NEXTNAV INC. (NN)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons. You should review “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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Overview

We are the market leader in delivering resilient, next generation, complementary positioning, navigation and timing (“PNT”) solutions designed to overcome the limitations and vulnerabilities of the existing space-based Global Positioning System (“GPS”) and Global Navigation Satellite Systems (“GNSS”). We are evolving our complementary PNT solutions to use 5G New Radio (“5G NR”) technologies (“NextGen”), in conjunction with our Petition for Rulemaking filed with the FCC, to update and reconfigure the Lower 900 MHz band and our spectrum licenses. We expect the evolution of our platform to NextGen will significantly improve the efficiency, flexibility, and scale of our operations, technically enabling the delivery of high-quality PNT based on a 5G broadband network. Our NextGen solution is being designed to allow one or more partners to integrate our Lower 900 MHz spectrum into their 5G networks. We expect that this will result in wide-scale availability of both complementary PNT services and additional broadband capacity.

Our complementary PNT solutions are built on a deep asset base, including valuable FCC licenses. Our licenses include a contiguous 8 MHz block of 900 MHz M-LMS spectrum covering over 90% of the U.S. population, and on March 7, 2024, we signed an agreement, subject to appropriate regulatory approvals, to acquire an additional 4 MHz of M-LMS licenses covering part of the U.S. population. On April 16, 2024, we petitioned the FCC to commence a rule making to reconfigure and update the rules governing the Lower 900 MHz band plan to allow us to utilize a 15 MHz nationwide configuration for both PNT and 5G broadband (“Petition”). The Petition is subject to an ongoing FCC regulatory review process. We believe that modernizing the Lower 900 MHz band will simultaneously enable a high-quality terrestrial PNT network to complement and back up GPS, address a critical national security vulnerability, and add 5G broadband capacity. We have been granted more than 145 patents related to our systems and services, and standardized certain of our technologies with the 3rd Generation Partnership Project (3GPP), a global telecommunications standards-setting body.

The impact of GPS on the U.S. economy was nearly $1.4 trillion in the aggregate between 1984 and 2017, according to data from a National Institute of Standards and Technology (“NIST”)-sponsored study conducted by RTI International (“RTI”), and the European Commission estimated the annual impact on the economy of the European Union in its 2018 budget process as EUR1.2 trillion. The usage of GPS services is also rapidly expanding, with its presence in devices in the U.S. increasing from 600 million devices to 900 million devices between 2015 and 2019, according to information presented to the National Space-Based PNT Advisory Board by the National Coordination Office for Space-Based PNT. PNT resiliency is a priority of the U.S. Federal Government and is rising in priority in the European Union, non-European Union countries in Eastern Europe and in other parts of the world due to both the demonstrated vulnerability and lack of local control of space-based signals and systems. Critical infrastructure, including communications networks and power grids, require a reliable GPS signal for accurate timing. A failure of GPS could be catastrophic, and there is no comprehensive, terrestrial backup that is widely deployed today. The Department of Homeland Security has also classified the PNT vulnerabilities from GPS as cyber security threats, and the U.S. Department of Transportation (“DoT”) has also outlined a Complementary PNT Action Plan, among other key federal initiatives. Higher performance and availability will continue to expand the reach and value of PNT solutions, while terrestrial resilience is essential to protect the vast economic activity that is reliant on GPS.

Simultaneously, demand for wireless data services continues to grow. The backbone of wireless data services, electromagnetic spectrum, is a finite resource. Our spectrum licenses, which lie in the Lower 900 MHz band, are referred to as “low-band spectrum.” There is a finite amount of low-band spectrum available, and low-band spectrum has favorable coverage characteristics compared to higher frequencies, including the ability to provide services indoors and over greater distances. These characteristics result in its ability to be used for coverage and to be deployed more economically, with higher-frequency spectrum often used to provide additional capacity in targeted locations. The transition to 5G NR for our PNT services will provide a technical capability to support broadband data services, which, subject to appropriate regulatory approvals, may allow the spectrum to be utilized to help meet the continued, growing demand for wireless data capacity.

As we evolve our technology platform to NextGen and pursue regulatory changes to the Lower 900 MHz band and our spectrum licenses, we continue to deliver high-quality PNT services through our Pinnacle and TerraPoiNT solutions. Our Pinnacle solution, launched in partnership with AT&T Services, Inc. (“AT&T”) as part of its FirstNet® initiative, can provide accurate altitude service to any device with a barometric pressure sensor and covers over 90% of commercial structures over three stories in the U.S. Our Pinnacle system is primarily used for public safety applications, including enhanced 911 (“E911”) for Verizon Communications, Inc. (“Verizon”), and a growing number of devices operating on the remaining national cellular network providers.

Our TerraPoiNT system is a terrestrially based dedicated, complementary PNT network designed to overcome the limitations inherent in the space-based nature of GPS. GPS is a faint, unencrypted signal, which is often unavailable indoors, distorted in urban areas, and vulnerable to both jamming and spoofing. TerraPoiNT overcomes these limitations through a network of wide-area location transmitters that broadcast a PNT signal on our licensed Lower 900 MHz M-LMS spectrum. Unlike GPS, the TerraPoiNT signal can be reliably received indoors and in urban areas, is difficult to jam or spoof compared to GPS, and can support signal authentication (e.g., encryption). Further, the TerraPoiNT signal can embed Pinnacle information to provide a full three-dimensional PNT solution. TerraPoiNT received the highest scores in testing by the DoT reported in 2021 regarding potential PNT backup solutions, in each category tested, and was the only solution evaluated capable of providing the full set of services provided by GPS. Continuing our engagement with the DoT, in 2024 we were awarded a contract to establish performance characteristics for TerraPoiNT to allow DoT to incorporate our solutions into a clearinghouse of solutions defined in the DoT Complementary PNT Action Plan, for potential use by Federal government customers.

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Key Components of Results of Operations

Revenue

We have generated limited revenue since our inception. We derive our revenue from PNT products and services. Our revenue includes revenue generated through services contracts with wireless carriers, services with applications developers, technology demonstration, assessment and support contracts with government customers, sales of equipment, and licensing of proprietary technology. We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, and collection of consideration is probable.

Operating Expense

Cost of Goods Sold

Cost of goods sold (“COGS”) consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our operations and manufacturing teams. COGS also includes expenses for site leases, cost of equipment, software license costs, including cloud hosting costs, and professional services related to the maintenance of the equipment at each leased site. Our COGS may increase for the foreseeable future as we continue to invest in our PNT technologies in domestic U.S. and international markets.

Research and Development

Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our research and development functions. Research and development costs also include outside professional services for software and hardware development, and software license costs, including cloud hosting costs. We expect our research and development costs to increase for the foreseeable future as we continue to invest in research and development for our current and future products including our NextGen platform.

Selling, General and Administrative

Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our business development, marketing, corporate, executive, finance, legal, human resources, IT and other administrative functions. Selling, general and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance and other administrative expenses.

We expect our selling, general and administrative expenses to increase for the foreseeable future with the growth of our business, in pursuit of regulatory and technology initiatives, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, and additional insurance expenses, investor relations activities, and other administrative and professional services.

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Depreciation and Amortization

Depreciation and amortization expense results from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated useful lives.

Interest Income (Expense)

Interest income consists of interest earned from our cash and cash equivalents balance and on marketable securities. Interest expense relates to interest and amortization of debt discounts on our senior secured notes.

Other Income (Expense)

Other income (expense) consists of miscellaneous non-operating items, such as change in fair value of warrants and Asset Purchase Agreement liability, equity method income (loss), and foreign currency gains (losses).

Results of Operations

The following table sets forth our statements of operations for the periods indicated:

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Comparison of the Fiscal Years Ended December 31, 2024 and 2023

Revenue

Revenue increased by $1.8 million, or 47%, to $5.7 million for the year ended December 31, 2024 from $3.9 million for the year ended December 31, 2023. The increase was driven by an increase in service revenue from technology and services contracts with government and commercial customers. For the year ended December 31, 2024, three customers accounted for 57%, 18% and 11% of total revenue. For the year ended December 31, 2023, two customers accounted for 75% and 10% of total revenue. Accounts receivable as of December 31, 2024 and December 31, 2023 were $3.3 million and $2.3 million, respectively; the deferred revenue balance as of December 31, 2024 and December 31, 2023 was $0.3 million.

Operating Expense

Cost of Goods Sold (COGS)

COGS decreased by $2.0 million, or 15%, to $10.8 million for the year ended December 31, 2024 from $12.7 million for the year ended December 31, 2023. The decrease was primarily driven by a $1.6 million decrease in stock-based compensation, a $0.4 million decrease in software license expenses, a $0.3 million decrease in outside consulting expenses, and a $0.3 million decrease in maintenance and operational cost. The decreases were partially offset by a $0.3 million increase in payroll-related expenses, a $0.2 million increase in site rent expense due to deployment of new sites in second and third quarter of 2023, and a $0.1 million increase in non-recurring engineering services.

Research and Development

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Research and development expenses decreased by $3.3 million, or 17%, to $16.2 million for the year ended December 31, 2024 from $19.5 million for the year ended December 31, 2023. The decrease was primarily driven by a $2.5 million decrease in stock based compensation, a $0.7 million decrease in software license expenses, a $0.4 million decrease in outside consulting expenses, a $0.2 million decrease in maintenance and operational cost, and a $0.1 million decrease in professional fee. The decreases were partially offset by a $0.6 million increase in payroll-related expenses.

Selling, General and Administrative

Selling, general and administrative expenses increased by $3.2 million, or 11%, to $33.5 million during the year ended December 31, 2024 from $30.3 million in the year ended December 31, 2023. The increase was primarily driven by a $3.0 million increase in professional services, a $3.0 million increase in payroll-related expenses driven by headcount costs, executive and employment separation costs, a $1.0 million increase in outside consulting expenses, a $0.5 million increase in other operational expenses, and a $0.3 million increase in marketing and recruiting cost. The increases were partially offset by a $3.8 million decrease in stock-based compensation and a $0.8 million decrease in directors’ and officers’ insurance.

Depreciation and Amortization

Depreciation and amortization expenses increased by $0.4 million, or 9%, to $5.2 million during the year ended December 31, 2024 from $4.8 million during the year ended December 31, 2023. The increase in depreciation and amortization expense is primarily attributable to placing the network assets in service since the third quarter of 2023.

Interest Expense, Net

Interest expense, net of interest income, for the year ended December 31, 2024 was $9.4 million. Interest expense, net of interest income, for the year ended December 31, 2023 was $3.7 million. The increase in interest expense was due to interest and amortization of debt discounts on our senior secured notes issued during the second and third quarters of 2023.

Other Expense

Other expense was $32.2 million for the year ended December 31, 2024 compared with other expense of $4.3 million for the year ended December 31, 2023.The increase was primarily driven by a $29.1 million increase in expense related to change in the fair value of warrants, partially offset by $1.0 million of income related to the settlement of the Asset Purchase Agreement liability.

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Liquidity and Capital Resources

We have incurred net losses since our inception and to date have generated only limited revenue. We have primarily relied upon debt and equity financings to fund our cash requirements. During each of the twelve months ended December 31, 2024 and 2023, we incurred net losses of $101.9 million and $71.7 million, respectively. During each of the twelve months ended December 31, 2024, our net cash used in operating activities and cash provided by investing activities was $38.0 million was $39.5 million, respectively. During the twelve months ended December 31, 2023, our net cash used in operating activities and investing activities was $35.4 million and $1.1 million, respectively. As of December 31, 2024, we had cash and cash equivalents and marketable securities of $80.1 million and an accumulated deficit of $862.1 million. We expect to incur additional losses and higher operating expenses for the foreseeable future. Our primary uses of cash are to fund our operations as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and our PNT networks.

Managing liquidity and our cash position is a priority of ours. We continually work to optimize our expenses in light of the growth of our business, and adapt to changes in the economic environment. We believe that our cash and cash equivalents and marketable securities as of December 31, 2024 will be sufficient to meet our working capital and capital expenditure needs, including all contractual commitments, beyond the next 12 months from the filing of this Annual report on Form 10-K. We believe we will meet longer term expected future cash requirements and obligations through a combination of our existing cash and cash equivalents balances and marketable securities, cash flows from operations, and issuance of equity securities or debt offerings.  However, this determination is based upon internal financial projections and is subject to changes in market and business conditions.

In 2023, we issued $70.0 million in aggregate principal amount of senior secured notes with a fixed interest rate of 10% to the lenders thereto. Such notes will mature on December 1, 2026 with interest payable semi-annually in arrears on June 1 and December 1 of each year. We may elect, at our sole discretion, to pay up to 50% of the accrued and unpaid interest on the senior secured notes due with our common stock. Refer to Note 8 to our consolidated financial statements for the twelve months ended December 31, 2024 included elsewhere in this Annual Report on Form 10-K for more information.

Cash Flows

The following table summarizes our cash flows for the period indicated:

Cash Flows from Operating Activities

Our cash flows used in operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and selling, general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities during 2024 was $38.0 million, resulting primarily from a net loss of $101.9 million adjusted for non-cash charges of $13.9 million for stock-based compensation, $33.2 million for change in the fair value of warrant liability, $6.2 million in amortization of debt issuance costs, $5.2 million for depreciation and amortization, $0.2 million for equity method investment loss, and $0.1 million in asset retirement obligations accretion expense. These changes were partially offset by a net increase in operating liabilities of $7.0 million, non-cash income of $1.0 million for change in fair value of Asset Purchase Agreement liability, and $0.9 million realized and unrealized gain on marketable securities.

Net cash used in operating activities during 2023 was $35.4 million, resulting primarily from a net loss of $71.7 million adjusted for non-cash charges of $21.8 million for stock-based compensation, $4.8 million for depreciation and amortization, $4.1 million for change in the fair value of warrant liability, $3.2 million in amortization of debt issuance costs, $0.5 million realized and unrealized gain on marketable securities, $0.2 million for equity method investment loss, and $0.1 million in asset retirement obligations accretion expense. Additionally, there was a net increase in operating liabilities of $2.7 million.

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Cash Flows from Investing Activities

Net cash provided by investing activities during 2024 was $39.5 million, representing net purchase of marketable securities of $35.9 million, and cash used for Asset Purchase Agreement of $2.7 million and cash used for property and equipment, including internal use software of $0.8 million.

Net cash provided by investing activities during 2023 was $1.1 million, representing sale and of maturity of marketable securities, net of purchase of marketable securities, and cash used for addition in property and equipment primarily related to the deployment of the TerraPoiNT network and internal use software.

Cash Flows from Financing Activities

Net cash provided by financing activities during 2024 was $35.1 million, primarily reflecting cash proceeds from exercise of warrants and stock options.

Net cash provided by financing activities during 2023 was $69.0 million, primarily reflecting cash proceeds from issuance of senior secured notes, net of debt issuance cost.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. In doing such preparation, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

Revenue Recognition

We derive our revenue from PNT technology, products and services including revenue generated through technology demonstration and assessment contracts with customers, support services provided to customers, sales of equipment, and licensing of proprietary technology.

We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, payment terms are determined and collection of consideration is probable.

We sell software licenses and services through arrangements that may bundle software, equipment, and other services. When we determine that we have separate distinct performance obligations, we allocate the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, we estimate the amount to be allocated for each performance obligation based on observable market transactions. When we determine the performance obligations are not distinct, we recognize revenue on a combined basis as the obligation is satisfied. To the extent our contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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We recognize equipment sales and the related costs when control of the equipment passes to the customer, typically upon shipment. Customers do not have rights of return without our prior consent. Revenue pursuant to licensing agreements for our technology represents performance obligations that are satisfied over time. We recognize support services ratably over the periods in which the services are provided; the related costs are expensed as incurred.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue on the Consolidated Balance Sheets. We bill amounts under our agreed-upon contractual terms at periodic intervals for services, upon shipment for equipment, or upon achievement of contractual milestones or as work progresses. Billing may occur subsequent to revenue recognition, resulting in accounts receivable. We may also receive payments from customers before revenue is recognized, resulting in deferred revenue.

Indefinite-lived Intangible Assets

We hold wireless Multilateration LMS licenses. Certain general regulatory requirements apply to all licensed wireless spectrum, including, for example, certain build-out or “substantial service” requirements, which generally must be satisfied as a condition to the retention of the license. We are actively engaged in either meeting such requirements currently or seeking an extension of such requirements from the FCC for each of our LMS licenses. Although licenses are issued for only a fixed time, ten years, such licenses are subject to renewal by the FCC, based on the achievement of certain milestones and a finding that such renewal would serve the public interest. Renewal of our licenses has occurred previously and at nominal cost. As a result, we treat our wireless LMS spectrum licenses as an indefinite-lived intangible asset. We reevaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. Costs incurred to maintain the FCC licenses are recorded in operating expenses.

We assess indefinite-lived intangible assets for potential impairment annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. However, if we conclude that it is more likely than not that the fair value of the asset is less than its carrying value, then we perform a two-step impairment test to identify potential impairment and measures the amount of impairment we will recognize, if any.

Goodwill

Goodwill is tested for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company operates as one reporting unit. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. If the Company determines it is not more likely than not the reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.

Long-term debt

In conjunction with the issuance of senior secured notes in May and July of 2023, we issued warrants to certain of the purchasers thereto. We allocated the proceeds from the debt issuance to long term debt and equity classified warrants based on relative fair value as determined by the Discounted Cash Flow approach and Monte Carlo simulation model, respectively. The portion of proceeds allocated to equity-classified warrants and direct debt issuance costs are classified as debt discounts. The carrying value of long term debt in the Company’s consolidated balance sheet consists of principal amount of debt, net of debt discounts. Debt discounts are amortized to interest expense based on the related debt agreements primarily using the effective interest method.

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Recently Issued and Adopted Accounting Standards

For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 2 to our consolidated financial statements for the year ended December 31, 2024 included elsewhere in this Annual Report on Form 10-K.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Spartacus previously elected to avail itself of the extended transition period, and following the consummation of the Business Combination, we became an emerging growth company (for the period described in the immediately succeeding paragraph) and will continue to take advantage of the benefits of the extended transition period emerging growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.

We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons. You should review “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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Overview

We are the market leader in delivering resilient, next generation, complementary positioning, navigation and timing (“PNT”) solutions designed to overcome the limitations and vulnerabilities of the existing space-based Global Positioning Systems (“GPS”) and Global Navigation Satellite Systems (“GNSS”). Our complementary PNT solutions are built on a deep asset base, which we are evolving to utilize 5G New Radio (“5G NR”) technologies. We expect the evolution of our platform to 5G NR to significantly improve the efficiency and flexibility of our operations, technically enabling the delivery of high-bandwidth data services simultaneously with our industry-leading PNT solutions.  Since the inception of NextNav, LLC in 2007, we have secured valuable Federal Communications Commission (“FCC”) licenses for a contiguous 8 MHz band of 900 MHz M-LMS spectrum covering over 90% of the U.S. population, been granted more than 180 patents related to our systems and services, and standardized our TerraPoiNT technology in 3GPP, the global telecommunications standards-setting body.

We deliver differentiated PNT solutions through our network-based Pinnacle and TerraPoiNT solutions. Our Pinnacle service provides accurate altitude to any device with a barometric pressure sensor, including most off-the-shelf Android and iOS smartphones, appropriately specified Internet of Things (“IOT”) devices, as well as vehicles and other equipment. In 2021, we launched our Pinnacle network in partnership with AT&T Services, Inc. (“AT&T”) for FirstNet®, the nationwide, interoperable public safety broadband network. Our Pinnacle network covers over 90% of commercial structures over three stories in the U.S., and in addition to FirstNet®, our network is being used for enhanced 911 (“E911”) by Verizon Communications, Inc. (“Verizon”), and a growing set of devices operating on the remaining national cellular network providers.  Pinnacle has also been adopted by a growing number of public safety apps, commercial apps, and is available on multiple app development platforms. Our Pinnacle network is also an important component of our PNT resiliency services, and is being evaluated as a persistent PNT characterization platform.  We believe that continuing integration of our Pinnacle service into devices and applications will support revenue growth over the coming year.

Our TerraPoiNT system is a terrestrially-based network designed to overcome the limitations inherent in the space-based nature of GPS.  GPS is a faint, unencrypted signal, which is often unavailable indoors, distorted in urban areas, and vulnerable to both jamming and spoofing. TerraPoiNT overcomes these limitations through the transmission of a PNT signal on our licensed 900 MHz LMS spectrum. Unlike GPS, the TerraPoiNT signal can be reliably received indoors and in urban areas, is difficult to jam or spoof, and can support signal authentication (e.g., encryption). Further, the TerraPoiNT signal can embed Pinnacle information to provide a full 3D PNT solution. TerraPoiNT offers positioning, navigation and can be configured to provide NIST-traceable timing services independently of GPS. We believe that these capabilities, whether as a more robust primary solution or as a backup in the event of GPS disruptions, are essential due to the economy’s reliance on GPS for location and precision timing. GPS resiliency is increasingly a U.S. national security priority, and is rising in priority in the European Union, non-European Union countries in Eastern Europe and in other parts of the world due to both the demonstrated vulnerability and lack of local control of space-based signals and systems, highlighted by recent events in Ukraine, the Middle East and elsewhere. Critical infrastructure, including communications networks and power grids, require a reliable GPS signal for accurate timing. A failure of GPS could be catastrophic, and there is no comprehensive, terrestrial backup that is widely deployed today.

Simultaneously, demand for wireless data services continues to grow. The backbone of wireless data services, electromagnetic spectrum, is a finite resource. Our spectrum licenses, covering 919.75-927.75 MHz, are referred to as “low-band spectrum”. There is a finite amount of low-band spectrum available, and it has favorable coverage characteristics compared to higher frequencies, including the ability to provide services indoors and at greater distances. These characteristics result in its ability to be used for coverage and to be deployed more economically, with higher-frequency spectrum often used to provide additional capacity in targeted locations. Our transition to 5G NR as the basis for our PNT services will provide a technical basis for simultaneous broadband data in our band, in addition to our base PNT services, and, subject to appropriate regulatory approvals, may allow us to utilize our spectrum to help meet the continued, growing demand for wireless data capacity.

As of March 2024, TerraPoiNT is deployed and available, with metro-wide service in the San Francisco Bay Area and select services available in 92 total markets nationally. It is also in use by the National Aeronautics and Space Administration (“NASA”) at its Langley Research Center in Hampton, VA for drone operations research and at its Ames facility in Mountain View, CA, leveraging our network in the Bay Area.

On October 31, 2022,  we acquired Nestwave, SAS, a French société par actions simplifiée (as subsequently renamed, “NextNav France”), a privately held global leader in low-power geolocation, and completed integrating the NextNav France team into our existing engineering and technology organization during 2023. NextNav France provides advanced geolocation solutions to IOT modem and digital signal processor vendors and end IOT users. We believe that the combination of our technology with NextNav France’s LTE/5G capabilities will allow us to evolve our system to align with 5G NR.

NextNav France’s intellectual property also included a “soft GPS” capability, allowing GPS processing on LTE and 5G NR chipsets, reducing the cost and power requirements for certain types of GPS services for IOT devices.  We have licensed this technology to chipset vendors, including a global Tier 1 LTE and 5G NR modem vendor.  We expect to start to see the results of these licensing arrangements in 2024.

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Macroeconomic Factors

We are aware that network deployment projects are experiencing delays in schedules and potential cost increases due to a tight labor supply in the field services market. While the impact of this supply constraint is not material to our network projects at this time, we continue to carefully manage labor and materials supply matters. Additionally, there is an increased risk of financial market disruption. Management continues to actively monitor our financial condition, liquidity, operations, suppliers, industry and workforce. We expect these macroeconomic factors and their effects on our operations to continue through the remainder of 2024.

Key Components of Results of Operations

Revenue

We have generated limited revenue since our inception. We derive our revenue from PNT products and services, including “floor-level” altitude location data, and related products and services. Our revenue includes revenue generated through services contracts with wireless carriers, services with applications developers, technology demonstration, assessment and support contracts with government customers, sales of equipment, and licensing of proprietary technology. We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, and collection of consideration is probable.

Operating Expense

Cost of Goods Sold

Cost of goods sold (“COGS”) consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our operations and manufacturing teams. COGS also includes expenses for site leases, cost of equipment, and professional services related to the maintenance of the equipment at each leased site. We expect our operations costs to increase for the foreseeable future as we continue to invest in our Pinnacle and TerraPoiNT networks in domestic U.S. and international markets.

Research and Development

Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our research and development functions. Research and development costs also include outside professional services for software and hardware development, cloud hosting costs, and software licensing costs. We expect our research and development costs to increase for the foreseeable future as we continue to invest in research and development for our current and future products.

Selling, General and Administrative

Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our business development, marketing, corporate, executive, finance, legal, human resources, IT and other administrative functions. Selling, general and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance and other administrative expenses.

We expect our selling, general and administrative expenses to increase for the foreseeable future with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, and additional insurance expenses, investor relations activities, and other administrative and professional services. As a result, we expect our selling, general and administrative expenses will increase in absolute dollars, subject to fluctuations in the volume of stock-based compensation granted, but may fluctuate as a percentage of total revenue over time.

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Depreciation and Amortization

Depreciation and amortization expense results from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated useful lives.

Interest Income (Expense)

Interest income consists of interest earned from our cash and cash equivalents balance and on marketable securities. Interest expense relates to interest and amortization of debt discounts on our senior secured notes.

Other Income (Expense)

Other income (expense) consists of miscellaneous non-operating items, such as change in fair value of warrants, equity method income (loss), and foreign currency gains (losses).

Results of Operations

The following table sets forth our statements of operations for the periods indicated:

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Comparison of the Fiscal Years Ended December 31, 2023 and 2022

Revenue

Revenue decreased by less than $0.1 million, or 2%, for the year ended December 31, 2023 from the year ended December 31, 2022. The decrease was driven by decreased integration revenue, partially offset by increased recurring service revenue from technology and service contracts with commercial customers. For the year ended December 31, 2023, two customers accounted for 75% and 10% of total revenue. For the year ended December 31, 2022, two customers accounted for 83% and 10% of total revenue. Accounts receivable as of December 31, 2023 and December 31, 2022 were $2.3 million and $2.2 million, respectively; the deferred revenue balance as of December 31, 2023 and December 31, 2022 was $0.3 million and $0.1 million, respectively.

Operating Expense

Cost of Goods Sold (COGS)

COGS increased by $0.9 million, or 8%, to $12.7 million for the year ended December 31, 2023 from $11.8 million for the year ended December 31, 2022. The increase was primarily driven by a $0.8 million increase in site rent expense due to deployment of new sites in 2023, a $0.4 million increase in software license expenses, and a $0.3 million increase in payroll-related expenses. The increases were partially offset by a $0.3 million decrease in outside consulting expenses, a $0.2 million decrease in maintenance and operational cost, and a $0.1 million decrease in stock-based compensation.

Research and Development

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Research and development expenses increased by $2.4 million, or 14%, to $19.5 million for the year ended December 31, 2023 from $17.1 million for the year ended December 31, 2022. The increase was primarily driven by a $1.6 million increase in payroll-related expenses driven by headcount, a $0.5 million increase in maintenance and operational cost, a $0.2 million increase in software license expenses, a $0.2 million increase in outside consulting expenses, and a $0.1 million increase in professional fee. The increases were partially offset by a $0.1 million decrease in stock-based compensation.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $6.6 million, or 18%, to $30.3 million during the year ended December 31, 2023 from $36.9 million in the year ended December 31, 2022. The decrease was primarily driven by a $4.5 million decrease in stock-based compensation, a $1.0 million decrease in professional services, a $1.0 million decrease in directors’ and officers’ insurance, a $0.8 million decrease in outside consulting expenses, and a $0.4 million decrease in marketing and recruiting cost. The decreases were partially offset by a $0.9 million increase in payroll-related expenses driven by headcount and a $0.2 million increase in other operational expenses.

Depreciation and Amortization

Depreciation and amortization expenses increased by $1.2 million, or 31%, to $4.8 million during the year ended December 31, 2023 from $3.7 million during the year ended December 31, 2022. The increase in depreciation and amortization expense is primarily attributable to placing the Pinnacle and TerraPoiNT network assets in service since the third quarter of 2022 and amortization related to acquired intangibles in the fourth quarter of 2022.

Interest Income (Expense)

Interest expense was $7.4 million whereas interest income was $3.7 million resulting in net interest expense of $3.7 million for the year ended December 31, 2023 compared with interest income of $0.9 million for the year ended December 31, 2022. The increase in interest expense was due to interest and amortization of debt discounts on our senior secured notes issued during 2023.

Other Income (Expense)

Other expense was $4.3 million for the year ended December 31, 2023 compared with other income of $24.5 million for the year ended December 31, 2022.The change in other expense was primarily driven by change in the fair value of warrants.

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Liquidity and Capital Resources

We have incurred net losses since our inception and to date have generated only limited revenue. We have primarily relied upon debt and equity financings to fund our cash requirements. During each of the twelve months ended December 31, 2023 and 2022, we incurred net losses of $71.7 million and $40.1 million, respectively. During each of the twelve months ended December 31, 2023, our net cash used in operating activities and cash provided by investing activities was $35.4 million was $1.1 million, respectively. During the twelve months ended December 31, 2022, our net cash used in operating activities and investing activities was $37.1 million and $15.7 million, respectively. As of December 31, 2023, we had cash and cash equivalents and marketable securities of $85.8 million and an accumulated deficit of $760.2 million. We expect to incur additional losses and higher operating expenses for the foreseeable future. Our primary uses of cash are to fund our operations as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and our PNT networks.

Managing liquidity and our cash position is a priority of ours. We continually work to optimize our expenses in light of the growth of our business, and adapt to changes in the economic environment. We believe that our cash and cash equivalents and marketable securities as of December 31, 2023 will be sufficient to meet our working capital and capital expenditure needs, including all contractual commitments, beyond the next 12 months. We believe we will meet longer term expected future cash requirements and obligations through a combination of our existing cash and cash equivalents balances and marketable securities, cash flows from operations, and issuance of equity securities or debt offerings.  However, this determination is based upon internal financial projections and is subject to changes in market and business conditions.

In 2023, we issued $70.0 million in aggregate principal amount of senior secured notes with a fixed interest rate of 10% to the lenders thereto. Such notes will mature on December 1, 2026 with interest payable semi-annually in arrears on June 1 and December 1 of each year. We may elect, at our sole discretion, to pay up to 50% of the accrued and unpaid interest on the senior secured notes due with our common stock. Refer to Note 8 to our consolidated financial statements for the twelve months ended December 31, 2023 included elsewhere in this Annual Report on Form 10-K for more information.

Cash Flows

The following table summarizes our cash flows for the period indicated:

Cash Flows from Operating Activities

Our cash flows used in operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and selling, general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities during 2023 was $35.4 million, resulting primarily from a net loss of $71.7 million adjusted for non-cash charges of $21.8 million for stock-based compensation, $4.8 million for depreciation and amortization, $4.1 million for change in the fair value of warrant liability, $3.2 million in amortization of debt issuance costs, $0.5 million realized and unrealized gain on marketable securities, $0.2 million for equity method investment loss, and $0.1 million in asset retirement obligations accretion expense. Additionally, there was a net increase in operating liabilities of $2.7 million.

Net cash used in operating activities during 2022 was $37.1 million, resulting from a net loss of $40.1 million and non-cash charge of $24.7 million for the change in fair value of warrant liability, adjusted for non-cash charges of $26.5 million in stock-based compensation charges, $0.23 million for equity method investment loss, non-cash charges of $3.7 million in depreciation, and a decrease of $2.7 million in accounts payable, prepaid and other current assets.

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Cash Flows from Investing Activities

Net cash provided by investing activities during 2023 was $1.1 million, representing sale and of maturity of marketable securities, net of purchase of marketable securities, and cash used for addition in property and equipment primarily related to the deployment of the TerraPoiNT network and internal use software.

Net cash used in investing activities during 2022 was $15.7 million, representing additions to short term investment, acquisition of NextNav France, equity method investments, and property and equipment primarily related to the deployment of the Pinnacle and TerraPoiNT network and internal use software.

Cash Flows from Financing Activities

Net cash provided by financing activities during 2023 was $69.0 million, primarily reflecting cash proceeds from issuance of senior secured notes, net of debt issuance cost.

Net cash provided by financing activities during 2022 was $43 thousand, primarily reflecting cash proceeds from exercise of common stock options.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. In doing such preparation, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

Revenue Recognition

We derive our revenue from PNT technology, products and services including revenue generated through technology demonstration and assessment contracts with customers, support services provided to customers, sales of equipment, and licensing of proprietary technology.

We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, payment terms are determined and collection of consideration is probable.

We sell software licenses and services through arrangements that may bundle software, equipment, and other services. When we determine that we have separate distinct performance obligations, we allocate the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, we estimate the amount to be allocated for each performance obligation based on observable market transactions. When we determine the performance obligations are not distinct, we recognize revenue on a combined basis as the obligation is satisfied. To the extent our contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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We recognize equipment sales and the related costs when control of the equipment passes to the customer, typically upon shipment. Customers do not have rights of return without our prior consent. Revenue pursuant to licensing agreements for our technology represents performance obligations that are satisfied over time. We recognize support services ratably over the periods in which the services are provided; the related costs are expensed as incurred.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue on the Consolidated Balance Sheets. We bill amounts under our agreed-upon contractual terms at periodic intervals for services, upon shipment for equipment, or upon achievement of contractual milestones or as work progresses. Billing may occur subsequent to revenue recognition, resulting in accounts receivable. We may also receive payments from customers before revenue is recognized, resulting in deferred revenue.

Indefinite-lived Intangible Assets

We hold wireless Multilateration LMS licenses. Certain general regulatory requirements apply to all licensed wireless spectrum, including, for example, certain build-out or “substantial service” requirements, which generally must be satisfied as a condition to the retention of the license. We are actively engaged in either meeting such requirements currently or seeking an extension of such requirements from the FCC for each of our LMS licenses. Although licenses are issued for only a fixed time, ten years, such licenses are subject to renewal by the FCC, based on the achievement of certain milestones and a finding that such renewal would serve the public interest. Renewal of our licenses has occurred previously and at nominal cost. As a result, we treat our wireless LMS spectrum licenses as an indefinite-lived intangible asset. We reevaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. Costs incurred to maintain the FCC licenses are recorded in operating expenses.

We assess indefinite-lived intangible assets for potential impairment annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. However, if we conclude that it is more likely than not that the fair value of the asset is less than its carrying value, then we perform a two-step impairment test to identify potential impairment and measures the amount of impairment we will recognize, if any.

Goodwill

Goodwill is tested for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company operates as one reporting unit. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. If the Company determines it is not more likely than not the reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.

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Long-term debt

In conjunction with the issuance of senior secured notes in May and July of 2023, we issued warrants to certain of the purchasers thereto. We allocated the proceeds from the debt issuance to long term debt and equity classified warrants based on relative fair value as determined by the Discounted Cash Flow approach and Monte Carlo simulation model, respectively. The portion of proceeds allocated to equity-classified warrants and direct debt issuance costs are classified as debt discounts. The carrying value of long term debt in the Company’s consolidated balance sheet consists of principal amount of debt, net of debt discounts. Debt discounts are amortized to interest expense based on the related debt agreements primarily using the effective interest method.

Recently Issued and Adopted Accounting Standards

For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 2 to our consolidated financial statements for the year ended December 31, 2023 included elsewhere in this Annual Report on Form 10-K.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Spartacus previously elected to avail itself of the extended transition period, and following the consummation of the Business Combination, we became an emerging growth company (for the period described in the immediately succeeding paragraph) and will continue to take advantage of the benefits of the extended transition period emerging growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.

We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons. You should review “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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Overview

We are the market leader in delivering next generation PNT solutions that overcome the limitations of existing space-based GPS. The world increasingly requires more accurate and resilient PNT capabilities. Public safety, autonomous vehicles, eVTOLs, UAVs, and the app economy all require precise 3D location solutions. Paramedics need to know which apartment a 911 call originated from, ride hailing and delivery apps need to know precisely where you are standing and game developers need precise 3D location data to deliver a next generation augmented reality experience.

In early 2021, we launched the first element of our next generation GPS service through initial commercial launch of our nationwide Pinnacle network that was deployed in partnership with AT&T Services, Inc. (“AT&T”). The Pinnacle network provides “floor-level” altitude data to over 90% of commercial structures over three stories in the U.S. Pinnacle is being utilized by FirstNet® for public safety. We are currently providing service to Verizon as a customer for E911 services, using our Pinnacle 911 solution.  Pinnacle has also been adopted by a growing number of public safety apps, commercial apps and app development platforms, including Unity Engine, CRG, GeoComm, Rapid Deploy, Central Square, NGA 911, Qualcomm, and the Unreal Engine. We believe that ramp up of customers using our existing Pinnacle network will support revenue growth over the coming year.

We will be extending our capabilities by expanding the deployment our TerraPoiNT system, which is a nationwide network that is designed to overcome the inherent limitations of traditional GPS. TerraPoiNT utilizes a network of specialized wide area location transmitters that broadcast an encrypted PNT signal on our licensed 900 MHz LMS spectrum with a signal that is 100,000 times stronger than GPS. TerraPoiNT is well suited for urban and indoor environments where existing GPS signals are either distorted or blocked all together. In addition, TerraPoiNT provides redundancy for GPS, which is vulnerable to spoofing and jamming. GPS redundancy is increasingly a U.S. national security priority and is a rising priority in the other parts of the world. Critical infrastructure, including communications networks and power grids, require a reliable GPS signal for accurate timing. A failure of GPS would be catastrophic, and there is no back-up today.

Since the inception of NextNav, LLC in 2007, we have secured valuable FCC licenses covering approximately 93% of the U.S. population for a continuous 8 MHz band of 900 MHz spectrum, filed more than 150 patents related to our systems and services, deployed the nationwide Pinnacle network and launched commercial service. In addition, we have deployed our TerraPoiNT solution in 85 markets, and TerraPoiNT received the highest scores in testing by the Department of Transportation of potential PNT back-up solutions.

In October 2022, we acquired Nestwave SAS (“Nestwave”). We expect the integration of the Nestwave technology to significantly reduce the capital and operating expenditures associated with a national deployment of a TerraPoiNT network.  In addition, Nestwave’s technology could result in a significant improvement in the spectral efficiency of our radio transmissions, which may allow us to offer an expanded suite of PNT and data services.

The Business Combination

On October 28, 2021 (the “Closing Date”), we consummated a Business Combination pursuant to the terms of the Merger Agreement. As a result of the Business Combination, we changed our name to NextNav Inc., and certain blocker entities formed by Holdings equity holders, Holdings and the various operating subsidiaries of Holdings became the Company’s wholly owned subsidiaries, with the equity holders of each of such blocker entities and Holdings and Spartacus’ stockholders becoming our stockholders. The Nasdaq ticker symbols for our common stock, par value $0.0001 per share, and warrants are “NN” and “NNAVW,” respectively. See Note 1 to our consolidated financial statements for the year ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K for additional information.

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Macroeconomic Factors

We are aware that network deployment projects are experiencing delays in schedules and potential cost increases due to a tight labor supply in the field services market. While the impact of this supply constraint is not material to the Company's network projects at this time, we continue to carefully manage labor and materials supply matters.  Additionally, the full impact of the COVID-19 pandemic continues to evolve as of the date of this Annual Report on Form 10-K. Management continues to actively monitor our financial condition, liquidity, operations, suppliers, industry and workforce. We expect these macroeconomic and COVID-19 factors and their effects on our operations to continue through the remainder of 2023.

Key Components of Results of Operations

Revenue

We have generated limited revenue since our inception. We derive our revenue from “floor-level” altitude location data, and related products and services, and PNT products and services. Our revenue includes revenue generated through services contracts with wireless carriers, services with applications developers, technology demonstration, assessment and support contracts with government customers, sales of equipment, and licensing of proprietary technology. We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, and collection of consideration is probable.

Operating Expense

Cost of Goods Sold

Cost of goods sold (“COGS”) consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our operations and manufacturing teams. COGS also includes expenses for site leases, cost of equipment, and professional services related to the maintenance of the equipment at each leased site. We expect our operations costs to increase for the foreseeable future as we continue to invest in the expansion of our Pinnacle and TerraPoiNT networks in domestic U.S. and international markets.

Research and Development

Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our research and development functions. Research and development costs also include outside professional services for software and hardware development, cloud hosting costs, and software licensing costs. We expect our research and development costs to increase for the foreseeable future as we continue to invest in research and development for our current products and future products.

Selling, General and Administrative

Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our business development, marketing, corporate, executive, finance legal, human resources, IT and other administrative functions. Selling, general and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance and other administrative expenses.

We expect our selling, general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services. As a result, we expect our selling, general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue over time.

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Depreciation and Amortization

Depreciation and amortization expense results from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated useful lives.

Interest Income (Expense)

Interest expense relates to interest on our senior secured loan facility, which was fully repaid in connection with closing of the Business Combination. Interest income consists of interest earned from our cash and cash equivalents balance.

Other Income (Expense)

Other income (expense) consists of miscellaneous non-operating items, such as change in fair value of warrants, equity method income (loss), and foreign currency gains (losses).

Results of Operations

The following table sets forth our statements of operations for the periods indicated:

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Comparison of the Fiscal Years Ended December 31, 2022 and 2021

Revenue

Revenue increased by $3.2 million, or 415%, to $3.9 million for the year ended December 31, 2022 from $0.8 million for the year ended December 31, 2021. The increase was driven by increased revenue from technology and services contracts with commercial customers. For the year ended December 31, 2022, two customers accounted for 83% and 10% of total revenue. For the year ended December 31, 2021, three customers accounted for 40%, 31%, and 19% of total revenue. The accounts receivables as of December 31, 2022 was $2.2 million and $1.7 million as of December 31, 2021, whereas deferred revenue balance as of December 31, 2022 was $0.1 million and $1.6 million as of December 31, 2021.

Operating Expense

Cost of Goods Sold (COGS)

COGS decreased by $6.6 million, or 36%, to $11.8 million for the year ended December 31, 2022 from $18.4 million for the year ended December 31, 2021. The decrease was primarily driven by a $9.5 million decrease in rent expense related to contingent rent recorded for warrants vested in the year 2021 and a $0.4 million decrease in outside consulting expenses. The decreases were partially offset by a $2.2 million increase in stock-based compensation, a $0.7 million increase in software license expenses, a $0.3 million increase in payroll-related expenses driven by headcount, and a $0.1 million increase in maintenance and operational cost.

Research and Development

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Research and development expenses increased by $7.6 million, or 80%, to $17.1 million for the year ended December 31, 2022 from $9.5 million for the year ended December 31, 2021. The increase was primarily driven by a $6.1 million increase in stock-based compensation, a $1.0 million increase in software license expenses, a $0.4 million increase in maintenance and operational cost, and a $0.3 million increase in payroll-related expenses driven by headcount. The increases were partially offset by a $0.3 million decrease in outside consulting expenses.

Selling, General and Administrative

Selling, general and administrative expenses increased by $23.4 million, or 172%, to $36.9 million during the year ended December 31, 2022, from $13.6 million in the year ended December 31, 2021. The increase was primarily driven by a $16.5 million increase in stock-based compensation, a $3.1 million increase in professional services, a $2.6 million increase in directors’ and officers’ insurance, a $1.6 million increase in payroll-related expenses driven by headcount, and a $0.9 million increase in marketing and recruiting cost. The increases were partially offset by a $0.9 million decrease in outside consulting expenses and a $0.6 million decrease in other operational expenses.

Depreciation and Amortization

Depreciation and amortization expenses increased by $1.9 million, or 106%, to $3.7 million during the year ended December 31, 2022, from $1.8 million during the year ended December 31, 2021. The increase in depreciation and amortization expense is primarily attributable to placing the Pinnacle and TerraPoiNT network assets in service since the third quarter of 2021.

Interest Income (Expense)

Interest income was $0.9 million for the year ended December 31, 2022 compared with interest expense of $17.8 million for the year ended December 31, 2021.The decrease in interest expense was driven by full repayment of debt as a part of the Business Combination in the fourth quarter of 2021. Interest income consists of interest earned on marketable securities.

Other Income (Expense)

Other income was $24.5 million for the year ended December 31, 2022 compared with other expenses of $84.3 million for the year ended December 31, 2021.The change in other expense was primarily driven by change in the fair value of warrants.

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Liquidity and Capital Resources

We have incurred net losses since our inception and to date have generated only limited revenue. We have primarily relied upon debt and equity financings to fund our cash requirements.

During the years ended December 31, 2022 and 2021, we incurred net losses of $40.1 million and $144.7 million, respectively. During the year ended December 31, 2022, our net cash used in operating activities and investing activities was $37.1 million and $15.7 million, respectively. During the year ended December 31, 2021, our net cash used in operating activities and investing activities was $47.9 million and $1.3 million, respectively. As of December 31, 2022, we had cash and cash equivalents and marketable securities of $55.4 million and an accumulated deficit of $688.5 million. We expect to incur additional losses and higher operating expenses for the foreseeable future. Our primary uses of cash are to fund our operations as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and the expansion of the TerraPoiNT network. Management has the intent and ability to manage liquidity through the timing and extent of research and development spend, as well as other discretionary operating expenses.

Managing liquidity and our cash position is a priority of the Company. We continually work to optimize our expenses in light of the growth of our business, and adapt to changes in the economic environment. We believe that our cash and cash equivalents and marketable securities as of March 30, 2023 will be sufficient to meet our working capital and capital expenditure needs, including all contractual commitments, for the next 12 months. We expect to meet longer term expected future cash requirements and obligations through a combination of cash flows from operations and issuance of equity securities or debt offerings. However, this determination is based upon internal projections of operating cash flows and is subject to changes in market and business conditions. Our ability to obtain debt financing and/or issue equity securities on acceptable terms, or at all, will depend on, among other things, our financial performance and credit ratings, general economic factors, including inflation and then-current interest rates, the condition of the credit and capital markets and other events, some of which may be beyond our control.

Cash Flows

The following table summarizes our cash flows for the period indicated:

Cash Flows from Operating Activities

Our cash flows used in operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and selling, general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities during 2022 was $37.1 million, resulting primarily from a net loss of $40.1 million adjusted for non-cash charges of  $26.5 million for stock-based compensation, $3.7 million for depreciation and amortization, $0.2 million for equity method investment loss and non-cash income of $24.7 million for change in the fair value of warrant liability. Additionally, there was a net decrease in operating liabilities of $2.7 million.

Net cash used in operating activities during 2021 was $47.9 million, resulting from a net loss of $144.7 million and non-cash charge of $84.3 million for the change in fair value of warrant liability, adjusted for non-cash charges of $1.7 million in stock based compensation charges, non-cash charges of $4.7 million in interest expense that is primarily attributable to the increase in borrowing from the financing arrangement, non-cash charges of $9.3 million in amortization of debt issuance costs, non-cash charges of $1.8 million in depreciation, and a decrease of $14.4 million in accounts payable, prepaid and other current assets.

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Cash Flows from Investing Activities

Net cash used in investing activities during 2022 was $15.7 million, representing additions to short term investment, acquisition of Nestwave, equity method investments, and property and equipment primarily related to the deployment of the Pinnacle and TerraPoiNT network and internal use software.

Net cash used in investing activities during 2021 was $1.3 million, representing additions to property, equipment and related installation costs primarily related to the deployment of the Pinnacle Network.

Cash Flows from Financing Activities

Net cash provided by financing activities during 2022 was $43 thousand, primarily reflecting cash proceeds from exercise of common stock options.

Net cash provided by financing activities during 2021 was $135.6 million, primarily reflecting cash proceeds from the Business Combination and PIPE investments of $230.9 million (net of costs paid directly related to the Business Combination and PIPE investment of $23.1 million), and borrowing of $24.6 million from the Financing Agreement. The equity and debt proceeds were partially offset by $96.9 million of debt repayments in connection with the consummation of the Business Combination.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. In doing such preparation, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

Revenue Recognition

We derive our revenue from indoor and dense-urban positioning technology, products and services including revenue generated through technology demonstration and assessment contracts with customers, support services provided to customers, sales of equipment, and licensing of proprietary technology.

We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, payment terms are determined and collection of consideration is probable.

We sell software licenses and services through arrangements that may bundle software, equipment, and other services. When we determine that we have separate distinct performance obligations, we allocate the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, we estimate the amount to be allocated for each performance obligation based on observable market transactions. When we determine the performance obligations are not distinct, we recognize revenue on a combined basis as the obligation is satisfied. To the extent our contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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We recognize equipment sales and the related costs when control of the equipment passes to the customer, typically upon shipment. Customers do not have rights of return without our prior consent. Revenue pursuant to licensing agreements for our technology represents performance obligations that are satisfied over time. We recognize support services ratably over the periods in which the services are provided; the related costs are expensed as incurred.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue on the Consolidated Balance Sheets. We bill amounts under our agreed-upon contractual terms at periodic intervals for services, upon shipment for equipment, or upon achievement of contractual milestones or as work progresses. Billing may occur subsequent to revenue recognition, resulting in accounts receivable. We may also receive payments from customers before revenue is recognized, resulting in deferred revenue.

Indefinite-lived Intangible Assets

We hold wireless Multilateration LMS licenses. Certain general regulatory requirements apply to all licensed wireless spectrum, including, for example, certain build-out or “substantial service” requirements, which generally must be satisfied as a condition to the retention of the license. We are actively engaged in either meeting such requirements currently or seeking an extension of such requirements from the FCC for each of our LMS licenses. Although licenses are issued for only a fixed time, ten years, such licenses are subject to renewal by the FCC, based on the achievement of certain milestones and a finding that such renewal would serve the public interest. Renewal of our licenses has occurred previously and at nominal cost. As a result, we treat our wireless LMS spectrum licenses as an indefinite-lived intangible asset. We reevaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. Costs incurred to maintain the FCC licenses are recorded in operating expenses.

We assess indefinite-lived intangible assets for potential impairment annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. However, if we conclude that it is more likely than not that the fair value of the asset is less than its carrying value, then we perform a two-step impairment test to identify potential impairment and measures the amount of impairment we will recognize, if any.

Long-lived Assets

Our property and equipment, network under construction, intangible assets and equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, impairment is determined by comparing the carrying value of these long-lived assets to management’s probability weighted estimate of the future undiscounted cash flows expected to result from the use of the assets or asset group. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset group.

Goodwill

Goodwill is tested for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company operates as one reporting unit. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. If the Company determines it is not more likely than not the reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.

Warrants

Private Placement Warrants are classified as non-current liabilities and reported at fair value at each reporting period. The fair value of the Private Placement Warrants is accounted for using the Monte-Carlo simulation analysis. The Monte-Carlo simulation analysis requires us to make certain assumptions, including the expected volatility, the risk-free interest rate, and the dividend yield. The expected dividend rate of zero is based on the fact that we have not historically paid and do not expect to pay a dividend on our common stock. The risk free rate was based on U.S. Treasury yields for securities with similar terms. Volatility was calculated based on the trading prices for a group of comparable public companies.

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Stock-Based Compensation

We estimate the fair value of stock-based awards on the date of grant. The fair value of stock options is determined using the Black-Scholes option pricing model. The fair value of restricted stock awards is based on the closing price of our common stock on the date of grant. We amortize the fair value of awards expected to vest on a straight-line basis over the requisite service periods of the awards, which is generally the period from the grant date to the end of the vesting period. The determination of the fair value of our stock option awards is based on a variety of factors, including, but not limited to, our common stock price, risk-free rate, expected stock price volatility over the expected life of awards, dividend yield and, award’s expected term. The assumptions used to determine the fair value of the stock options represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. Additionally, we account for forfeitures for stock-based awards as they occur.

Income Taxes

Under Accounting Standards Codification (“ASC”) 740, “Income Taxes,” deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to net operating losses, tax credits, and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, which will result in taxable or deductible amounts in the future. Our income tax expense/benefit, deferred tax assets and tax receivable liability reflect management’s best assessment of estimated current and future taxes. Significant judgments and estimates are required in determining the consolidated income tax expense/benefits, deferred tax assets and tax receivable agreement liability. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and results of recent operations. Estimating future taxable income is inherently uncertain, requires judgment and is consistent with estimates we are using to manage our business. If we determine in the future that we will not be able to fully utilize all or part of the deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made.

Recently Issued and Adopted Accounting Standards

For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 2 to our consolidated financial statements for the year ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Spartacus previously elected to avail itself of the extended transition period, and following the consummation of the Business Combination, we became an emerging growth company (for the period described in the immediately succeeding paragraph) and will continue to take advantage of the benefits of the extended transition period emerging growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.

We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.

Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related
notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information,
some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results
and outcomes could differ materially for a variety of reasons. You should review “Cautionary Note Regarding Forward-Looking Statements”
and “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause our
actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following
discussion and analysis.

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Overview

We are the market leader in delivering next
generation PNT solutions that overcome the limitations of existing space-based GPS. The world increasingly requires more accurate and
resilient PNT capabilities. Public safety, autonomous vehicles, eVTOLs, UAVs, and the app economy all require precise 3D location solutions.
Paramedics need to know which apartment a 911 call originated from, ride hailing and delivery apps need to know precisely where you are
standing and game developers need precise 3D location data to deliver a next generation augmented reality experience.

In early 2021, we launched the first element
of our next generation GPS service through initial commercial service on our nationwide Pinnacle network that was deployed in partnership
with AT&T. The Pinnacle network provides “floor-level” altitude detection to over 90% of commercial structures over three
stories in the U.S., and is being utilized by FirstNet® for public safety, as well as a growing number of commercial apps and app
development platforms, including Atlas Earth, Unity Engine, Eco3d, CRG, Qualcomm, and the Unreal Engine. In December 2021, we entered
into an agreement with one of the nation’s largest wireless carriers to deliver vertical location for E911, using our Pinnacle 911 solution
for all its customers. We believe that ramp up of services using our existing deployed network will support significant revenue growth
over the coming years.

We will be extending our capabilities by expanding
the deployment our TerraPoiNT system, which is a nationwide network that is designed to overcome the inherent limitations of traditional
GPS. TerraPoiNT utilizes a network of specialized wide area location transmitters that broadcast an encrypted PNT signal on our licensed
900 MHz spectrum with a signal that is 100,000 times stronger than GPS. TerraPoiNT is well suited for urban and indoor environments where
existing GPS signals are either distorted or blocked all together. In addition, TerraPoiNT provides redundancy for GPS, which is vulnerable
to spoofing and jamming. GPS redundancy is increasingly a U.S. national security priority and is a rising priority in the other parts
of the world. Critical infrastructure, including communications networks and power grids, require a reliable GPS signal for accurate
timing. A failure of GPS would be catastrophic, and there is no back-up today.

Since the inception of NextNav, LLC in 2007,
we have secured valuable FCC licenses covering approximately 93% of the U.S. population for a continuous 8 MHz band of 900 MHz spectrum,
filed over 120 patents related to our systems and services, deployed the nationwide Pinnacle network and launched commercial service.
In addition, we have deployed our TerraPoiNT solution in 51 markets, and TerraPoiNT received the highest scores in testing by the Department
of Transportation of potential PNT back-up solutions.

The Business Combination; Public Company Costs

On October 28, 2021 (the “Closing Date”),
we consummated the previously announced Business Combination pursuant to the terms of the Merger Agreement. As a result of the Business
Combination, we changed our name to NextNav Inc., and certain blocker entities formed by Holdings equity holders, Holdings and the various
operating subsidiaries of Holdings became the Company’s wholly owned subsidiaries, with the equity holders of each of such blocker
entities and Holdings and Spartacus’ stockholders becoming our stockholders. The Nasdaq ticker symbols for our common stock, par
value $0.0001 per share, and warrants are “NN” and “NNAVW,” respectively. See Note 1 to our consolidated financial
statements for the year ended December 31, 2021 included elsewhere in this Annual Report on Form 10-K for additional information.

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As a publicly traded company, we will continue
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 that Holdings has not previously incurred.

Impact of COVID-19 on NextNav’s Business

In March 2020, the COVID-19 outbreak was declared
a pandemic by the World Health Organization. There are many uncertainties regarding the current pandemic, and we continue to closely
monitor the impact of the pandemic on all aspects of our business, including how it will continue to impact our employees, suppliers,
vendors and business partners.

The pandemic has resulted in government authorities
implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, stay-at-home or shelter-in-place
orders, and business shutdowns. These measures may adversely impact our employees and operations and the operations of our suppliers
and business partners. In addition, various aspects of our business cannot be conducted remotely. These measures by government authorities
may continue to remain in place for a significant period of time and could adversely affect our development plans, sales and marketing
activities, and business operations.

The evolution of the virus is unpredictable
at this point and any resurgence may slow down our customer adoption and deployment of the TerraPoiNT network. The COVID-19 pandemic
could limit the ability of suppliers and business partners to perform, including third-party suppliers’ ability to provide components
and materials. We have also experienced and may continue to experience an increase in the cost of raw materials.

The full impact of the COVID-19 pandemic continues
to evolve as of the date of this Annual Report on Form 10-K. As such, it is not possible to determine the duration and scope of the pandemic,
the scale and rate of economic recovery from the pandemic, supply chain disruptions, and labor availability and costs, or the impact
of other indirect factors that may be attributable to the pandemic, and the extent to which these or other currently unanticipated consequences
of the pandemic are reasonably likely to materially affect our results of operations. In addition, these direct and indirect factors
can make it difficult to isolate and quantify the portion of our costs that are a direct result of the pandemic and costs arising from
factors that may have been influenced by the pandemic, including increased wage rates and incentives resulting from constrained labor
markets and global supply chain constraints. Management continues to actively monitor our financial condition, liquidity, operations,
suppliers, industry and workforce. We expect these factors and their effects on our operations to continue into 2022.

Key Components of Results of Operations

Revenue

We have generated limited revenue since our
inception. We derive our revenue from “floor-level” altitude location data, and related products and services, and PNT products
and services. Our revenue includes revenue generated through services contracts with wireless carriers, services with applications developers,
technology demonstration, assessment and support contracts with government customers, sales of equipment, and licensing of proprietary
technology. We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the
transaction price is determined, the arrangement has commercial substance, and collection of consideration is probable.

Operating Expense

Cost of Goods Sold

Cost of goods sold (“COGS”) consist
of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our operations
and manufacturing teams. COGS also includes expenses for site leases, cost of equipment, and professional services related to the maintenance
of the equipment at each leased site. We expect our operations costs to increase for the foreseeable future as we continue to invest
in the expansion of our Pinnacle and TerraPoiNT networks in domestic U.S. and international markets.

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Research and Development

Research and development expenses consist of
personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our research
and development functions. Research and development costs also include outside professional services for software and hardware development,
cloud hosting costs, and software licensing costs. We expect our research and development costs to increase for the foreseeable future
as we continue to invest in research and development for our current products and future products.

Selling, General and Administrative

Selling, general and administrative expenses
consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our
business development, marketing, corporate, executive, finance legal, human resources, IT and other administrative functions. Selling,
general and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting
services, recruitment expenses, travel expenses and certain non-income taxes, insurance and other administrative expenses.

We expect our selling, general and administrative
expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as
a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor
relations activities, and other administrative and professional services. As a result, we expect our selling, general and administrative
expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue over time.

Depreciation and Amortization

Depreciation and amortization expense results
from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated useful
lives.

Interest Expense

Interest expense relates to interest on our
senior secured loan facility, which was fully repaid in connection with closing of the Business Combination.

Other Income (expense)

Other income (expense) consists of miscellaneous
non-operating items, such as change in fair value of warrants and foreign currency gains (losses).

Results of Operations

The following table sets forth our statements
of operations for the periods indicated:

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Comparison of the Fiscal Years Ended December 31, 2021 and
2020

Revenue

Revenue increased by $0.19 million, or 34%, to $0.8 million for the
year ended December 31, 2021 from $0.6 million for the year ended December 31, 2020. The increase was driven by increased revenue from
technology and services contracts with commercial customers. For the year ended December 31, 2021, three customers accounted for 40%,
31%, and 19% of total revenue. For the year ended December 31, 2020, three customers accounted for 53%, 27%, and 18% of total revenue.
The accounts receivables as of December 31, 2021, was $1.7 million and $0.1 million as of December 31, 2020, whereas deferred revenue
balance as of December 31, 2021 was $1.6 million and zero as of December 31, 2020.

Operating Expense

Cost of Goods Sold (COGS)

COGS increased by $10.6 million, or 137%, to
$18.4 million for the year ended December 31, 2021 from $7.8 million for the year ended December 31, 2020. The increase was
primarily driven by a $9.0 million increase in rent expense related to contingent rent recorded for warrants vested in the year 2021
(see NextNav Inc. Notes to the Consolidated Financial Statements — Note 3 for more information), a $1.0 million increase in site
rental and maintenance expense related to new TerraPoiNT and Pinnacle sites, a $0.6 million increase in outside consulting expense due
to the Pinnacle network deployment and a $0.6 million increase in maintenance and operations of the Pinnacle network. The increases were
partially offset by a decrease of $0.3 million in equipment and material costs, and a decrease of $0.2 million in payroll-related expenses.

Research and Development

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Research and development expenses increased
by $0.7 million, or 7.8%, to $9.5 million for the year ended December 31, 2021 from $8.8 million for the year ended December 31,
2020. The increase was primarily driven by a $0.6 million increase in payroll-related expenses driven by increased headcount and annual
bonus, and a $0.5 million increase in software licenses. The increases were partially offset by a $0.3 million decrease in material and
equipment cost.

Selling, General and Administrative

Selling, general and administrative expenses
increased by $0.3 million, or 2.3%, to $13.6 million during the year ended December 31, 2021, from $13.3 million in the year ended
December 31, 2020. The increase was primarily driven by a $1.4 million increase in outside consulting and professional services,
a $0.7 million increase in directors’ and officers’ insurance, and a $0.7 million increase in IT related expenses. The increases
were partially offset by a $2.5 million decrease in payroll-related expenses.

Depreciation and Amortization

Depreciation and amortization expenses increased
by $1.5 million, or 658%, to $1.8 million during the year ended December 31, 2021, from $0.2 million during the year ended December 31,
2020. The increase in depreciation and amortization expense is primarily attributable to placing the Pinnacle and TerraPoiNT network
assets in service since the third quarter of 2020.

Interest Expense

Interest expense increased by $7.8 million,
or 78%, to $17.8 million during the year ended December 31, 2021, from $10.0 million during the year ended December 31, 2020.
The increase in interest expense is primarily attributable to write off of unamortized debt discount upon full repayment of debt as a
part of the Business Combination (see NextNav Inc. Notes to the Consolidated Financial Statements — Note 6 for more information).

Other Income (Expense)

Other expense decreased by $13.4 million, or
14%, to $84.3 million during the year ended December 31, 2021, from $97.8 million during the year ended December 31, 2020.
The decrease was primarily driven by change in the fair value of warrants.

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Liquidity and Capital Resources

We have incurred losses since our inception
and to date have generated only limited revenue. Prior to the closing of the Business Combination, we had funded our operations primarily
through the issuances of convertible preferred units and through borrowing under an existing senior secured loan facility (the “Financing
Agreement”), which Holdings entered into in December 2019 and amended in June 2021 with Fortress Credit Corporation.

In connection with the consummation of the Business
Combination (see NextNav Inc. Notes to the Consolidated Financial Statements — Note 1 for more information), all amounts outstanding
under the Financing Agreement were repaid and the Financing Agreement was terminated. As a result, we had no debt outstanding as of December
31, 2021 (see NextNav Inc. Notes to the Consolidated Financial Statements — Note 6 for more information).

As a part of the Business Combination our cash
balance increased by approximately $104.2 million which is available to fund future operations with no debt outstanding.

During the years ended December 31, 2021 and
2020, we incurred net losses of $144.7 million and $137.3 million, respectively. During the year ended December 31, 2021, our net cash
used in operating activities and investing activities was $47.9 million and $1.3 million, respectively. During the year ended December
31, 2020, our net cash used in operating activities and investing activities was $28.4 million and $7.2 million, respectively. As of
December 31, 2021, we had cash and cash equivalents of $100.1 million and an accumulated deficit of $647.9 million. We expect to incur
additional losses and higher operating expenses for the foreseeable future. Our primary uses of cash are to fund our operations as we
continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development
and the expansion of the TerraPoiNT network.

Cash Flows

The following table summarizes our cash flows for
the period indicated:

Cash Flows from Operating Activities

Our cash flows used in operating activities
are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and selling,
general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related
expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities during
2021 was $47.9 million, resulting primarily from a net loss of $144.7 million adjusted for non-cash charges of $84.3 million for change
in the fair value of warrant liability, $9.3 million for amortization of debt issuance cost, $9.0 million related to issuance of warrant
for rent expense, $1.7 million for stock-based compensation, $4.7 million for paid-in-kind interest expense, $1.8 million for depreciation
and amortization, and $0.2 million for asset retirement obligation accretion. Additionally, there was a net increase in operating assets
and liabilities of $14.4 million.

Net cash used in operating activities during
2020 was $28.4 million, resulting from a net loss of $137.3 million and non-cash charge of $97.6 million for the change in fair value
of warrant liability, adjusted for non-cash charges of $7.4 million in stock based compensation charges, non-cash charges of $3.6 million
in interest expense that is primarily attributable to the increase in borrowing from the financing arrangement, non-cash charges of $0.7
million in amortization of debt issuance costs, non-cash charges of $0.2 million in depreciation, and a decrease of $0.9 million in accounts
payable, prepaid and other current assets.

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Cash Flows from Investing Activities

Net cash used in investing activities during
2021 was $1.3 million, representing additions to property and equipment primarily related to the deployment of the Pinnacle and TerraPoiNT
network and internal use software.

Net cash used in investing activities during
2020 was $7.2 million, representing additions to property, equipment and related installation costs primarily related to the deployment
of the Pinnacle Network.

Cash Flows from Financing Activities

Net cash provided by financing activities during
2021 was $135.6 million, primarily reflecting cash proceeds from the Business Combination and PIPE investments of $230.9 million (net
of costs paid directly related to the Business Combination and PIPE investment of $23.1 million), and borrowing of $24.6 million from
the Financing Agreement. The equity and debt proceeds were partially offset by $96.9 million of debt repayments in connection with the
consummation of the Business Combination.

Net cash provided by financing activities during
2020 was $34.8 million, primarily reflecting $40.3 million in borrowing from the Financing Agreement offset by $5.5 million in financing
issuance costs.

Critical Accounting Policies and Significant Management Estimates

Our discussion and analysis of our financial
condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with U.S.
GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts
reported in our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the ongoing and potential
impacts of the COVID-19 pandemic and related government mandates and restrictions. These estimates may change as new events occur or
additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control
and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual
results may differ from these estimates under different assumptions or conditions.

The following critical accounting discussion
pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results
of operations and that require significant, difficult, subjective or complex judgments.

Long Lived Assets

Our property and equipment and network under
construction are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
If circumstances require a long-lived asset or asset group to be tested for possible impairment, impairment is determined by comparing
the carrying value of these long-lived assets to management’s probability weighted estimate of the future undiscounted cash flows
expected to result from the use of the assets or asset group. In the event an impairment exists, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the asset group.

Revenue Recognition

We derive our revenue from indoor and dense-urban
positioning technology, products and services including revenue generated through technology demonstration and assessment contracts with
customers, support services provided to customers, sales of equipment, and licensing of proprietary technology.

We recognize revenue when an arrangement exists,
services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial
substance, payment terms are determined and collection of consideration is probable.

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We sell software licenses and services through
arrangements that may bundle software, equipment, and other services. When we determine that we have separate distinct performance obligations,
we allocate the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling
price. If the stand-alone selling price is not directly observable, we estimate the amount to be allocated for each performance obligation
based on observable market transactions. When we determine the performance obligations are not distinct, we recognize revenue on a combined
basis as the obligation is satisfied. To the extent our contracts include variable consideration, the transaction price includes both
fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits
and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine
whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent
that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is subsequently resolved.

We recognize equipment sales and the related costs
when control of the equipment passes to the customer, typically upon shipment. Customers do not have rights of return without our prior
consent. Revenue pursuant to licensing agreements for our technology represents performance obligations that are satisfied over time.
We recognize support services ratably over the periods in which the services are provided; the related costs are expensed as incurred.

The timing of revenue recognition, billings and
cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue on the Consolidated Balance Sheets.
We bill amounts under our agreed-upon contractual terms at periodic intervals for services, upon shipment for equipment, or upon achievement
of contractual milestones or as work progresses. Billing may occur subsequent to revenue recognition, resulting in accounts receivable.
We may also receive payments from customers before revenue is recognized, resulting in deferred revenue.

Intangible Assets

We hold wireless Multilateration LMS licenses.
Certain general regulatory requirements apply to all licensed wireless spectrum, including, for example, certain build-out or “substantial
service” requirements, which generally must be satisfied as a condition to the retention of the license. We are actively engaged
in either meeting such requirements currently or seeking an extension of such requirements from the FCC for each of our LMS licenses.
Although licenses are issued for only a fixed time, ten years, such licenses are subject to renewal by the FCC, based on the achievement
of certain milestones and a finding that such renewal would serve the public interest. Renewal of our licenses has occurred previously
and at nominal cost. As a result, we treat our wireless LMS spectrum licenses as an indefinite-lived intangible asset. We reevaluate
the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite
useful life. Costs incurred to maintain the FCC licenses are recorded in operating expenses.

We assess indefinite-lived intangible assets
for potential impairment annually as of October 1, or during the year if an event or other circumstance indicates that we may not be
able to recover the carrying amount of the asset. In evaluating indefinite-lived intangible assets for impairment, we first assess qualitative
factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude
that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required.
However, if we conclude that it is more likely than not that the fair value of the asset is less than its carrying value, then we perform
a two-step impairment test to identify potential impairment and measures the amount of impairment we will recognize, if any.

Warrants

Private Placement Warrants are classified as
non-current liabilities and reported at fair value at each reporting period. The fair value of the Private Placement Warrants is accounted
for using the Monte-Carlo simulation analysis. The Monte-Carlo simulation analysis requires us to make certain assumptions, including
the expected volatility, the risk-free interest rate, and the dividend yield. The expected dividend rate of zero is based on the fact
that we have not historically paid and do not expect to pay a dividend on our common stock. The risk free rate was based on U.S. Treasury
yields for securities with similar terms. Volatility was calculated based on the trading prices for a group of comparable public companies.

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Stock-Based Compensation

We estimate the fair value of stock-based awards
on the date of grant. The fair value of stock options is determined using the Black-Scholes option pricing model. The fair value of restricted
stock units (“RSUs”) and restricted stock awards is based on the closing price of our common stock on the date of grant.
We amortize the fair value of awards expected to vest on a straight-line basis over the requisite service periods of the awards, which
is generally the period from the grant date to the end of the vesting period. The determination of the fair value of our stock option
awards is based on a variety of factors, including, but not limited to, our common stock price, risk-free rate, expected stock price
volatility over the expected life of awards, dividend yield and, award’s expected term. The assumptions used to determine the fair
value of the stock options represent management’s best estimates. These estimates involve inherent uncertainties and the application
of management’s judgment. Additionally, we account for forfeitures for stock-based awards as they occur.

Income Taxes

Under Accounting Standards Codification (“ASC”)
740, “Income Taxes,” deferred tax assets and liabilities are recognized for the expected future tax consequences attributable
to net operating losses, tax credits, and temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, which will result in taxable or deductible amounts in the future. Our income tax expense/benefit,
deferred tax assets and tax receivable liability reflect management’s best assessment of estimated current and future taxes. Significant
judgments and estimates are required in determining the consolidated income tax expense/benefits, deferred tax assets and tax receivable
agreement liability. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence,
including projected future taxable income and results of recent operations. Estimating future taxable income is inherently uncertain,
requires judgment and is consistent with estimates we are using to manage our business. If we determine in the future that we will not
be able to fully utilize all or part of the deferred tax assets, we would record a valuation allowance through earnings in the period
the determination was made.

Recently Issued and Adopted Accounting Standards

For information regarding new accounting pronouncements,
and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 2 to our consolidated financial
statements for the year ended December 31, 2021 included elsewhere in this Annual Report on Form 10-K.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging
growth companies from being required to comply with new or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage
of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election
to not take advantage of the extended transition period is irrevocable. Spartacus previously elected to avail itself of the extended
transition period, and following the consummation of the Business Combination, we became an emerging growth company (for the period described
in the immediately succeeding paragraph) and will continue to take advantage of the benefits of the extended transition period emerging
growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results
with the financial results of another public company that complies with public company effective dates for accounting standard updates
because of the potential differences in accounting standards used.

We will remain an emerging growth company under
the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue
of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC
or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.