NextNav Inc. (NASDAQ:NN) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good afternoon, everyone and welcome to NextNav’s First Quarter 2023 Earnings Conference Call. Participating on today’s call are Gary Parsons, NextNav’s Chairman; Ganesh Pattabiraman; NextNav’s Co-Founder and CEO; and Chris Gates, NextNav’s Chief Financial Officer. Before we begin, please note that during today’s presentation, the company may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements, which involve risks and uncertainties relate to analysis and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to NextNav’s future prospects, developments and business strategies.

In particular, such forward-looking statements include statements about NextNav’s position to drive growth in its 3D geolocation businesses and expansion of its next-generation GPS platform, the business plans, objectives, expectations and intentions of NexNav. NextNav’s partnerships and the potential success thereof in NextNav estimated and future business strategies, competitive position, industry environment and potential growth opportunities. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. Such forward-looking statements 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.

These risks, uncertainties, assumptions and other important factors include, but are not limited to, the ability of NextNav to continue to gain traction in key markets and with notable platforms and partners both within the US and internationally. The ability of NextNav to grow and manage growth profitably, maintain relationships with partners, customers and suppliers including with respect to NextNav Pinnacle 911 solution and its TerraPoiNT network, and the ability to retain its management and key employees, the ability to main balance sheet flexibility and generate and effectively deployed capital in line with its business strategies, the possibility that NextNav may be adversely affected by economic business and/or competitive factors including the impact of the ongoing COVID-19 coronavirus pandemic, other risks and uncertainties indicated from time to time in documents filed with the Securities and Exchange Commission by NextNav.

New risks and uncertainties arise from time to time and it is impossible for us to predict these events or how they may affect us. You are cautioned not to place undue reliance upon any forward-looking statements which speak only as 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. Risk factors that may impact our performance are identified in our most recent SEC filings. 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. With that, I’ll turn the call over to NextNav’s Chairman, Gary Parsons.

Please go ahead.

Gary Parsons: Thank you, operator. Good afternoon everyone and welcome to NextNav’s First Quarter 2023 Earnings Call. And as the operator said joining me today is NextNav’s CEO, Ganesh Pattabiraman; and NextNav’s CFO, Chris Gates. 2023 is really off to a solid start. Having established a strong operational foundation and expanded our product and technology capabilities in 2022, we are continuing to execute against our three strategic priorities. As a reminder, those priorities are: first being an industry leader and resilient position navigation and timing or PNT. Secondly, leveraging our recent Nestwave acquisition to dramatically reduce our future capital needs and add significant capabilities to our spectrum assets. And then finally expanding our global reach.

To begin however, I’d like to touch on our newly announced $50 million debt financing which includes additional levers for potential expansion of the notes up to $80 million. In short, we’re thrilled to have closed this transaction and see this both as a significant milestone for the business and the strong marketplace validation of the significant underlying value of our asset base, including our intellectual property portfolio, our nationwide spectrum assets and our deployed network. Now Chris will get into some of the specifics. But in my view the new financing provides us with multiple years of funding with modest equity dilution. As you’ll hear from Ganesh, we continue to see growing customer and governmental traction in our 3D location and our GPS resiliency services, but even without material revenue increases.

Given our ongoing management and refining of our expenses this financing provides multiple years of funding. It’s also important to consider the successful financing in concert with several other significant accomplishments over the past several months, which are designed to unlock additional value and strengthen our long-term fundamentals of the business. You’ll remember starting in the late 2022 we closed the Nestwave acquisition. And we spent much of the first quarter integrating the two technologies with field testing of the combined network capabilities taking place as we speak. The rapid integration and testing of the combined technology not only dramatically reduces our future capital needs as we talked about when we first made the acquisition, but it also significantly improves the spectral efficiency of our network and the underlying spectrum assets through the use of state-of-the-art 5G waveforms.

Incorporation of the 5G way form facilitates data-carrying capability in addition to optimizing our 3D location and our P&T resiliency capabilities. For future calls, we’ll provide ongoing updates on these key efforts. Importantly in late March, we received an order from the FCC finding that — NextNav’s network deployment focus covering urban centers and concentration of tall buildings promotes the public interest as in and the needs of the public safety community and therefore meets the SEC’s substantial service standard. In early April using the standard the Wireless Bureau of the FCC approved NextNav’s final construction milestones for licenses covering 256 cellular market areas or CNA. We felt for a long time this was the preferred deployment approach both for E911 as well as resilient GPS or P&C services and we’re obviously pleased that the FCC has concurred in this position.

Also in the first quarter, we made significant additional progress in our international initiatives. In March, the European JRC report on alternative P&T technologies was released with a firm recommendation that every European country allocates spectrum in support of resilient P&D. This creates a significant spectrum as well as product opportunity in Europe much like what we have done with MetCom in Japan. We remain in active conversations with other governments globally and believe there’s a substantial opportunity ahead of us as the recognized leaders in P&T resiliency. Ganesh will get into more detail on the European JRC reports findings as well as on our other P&C resiliency and customer initiatives. With that let me turn it over to Ganesh.

Ganesh Pattabiraman: Thank you, Gary and good afternoon everyone. It’s been a busy quarter for the team and we’ve had several notable achievements as Gary highlighted. We closed the debt financing that Chris will get into in more detail, secured approval from the FCC on our build-out requirements for a vast majority of the major markets and continue to make progress on our resilient P&T activities globally. The debt financing signals significant confidence from the investment community in our portfolio of assets. It also provides us with multiple years of funding to advance our strategic priorities and efficiently maximize the full value of our asset-rich platform for shareholders and customers. We were also very pleased with the many recent FCC approvals regarding our spectrum and build-out milestones.

As you may be aware the FCC requires spectrum holders to demonstrate its ability to meet construction milestones in one of two ways either using population coverage or using substantial service. Consistent with the latest SEC order on 911, we had planned our initial service to cover multistory structures around the country and we petitioned the FCC to adopt the same model for our build-out requirements. This approach really allows us to allocate capital efficiently and provide our service to the areas with the highest need first. We were therefore very pleased to see the FCC’s concurrence on the approach in the order that they issued on March 29. The SEC approved 78 of our licenses which represents about 256 cellular market areas in major markets around the country like New York, L.A., San Francisco and Chicago.

The approvals are obviously a significant milestone for our business marking the final step in meeting our spectrum license obligations in these markets. Turning now to our Pinnacle technology. We continue to expand our footprint in the public safety and E911 arena. Notably earlier this month we announced the launch of several new devices on multiple Tier 1 operator networks helping them meet the FCC’s 911 requirements. We recently enabled an additional device under our carrier agreement with Verizon integrating our Z-axis capabilities into Kyocera’s Europe X5 Extremes feature phone for both Verizon and Verizon frontline customers. This device is available now online and in Verizon stores nationwide. Our Z-axis technology has also been integrated into Hot Pepper mobile feature phones, Tabasco, which is currently being sold in Metro by T-Mobile stores nationwide.

This development builds off of Hot Pepper’s mobile agreement with NextNav announced in 2022 that allows for Pinnacle’s use on Hot Pepper devices across all major wireless carriers, enabling 3D Z-axis geolocation capabilities, which are required in major urban areas for 911 emergency services. And now turning to our global initiatives. The European Union’s Joint Research Center released its new report at the end of March on trials of the ultimate P&T technology. As part of the report, the JRC recognized NextNav’s Terra point solution as a mature solution that meets or exceeds all relevant benchmarks to serve as a resilient layer to existing GNSS technology. After technologies are tested TerraPointe delivers both horizontal and vertical location services, indoor and outdoor timing capabilities while remaining commercially deployable and cost-effective for end users.

As European policymakers begin to develop their resilient P&T policy and strategy, tied to the upcoming European radio navigation plan, we look forward to working with them and to use these findings to act quickly before facing the serious consequences of a GNSS outage. Finally, before I turn things over to Chris, I want to touch briefly on our work with the federal government. Currently, we continue to believe that the federal procurement language modifications as outlined in Executive Order 13905 will be released in the coming months. As we have more insight into the exact timing, we will be sure to update the market In the interim, we continue to hold extensive discussions with federal officials on the potential implementation architecture of the executive order.

Therefore, we continue to make progress there. We continue to see government officials highlighting the importance of resilient PNT systems in several of their conversations. Recently in a presentation to the House Committee on Science Space & Technology, Dr. Parimal Kopardekar, Director of NASA’s Aeronautics Research Institute at Ames Mountain View, discussed the work that NASA is doing to develop technologies for urban air mobility operations in the US, including its work in the alternate PNT space. As many of you know, we are happy to partner with NASA in support of their ongoing initiatives. With that, let me turn it over to Chris for a review of our financials. Chris?

Chris Gates: Thanks Ganesh, and good afternoon, everyone. Before I dive into the first quarter’s results, I’d like to provide more detail on our recently announced debt financing. On May 9, we closed on $50 million of senior secured notes due on December one 2026, a total term of approximately 3.5 years in a private placement. The notes bear interest at a 10% rate payable semiannually and importantly from a cash point of view we can elect to pay 50% of any accrued interest in shares of our common stock. For the next 30 days the noteholders have the option to acquire up to $20 million of additional senior secured notes and we have the further option to sell $10 million to $15 million of carried past-due notes to existing or new parties in the future depending on the exercise of the current option up to an aggregate total of $80 million.

The notes are redeemable at 101% of the principal value on or after the first anniversary of the initial issuance. In conjunction with the sale of the notes, we are also issuing warrants to purchase our common stock with an aggregate strike price of $40, million which will result in approximately 12.5% ownership on a fully diluted basis. The warrants are exercisable for cash and are partially callable beginning in 2025. The warrants will expire on June one 2027. As Gary and Ganesh both mentioned, this note issuance substantially extends our operational funding and we believe especially in this market is a strong endorsement of the opportunity presented by NextNav’s unique asset platform. And now, I’ll turn to our first quarter results. First quarter 2023 top line revenue was approximately $830,000 compared to approximately $1.2 million in the first quarter of 2022.

The year-over-year decrease was driven by a decline in one-time integration revenue, partially offset by an increase in recurring revenue from commercial customers and represents sequential growth from the fourth quarter. Operating expenses for the first quarter of 2023 were approximately $14.8 million, down from $17.2 million in the same period last year. Operating expenses included $1.1 million in depreciation and amortization as well as $3.9 million in equity compensation expense compared to $0.9 million in depreciation and amortization and $7.2 million in equity compensation expense in the first quarter of 2022. Net loss for the first quarter of 2023 was $16.3 million, which included a $2.8 million loss associated with a fair value of our warrants compared to $9.7 million in the first quarter of 2022, which included a gain on the fair value of warrants of $6.4 million.

From a balance sheet perspective, we finished the quarter with $46.8 million in cash which does not include the benefit of the financing we recently closed. As Gary mentioned, I’d like to reiterate that while we continue to see opportunities for new PNT customers and revenue expansion in this financing provides us with multiple years of runway even without material revenue growth. As we’ve indicated in the past we’re continuously working to refine our expenses and as we bring new customers into service we remain focused on success-based capital. With that, I’ll turn the call over to the operator for questions. Operator?

Q&A Session

Operator: The floor is now open for your questions. [Operator Instructions]. Our first question comes from the line of Mike Crawford from B. Riley Securities. Your line is open.

Operator: Our final question comes from the line of Jamie Perez from RF Lafferty. Your line is open.

Operator: I would now like to turn the call over to Gary Parsons, for closing remarks.

Gary Parsons: Well, thank you very much, operator. And once again, thanks to everybody, for calling in and listening to the report. We feel very good about the progress that we’ve made and the number of substantial let’s call it, achievements that we’ve had over the last number of months that I mentioned and most particularly this financing, let’s face it. It’s a challenging marketplace out there, particularly when you’re looking at debt financing as well too. We did not want to do a highly dilutive equity deal. We knew from past experience, that we would be able to have secured debt because of the asset base that we have. And we feel good about, how it’s pulled together, which provides us an awful lot of certainty and stability from a financial standpoint, to allow us to drive forward and achieve the milestones operationally revenue-wise and then strategically, that we think are important going forward.

So we look forward to next quarter’s call, and thanks very much to everyone for participating.