NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
1. Organization and Business
On September 9, 2021, Osprey Technology Acquisition Corp. (“Osprey”) consummated the previously announced merger (the “Merger”) with BlackSky Holdings, Inc. (f/k/a Spaceflight Industries, Inc.), a Delaware corporation (“Legacy BlackSky”), pursuant to the agreement and plan of merger, dated February 17, 2021, by and among Osprey, Osprey Technology Merger Sub, Inc., a direct, wholly owned subsidiary of Osprey, and Legacy BlackSky. Immediately following the Merger, Osprey changed its name to BlackSky Technology Inc. (“BlackSky” or the “Company”). Legacy BlackSky survived the Merger and is now a wholly owned subsidiary of BlackSky. As a special purpose acquisition corporation, Osprey had no pre-Merger operations other than to identify and consummate a merger. Therefore, BlackSky’s operations post-Merger are attributable to those of Legacy BlackSky and its subsidiaries, and references to “BlackSky” or the “Company” should be read to include BlackSky’s wholly owned subsidiaries. References in this report to Company actions, assets/liabilities, or contracts may be references to actions taken, assets/liabilities held, or contracts entered into by one or more current Company subsidiaries; however, the Company has distinguished between actions taken by Legacy BlackSky or Osprey for certain time based, historical transactions.
BlackSky, headquartered in Herndon, Virginia, is a leading provider of real-time geospatial intelligence. The Company owns and operates one of the industry's leading high-performance low earth orbit small satellite constellations. Our constellation is optimized to cost-efficiently capture imagery at high revisit rates where and when our customers need it. BlackSky’s Spectra AI software platform processes millions of observations a day from our proprietary satellite constellation and from multiple external data sources including imaging, radar and radio frequency satellites, environmental sensors, asset tracking sensors, Internet of Things (“IoT”) connected devices, internet-enabled narrative sources, and a variety of geotemporal data feeds. Spectra AI employs advanced, proprietary artificial intelligence ("AI") and machine learning (“ML”) techniques to process, analyze, and transform these data feeds into alerts, information, and insights. Customers can access Spectra AI’s data and analytics through easy-to-use web services or through platform application programming interfaces.
As of September 30, 2022, BlackSky had 14 satellites in commercial operation. BlackSky has two primary operating subsidiaries, BlackSky Global LLC and BlackSky Geospatial Solutions, Inc. The Company also owns fifty percent of LeoStella LLC (“LeoStella”), its joint venture with Thales Alenia Space US Investment LLC (“Thales”). LeoStella is a vertically-integrated small satellite design and manufacturer based in Tukwila, Washington, from which the Company procures satellites to operate its business. The Company accounts for LeoStella and X-Bow Launch Systems Inc. (“X-Bow”), a space technology company specializing in additive manufacturing of solid rocket motors of which BlackSky owns less than 20%, as equity method investments (Note 6).
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Preparation
The Company has prepared its unaudited condensed consolidated financial statements in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) and the instructions to Form 10-K and Article 8 of Regulation S-X of the Securities and Exchange Commission (the "SEC"). The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In addition, the unaudited condensed consolidated financial statements include the Company’s proportionate share of the earnings or losses of its equity method investments and a corresponding increase or decrease to its investment, with recorded losses limited to the carrying value of the Company’s investment. All intercompany transactions and balances have been eliminated upon consolidation.
The Company’s unaudited condensed consolidated financial statements have been prepared on a historical cost basis, except for certain financial assets and liabilities, including equity warrants and other equity
instruments classified as derivative liabilities, which are stated at fair value. The Company also incurred debt in the year ended December 31, 2021, which was stated at fair value and subsequently converted to equity in the Merger. Unless otherwise indicated, amounts presented in the Notes pertain to the Company’s continuing operations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes included in the Company’s Form 10-K filed with the SEC on March 31, 2022. In management’s opinion, all adjustments of a normal recurring nature that are necessary for a fair statement of the accompanying unaudited condensed consolidated financial statements have been included.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies at the reporting date, and the reported amounts of revenue and expenses during the reporting period. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results could materially differ from these estimates. Significant estimates made by the Company include, but are not limited to, revenue and associated cost recognition, the collectability of accounts receivable, the recoverability and useful lives of property and equipment, the valuation of equity warrants and warrant liabilities, fair value estimates, the recoverability of goodwill and intangible assets, the provision for income taxes, and stock-based compensation.
Investments
The Company’s investments generally consist of A-1, or higher, rated corporate debt and governmental securities as short-term investments. Our investments are classified as held-to-maturity and have a stated maturity date of one year or less from the balance sheet date. Any investments with original maturities less than three months are considered as cash equivalents.
Property and Equipment - net
The Company capitalizes internal and external costs incurred to develop and implement internal-use software, which consist primarily of costs related to design, coding, and testing. Internal costs include salaries and allocations of fringe and stock-based compensation. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated life to either depreciation or cost of sales depending on the nature of the software. Costs incurred prior to and after the application development stage are charged to development costs as part of selling, general, and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss. The Company regularly reviews its capitalized software projects for impairment.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The process for analyzing the fair value measurement of certain financial instruments on a recurring, or non-recurring, basis includes significant judgment and estimates of inputs including, but not limited to, share price, volatility, discount for lack of marketability, application of an appropriate discount rate, and probability of liquidating events. The Company utilizes the market valuation methodology and specific option pricing methodology, such as the Monte Carlo simulation, method to value the more complex financial instruments and the Black-Scholes option-pricing model to value standard common stock warrants and common stock options.
The framework for measuring fair value specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 Inputs. Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2 Inputs. Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3 Inputs. Inputs are unobservable inputs which reflect the Company’s own assumptions on what assumptions market participants would use in pricing the asset or liability based on the best available information.
Revenue Recognition
The Company generates revenue from the sale of imagery and software analytical services and engineering and systems integration. Imagery and software analytical services revenue includes imagery, data, software, and analytics, including professional services. This revenue is recognized from services rendered under cost-plus-fixed-fee contracts, firm fixed price contracts, a time and materials basis or non-cancellable subscription order agreements. Engineering and systems integration revenue is from fixed price long-term construction contracts.
The Company generates revenue primarily through contracts with government agencies. Most of the fixed price contracts include multiple promises, which are generally separated as distinct performance obligations. The Company allocates the transaction price to each performance obligation based on the relative standalone selling prices using observable sales transactions where applicable.
In accordance with Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”), the Company uses the five-step model of identifying the performance obligations contained in a contract, determining transaction price, allocating transaction price, and determining when performance obligations are satisfied can require the application of significant judgment, as further discussed below.
Revenue is measured at the fair value of consideration received or receivable and net of discounts. The Company applies a policy election to exclude transaction taxes collected from customer sales when the tax is both imposed on and concurrent with a specific revenue-producing transaction. The Company estimates any variable consideration, and whether the transaction price is constrained, upon execution of each contract. The Company did not have any active contracts with significant variable consideration as of September 30, 2022.
Imagery & Software Analytical Services Revenue
Imagery
Imagery services include imagery delivered from the Company’s satellites in orbit via its Spectra AI platform and in limited cases directly uploaded to certain customers. Customers can directly task our proprietary satellite constellation to collect and deliver imagery over specific locations, sites and regions that are critical to their operations. We offer customers several service level options that include basic plans for on-demand tasking or multi-year assured access programs, where customers can secure priority access and imaging capacity at a premium over a region of interest on a take or pay basis. Imagery performance obligations are recognized ratably over the fixed price subscription period for the right to access imagery or as revenue at the point-in-time when the Company delivers images to the Spectra AI platform.
Data, Software, and Analytics
The Company leverages proprietary AI and ML algorithms to analyze data coming from both the Company’s proprietary sensor network and third-party space and terrestrial sources to provide hard-to-get data,
insights, and analytics for customers. The Company continues to integrate and enhance its offerings by performing contract development, while retaining the intellectual property rights. The Company also provides technology enabled professional service solutions to support customer-specific software development requests, integration, testing, and training. The Company uses system engineers to support customer efforts to manage mass quantities of data. The Company also offers professional service solutions related to object, change and anomaly detection, site monitoring, and enhanced analytics, through which the Company can detect key pattern of life changes in critical locations such as ports, airports, and construction sites; retail activity; commodities stockpiles; and other sites that contain critical commodities and supply chain information.
Our analytics services are also offered on a consumption or subscription basis and provide customers with access to our site monitoring, event monitoring and global data services. Imagery and software analytical services revenue from data, software, and analytics contracts is recognized from the rendering of services over time on a cost-plus-fixed-fee, firm fixed price, or time and materials basis as well as, at the point-in-time the customer receives access to an analytic product. For firm fixed price professional service contracts, the Company recognizes revenue using total estimated costs to complete the performance obligation, ("Estimate at Completion" or "EAC"). A performance obligation’s EAC includes all direct costs such as labor, materials, subcontract costs and overhead. In addition, an EAC of a performance obligation includes future losses estimated to be incurred on contracts, as and when known. For contracts structured as cost-plus-fixed-fee or on a time and materials basis, the Company generally recognizes revenue based on the right-to-invoice when practically expedient, as the Company is contractually able to invoice the customer based on the control transferred to the customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date.
Engineering and Systems Integration Revenue
The Company develops and delivers advanced launch vehicle, satellite and payload systems for a limited number of customers that leverage the Company’s capabilities in mission systems engineering and operations, ground station operations, and software and systems development. These systems are sold to government customers under fixed price contracts. The Company generally recognizes revenue over time using the cost-to-cost method to measure progress, pursuant to which the extent of progress towards completion is measured based on the ratio of costs incurred to date to the EAC. The estimation of total estimated costs at completion is subject to many variables and requires judgment. The Company recognizes changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in a prior period. If at any time, the estimate of profitability for a performance obligation indicates a probable anticipated loss, the Company recognizes the total loss for the performance obligation in the period it is identified. Changes in estimates related to contracts accounted for using the cost-to-cost measure of progress are recognized in the period in which such changes are made for the inception-to-date effect of the changes. For the three and nine months ended September 30, 2022, the Company recognized $0.3 million and $2.0 million, respectively, of unfavorable cumulative adjustments to revenue directly from estimated cost increases on two engineering and systems integration contracts (Note 5). All, or a portion, of this cumulative adjustment will be recognized in future revenue as the percentage of completion increases over time. During the three and nine months ended September 30, 2021, the Company recognized a $1.6 million unfavorable impact to revenue attributable to changes in estimates for two engineering and systems integration contracts. During the three and nine months ended September 30, 2022, there was no revenue recognized from performance obligations satisfied in previous periods.
Imagery and Software Analytical Service and Engineering and Systems Integration Costs
Imagery and software analytical service costs primarily include internal aerospace and geospatial software development labor, third-party data and imagery, internal labor to support the ground stations and space operations, and cloud computing and hosting services. The Company recognizes stock-based compensation expense for those employees whose work supports the imagery and software analytical service costs we provide to customers, under imagery and software analytical service costs, excluding depreciation and amortization. For those employees who provide engineering and systems support to customers, the stock-based compensation
expense is classified under engineering and systems integration costs. For the remaining employees who generally support the Company and its business, the stock-based compensation expense is recognized under selling, general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
Engineering and systems integration costs primarily include the cost of internal labor for product design, integration and engineering in support of long-term development contracts for launch vehicle, satellite and payload systems. The Company also incurs subcontract direct materials and external labor costs to build and test specific components such as the communications system, payload demands and sensor integration.
Stock-Based Compensation
Restricted Stock Awards and Restricted Stock Units
We have granted RSAs and we grant RSUs to certain employees, for which the grant date fair value is equal to the trading price fair value of the Class A common stock on the date of grant. In order to determine the fair value of its Class A common stock on the date of grant and prior to the Merger, Legacy BlackSky historically performed a valuation analysis using a combination of market and income approaches. Subsequent to the Merger, the Company uses the New York Stock Exchange (“NYSE”) trading price as the fair value of the Class A common stock for valuation purposes. For all awards for which vesting is only subject to a service condition, including those subject to graded vesting, the Company has elected to use the straight-line method to recognize the fair value as compensation cost over the requisite service period.
Certain of the Company’s outstanding RSUs had performance vesting conditions that were triggered upon the consummation of the Merger. Therefore, since the performance conditions attributable to these RSUs had been met, the Company commenced recording the associated compensation expense, inclusive of a catch-up amount for the service period between their grant date and satisfaction of the performance condition, as of the closing of the Merger. The fair value of the RSUs that include a performance condition is recognized as compensation expense over the requisite service period using the accelerated attribution method, which accounts for RSUs with discrete vesting dates as if they were a separate award. Expense related to stock-based payments is classified in the unaudited condensed consolidated statements of operations and comprehensive loss based upon the classification of each employees’ cash compensation.
Stock Options
The Company uses the Black-Scholes option pricing model to value all options and the straight-line method to recognize the fair value as compensation cost over the requisite service period. The fair value of each option granted was estimated as of the date of grant. The Company granted options in the three and nine months ended September 30, 2022. The Company uses the following inputs when applying the Black-Scholes option pricing model:
Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as an input. The dividend yield is based on historical experience and expected future changes. The Company currently has no plans to pay dividends on its Class A common stock.
Expected Volatility. The Company does not have enough historical share price history, therefore, the expected volatility was estimated based upon the historical share price volatility of guideline comparable companies.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants.
Expected Term. For options granted in 2021 and 2022, since there is not a history of option exercises as a public company, the Company considered the option vesting terms and contractual period, as well as the demographics of the holders, in estimating the expected term. For options granted prior to 2021, the expected term was the estimated duration to a liquidation event based on a weighted average consideration of the most likely exit prospects for that stage of development. Legacy BlackSky was privately funded and, accordingly, the
lack of marketability was factored into the expected term of options granted. The Company will review its estimate in the future and adjust it, if necessary, due to changes in the Company’s historical exercises.
The most significant assumption used to determine the fair value of the Legacy BlackSky equity-based awards was the estimated fair value of the Class A common stock on the grant date. In order to determine the fair value of its Class A common stock on the date of grant and prior to the Merger, Legacy BlackSky historically performed a valuation analysis using a combination of market and income approaches. Subsequent to the Merger, the Company uses the NYSE trading price as the fair value of the Class A common stock for valuation purposes.
Legacy BlackSky historically adjusted the exercise price of certain outstanding stock options. For each award with an adjusted exercise price, Legacy BlackSky calculated the incremental fair value, which was the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The incremental fair value was recognized as stock-based compensation expense immediately to the extent that the modified stock option already had vested, and for stock options that were not yet vested, the incremental fair value has been recognized as stock-based compensation expense over the remaining vesting period.
Common Stock Repurchases and Retirements
The Company may repurchase common stock from employees or former employees and recognizes any excess of the repurchase price over the fair value of the instruments repurchased as additional compensation cost. Further, when that same common stock is retired, the excess is charged entirely to retained earnings. During the three and nine months ended September 30, 2022, the Company repurchased and retired 14,603 shares of common stock. The Company recorded $30 thousand to retained earnings in the unaudited condensed consolidated balance sheets as of September 30, 2022 and $18 thousand to stock-based compensation as part of selling, general, and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022.
Sponsor Shares
Osprey pre-Merger class B common shares were exchanged for the Company’s class A common shares upon the consummation of the merger (“Sponsor Shares”). The Company accounted for the Sponsor Shares in accordance with the guidance contained in ASC 815-40, under which the Sponsor Shares did not meet the criteria for equity treatment and were recorded as derivative liabilities in the Company’s unaudited condensed consolidated balance sheets as of September 30, 2022. The Sponsor Shares are adjusted to fair value at each reporting period and the change in fair value is recognized in gain (loss) on derivatives in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.
3. Accounting Standards Updates (“ASU”)
Accounting Standards Recently Adopted
In May 2021, the FASB issued ASU 2021-04, “Earnings per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)”, which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified upon modification or exchange. This ASU is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. The Company adopted this guidance as of January 1, 2022 and this guidance is not expected to impact the Company unless it modifies or exchanges freestanding financial instruments within the scope of the guidance subsequent to adoption.
Accounting Standards Recently Issued But Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02 “Leases”. The amendments in this update require the recognition of lease assets and lease liabilities on the balance sheet, as well as certain qualitative disclosures regarding leasing arrangements. The guidance requires the use of the modified retrospective method, with the cumulative effect of initially applying these updates recognized at the date of initial application. The guidance was effective for public business entities for annual periods, including interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022, with early adoption permitted. As of September 30, 2022, the Company holds emerging growth company status and as such, it is permitted to present the impact of the new guidance in its annual statements as of December 31, 2022 and interim statements thereafter. The Company is currently in the process of finalizing the adoption impact and expects the adoption of the standard to have a material impact to the unaudited condensed consolidated balance sheets since the Company will be required to report operating leases in the unaudited condensed consolidated balance sheets for the first time. Upon adoption, the Company estimates it will recognize between $3 million and $4 million of right-of-use (“ROU”) assets and lease liabilities for operating leases. The difference between the ROU assets and lease liabilities results from deferred rent liability balances that will be reclassified to ROU assets upon adoption. The Company currently has no finance leases.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this update are primarily for entities holding financial assets and net investment leases measured under an incurred loss impairment methodology. A new methodology must be adopted to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates, which would include losses on trade accounts receivable. This ASU requires modified retrospective application. The guidance is effective for public business entities that are not smaller reporting companies for fiscal years beginning after December 15, 2019, including interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2022, including interim periods therein. The Company is currently in the planning stage and, as an emerging growth company, will adopt the guidance on January 1, 2023. The Company does not expect this guidance to have an impact on its consolidated financial statements upon adoption.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes”. The amendments in this update are intended to simplify various aspects related to accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU can be applied on a retrospective, modified retrospective or prospective basis. The guidance is effective for all public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022. Early adoption is also permitted. As of September 30, 2022, the Company holds emerging growth company status, as such it is permitted to present the impact of the new guidance in its annual statement as of December 31, 2022 and interim statements thereafter. The Company does not expect this guidance to have an impact on its consolidated financial statements upon adoption.
4. Revenue
Disaggregation of Revenue
The Company earns revenue through the sale of imagery and software analytical services and engineering and systems integration. The Company’s management primarily disaggregates revenue as follows: (i) imagery; (ii) data, software and analytics; and (iii) engineering and integration. This disaggregation allows the Company to evaluate market trends in certain imagery and software analytical services and engineering and systems integration services. These offerings currently have both recurring and non-recurring price attributes, particularly the engineering and systems integration offerings.
The following table disaggregates revenue by type of imagery and software analytical services and engineering and integration for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| Imagery | | $ | 10,769 | | | $ | 2,773 | | | $ | 21,212 | | | $ | 5,621 | |
| Data, software and analytics | | 4,222 | | | 3,756 | | | 16,901 | | | 12,024 | |
| Engineering & integration | | 1,944 | | | 1,408 | | | 7,820 | | | 4,951 | |
| Total revenue | | $ | 16,935 | | | $ | 7,937 | | | $ | 45,933 | | | $ | 22,596 | |
The approximate revenue based on geographic location of customers is as follows for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| US | | $ | 14,996 | | | $ | 6,704 | | | $ | 38,580 | | | $ | 19,063 | |
| Middle East | | 969 | | | 607 | | | 2,345 | | | 1,987 | |
| Asia | | 10 | | | 343 | | | 3,588 | | | 1,113 | |
| Other | | 960 | | | 283 | | | 1,420 | | | 433 | |
| Total revenue | | $ | 16,935 | | | $ | 7,937 | | | $ | 45,933 | | | $ | 22,596 | |
Revenue from significant customers for the three and nine months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| U.S. federal government and agencies | | $ | 14,858 | | | $ | 6,590 | | | $ | 38,083 | | | $ | 18,897 | |
| International government | | 1,822 | | | — | | | 7,309 | | | 2,352 | |
| Commercial and other | | 255 | | | 1,347 | | | 541 | | | 1,347 | |
| Total revenue | | $ | 16,935 | | | $ | 7,937 | | | $ | 45,933 | | | $ | 22,596 | |
As of September 30, 2022 and December 31, 2021, accounts receivable consisted of the following:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
| (in thousands) |
| U.S. federal government and agencies | $ | 1,919 | | | $ | 2,576 | |
| International government | 3,062 | | | 76 | |
| Commercial and other | 120 | | | 16 | |
| Allowance for doubtful accounts | — | | | (39) | |
| Total accounts receivable | $ | 5,101 | | | $ | 2,629 | |
Backlog
Backlog represents the future sales we expect to recognize on firm orders received by the Company and is equivalent to the Company’s remaining performance obligations at the end of each period. It comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. The Company's backlog excludes unexercised contract options. As of September 30, 2022, the Company had $108.4 million of backlog, which represents the transaction price of executed contracts less inception to date revenue recognized. The Company expects to recognize revenue relating to our backlog, of which a portion is recorded in deferred revenue in the unaudited condensed consolidated balance sheets, of $19.9 million, $57.4 million, and $31.2 million in the three months ending December 31, 2022, fiscal year 2023, and thereafter, respectively.
5. Contract Assets and Liabilities
The components of contract assets and contract liabilities consisted of the following:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
| (in thousands) |
| Contract assets - current | | | |
| Unbilled revenue | $ | 5,651 | | | $ | 788 | |
| Contract assets | 264 | | | 890 | |
| Total contract assets - current | $ | 5,915 | | | $ | 1,678 | |
| | | |
| Contract assets - long-term | | | |
| Unbilled revenue - long-term | $ | 1,116 | | | $ | — | |
| Contract assets - long-term | 216 | | | — | |
Total contract assets - long-term(1) | $ | 1,332 | | | $ | — | |
| | | |
| Contract liabilities - current | | | |
| Deferred revenue - short-term | $ | 8,611 | | | $ | 11,082 | |
| Other contract liabilities | 407 | | | 184 | |
| Total contract liabilities - current | $ | 9,018 | | | $ | 11,266 | |
| | | |
| Contract liabilities - long-term | $ | — | | | $ | — | |
| Deferred revenue - long-term | 42 | | | 568 | |
| Total contract liabilities - long-term | $ | 42 | | | $ | 568 | |
(1) Total contract assets - long term is included in other assets in our unaudited condensed consolidated balance sheets.
Deferred revenue and other contract liabilities are reported as contract liabilities in the accompanying unaudited condensed consolidated balance sheets. Contract liabilities include payments received and billings made in advance of the satisfaction of performance obligations under the contract and are realized when the associated revenue is recognized under the contract. Contract assets include (i) unbilled revenue, which is the amount of revenue recognized in excess of the amount billed to customers, where the rights to payment are not just subject to the passage of time; and (ii) costs incurred to fulfill contract obligations. Other contract assets and other contract liabilities primarily relate to contract commissions on customer contracts.
Changes in short-term and long-term contract assets and contract liabilities for the nine months ended September 30, 2022 were as follows:
| | | | | | | | | | | |
| Contract Assets | | Contract Liabilities |
| (in thousands) |
| Balance on January 1, 2022 | $ | 1,678 | | | $ | 11,834 | |
| Billings or revenue recognized that was included in the beginning balance | (788) | | | (9,152) | |
| Changes in contract assets or contract liabilities, net of reclassification to receivables | 6,767 | | | 3,329 | |
| Cumulative catch-up adjustment arising from changes in estimates to complete | — | | | 2,536 | |
| Cumulative catch-up adjustment arising from contract modification | — | | | 290 | |
| Changes in costs to fulfill and amortization of commission costs | (410) | | | — | |
| Changes in contract commission costs | — | | | 223 | |
| Balance on September 30, 2022 | $ | 7,247 | | | $ | 9,060 | |
6. Equity Method Investments
LeoStella
The Company accounts for its investment in LeoStella as an equity method investment. The Company did not make any additional capital investments in LeoStella during the three and nine months ended September 30, 2022 or 2021. During the nine months ended September 30, 2022 and 2021, the Company remitted $22.1 million and $15.1 million, respectively, of payments to LeoStella for satellite manufacturing and satellite software development.
LeoStella's revenue from related parties was $3.0 million and $20.2 million for the three and nine months ended September 30, 2022, respectively and $1.6 million and $15.3 million for the three and nine months ended September 30, 2021, respectively. The Company had differences between the carrying value of its equity method investments and the underlying equity in the net assets of the investees of $3.7 million as of September 30, 2022 and $2.9 million as of December 31, 2021. The difference is the result of the elimination of upstream intra-entity profits from the sale of satellites.
X-Bow
In 2017, the Company entered into a stock subscription and technology transfer agreement with X-Bow, whereby the Company assigned and transferred certain intellectual property rights owned by the Company to X-Bow in exchange for 13.5 million shares of X-Bow, a strategic investment in a space technology company specializing in additive manufacturing of solid rocket motors. As of September 30, 2022, the Company's interest in X-Bow was less than 20%.
The following tables present summarized financial information for the Company’s equity method investments as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| Summarized balance sheets | | 2022 | | 2021 |
| | (in thousands) |
| Current assets | | $ | 67,579 | | | $ | 60,652 | |
| Non-current assets | | 7,334 | | | 5,798 | |
| Total assets | | $ | 74,913 | | | $ | 66,450 | |
| | | | |
| Current liabilities | | $ | 35,265 | | | $ | 39,612 | |
| Noncurrent liabilities | | 2,858 | | | 706 | |
| Total liabilities | | $ | 38,123 | | | $ | 40,318 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Summarized statements of operations | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| Revenue | | $ | 3,697 | | | $ | 3,494 | | | $ | 34,956 | | | $ | 24,212 | |
| Net (loss) income | | (3,784) | | | (1,590) | | | (2,718) | | | 570 | |
Current assets of the Company’s equity method investees primarily consisted of cash of $35.2 million and $25.8 million as of September 30, 2022 and December 31, 2021, respectively. Total liabilities of the Company’s equity method investees primarily consisted of customer advances of $29.6 million and $35.2 million as of September 30, 2022 and December 31, 2021, respectively.
7. Discontinued Operations
On June 12, 2020, the Company completed the sale of 100% of its equity interests in Spaceflight to M&Y Space. Under a transition services agreement, the Company provides, post-closing transition services to Spaceflight, including, but not limited to, the sublease of the Company’s office facility in Seattle, Washington and common area maintenance fees related to the sublease.
Settlement Arrangement for the Sale of the Spaceflight
On March 30, 2021, the Company settled certain disputes with respect to the purchase price in the total amount of $6.8 million, which was accrued as a liability as of December 31, 2020. The Company paid the settlement amount in two tranches—(i) $2.0 million on April 1, 2021 and (ii) the remaining $4.8 million was triggered at the closing of the Merger. In April 2021, the Company also terminated a launch arrangement with Spaceflight and, as agreed upon by the parties, offset the amount due to M&Y Space with a contractual refund of $3.9 million of which the net amount of $819 thousand was settled for cash in September 2021. As a result, the Company recorded a reduction to the accrued liability and a reduction to satellite procurement in the unaudited condensed consolidated balance sheet as of December 31, 2021.
On February 9, 2022, the Company received an indemnification claim notice regarding certain collection and tax payments related to the Share Purchase Agreement dated as of January 31, 2020, among BlackSky Holdings, Inc., Spaceflight, Inc., and M&Y Space Co., Ltd. On October 21, 2022, the parties agreed to the framework for a global settlement of such indemnification claims, to include a settlement payment by the Company of $1.0 million and a holdback amount of $0.1 million subject to M&Y Space Co.’s ability to collect against certain receivables. As a result, we reduced our existing contingent liability by $707 thousand, which was recorded to the gain from discontinued operations in the three and nine months ended September 30, 2022. See Note 19: Subsequent Events for additional information.
The following summarizes the components of the gain (loss) from discontinued operations, net of income taxes, that the Company has reported in the unaudited condensed consolidated statements of operations and comprehensive loss. The Company recognized an unfavorable working capital adjustment of $1.0 million during the nine months ended September 30, 2021 primarily related to a potential shortfall in accounts receivable in the closing balance sheet delivered to M&Y Space.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| Major classes of line items constituting loss from discontinued operations: | | | | | | | | |
| Revenue - launch services | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Total operating costs and expenses | | — | | | — | | | — | | | — | |
| Operating loss | | — | | | — | | | — | | | — | |
| Loss from discontinued operations, before income taxes | | — | | | — | | | — | | | — | |
| Gain (loss) on disposal of discontinued operations | | 707 | | | — | | | 707 | | | (1,022) | |
| Total gain (loss) from discontinued operations, net of income taxes | | 707 | | | — | | | 707 | | | (1,022) | |
8. Property and Equipment - net
The following summarizes property and equipment - net as of:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
| (in thousands) |
| Satellites | $ | 116,217 | | | $ | 93,709 | |
| Software | 6,407 | | — |
| Software development in process | 2,620 | | — |
| Computer equipment | 2,002 | | 1,372 |
| Office furniture and fixtures | 808 | | 744 |
| Other equipment | 690 | | 682 |
| Site equipment | 2,471 | | 1,393 |
| Ground station equipment | 111 | | 111 |
| Total | 131,326 | | 98,011 |
| Less: accumulated depreciation | (53,169) | | (27,460) |
| Property and equipment — net | $ | 78,157 | | | $ | 70,551 | |
Depreciation of property and equipment from continuing operations was $9.5 million and $3.2 million, for the three months ended September 30, 2022 and 2021, respectively, and $25.7 million and $8.8 million for the nine months ended September 30, 2022 and 2021, respectively.
The Company disposed of property and equipment, which consisted of site equipment, furniture and ground station equipment of $36 thousand and $0.8 million, during the nine months ended September 30, 2022 and 2021, respectively, for a loss of $0 for the three and nine months ended September 30, 2022 and $0 and $24 thousand for the three and nine months ended September 30, 2021, respectively.
9. Debt and Other Financing
The carrying value of the Company’s outstanding debt consisted of the following amounts:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
| (in thousands) |
| Current portion of long-term debt | $ | — | | | $ | — | |
| Non-current portion of long-term debt | 74,126 | | | 74,126 | |
| Total long-term debt | 74,126 | | | 74,126 | |
| Unamortized debt issuance cost | (1,170) | | | (2,718) | |
| Outstanding balance | $ | 72,956 | | | $ | 71,408 | |
The outstanding debt was solely comprised of loans from related parties with effective interest rates of 7.41% to 8.00%.
Bridge Notes and Related Transactions
On February 2, 2021, Legacy BlackSky amended its omnibus agreement dated June 27, 2018 (the “2021 Omnibus Amendment”). As a result of the amendment, Legacy BlackSky was permitted to enter into additional indebtedness by issuing new subordinated, unsecured convertible promissory notes (the "Bridge Notes"), between February 2, 2021 and June 30, 2021, for up to an aggregate principal amount of $60 million.
During the period from February 2, 2021 through February 3, 2021, Legacy BlackSky completed the closing of its initial tranche of the Bridge Notes from existing stockholders. The aggregate principal amount of the Bridge Notes issued in the initial tranche was $18.1 million. All investors participating in the initial tranche also received incentive equity equal to seven shares of class A common stock of Legacy BlackSky for each dollar invested. Certain investors participating in the initial tranche additionally received warrants exercisable for shares of Legacy BlackSky class A common stock in amounts ranging from 0.14% of Legacy BlackSky’s fully-diluted share capital for each dollar invested divided by $1.0 million to 3.5% of Legacy BlackSky’s fully-diluted share capital (Note 10). On February 18, 2021, the Company completed the closing of a second tranche of the Bridge Notes, raising an aggregate principal amount of $40.0 million from an existing stockholder and from new investors. Participants in the second tranche did not receive shares of Legacy BlackSky class A common stock or warrants to purchase Legacy BlackSky class A common stock.
Upon the closing of the two previously mentioned tranches, $1.9 million of Bridge Notes remained available to be offered to certain shareholders under terms similar to the initial tranche pursuant to a rights offering (“Rights Offering”). The Company subsequently completed the Rights Offering in June 2021 with a total of $0.5 million additional investment, resulting in final aggregate proceeds of $58.6 million in principal investments pursuant to the Bridge Notes. As the terms of the Rights Offering were substantially identical to those offered in the initial tranche of the Bridge Notes, participants received seven shares of the Legacy BlackSky's class A common stock for each dollar invested, as well as warrants.
The Bridge Notes, in all three tranches, bore interest at a rate of 10% and had a maturity date of April 30, 2025. There were no covenants in the Bridge Notes that were tied to financial metrics. The Company made an irrevocable election to carry the Bridge Notes at fair value.
In connection with the Merger, all of the Company’s issued and outstanding Bridge Notes were converted into Legacy BlackSky class A common stock at a conversion price of 80% of the deemed value of a single Legacy BlackSky class A common share and, immediately thereafter, those Legacy BlackSky class A common shares were exchanged for Osprey class A common shares based on the class A common stock exchange ratio. As of December 31, 2021, the Company had no convertible Bridge Notes outstanding.
In connection with the 2021 Omnibus Amendment, the investors guaranteeing the Silicon Valley Bank (“SVB”) line of credit further reaffirmed their guarantees and received a one-time issuance of seven shares of Legacy BlackSky class A common stock for every dollar guaranteed. Additionally, Legacy BlackSky agreed to pay a fee to each of its senior secured lenders (“Consent Fees”). The Consent Fees were payable in either cash
or shares of Legacy BlackSky’s class A common stock at the choice of the lender. The Consent Fees were considered variable share-settled liabilities and were recorded at fair value. All of the Consent Fees were settled for cash at the closing of the Merger.
The following table summarizes the additional shares of Legacy BlackSky class A common stock and warrants to purchase Legacy BlackSky class A common stock issued as a result of the Bridge Notes.
| | | | | | | | | | | |
| Legacy BlackSky Class A Common Stock(1) | | Legacy BlackSky Class A Common Stock Warrants(1) |
| (in thousands) |
| Issued to SVB guarantors | 8,485 | | | — | |
| Issued in connection with the initial tranche of Bridge Notes | 11,544 | | | 3,873 | |
| Issued as incentive shares and as incentive warrants, in connection with the Rights Offering | 314 | | | 51 | |
| Total | 20,343 | | | 3,924 | |
(1) Issuance of class A common stock and class A common stock warrants has been retroactively restated to give effect to the reverse recapitalization.
In connection with the Merger, all issued and outstanding Legacy BlackSky Bridge Notes and Class A common stock warrants granted in accordance with the Bridge Notes were automatically exercised into Legacy BlackSky class A common stock and those shares were exchanged for the Company's common shares at the exchange rate applicable to the Company’s common stock.
Loans from Related Parties
After the Merger, the Company’s primary debt (and its sole secured debt) consists of its amended and restated loan and security agreement dated October 31, 2019, as amended or modified from time to time, with Intelsat Jackson Holdings SA (“Intelsat”) and Seahawk SPV Investment LLC (“Seahawk”). Interest accrues on the amounts outstanding under this facility at a fixed rate of 4% until October 31, 2022, 9% from November 1, 2022 to October 31, 2023, and 10% from November 1, 2023 to the maturity date of October 31, 2024. During the 4% interest period, the amount of accrued interest is added, on a pro-rata basis, to the outstanding principal amount of each lender’s advances on October 31, 2020, October 31, 2021, and October 31, 2022. Thereafter, interest is payable in cash semi-annually in arrears commencing on May 1, 2023. This facility is secured by substantially all of the Company’s assets, is guaranteed by the Company’s subsidiaries, and contains customary covenants and events of default. There are no covenants tied to financial metrics.
Fair Value of Debt
The estimated fair value of all of the Company’s outstanding long-term debt was $67.4 million and $76.1 million as of September 30, 2022 and December 31, 2021, respectively, which is different than the historical costs of such long-term debt as reflected in the Company’s unaudited condensed consolidated balance sheets. The fair value of the long-term debt was estimated using Level 3 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements and credit rating.
Compliance with Debt Covenants
As of September 30, 2022, all debt instruments contain customary covenants and events of default. There are no covenants tied to financial metrics and the Company was in compliance with all non-financial covenants as of September 30, 2022.
10. Equity Warrants Classified as Derivative Liabilities
Equity warrants that are classified as derivative liabilities must be measured at fair value upon issuance and re-valued at the end of each reporting period through expiration and are included in derivative liabilities in the
Company's unaudited condensed consolidated balance sheets. Any change in fair value between the respective reporting dates is recognized as an unrealized gain or loss in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss (Note 16). In the nine months ended September 30, 2022, the Company's derivative liabilities were made up of only the equity warrants and the Sponsor Shares. In the nine months ended September 30, 2021, the Company's derivative liabilities included warrants, Consent Fees from the Bridge Notes (see Note 9), and Legacy BlackSky preferred stock warrants.
The following table is a summary of the number of shares of the Company’s Class A common stock issuable upon exercise of warrants at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Exercise Price | | Redemption Price | | Expiration Date | | Classification | | Gain in value for the nine months ended September 30, 2022 | | Fair Value at September 30, 2022 |
| (in thousands) | | | | | | | | | | (in thousands) |
| Public Warrants | 15,813 | | | $ | 11.50 | | | $ | 18.00 | | | 9/9/2026 | | Liability | | $ | 5,851 | | | $ | 2,846 | |
| Private Placement Warrants | 4,163 | | | $ | 11.50 | | | $ | 18.00 | | | 9/9/2026 | | Liability | | 1,456 | | | 1,041 | |
| Private Placement Warrants | 4,163 | | | $ | 20.00 | | | $ | 18.00 | | | 9/9/2026 | | Liability | | 416 | | | 583 | |
In addition, the Company has 1.8 million Class A common stock warrants outstanding which have an exercise price of $0.11 and expiration dates from June 27, 2028 to October 31, 2029. These warrants are equity classified and are included in additional paid-in capital in the Company’s unaudited condensed consolidated balance sheets.
11. Other (Expense) Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| Loss on issuance of Bridge Notes tranche one | | $ | — | | | $ | — | | | $ | — | | | $ | (84,291) | |
| Loss on issuance of Bridge Notes tranche two | | — | | | — | | | — | | | (12,185) | |
| Loss on issuance of Bridge Notes Rights Offering | | — | | | — | | | — | | | (3,193) | |
| Loss on debt extinguishment of Bridge Notes | | — | | | (75) | | | — | | | (75) | |
| Debt issuance costs expensed for debt carried at fair value | | — | | | — | | | — | | | (47,718) | |
| Transaction costs associated with derivative liabilities | | — | | | (291) | | | — | | | (291) | |
| Other | | (14) | | | 1 | | | (54) | | | 18 | |
| | $ | (14) | | | $ | (365) | | | $ | (54) | | | $ | (147,735) | |
In February 2021, Legacy BlackSky issued Bridge Notes in two tranches (Note 9). The first tranche of the Bridge Notes were issued at par to several existing investors at a principal amount of $18.1 million and a fair value of $24.2 million. Additionally, certain investors in the first tranche of Bridge Notes received 11.5 million shares of Legacy BlackSky class A common stock with a fair value of $59.8 million and warrants to purchase 3.9 million shares of Legacy BlackSky class A common stock with a fair value of $18.4 million. The transaction involved investments primarily by the existing Legacy BlackSky investors at that time. Legacy BlackSky, which had an external valuation performed on the Bridge Notes, Legacy BlackSky class A common stock, and Legacy BlackSky warrants, determined that the fair value of the financial instruments issued exceeded the cash proceeds received. Since no unstated rights and/or privileges were identified with the first tranche of the Bridge Notes, Legacy BlackSky recorded a loss on issuance of $84.3 million.
The second tranche of the Bridge Notes were issued at par to several new investors and an existing investor at a principal amount of $40.0 million and a fair value of $52.2 million, resulting in a loss on issuance of $12.2 million.
Legacy BlackSky incurred and expensed $47.6 million in debt issuance costs related to the Bridge Notes issued in February 2021 and the modification of existing debt arrangements at that time. These debt issuance costs consisted of 8.5 million shares of Legacy BlackSky class A common stock valued at $43.9 million that were issued to certain guarantors in conjunction with modification of Legacy BlackSky’s SVB line of credit and $3.7 million paid to third-parties in cash. Additionally, the Company incurred $0.1 million in debt issuance costs related to the rights offering, which was expensed.
The debt issuance costs were expensed because the Bridge Notes were being carried on the balance sheet at fair value. The modification of existing debt did not qualify as a troubled debt restructuring, nor did it result in the extinguishment of the debt.
12. Stockholders’ Equity
Class A Common Stock
As of September 30, 2022, the Company was authorized to issue 300.0 million shares of Class A common stock and 100.0 million shares of preferred stock.
Issued and outstanding stock as of September 30, 2022 consisted of 121.4 million and 118.9 million shares of Class A common stock, respectively. The par value of each share of the class A common stock is $0.0001 per share.
The Company had reserved shares of Class A common stock for issuance in connection with the following:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
| (in thousands) |
| Common stock warrants (exercisable for class A common stock) treated as equity | 1,770 | | | 1,770 | |
| Stock options outstanding | 8,083 | | | 5,022 | |
| Restricted stock units outstanding | 8,268 | | | 10,959 | |
| Public Warrants (exercisable for class A common stock) treated as liability | 15,813 | | | 15,813 | |
| Private Placement Warrants (exercisable for class A common stock) treated as liability | 8,325 | | | 8,325 | |
| Shares available for future grant | 136,369 | | | 140,951 | |
| Total class A common stock reserved | 178,628 | | | 182,840 | |
The Company has approximately 2.4 million Sponsor Shares that are subject to specific lock-up provisions and potential forfeitures depending upon the post-Merger performance of the Company’s Class A common stock, and therefore are required to be recorded as derivative liabilities at their fair value and adjusted to fair value at each reporting period. As a result, as of September 30, 2022 and December 31, 2021, the Company's derivative liabilities in the unaudited condensed consolidated balance sheets included Sponsor Shares of $1.8 million and $4.7 million, respectively. The Company recorded a $2.9 million gain on derivatives in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2022 related to the fair value adjustments of these Sponsor Shares. The Sponsor Shares have the following provisions:
| | | | | | | | |
| | Terms |
| Contractual Life | | Seven years from the closing date of the Merger |
| | |
| Release Provision | | Exactly half of the Sponsor Shares have a release provision ("Release") at such time that the volume weighted average price ("VWAP") is equal to, or greater than, $15.00 per share for ten of any twenty consecutive trading days. The remaining Sponsor Shares Release at such time that the VWAP is equal to, or greater than, $17.50 per share for ten of any twenty consecutive trading days. There is an additional provision for acceleration of the Release upon a defined change in control. |
| | |
| Forfeiture Provision | | If, within the seven year period, the Sponsor Shares have not met the Release provisions, the Sponsor Shares will automatically forfeit and be cancelled. |
13. Net Loss Per Share of Class A Common Stock
The following table includes the calculation of basic and diluted net (loss) income per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands except per share information) |
| Loss from continuing operations | | $ | (13,755) | | | $ | (46,897) | | | $ | (60,021) | | | $ | (250,016) | |
| Gain (loss) from discontinued operations | | 707 | | | — | | | 707 | | | (1,022) | |
| Net loss available to common stockholders | | $ | (13,048) | | | $ | (46,897) | | | $ | (59,314) | | | $ | (251,038) | |
| | | | | | | | |
| Basic and diluted net loss per share - continuing operations | | $ | (0.12) | | | $ | (0.67) | | | $ | (0.51) | | | $ | (4.29) | |
| Basic and diluted net gain (loss) per share - discontinued operations | | 0.01 | | | — | | | 0.01 | | | (0.02) | |
| Basic and diluted net loss per share | | $ | (0.11) | | | $ | (0.67) | | | $ | (0.50) | | | $ | (4.31) | |
| | | | | | | | |
| Shares used in the computation of basic and diluted net loss per share | | 118,582 | | | 69,975 | | | 117,403 | | | 58,297 | |
The potentially dilutive securities listed below were not included in the calculation of diluted weighted average common shares outstanding, as their effect would have been anti-dilutive during the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three and nine months ended September 30, | | | | | | | | | | | | | |
| | | | | 2022 | | 2021 | | | | | | | | | | | | | |
| | | | | (in thousands) | | | | | | | | | | | | | |
| Restricted class A common stock | | | | | 79 | | | 420 | | | | | | | | | | | | | | |
| Common Stock warrants | | | | | 1,770 | | | 1,770 | | | | | | | | | | | | | | |
| Stock options | | | | | 8,083 | | | 2,344 | | | | | | | | | | | | | | |
| Restricted stock units | | | | | 8,268 | | | 9,158 | | | | | | | | | | | | | | |
| Public Warrants (exercisable for class A common stock) treated as liability | | | | | 15,813 | | | 15,813 | | | | | | | | | | | | | | |
| Private Placement Warrants (exercisable for class A common stock) treated as liability | | | | | 8,325 | | | 8,325 | | | | | | | | | | | | | | |
| Sponsor Shares | | | | | 2,372 | | | 2,372 | | | | | | | | | | | | | | |
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14. Stock-Based Compensation
The Company adopted two equity incentive plans in prior years. Legacy BlackSky issued equity and equity-based awards under its 2014 stock incentive plan (the “2014 Plan”) and 2011 stock incentive plan (the “2011 Plan”, together with the 2014 Plan, collectively the “Plans”), which are now administered by the Company’s board of directors. The Plans are no longer active; however, outstanding awards granted under these Plans will not be affected. Both Plans allowed the board of directors to grant stock options, designated as incentive or nonqualified, and stock awards to employees, officers, directors, and consultants. Stock options were granted with an exercise price per share equal to at least the estimated fair value of the underlying class A common stock on the date of grant. The vesting period was determined through individual award agreements and was generally over a four-year period. Awards generally expired 10 years from the date of grant. As of September 30, 2022, the Company had 41 thousand and 1.5 million options outstanding, respectively, under the 2011 and 2014 Plans.
The stock-based compensation expense attributable to continuing operations was included in the unaudited condensed consolidated statements of operations and comprehensive loss as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) |
| Imagery & software analytical service costs, excluding depreciation and amortization | | $ | 259 | | | $ | 2,898 | | | $ | 1,364 | | | $ | 2,949 | |
| Engineering & systems integration costs, excluding depreciation and amortization | | 37 | | | — | | | 202 | | | — | |
| Selling, general and administrative | | 2,867 | | | 25,595 | | | 14,823 | | | 26,316 | |
| Total stock-based compensation expense | | $ | 3,163 | | | $ | 28,493 | | | $ | 16,389 | | | $ | 29,265 | |
The stock-based compensation expense recorded for the RSUs during the three and nine months ended September 30, 2021 included a cumulative adjustment for service completed from the grant date to the close of the Merger as the result of a vested performance condition. Additionally, the Company recorded stock-based compensation related to capitalized internal labor for software development activities of $0.3 million and $0 during the three months ended September 30, 2022 and 2021, respectively, and $1.3 million and $0 during the nine months ended September 30, 2022 and 2021, respectively. These amounts are included in property, plant, and equipment - net on the unaudited condensed consolidated balance sheets.
Stock Options
Following the Merger, the outstanding stock options issued under the 2014 Plan may be exercised (subject to their original vesting, exercise and other terms and conditions) to purchase a number of shares of class A common stock equal to the number of shares of Legacy BlackSky class A common stock, as adjusted for the common stock exchange ratio, subject to the same terms and conditions as were applicable to such Legacy BlackSky stock option (each an “Assumed Company Stock Option”). The exercise price per share of each Assumed Company Stock Option was equal to the quotient obtained by dividing the exercise price per share applicable to such Legacy BlackSky stock option by the common stock exchange ratio.
The Black-Scholes option pricing model is used to determine the fair value of options granted. The Company utilized assumptions concerning expected term, a risk-free interest rate, and expected volatility to determine such values. A summary of the weighted-average assumptions used by the Company is presented below for the nine months ended September 30, 2022; there were no stock options awarded during the nine months ended September 30, 2021:
| | | | | |
| Fair value per common share | $2.10 - $2.15 |
| Weighted-average risk-free interest rate | 3.20% - 3.38% |
| Volatility | 33.90% - 34.20% |
| Expected term (in years) | 8.0 |
| Dividend rate | 0 | % |
Legacy BlackSky historically adjusted the exercise price of certain outstanding stock options. For each award with an adjusted exercise price, Legacy BlackSky calculated the incremental fair value, which was the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The incremental fair value was recognized as stock-based compensation expense immediately to the extent that the modified stock option already had vested, and for stock options that were not yet vested, the incremental fair value has been recognized as stock-based compensation expense over the remaining vesting period.
A summary of the Company’s stock option activity under the Plans during the nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted-Average Exercise Price | | Weighted Average Contractual Term | | Aggregate Intrinsic Value |
| (in thousands) | | | | (in years) | | (in thousands) |
| Outstanding - January 1, 2022 | 5,022 | | | $ | 4.4914 | | | | | |
| Granted | 4,654 | | | 2.1468 | | | | | |
| Exercised | (638) | | | 0.0565 | | | | | |
| Forfeited | (955) | | | 7.3285 | | | | | |
| Outstanding - September 30, 2022 | 8,083 | | | 3.1558 | | | 9.11 | | $ | 1,924 | |
| Exercisable - September 30, 2022 | 1,275 | | | 1.6698 | | | 6.79 | | 1,221 |
For options exercised, intrinsic value is calculated as the difference between the estimated fair value on the date of exercise and the exercise price. The total intrinsic value of options exercised during the nine months ended September 30, 2022 and 2021 was $1.7 million and $6.8 million, respectively. The total fair value of options vested during the nine months ended September 30, 2022 and 2021 was $0.6 million and $0.6 million, respectively.
As of September 30, 2022, there was $6.7 million of total unrecognized compensation cost, which is expected to be recognized over a weighted-average period of 3.6 years.
Restricted Stock Awards
During the year ended December 31, 2020, the Company granted restricted stock awards ("RSA")s, which vest based upon the individual award agreements and generally vest over a three to four-year period. These shares are deemed issued as of the date of grant, but not outstanding until they vest. The Company intends to settle the RSAs in stock, and the Company has the shares available to do so.
A summary of the Company’s nonvested RSA activity during the nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | |
| Restricted Stock Awards | | Weighted-Average Grant-Date Fair Value |
| (in thousands) | | |
| Nonvested - January 1, 2022 | 335 | | | $ | 0.0121 | |
| Vested | (178) | | | 0.0121 | |
| Canceled | (78) | | | 0.0121 | |
| Nonvested - September 30, 2022 | 79 | | | 0.0121 | |
The Company has not granted any RSAs since 2020.
As of September 30, 2022, there was $1 thousand of total unrecognized compensation cost related to nonvested RSAs granted under the Plan, which is expected to be recognized over a weighted-average period of 1.6 years. The total grant date fair value of shares vested during the nine months ended September 30, 2022 was $2 thousand.
Restricted Stock Units
The Company granted an aggregate of 4.2 million RSUs to certain employees and service providers during the nine months ended September 30, 2022 under the 2021 Plan. The general vesting provisions are that 25% will vest on the one-year anniversary of the vesting commencement date and 75% will vest ratably over twelve consecutive quarters on specified quarterly vesting dates, with the first of such quarterly vesting dates occurring at least three months after the vesting of the initial 25% of the RSUs. During March 2022, 155 thousand RSUs were granted with a different vesting schedule, whereby 50% will vest annually on the anniversary of the vesting commencement date and during September 2022, 419 thousand RSUs were granted whereby 100% of such RSUs will vest at the earlier of (i) the one-year anniversary of the grant date or (ii) the date of the next annual meeting following the grant date.
A summary of the Company’s nonvested RSU activity during the nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant-Date Fair Value |
| (in thousands) | | |
| Nonvested - January 1, 2022 | 10,959 | | | $ | 6.7675 | |
| Granted | 4,181 | | | 2.0595 | |
| Vested | (5,968) | | | 6.9790 | |
| Canceled | (904) | | | 5.2863 | |
| Nonvested - September 30, 2022 | 8,268 | | | 4.3961 | |
A significant portion of the pre-Merger RSU grants vested in accordance with the vesting schedule of 180 days subsequent to the Merger. During the nine months ended September 30, 2022, 2.3 million of the vested RSUs were withheld to satisfy payroll tax withholding obligations, which was recorded to additional paid-in capital totaling $4.6 million. Unrecognized compensation costs related to nonvested restricted stock units totaled $20.7 million as of September 30, 2022, which is expected to be recognized over a weighted-average period of 2.5 years.
15. Related Party Transactions
A summary of the Company’s related party transactions during the nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | | | Amount Due to Related Party as of |
| | | | September 30, | | December 31, |
| | | | 2022 | | 2021 |
| Name | Nature of Relationship | Description of the Transactions | | (in thousands) |
| Seahawk | Debt Issuer | In 2019, the Company raised and converted $18.4 million from prior debt into new, outstanding debt and issued 13.5 million warrants to purchase Legacy BlackSky common stock. | | $ | 19,977 | | | $ | 19,977 | |
| Intelsat | Debt Issuer | In 2019, the Company entered into a term loan facility for $50.0 million and issued 20.2 million warrants to purchase Legacy BlackSky common stock. | | 54,149 | | | 54,149 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amount Due to Related Party as of |
| | | Total Payments in the nine months ended September 30, | | September 30, | | December 31, |
| Nature of Relationship | | 2022 | | 2021 | | 2022 | | 2021 |
| Name | Description of the Transactions | (in thousands) |
| LeoStella | Joint Venture | Design, development and manufacture of multiple satellites. | $ | 22,067 | | | $ | 15,060 | | | $ | 1,667 | | | $ | 8,381 | |
| X-Bow | Equity Method Investee | In 2017, the Company received stock in X-Bow. As of September 30, 2022, the Company had a less than 20% investment in X-Bow and had one Board seat. As described in Note 6, the Company has engaged X-Bow to develop a rocket for the Company. | — | | | 1,865 | | | — | | | — | |
| | | | | | | | | |
| Ursa Space Systems | Strategic Partner | The chairman of the Company’s board of directors, Will Porteous, is also an investor and member of the board of directors of Ursa Space Systems. The Company has a non-cancelable operational commitment with Ursa Space Systems. | 417 | | | — | | | — | | | 83 | |
| Thales Alenia Space | Shareholder and Parent of Wholly-owned Subsidiary, Seahawk (Debt Issuer) | Design, development and manufacture of telescopes. | 8,170 | | | 4,400 | | | — | | | — | |
Interest on the term loan facility is accrued and compounded annually. No significant interest payments were made in the nine months ended September 30, 2022 or 2021. The Company had interest due to related parties in the amount of $2.8 million as of September 30, 2022, which has been recorded as accrued interest.
16. Fair Value of Financial Instruments
Recurring basis
The following tables present information about the Company’s liabilities that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, as well as indicate the fair value hierarchy level of the valuation techniques and inputs that the Company utilized to determine such fair value:
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | Quoted Prices in Active Markets | | Significant Other Observable Input | | Significant Other Unobservable Inputs |
| | (Level 1) | | (Level 2) | | (Level 3) |
| | (in thousands) |
| Liabilities | | | | | | |
| Public Warrants | | $ | 2,846 | | | $ | — | | | $ | — | |
| Private Placement Warrants | | — | | | — | | | 1,624 | |
| Sponsor Shares | | — | | | — | | | 1,826 | |
| | $ | 2,846 | | | $ | — | | | $ | 3,450 | |
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Quoted Prices in Active Markets | | Significant Other Observable Input | | Significant Other Unobservable Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | |
| | (in thousands) | | |
| Liabilities | | | | | | | | |
| Public Warrants | | $ | 8,697 | | | $ | — | | | $ | — | | | |
| Private Placement Warrants | | — | | | — | | | 3,496 | | | |
| Sponsor Shares | | — | | | — | | | 4,732 | | | |
| | $ | 8,697 | | | $ | — | | | $ | 8,228 | | | |
The carrying values of the following financial instruments approximated their fair values as of September 30, 2022 and December 31, 2021 based on their maturities: cash and cash equivalents, restricted cash, short-term investments, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, leases payable and other current liabilities.
There were no transfers into or out of any of the levels of the fair value hierarchy during the nine months ended September 30, 2022 or 2021.
Changes in the fair value of the Level 3 liabilities during the nine months ended September 30, 2021 of $16.1 million included the Bridge Notes, Private Placement Warrants, Sponsor Shares, Class A common stock warrants, Legacy BlackSky preferred stock warrants and Consent Fees. The following is a summary of changes in the fair value of the Level 3 liabilities during the nine months ended September 30, 2022:
| | | | | | | | | | | |
| Sponsor Shares | | Private Placement Warrants |
| (in thousands) |
| Balance, January 1, 2022 | $ | 4,732 | | | $ | 3,496 | |
| Gain from changes in fair value | (2,906) | | | (1,872) | |
| Balance, September 30, 2022 | $ | 1,826 | | | $ | 1,624 | |
17. Commitments and Contingencies
Legal Proceedings
From time to time, we may become involved in various claims and legal proceedings arising in the ordinary course of business, which, by their nature, are inherently unpredictable. We are not currently a party to any material claims or legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Regardless of outcome, litigation and other legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Other Contingencies
The Company analyzed its unique facts and circumstances related to potential obligations in a certain state jurisdiction, including the delivery nature of its prior year intercompany services, payroll and other benefits-related services, current shared services between the parent and subsidiaries, and changing state laws and interpretations of those laws, and has determined that the Company may have an indirect tax obligation.
The Company has continued correspondence with the applicable authorities in an effort toward identifying a taxpayer-favorable resolution of the potential liabilities. As a result of this correspondence, the Company has updated its liability including interest and penalties based on its best estimate as of September 30, 2022.
The following table summarizes the estimated indirect tax liability activity during the nine months ended September 30, 2022:
| | | | | | | |
| (in thousands) | | |
| Balance, January 1, 2022 | $ | 737 | | | |
| Payments | (314) | | | |
| Adjustment to Expense | (218) | | | |
| Balance, September 30, 2022 | $ | 205 | | | |
The Company continues to analyze the additional obligations it may have, if any, and it will adjust the liability accordingly.
Other Commitments
The Company has commitments for multi-launch and integration services with launch services providers. As of September 30, 2022, the Company had a commitment for one launch, to include up to 2 satellites at future estimated launch dates for $1.7 million. The terms of the arrangement also allow the Company to remanifest the satellites if significant delays in excess of 365 days or other inexcusable delays occur with the provider. Subsequent to remanifest efforts four months after the 365 days, the Company can request a refund of all recoverable costs. Payment terms are 15 days from invoice date.
The company entered into a commitment during the nine months ended September 30, 2022 to provide a minimum guarantee of $3.0 million to a vendor as part of a reseller agreement in exchange for a license to promote and distribute products and services. We did not enter into any other material commitments during the nine months ended September 30, 2022.
18. Concentrations, Risks, and Uncertainties
The Company maintains all cash and cash equivalents with one financial institution. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts receivable and cash deposits.
For the three months ended September 30, 2022 and 2021, revenue from customers representing 10% or more of the consolidated revenue from continuing operations was $10.7 million and $3.2 million, respectively, and $23.9 million and $9.3 million, respectively, for the nine months ended September 30, 2022 and 2021. Accounts receivable related to these customers as of September 30, 2022 and December 31, 2021 was $1.0 million and $1.3 million, respectively.
Revenue from the U.S. federal government and agencies was $14.9 million and $6.6 million for the three months ended September 30, 2022 and 2021, respectively, and $38.1 million and $18.9 million for the nine months ended September 30, 2022 and 2021, respectively. Accounts receivable related to U.S. federal government and agencies was $1.9 million and $2.6 million as of September 30, 2022 and December 31, 2021, respectively.
The Company generally extends credit on account, without collateral. Outstanding accounts receivable balances are evaluated by management, and accounts are reserved when it is determined collection is not probable. As of September 30, 2022 and December 31, 2021, the Company evaluated the realizability of the aged accounts receivable, giving consideration to each customer’s financial history and liquidity position, credit rating and the facts and circumstances of collectability on each outstanding account, and did not have a significant reserve for uncollectible account.
19. Subsequent Events
On February 9, 2022, the Company received an indemnification claim notice regarding certain collection and tax payments related to the Share Purchase Agreement dated as of January 31, 2020, among BlackSky Holdings, Inc., Spaceflight, Inc., and M&Y Space Co., Ltd. On October 21, 2022, the parties agreed to the framework for a global settlement of such indemnification claims, to include a settlement payment by the Company of $1.0 million and a holdback amount of $0.1 million subject to M&Y Space Co.’s ability to collect against certain receivables. As a result, we reduced our existing contingent liability by $707 thousand, which was recorded to the gain from discontinued operations in the three and nine months ended September 30, 2022.
The Company evaluated subsequent events through November 8, 2022 and determined that there have been no other events that have occurred that would require adjustments to our disclosures or the unaudited condensed consolidated financial statements.