director Compensation Policy
Non-employee members of the board of directors (the “Board”) of Starry Group Holdings, Inc. (the “Company”) shall be eligible to receive cash and equity compensation as set forth in this Non-Employee Director Compensation Policy (this “Policy”). The cash and equity compensation described in this Policy shall be paid or be made, as applicable, automatically and without further action of the Board, to each member of the Board who is not an employee of the Company or any parent or subsidiary of the Company (each, a “Non-Employee Director”) who may be eligible to receive such cash or equity compensation, unless such Non-Employee Director declines the receipt of such cash or equity compensation by written notice to the Company. This Policy shall become effective after the effectiveness of the Company’s Form S-4 Registration and its approval by the Board (the “Effective Date”) and shall remain in effect until it is revised or rescinded by further action of the Board. This Policy may be amended, modified or terminated by the Board at any time in its sole discretion. The terms and conditions of this Policy shall supersede any prior cash and/or equity compensation arrangements for service as a member of the Board between the Company and any of its Non-Employee Directors and between any subsidiary of the Company and any of its non-employee directors.
1
2
3
* * * * *
4
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Chaitanya Kanojia, certify that:
Date: August 12, 2022 |
|
By: |
/s/ Chaitanya Kanojia |
|
|
|
Chaitanya Kanojia |
|
|
|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Komal Misra, certify that:
Date: August 12, 2022 |
|
By: |
/s/ Komal Misra |
|
|
|
Komal Misra |
|
|
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Starry Group Holdings, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, in the capacity and on the date indicated below, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: August 12, 2022 |
|
By: |
/s/ Chaitanya Kanojia |
|
|
|
Chaitanya Kanojia |
|
|
|
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Starry Group Holdings, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, in the capacity and on the date indicated below, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: August 12, 2022 |
|
By: |
/s/ Komal Misra |
|
|
|
Komal Misra |
|
|
|
Chief Financial Officer |