NEXTNAV INC. (NN) FY 2022 MD&A

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.