AST SpaceMobile, Inc.

Good day, and thank you for standing by. Welcome to the AST SpaceMobile second quarter 2023 business update call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Scott Wisniewski, Chief Strategy Officer of AST SpaceMobile. Please go ahead.

Thank you, and good afternoon, everyone. Let me refer you to slide two of the presentation, which contains our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements on this call. For more information about these risks and uncertainties, please refer to the Risk Factors section of AST Space Mobile's annual report on Form 10-K for the year that ended December 31, 2022, with the Securities and Exchange Commission, and other documents filed by AST Space Mobile with the ICC from time to time. Readers are cautioned not to put undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Also, after our initial remarks, we will be starting our Q&A section with questions submitted in advance by our shareholders. Now, referring to slide three, for those of you who may be new to our company and mission, There are over 5 billion mobile phones in use today around the world, but many of us still experience gaps in coverage as we live, work, and travel. In this backdrop, AST Space Mobile is building the first and only global cellular broadband network in space to operate directly with everyday smartphones based on our extensive IP and patent portfolio. Our engineers and space scientists are on a mission to eliminate the connectivity gaps faced by today's 5 billion mobile subscribers. finally bring broadband to the billions who remain unconnected. The markets we are pursuing are massive, and we have a significant first mover advantage. It has been an extremely active and productive few months since the last quarterly update call. As our chairman and CEO, Abel Avalon, will discuss, we have continued to make significant progress on technology, manufacturing, commercial, and regulatory fronts. and very importantly, with regards to funding our growth strategy. It is my pleasure to now pass the presentation over to Abel.

Thank you, Scott. I would like to welcome everybody to our Q2 2023 earnings call. We have had a very busy quarter, and I would like to provide you with an update on our progress. On our Blue Rocket 3 program, we made history again in June with the first-ever space-based cellular broadband 4G LTE connection directly to everyday smartphones with speeds above 10 megabits per second. This was done in collaboration with AT&T, Vodafone, and Nokia and follows this historic announcement in April of the first-ever voice call directly from space. We also continue to advance our commercial initiatives now having over 40 MOUs and agreements in place with MNOs globally that have around 2.4 billion subscribers. On the manufacturing front, we're focused on our efforts to build and launch our first five commercial Bluebird satellites and our ramping production in our Midland, Texas facility. This satellite program is fully funded and is planned to launch in Q1 2024. On the financing front, I'm happy to announce that we are close to entering non-diluted debt financing alongside our efforts to raise capital from players in the wireless ecosystem, as we discussed in our last quarter. Lastly, on the back of the progress of our company, technically, commercially, and industrially, we have received multiple indications of interest from strategic investments with both equity-linked and non-diluted commercial payments. Proceeds from this capital raise is intended to fund our operations through the launch of our initial Block II satellites target for 2024 and 2025. Now moving to page five. We have made history again on our 4G capabilities, and we continue to define the direct-to-device industry. And we are the first and only company that plans and has demonstrated the capability to offer a space-based cellular broadband that can scale in the future. Thanks to our comprehensive portfolio of IP with over 2,600 patents and patent-pending claims, the size of our satellites, and our vertically integrated manufacturing strategy that includes one of the largest manufacturing facilities for satellites in the United States. Again, I am humbled to see the public statements by our partners, who represent the largest and some of the most important and sophisticated companies in the telecommunications industry, celebrating with us these historic achievements. AT&T, Vodafone, and Nokia were our partners on 4G testing this quarter and were greatly appreciative of their continued support. We're chasing a very large opportunity based on the fact that there are more than 5 billion phones in circulation today. Our testing has demonstrated the ability to connect with every phone from all major brands, which maximize our access to this very large market. Moving to page six, now turning to our commercial regulatory process, progress. We now have over 40 MOUs and agreements with MNOs globally that have around 2.4 billion subscribers. Our MNO partners are working closely with us, sharing in our collective success. The telcos we're working with globally represent the leaders in the wireless industry, and we are proud to have established our footprint with such a great partner. We also continue to advance our regulatory efforts, updating our SCC application to reflect the spectrum list ongoing with AT&T. Our conversation with the SCC continues to be constructive and supportive of our plan. Moving to manufacturing, on page seven, we're ramping the manufacturing of our first five Block 1 satellites in our facilities in Texas. We have completed construction of our 185,000 square foot manufacturing facility, which we believe has one of the largest commercial clean rooms in the United States. We recently conducted a full manufacturing readiness review. You saw some of this activity in the video we released early this month, which you could find on our web page or YouTube channel. And let me summarize some of the progress we reviewed. Nearly all the equipment in our state-of-the-art clean room manufacturing facility in Midland, Texas, is delivered and installed. Our manufacturing process and production lines are completed and fully implemented for Block 1 with many opportunities for further automation as we progress into Block 2 program. We have set up a new production line from solar panels, power systems, mechanical structures, and antennas. implementing our strategy of being vertically integrated manufacturing. We also have installed additional test equipment to our Texas facilities, which will improve our timing from assembly to launch when compared to Blue Walker III. Lastly, in our Texas facility, we have completed a part-by-part traceability system for quality control as every part on the build of the site can be tagged and tracked. On a separate note, I'm very happy to announce that we have inaugurated a new space technology development center, an R&D center, in our HOP facility in Hyderabad, India. They will help us access one of the largest wireless markets globally and provide access to an incredible engineering talent, including the 1.5 million engineers that graduate every year in India. With that, I want to pass it on to Shona.

Thanks, Abel, and good afternoon, everyone. Since our last call, AST has continued to make significant progress and continues to define the satellite to device industry as one that will offer broadband cellular service using existing MNO spectrum and working on widely available smartphones and devices. Integrating the ubiquitous coverage of a satellite constellation into the terrestrial wireless infrastructure will be one of the most exciting innovations in communications in the last 25 years. We could not be able to define this new industry without our hardworking team of engineers, technicians, and suppliers, and without the support and confirmation by our partners who are some of the most sophisticated wireless companies in the world, including AT&T, Vodafone, and Nokia. Beyond defining this new segment in the wireless industry, we also continue to drive our plan of execution in the second quarter. As Abel outlined, we made progress around our commercial, regulatory, and manufacturing milestones, and we remain on target for the launch of five Bluebird commercial satellites in the first quarter of next year and the initiation of commercial service in 2024. Let's spend some time discussing a couple of our key operating metrics for the second quarter that are displayed on slide eight. Looking at the first chart, We see for the second quarter of 2023, we had non-GAAP adjusted cash operating expenses of $38.4 million versus $40.3 million in the first quarter. Non-GAAP adjusted operating expenses exclude certain non-cash operating costs, including depreciation and amortization and stock-based compensation, which totaled $4.2 million and $19.6 million for the first and second quarters, respectively. Most of the increase in our non-cash operating expenses reflect the initiation of non-cash amortization of our Blue Walker 3 satellite, which we disclosed in the last quarter. Our second quarter non-GAAP adjusted operating expenses decreased by $1.9 million versus the first quarter. Our research and development expenses fell this quarter as a result of the timing of certain milestones, which reduced the level of payments. Our R&D expenses consist principally of non-recurring development activities for which we typically engage third-party vendors and payments are based on the completion of milestones. Conversely, our engineering services and general administration expenses rose modestly in the second quarter. We currently expect that the level of non-GAAP adjusted operating expenses will remain in the mid to high 30s for at least two more quarters as we continue to pursue important R&D projects for our Bluebird satellites, and execute the construction and planned launch of our first five Bluebird commercial satellites in the first quarter of 2024. Turning towards the second chart, our capital expenditures for the second quarter were $12.1 million versus $14.4 million for the first quarter. These capital expenditures were directly related to the completion of many of the expenditures we have made around our Site 2 manufacturing facility. We expect that our levels of capital expenditures which include direct material expenditures and launch costs for satellites, as well as capital improvements for our manufacturing facilities and ground infrastructure, will increase in the third and fourth quarter. We expect that our capital expenditures, which have been averaging around $10 to $15 million per quarter, will begin to increase to nearly $15 to $20 million in the last two quarters of the year in order to fund the manufacturing and assembly of our first five Bluebird commercial satellites. In addition to these figures, we also expect to pay $45 to $50 million for launch services and related equipment and services all in the third quarter. Once these payments are completed, we will have made well over 90% of the projected expenditures for our first five commercial Bluebird satellites. And on the final chart on the slide, we ended the second quarter just shy of $192 million in cash on hand. As we stated in our 10Q, We believe this cash, as well as our ability to raise capital to our existing facilities, is sufficient to support our expenditures for at least the next 12 months. As we have also discussed in our 10Q, our cost positions and capital plans are quite modular, and this characteristic provides us the flexibility to increase or decrease our rate of expenditures, depending upon changes in our build-out plans and the availability of capital. This flexibility provides us comfort that we can manage our liquidity profile dynamically depending on our rate of raising capital. Let's turn to the next page outlining our capital raising efforts. As I've mentioned in our last earnings call, we continue to explore a variety of ways to fund our business plan. I'm pleased to report that during the second quarter through today, we've completed a comprehensive financing plan which will provide us $179 million of gross cash and liquidity. These activities include $64 million in equity proceeds, including our common stock offering in late June. We also closed two debt facilities. These facilities include a $15 million equipment loan facility and a $48.5 million draw on a $100 million senior secured credit facility. The equipment facility, arranged by Lone Star Bank in Midland, Texas, will enable us to leverage the portfolio of equipment and the building at our Site 2 manufacturing facility. The senior credit facility is structured such that we have drawn close to $50 million at close and have an additional ability to draw up to another $50 million over the next 12 months, subject to certain conditions, should we desire. These new facilities represent our growing ability to access a diverse set of capital sources, including debt providers. I also wanted to comment on Abel's discussion on our efforts around raising strategic capital from key players in the wireless ecosystem on the bottom half of this page. After hiring financial advisors, we approached a number of large, sophisticated players with the explicit desire to develop financial and strategic ties that will help fund our business plan and support the development of our commercial efforts in markets around the world. We are making progress. We have received multiple indications of interest from several parties, that we believe represent the right strategic partners for us as we move towards commercial service. We also believe that the structure of these transactions will enable us to fund the business with a combination of debt and equity securities, thereby reducing our reliance on selling equity. We are negotiating the terms of these non-binding indications of interest, and the counterparties are performing due diligence. The size, complexity, and commercial and strategic nature of these negotiations require significant time to complete and may require certain regulatory approvals in order to close. As of this time, we cannot guarantee that any agreements will be reached, nor can we disclose the name of the parties and the type of their potential commitment. As these discussions evolve, we will provide more detailed information. And with that, this completes the presentation component of our earnings call, and I pass it back to Scott.

Thanks, Sean. Before we go to the queue of analyst questions, we'd like to address a few of the questions submitted in advance by our investors. Operator, could you please start us off with the first question?

Tim from California asks, what is the overall test plan? Where are you at in accomplishing that plan? What are the key successes and challenges?

Thank you, Tim, for the question. First of all, I want to emphasize that now we are turning our attention to the build of our next five operational satellites. Blue Walker 3 has delivered all the knowledge we needed to look up our design, learn how to fly the largest commercial communication array that had been ever deployed into orbit, how to implement and use our patented Doppler and delay compensation, and how to integrate with network operators like AT&T and Vodafone to serve their customers, the future customers in 2G, 4G, and 5G. And this has been essential. It has been a long process to incorporate all this knowledge into our company. And this precision has very well to move to the next phase, which is basically the launch of the next five satellites to start commercial services. Now that all these lessons are being incorporated in our IP, they will translate to a faster rollout of these first five satellites. And, you know, we are very, very happy with everything that we had accomplished with Blue Walker 3. We have made the first ever phone call directly from space to standard cell phone device. We have made the first ever broadband connection, LTE connection ever done from space directly to a device. And we also, something that is extremely important for us is the demonstration that we can scale and that we can access the vast majority of those 5 billion phones that are in circulation which is also regardless of the manufacturer or regardless of the year or the type of phone that is in the market. So we were very happy with the results, the significant amount of learnings that have been incorporated to our IP and to our design. But with BlueWalker 3, basically, we were able to lock up our design and basically move to manufacturing, which is what we're doing now.

Dennis from Chile asks, considering that Blue Walker 3 took months for opening, positioning, and testing the satellite before operation, when will the first Blue Bird satellite become fully operational?

Thank you, Dennis, for the question. We are still on track to launch our first five Block 1 satellites. our first five commercial satellites in Q1 2020-2024. And they are in the process of being manufactured and tested in Midland. We have several common milestones with SpaceX, which will narrow the launch window and provide more clarity to the exact timing of the launch. With that said, once we launch, we will expect to spend around three months to test and calibrate the satellites in orbit, that will be significantly faster than what we did for Blue Walker 3, as Blue Walker 3 was the first satellite. And as I said earlier, there were a lot of lessons learned, so how to do it, how to fly it, how to calibrate it, how to connect directly to the phone. So, I mean, all that lessons are already part of what we know, we know how to do. So we estimate approximately three months. It may take longer, but that's what we're estimating. And both that in-orbit testing, we are preparing to start being ready for commercial service with these five satellites. The commercial services that we're anticipating on these satellites are not only broadband, other governmental and other type of applications that we anticipate to be using with the first five operational satellites.

Weedon from New Zealand asks, has the FCC been supportive during the meetings where ASTS and FCC met?

I'll take that one. Thank you, Weedon. Absolutely. We've continued to have very encouraging meetings with the FCC over the last quarter, and you'll see multiple new filings in support of our plan service. We believe that enabling technology like ours, which The FCC calls supplemental coverage from space. We believe this is a priority for them. And this is informed by the fact that they created a new space division, focused entirely on satellite communications. The initiative of a new rule-making process with tight public comment periods and also their responsiveness with us. So going forward, we look forward to further engagement with the FCC alongside AT&T in the U.S. And while we cannot comment on near-term timing, of course, we're confident we'll be able to begin commercial service in the U.S. once the space-based network is ready.

Edgardo from London asks, a senior DOD officer commented about testing integrated commercial service with military applications next year. Is there anything that can be shared on this regard?

Thank you, Edgardo, for the question. Listen, we continue to believe that there are very strong governmental applications for our phased array technology. This is basically thanks to our IP, but in particular because of the size and the power capabilities of our satellites in low Earth orbit in LEO. We're evaluating various opportunities on the government side while we continue to progress and maintain our focus on cellular broadband. We're planning to start commercialization and using our first five operational satellites, which we expect to launch in Q1, for application of interest to the U.S. government.

And with that, I'd like to thank our shareholders for submitting these questions. Operator, let's open the call to analyst questions now.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. And the first question comes from the line of Griffin Boss with B Riley Securities. Please proceed with your question.

Hi, thanks for taking my questions. Just wanted to start off, Samsung just, I think it was yesterday, talked about how its Galaxy S24 could feature an emergency SOS feature via satellite, similar to what Apple and GlobalStar are doing. That's also expected to launch in the first quarter of 24. I'm just curious if you are looking at that as an opportunity for your early services.

Hey, listen, I mean, well, thank you for the question. We are really focusing on broadband. I mean, we believe that, I mean, with this announcement that we did this quarter, we're announcing speeds of 10 megabits. You can do 10 megabits, you can do SOS, you can do voice, you can do basically every application that you have in your phone when you are in a connected area through terrestrial normal means. So our focus is being completely agnostic to the manufacturer and Our original phone calls were done on Samsung, but we have also basically tested every major device. That's the way that we position ourselves. That's the way that the technology it is designed to support broadband and all the other applications that you are capable of doing when you're in terrestrial means.

Okay. Got it. Thanks, Adele. And then just one for Sean on the credit facility. Is that interest payable in kind or in cash?

A portion of it, it's almost like a synthetic zero. A portion of it was set aside. So it'll be set in escrow and a portion will be funded with cash on hand. Okay. All right. Great.

Thanks for taking my questions. Appreciate it.

And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for additional questions. And the next question comes from the line of Chris Quilty with Quilty Analytics. Please proceed with your question.

Thanks, guys. Just wanted to ask a question about where you are in terms of potential customer decisions on that first batch of satellites.

Thanks. Thanks, Chris. Scott here. We've, as you know, we continue to grow the list of logos. We're now over 40 MNOs globally that we have MOUs and agreements with and over 2.4 billion subscribers among them. So we have a great list of potential sources. I think as we think about where to launch service first, it's obviously driven by a number of considerations. One is who are our close partners? And two, you know, which markets are most interesting to us. So I think as we look at that list, the U.S. is a pretty obvious choice as an attractive first market, but there's several around the world, and you can look to our partners for candidates for those. But at this stage, I think we're focused on the technology roadmap and believe all commercial, regulatory, and other major milestones fit within that. So I think as you think about timing it, it'll be within that. that timeframe, but we're pretty happy with the partners that we have at the table with us now.

Gotcha. And a question on the manufacturing base. It sounds like you've gotten most of your production equipment in place and ready to roll. Assuming that all that is applicable to a larger build, You know, what are you looking at in terms of time to ramp up the production capability for building, you know, at a high rate, you know, the next batch of satellites?

Yeah, Chris, I mean, the way that we have set up ourselves, given a number of parts and components, the facility that we have, 185,000 square feet of facility, it can support up to six satellites per month. We obviously are not there yet. And that ramp up is planned to take the next six to 12 months. But that's what we're aiming, is having the manufacturing capability in Midland to do six satellites per month.

Gotcha. And I guess just in the last year, we've had, you know, Rivada come online with 600 satellites. Last Friday, Telesat, you know, 300 satellites. When you look at your supply chain, are there any particular areas where you have concern about the supply base or the fact that you brought so much vertically in-house, you're in good shape?

Right, Chris. I mean, I think, listen, first of all, different than any other constellations, I mean, our number of total satellites needs for having global broadband connectivity is around 90 satellites. We're not talking about thousands or tens of satellites. We're talking about 90 satellites to get to broadband capability on a global basis. The other factor for us is that we are substantially very very substantially vertically integrated i mean we we literally start with aluminium and composite material and we build most of all our parts so so we we integrate all our antennas structures batteries solar panels uh all the control side structures literally every major part of our satellite we do it by ourselves not only to manage and control costs of each of these parts, but also to control supply chain.

Gotcha. And final question, just I know it's a long road on the FCC waiver, but at a high level, what are the sort of next steps we should expect coming out of the FCC for approval?

Well, I think the way that we see the FCC, we're very, very bullish about the new processes that the FCC has set up and where we are in our current regulatory process. We do not see the FCC delaying our initial commercial services next year. We are confident, however we are dependent on them, to make sure that they will be on time in order to support our services in 2024. The immediate step was the leasing with AT&T for Spectrum and then continue with the experimental satellite licenses that we have now active with Blue Walker 3 and the following satellites that we're launching.

Yeah, I would add, Chris, the key differentiator is that we have a satellite on orbit, right, to show data and to show information at the FCC. for both paths, because remember we have two parallel paths to a commercial license in the U.S. One is the rulemaking process, which the FCC has been a leader on and has been very fast. The public notice period for comments was only 30 days, which is pretty short for a big rulemaking like this, so they clearly are interested in speed on the rulemaking. And then on the other process where we filed the lease with AT&T for substantially all of their low-band licenses, over 1,000 individual licenses, that's another process that is, you know, like I said earlier, we have the data and the information to back it up. So we don't view this as a limiting factor on our overall timeline.

Great. Thanks for the update, guys.

And the next question comes from the line of Benjamin Soft with Deutsche Bank. Please proceed with your question.

Hey, guys. Thanks for taking the question. I've got a couple here. So obviously, you know, today versus the initial business plan, a lot has changed in terms of the timing and some of the costs. But I'm wondering, you know, if you sort of go back to the beginning, if you think the commercial assumptions as far as the like the revenue per satellite and the timing to ramp from when you launch, if those inputs still hold and still make sense, or if you think maybe some of those factors may have changed as well?

Thank you for the question. Listen, the completion of Lew-Walker 3 testing, the limb-body conformations, the number of type of devices that we're able to interoperate with our technology. That confirms basically all the fundamentals of our business plan.

Okay, and would you anticipate that the Block 1 commercial satellites would be sufficient to generate free cash flow on their own if you weren't going to make the additional investments in other satellite launches? Would those alone be able to fund the business?

Yeah, I think part of the reason for the announcement we had today with the comprehensive interim financing package and the status update on the strategic capital raise, we've kind of reached a point with technology, manufacturing, commercial and regulatory, we've reached a point where we see visibility to revenue on those first five commercial satellites. We don't think that that's not the business we're looking to build. As Abel said very clearly, we're looking to build cellular broadband. And to do that, you need more than five satellites. But based on market feedback and things you can clearly read in the press as well, we think that even those first five satellites will be interesting in terms of revenue. So we don't predict it will be cash flow positive, but we do believe there will be revenue opportunities on those first five satellites. whether you look at government applications or other services that benefit from, or they can take advantage of non-continuous service like IoT or monitoring. So we think there's interesting opportunities there, not cash flow positive, but definitely interesting opportunities and ones that we plan to commercialize fully.

Okay, and then Last one for me, just appreciate the call around the US being one of the early markets. You said that there might be others. I'm just curious if you could talk about some of the factors that you look for when deciding whether or not to go into one market or another, for example. Thanks.

Well, we obviously, we had a long list on those 40 operators that we had announced where we have MOUs or agreements. there's obviously interest in having the markets first. I mean, we will prioritize then according to size of the market, but also to their participation and how closely they're working with us, supporting us technically, financially, or otherwise. So it is a multi, you know, we had a lot of interest to start using our and we will prioritize according to the support that we get from the MNOs.

At this time, I'm showing no further questions, and I would like to turn the call back over to management for their closing remarks.

Thank you, Operator. Our company is building a space-based cellular broadband network designed for use of the phone in your pocket today. I want to thank everyone for joining, both the shareholders and the analysts, for their questions, and I hope everybody has a great week. Thank you.

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.