NextNav - Q1 2024

Transcript

Operator (participant)

This time I would like to welcome everyone to the NextNav first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers emerge, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Erica Bartsch. Please go ahead.

Erica Bartsch (Senior Managing Director Investor Relations & Financial Communications)

Good afternoon, everyone, and welcome to NextNav's first quarter 2024 earnings conference call. Participating on today's call are Mariam Sorond, NextNav's Chief Executive Officer, and Chris Gates, NextNav's Chief Financial Officer. Before we begin, let me remind everyone that this call will include certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as may, anticipate, believe, expect, intend, might, plan, possible, potential, aim, drive, predict, project, should, could, would, will, and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

Such forward-looking statements, which may relate to NextNav's forecasts of future results, future prospects, developments, and business strategies, are subject to known and unknown risks, uncertainties, assumptions, and other important factors, many of which are outside NextNav's control, that could cause actual results to differ materially from the results discussed in the forward-looking statements. You are cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date made, and NextNav undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise.

For additional information regarding risk factors, see part two, Item 1A, Risk Factors, of the company's quarterly report on Form 10-Q, and part one, Item 1A, Risk Factors, of NextNav's annual report on Form 10-K for the year ended December 31st, 2023, as well as those otherwise described or updated from time to time in our other filings with the Securities and Exchange Commission. Following our prepared remarks, the company will host an operator-led question-and-answer session. In addition, at the conclusion of today's call, a replay of our discussion will be posted to the company's investor relations website. I'd now like to turn the call over to Ms. Mariam Sorond, Chief Executive Officer of NextNav. Please go ahead.

Mariam Sorond (CEO)

Thank you, Erica, and good afternoon, everyone. I am pleased to have you join us for our first quarter call. On today's call, I would like to run through some of the recent strategic updates on the business, and we'll then turn things over to Chris for a review of our financials. While this is only my second earnings call as NextNav's CEO, I am particularly excited to be speaking with you today given the activity over the last few weeks. As I noted on our last call, I have been working closely with the team since I arrived to develop my strategic vision for the future of NextNav. Today, I am thrilled to be able to share in greater detail what we have been working on and our strategy for moving forward.

To get right to the point, the team and I are focused on presenting a new vision for complement and backup to GPS with additional spectrum for broadband services. The country's principal PNT system, GPS, is foundational to national security, the U.S. economy, and powering critical infrastructure, but it has coverage limitations indoors and in urban canyons and is vulnerable to jamming and spoofing. We see our vision as an innovative solution that enables next-gen terrestrial PNTs by leveraging 5G broadband. Our goal is single-digit accuracy everywhere, creating a terrestrial PNT solution that provides 3D location and timing that is highly accurate, is available indoors as well as outdoors and in urban canyons. On April 16, many of you know that we filed a petition for rulemaking asking the FCC to enable this innovative spectrum solution in the lower 900 band.

This was a significant milestone for the business and a big step forward in advancing our strategic vision. This action follows the March 28 court approval for our previously announced agreement to acquire spectrum licenses covering an additional 4 MHz in the lower 900 MHz band. In receiving court approval, we then had the green light to move forward with obtaining FCC approval in mid-April. In terms of our petition, at a high level, we are asking the FCC to reconfigure the band plan and update the rules to, one, enable a high-quality terrestrial PNT complement and backup to GPS on which the nation relies for essential PNT services, and two, provide 15 MHz of low-band spectrum for use by 5G broadband networks.

We believe this new vision for the lower 900 MHz band will unleash spectrum for essential PNT solutions as well as 5G broadband while ensuring incumbent operations are appropriately protected. More importantly, our proposal does not require taxpayer money or legislation. I will offer more on that in a moment. As many of you know, NextNav is already the main geographic licensee in the lower 900 MHz band. Our existing licenses are being used to develop industry-leading PNT expertise and products. However, the lower 900 MHz band is underutilized, primarily due to band fragmentation and legacy technical and service rules that limit use of the band. As part of our proposal, NextNav would commit to enabling a terrestrial 3D PNT service as a necessary backup and complement to GPS. Today, GPS plays a pivotal role in U.S. PNT architecture.

GPS is an incredible technology that powers much of our nation's critical infrastructure, including electricity, telecommunications, public safety, and banking, but it is vulnerable to jamming and spoofing. Look no further than issues happening internationally. Satellite-based systems like GPS have coverage limitations indoor and in urban canyons. Current GPS technology can be helpful for emergency services, as accurate geolocation can be the difference between life and death. However, without GPS, essential functions would be significantly impaired or inoperable. More importantly, spectrum is also a finite resource, and we will need more spectrum to power all the wireless services that fuel the economy. As a result, both public and private sector experts have determined that the U.S. urgently needs a robust terrestrial 3D PNT solution to complement and backup GPS. Additionally, there is broad consensus that making additional spectrum available for wireless networks would be advantageous to the U.S.

Economy and overall global competitiveness. We believe a terrestrial 3D PNT backup and complement to GPS will mitigate the risks to the country, unleash commercial opportunities, and help public safety by providing location information and situational awareness indoors and in multi-story buildings. However, it has historically not been economically feasible to deploy a standalone wide-scale terrestrial 3D PNT network. The reasons for this are twofold. One, GPS is free, limiting potential revenue for other PNT offerings. And two, it is difficult to drive adoption of PNT-specific protocols into consumer devices, thus limiting subscribers. By reconfiguring the band, we see a direct path to a wide-scale terrestrial 3D PNT network. Leveraging the lower 900 MHz band in terrestrial 5G networks creates a unique, economically viable opportunity to help address the urgent need for widespread complementary and backup PNT services.

The proposed rebanding and related rule modifications would establish 15 MHz of low-band spectrum to support terrestrial 3D PNT and 5G broadband. This would include the 8 MHz of spectrum NextNav already owns, the additional 4 MHz NextNav is seeking to acquire pending FCC approval, and 3 MHz of largely fallow spectrum, much of which is in FCC inventory. NextNav's next-gen technology will be a 5G-based solution, so it is more easily integrated into the existing ecosystem for both deployment and adoption. The revised rules would enable NextNav's next-gen terrestrial 3D PNT network to use 5G technology to extend PNT reach in areas where GPS is limited and supplement the country's 5G broadband capacity. To advance this, NextNav expects to partner with network operators or others interested in commercial deployment in the band for 5G.

Leveraging a 10 MHz downlink spectrum block and 5 MHz uplink, NextNav can reliably supply integrated, highly accurate, and consistent 3D positioning indoors and outdoors along with precision timing. More importantly, our next-gen PNT solution will only use a small portion of the capacity, allowing network providers to use the vast majority for broadband. We are already in active discussions with various potential partners and are also focused on ensuring that incumbent operations are appropriately protected. Overall, we believe this unique path forward addresses the coverage, cost, and user-device issues that have previously prevented broad terrestrial 3D PNT adoption. This is a full commercial solution with no need for government funding or legislation, an attractive proposition. With PNT resiliency already receiving broad bipartisan support, we anticipate continued support from both sides of the aisle as we move forward.

In terms of next steps, on April 24, the Federal Communications Commission, including in its weekly public notice of agency actions on wireless license transactions, the application to assign the A-block licenses that NextNav agreed to acquire from Telesaurus. This is specific to the transaction we announced on March 11, 2024. Approval of the license applications is also contingent on FCC grant of a waiver request, and that request has not yet been placed on public notice. The April 24th public notice is a routine FCC action that does not indicate how the commission will act. Instead, it initiates a 14-day period during which parties may file petitions on the assignment application. The commission then has seven additional days in which it must either grant, deny, or defer action on the applications. Ultimately, the exact timing of next steps is in the hands of the FCC.

However, we believe we have presented a petition that explains the urgency to the FCC and provides an economically viable solution to an issue of great importance. As we move forward, we will continue taking this process one step at a time. We believe this is a unique vision that will provide an innovative spectrum solution in the lower 900 MHz band. We look forward to continuing to provide an update on our progress as we move forward with the FCC and beyond. Finally, before I turn things over to Chris, I want to highlight a new addition to the NextNav team. Yesterday, we announced that Dr. Sanyogita Shamsunder is joining NextNav as Chief Operating Officer, effective May 9.

Sanyogita was recently the head of Edge Network Infrastructure at Google and prior to that spent several years at Verizon in various roles, including serving as the VP of Product Strategy and Operations, where she led early 5G network technology development and trials. We are thrilled to have someone of Sanyogita's caliber joining the team, and I look forward to her contributions as we continue to advance our strategic vision. With that, I will turn things over to Chris for a review of our financials. Chris?

Chris Gates (CFO)

Thanks, Mariam, and good afternoon, everyone. First quarter revenue was $1 million, a $200,000 increase compared to $830,000 in the prior year period. The year-over-year increase was driven by an increase in recurring service revenue from technology and services contracts with commercial customers. Operating expenses for the quarter were $17.2 million, up from $14.8 million in the same period last year. Operating expenses included $1.3 million in depreciation and amortization, and $4.2 million in equity compensation expense compared to $1.1 million in depreciation and amortization, and $3.9 million in equity compensation in the first quarter of 2023.

Net loss for the first quarter of 2024 was $31.6 million, which included a $13.2 million loss associated with the change in the fair value of warrants compared to a loss of $16.3 million in the first quarter of 2023, which included a $2.8 million loss on change in the fair value of warrants. From a balance sheet perspective, we finished the quarter with $79.2 million in cash, cash equivalents, and short-term investments. Our balance sheet showed $49.9 million in debt, net of unamortized discount attributed to transaction costs and the issuance of warrants, with a gross value of $70 million. After the close of the quarter, following the approval of the A-block transaction by the Alameda Court on March 28, and per the terms of the asset purchase agreement, we made the $2.5 million cash payment under the contract.

As a reminder, any future payments under this agreement will be satisfied with shares of our common stock, with the number of shares based on the price of our stock at the time of the payment. Finally, in the past, I've mentioned that the warrants we issued in conjunction with our debt financing may be a source of additional liquidity. I'm pleased to report that since the end of the first quarter and as of May 3rd, $7.7 million of those warrants were exercised for an aggregate of $16.6 million in cash. With that, I'll turn the call over to the operator for questions. Operator?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Griffin Boss with B. Riley Securities. Please go ahead.

Griffin Boss (Equity Research Analyst)

Hi. Good afternoon. Thanks for taking my questions. So first off, there was a time not too long ago where the CapEx expectations for NextNav were a lot higher than they are now when you were contemplating deploying TerraPoiNT and Pinnacle. Can you give us a better sense of what your expectations are today for the CapEx requirements of the business going forward, given this new vision you're beginning to lay out?

Mariam Sorond (CEO)

Thanks, Griffin, for the question. Currently, our path is to partner, and we believe that what we're presenting to the FCC and upon their approval will actually unleash 15 MHz of broadband spectrum for a 5G build. We believe that this is attractive to potential partners who can incorporate the spectrum into their networks. Yes, you are correct that their CapEx is very different than what we have previously mentioned about a standalone PNT network, which we have highlighted that it is not feasible earlier in our comments.

Griffin Boss (Equity Research Analyst)

Okay. All right. Thanks for the color. And then just, yeah, on the FCC, you received court approval. That's obviously great to see. Did I hear you correctly that you said on April 24th that kicked off that 14-day period for comments on the assignment of the licenses, which would imply that ended today and then opens up the seven additional days?

Mariam Sorond (CEO)

That is correct. Today is the deadline for that 14-day comment period, and the parties could file comments or petitions in response to that, and deadline would be tonight.

Griffin Boss (Equity Research Analyst)

Okay. Understood. And so the FCC would have seven additional days to make a decision. Is that correct?

Mariam Sorond (CEO)

That is correct. They have these seven days in which they grant, deny, or defer action on the application.

Griffin Boss (Equity Research Analyst)

Okay. All right. Great. Understood. And then, Chris, I missed it when you were just talking about the initial $2.5 million payment. Was that made subsequent to the end of the first quarter?

Chris Gates (CFO)

Correct. Yes. The terms of the asset purchase agreement were that payment to be made within 30 days of the court approval, which is on March 28. And so we made that payment consistent with the terms of the contract.

Griffin Boss (Equity Research Analyst)

Okay. Got it. Understood. And then the next milestone on that, I know it's the earlier of either the FCC approval of the transfer or November. So I guess, theoretically, yeah, my question is that next $7.5 million payment in stock could either come this quarter if the FCC approves it or next quarter or, I guess, fourth quarter?

Chris Gates (CFO)

That's correct. It would be the earlier of November 15th or FCC action.

Griffin Boss (Equity Research Analyst)

Okay. Understood. Great. Thanks for taking my questions. I appreciate it.

Operator (participant)

Your next question comes from the line of Jaime Perez with R.F. Lafferty. Please go ahead.

Jaime Perez (Senior Research Analyst)

Hi. Thanks for taking my call, and good day, everybody. The $1 million of revenue, I know it's not TerraPoiNT, but I mean, is it all Pinnacle? And I know it seemed like this change of strategy going away from the commercial initiative when you first came out of SPAC. Could you give a little bit more color on any further commercial initiative you have?

Mariam Sorond (CEO)

So basically, we have only recently filed with the FCC, right, and are taking this process one step at a time. And as we move through the process, we'll keep the market updated of the timeline and the key milestones or any revenues associated with it. It would be premature to talk about it right now. We're focusing on the plan, and we're looking at a situation where the FCC has an opportunity to deliver an innovative spectrum solution in the lower 900 MHz band, right? So we're focused on the plan. We're very optimistic around our goals and path forward, and we will take this a step at a time.

Jaime Perez (Senior Research Analyst)

All right. Let me see. And my next question, any update on the executive order that's sort of pending?

Mariam Sorond (CEO)

I think there's been a lot of action in the federal government, including the executive order, that are all demonstrating the need for a backup and complement to GPS, whether that's through the executive order with talking about the federal agencies having a solution or whether it's us as a country to have a solution. All of these are good examples and good initiatives by the government that demonstrate the need. That's why we have proposed this plan, which actually puts a really solid solution that doesn't require government funding. It doesn't require legislation to solve and address the problem on the country's principal PNT system.

Jaime Perez (Senior Research Analyst)

All right. Okay. That's all the questions I have. Thanks.

Operator (participant)

Your next question comes from the line of Rosemary Sisson with Odeon Capital. Please go ahead.

Rosemary Sisson (Head of Research)

Thank you. Thanks for taking the questions. I had a question on liquidity and kind of how you see that working out over the course of the next year. So your cash burn during the quarter was about $8.5 million-$9 million, and then you spent another $2.5 million in cash after the end of the quarter. So just kind of how do you look at that? Is that the right burn rate to think about on a quarterly basis going forward in the near term?

Chris Gates (CFO)

[crosstalk]

I'll go ahead and address that question. Historically, we haven't provided forward-looking guidance. However, I can offer a few remarks about, number one, the strength of our balance sheet. As we've seen, we've attempted to structure transactions that have a favorable liquidity profile for us. For example, our A-block transaction is intended to be paid substantially in stock. We've made the cash payment associated with that. And with respect to our operating expenses, we're constantly looking at the ability to refine those expenses in line with the achievement of our objectives. I would guide. I think if you look at last year in terms of what our OpEx and kind of cash burn looked like for that year, I think that's a reasonable place to start.

In terms of forward guidance on expenses, again, that's something that we haven't historically provided.

Rosemary Sisson (Head of Research)

Okay. All right. Thank you very much.

I will now turn the call back over to CEO Mariam Sorond for closing remarks. Please go ahead.

Mariam Sorond (CEO)

Thank you. Before we close the call, I want to add one important point. We recently received inbound questions from investors regarding our willingness to sell specific company assets. I want to take a moment to directly respond to those inquiries here. Specifically, we currently have a strategy in place that utilizes our spectrum for both PNT and broadband, which we believe creates tremendous value for our customers and ultimately our shareholders. As the CEO of NextNav, and in coordination with our board, we have a fiduciary duty to consider any offers that are presented, and we will continue to do so. Having said that, I want to reemphasize that we're very pleased with our progress to date.

The company is on a strong trajectory, and we look forward to working with the FCC in advancing our vision for an innovative spectrum solution in the lower 900 MHz band to provide a complement and backup to GPS as well as 5G broadband spectrum availability. We will continue to keep you posted and updated on our progress, and I look forward to engaging with the financial community on this. I want to also thank you all for joining us today. Everyone, have a great afternoon.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.