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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-39113
___________________________________
BLACKSKY TECHNOLOGY INC.
___________________________________
(Exact name of registrant as specified in its charter)
Delaware47-1949578
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
13241 Woodland Park Road
Suite 300
Herndon, Virginia
20171
(Address of Principal Executive Offices)(Zip Code)
(571) 267-1571
Registrant’s telephone number, including area code
___________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, par value $0.0001 per shareBKSYThe New York Stock Exchange
Warrants, each whole warrant exercisable for one share of Class A common stock at an exercise price of $11.50BKSY.WThe New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No ý


As of November 07, 2022, there were 121,364,748 shares of the registrant’s class A common stock, at $0.0001 par value, outstanding.


Table of Contents
TABLE OF CONTENTS
Page

Part I. Financial Information

Part II. Other Information




2

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “could,” “would,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding:

• our ability to retain or recruit key employees;
• our ability to grow distribution channels and partner ecosystems;
• our anticipated capital expenditures, liquidity, and our estimates regarding our capital requirements;
• our ability to integrate proprietary and third-party sensor data;
• our ability to add new satellites to our commercial operations;
• our ability to invest in our software, research and development capabilities;
• our ability to grow a third-party developer community;
• our ability to expand our services and offerings to customers both domestically and internationally;
• our ability to continue delivering data in a cost-effective manner;
• our ability to maintain and protect our brand;
• our ability to expand within our current customer base;
• our ability to compete with legacy satellite imaging providers and other emergent geospatial intelligence providers;
• our ability to maintain intellectual property protection for our products or avoid or defend claims of infringement;
• our ability to comply with laws and regulations applicable to our business;
• our expectations about market trends and needs;
• our estimates of market growth, future revenue, expenses, cash flows, capital requirements and additional financing;
• our expectations regarding our ability to progress toward becoming operating cash flow positive;
• our ability to manage the timing of capital expenditures to allow for additional flexibility to optimize our long-term liquidity requirements;
• our ability to optimize our cash spend to meet short and long-term operational needs;
• the volatility of the trading price of our common stock;
• the performance of our Spectra AI platform;
• our plans and expectations for our next generation satellites (“Gen-3”);
• the impact of local, regional, national and international economic conditions and events;
• the effect of COVID-19 on the foregoing; and
• other factors including but not limited to those detailed under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and filed by us with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.
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We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, whether written or oral, except as required by law.










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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACKSKY TECHNOLOGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except par value)
September 30,December 31,
20222021
Assets
Current assets:
Cash and cash equivalents$37,201 $165,586 
Restricted cash2,8352,518
Short-term investments50,699
Accounts receivable, net of allowance of $0 and $39, respectively
5,1012,629
Prepaid expenses and other current assets5,4876,264
Contract assets5,9151,678
Total current assets107,238178,675
Property and equipment - net78,15770,551
Goodwill9,3939,393
Investment in equity method investees4,1504,002
Intangible assets - net2,0582,480
Satellite procurement work in process41,66440,102
Other assets1,675 560 
Total assets$244,335 $305,763 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities$14,579 $10,837 
Amounts payable to equity method investees1,6675,613
Contract liabilities - current9,01811,266
Other current liabilities1,5312,819
Total current liabilities26,79530,535
Liability for estimated contract losses1,9666,054
Long-term contract liabilities42568
Derivative liabilities6,29616,925
Long-term debt - net of current portion72,95671,408
Other liabilities2,867653
Total liabilities110,922126,143
Commitments and contingencies (Note 17)
Stockholders’ equity:
Class A common stock, $0.0001 par value-authorized, 300,000 shares; issued, 121,357 and 117,160 shares; outstanding, 118,906 shares and 114,452 shares as of September 30, 2022 and December 31, 2021, respectively.
1211
Additional paid-in capital663,654650,518
Accumulated deficit(530,253)(470,909)
Total stockholders’ equity133,413179,620
Total liabilities and stockholders’ equity$244,335 $305,763 

See notes to unaudited condensed consolidated financial statements
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BLACKSKY TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue
Imagery & software analytical services$14,991 $6,529 $38,113 $17,645 
Engineering & systems integration1,944 1,408 7,820 4,951 
Total revenue16,935 7,937 45,933 22,596 
Costs and expenses
Imagery & software analytical service costs, excluding depreciation and amortization5,251 7,266 16,508 15,816 
Engineering & systems integration costs, excluding depreciation and amortization 2,536 5,387 12,020 8,754 
Selling, general and administrative18,713 40,674 58,988 57,979 
Research and development197 57 449 85 
Depreciation and amortization9,598 3,503 26,166 9,804 
Satellite impairment loss   18,407 
Operating loss(19,360)(48,950)(68,198)(88,249)
Gain (loss) on derivatives7,135 3,813 10,629 (11,162)
(Loss) income on equity method investment(776)(170)694 793 
Interest income486  664  
Interest expense(1,226)(1,225)(3,756)(3,663)
Other expense, net(14)(365)(54)(147,735)
Loss before income taxes(13,755)(46,897)(60,021)(250,016)
Income tax (expense) benefit    
Loss from continuing operations(13,755)(46,897)(60,021)(250,016)
Discontinued operations:
Gain (loss) from discontinued operations (including gain (loss) from disposal of Spaceflight Inc. of $707, $0, $707, and $(1,022) for the three and nine months ended September 30, 2022 and 2021, respectively)
707  707 (1,022)
Income tax (expense) benefit    
Gain (loss) from discontinued operations, net of income taxes707  707 (1,022)
Net loss(13,048)(46,897)(59,314)(251,038)
Other comprehensive income 541   
Total comprehensive loss$(13,048)$(46,356)$(59,314)$(251,038)
Basic and diluted loss per share of common stock:
Loss from continuing operations$(0.12)$(0.67)$(0.51)$(4.29)
Gain (loss) from discontinued operations, net of income taxes0.01  0.01 (0.02)
Net loss per share of common stock$(0.11)$(0.67)$(0.50)$(4.31)

See notes to unaudited condensed consolidated financial statements
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BLACKSKY TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands)
Nine Months Ended September 30, 2022
Common StockAdditional Paid-InOther ComprehensiveAccumulatedTotal Stockholders'
SharesAmountCapitalIncome (Loss)DeficitEquity
Balance as of January 1, 2022114,452 $11 $650,518 $ $(470,909)$179,620 
Stock-based compensation— — 10,862 — — 10,862 
Issuance of common stock upon exercise of stock options404 — 17 — — 17 
Issuance of common stock upon vesting of restricted stock awards129 — — — — — 
Issuance of common stock upon vesting of restricted stock units4,816 1 — — — 1 
Withholding of restricted stock units to satisfy tax withholding obligations upon the vesting of restricted stock units(1,874)— (3,616)— — (3,616)
Net loss— — — — (19,988)(19,988)
Balance as of March 31, 2022117,927 12 657,781  (490,897)166,896 
Stock-based compensation— — 3,365 — — 3,365 
Issuance of common stock upon exercise of stock options180 — 8 — — 8 
Issuance of common stock upon vesting of restricted stock awards27 — — — — — 
Issuance of common stock upon vesting of restricted stock units520 — — — — — 
Withholding of stock units to satisfy tax withholding obligations upon the vesting of restricted stock units and exercise of stock options(201)— (444)— — (444)
Net loss— — — — (26,278)(26,278)
Balance as of June 30, 2022118,453 12 660,710  (517,175)143,547 
Stock-based compensation— — 3,423 — — 3,423 
Issuance of common stock upon exercise of stock options54 — 12 — — 12 
Issuance of common stock upon vesting of restricted stock awards22 — — — — — 
Issuance of common stock upon vesting of restricted stock units633 — — — — — 
Withholding of stock units to satisfy tax withholding obligations upon the vesting of restricted stock units and exercise of stock options(241)— (491)— — (491)
Repurchase and retirement of common stock(15)— — — (30)(30)
Net loss— — — — (13,048)(13,048)
Balance as of September 30, 2022118,906 $12 $663,654 $ $(530,253)$133,413 
See notes to unaudited condensed consolidated financial statements
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BLACKSKY TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands)
Nine Months Ended September 30, 2021
Common Stock Additional Paid-InOther ComprehensiveAccumulatedTotal Stockholders'
SharesAmountCapitalIncome (Loss)DeficitDeficit
Balance as of January 1, 2021, as adjusted34,692 $3 $191,168 $ $(223,984)$(32,813)
Stock-based compensation— — 508 — — 508 
Issuance of common stock due to Bridge Notes20,029 2 103,722 — — 103,724 
Issuance of common stock upon exercise of stock options468 — 1 — — 1 
Issuance of common stock upon vesting of restricted stock awards171 — — — — — 
Issuance of common stock upon exercise of warrants1,095 — 120 — — 120 
Other comprehensive income— — — 1,389 — 1,389 
Net loss— — — — (168,556)(168,556)
Balance as of March 31, 202156,455 5 295,519 1,389 (392,540)(95,627)
Stock-based compensation— — 264 — — 264 
Issuance of common stock due to Bridge Notes Rights Offering314 — 2,629 — — 2,629 
Issuance of common stock upon exercise of stock options210 — 6 — — 6 
Issuance of common stock upon vesting of restricted stock awards130 — — — — — 
Issuance of common stock upon vesting of restricted stock units34 — — — — — 
Other comprehensive loss— — — (1,930)— (1,930)
Net loss— — — — (35,585)(35,585)
Balance as of June 30, 202157,143 5 298,418 (541)(428,125)(130,243)
Stock-based compensation— — 28,493 — — 28,493 
Issuance of common stock upon exercise of stock options290 — 93 — — 93 
Issuance of common stock upon exercise of warrants, inclusive of preferred stock warrants exercised then converted to common stock in connection with the merger2,156 — 2,169 — — 2,169 
Issuance of common stock upon vesting of restricted stock awards160 — — — — — 
Issuance of common stock upon vesting of restricted stock units68 — 
Conversion of bridge notes and accrued interest into common stock7,736 1 77,096 — — 77,097 
Exercise of warrants in connection with merger11,187 1 38,328 — — 38,329 
Issuance of Sponsor Shares— — (17,659)— — (17,659)
Reverse recapitalization, net34,584 4 202,152 — (1,282)200,874 
Other comprehensive income— — — 541 — 541 
Net loss— — — — (46,897)(46,897)
Balance as of September 30, 2021113,324 $11 $629,090 $ $(476,304)$152,797 

See notes to unaudited condensed consolidated financial statements
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BLACKSKY TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended September 30,
20222021
Cash flows from operating activities:
Net loss$(59,314)$(251,038)
Gain (loss) from discontinued operations, net of income taxes707 (1,022)
Loss from continuing operations(60,021)(250,016)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense26,166 9,804 
Loss on debt extinguishment 75 
Bad debt expense13 4 
Stock-based compensation expense16,389 29,265 
Loss on issuance of 2021 convertible Bridge Notes 96,476 
Loss on issuance of 2021 convertible Bridge Notes Rights Offering 3,193 
Issuance costs for derivative liabilities and debt carried at fair value 48,009 
Amortization of debt discount and issuance costs1,549 1,311 
Gain on equity method investment(694)(793)
Loss on disposal of property and equipment 24 
(Gain) loss on derivatives(10,629)11,162 
Satellite impairment loss 18,407 
Interest income(373) 
Other, net106  
Changes in operating assets and liabilities:
Accounts receivable(2,485)(2,010)
Contract assets(4,237)1,487 
Prepaid expenses and other current assets657 (4,428)
Other assets(1,335)(423)
Accounts payable and accrued liabilities692 (15)
Other current liabilities(581)(2,195)
Contract liabilities - current and long-term(2,774)(1,960)
Liability for estimated contract losses(4,088)1,385 
Other liabilities2,216 2,496 
Net cash used in operating activities(39,429)(38,742)
Cash flows from investing activities:
Purchase of property and equipment(8,905)(532)
Satellite procurement work in process(25,421)(48,951)
Purchase of short-term investments(50,343) 
Purchase of domain name (7)
Proceeds from equity method investment546  
Net cash used in investing activities(84,123)(49,490)
Cash flows from financing activities:
Proceeds from recapitalization transaction, net of payment of equity issuance costs 245,222 
Payments of transaction costs related to Sponsor Shares (291)
Proceeds from issuance of debt 58,573 
Proceeds from options exercised37 100 
Proceeds from warrants exercised 163 
Capital lease payments(2) 
Debt payments (22,198)
Payments for debt issuance costs (6,238)
Withholding tax payments on vesting of restricted stock units(4,551) 
Net cash (used in) provided by financing activities(4,516)275,331 
Net (decrease) increase in cash, cash equivalents, and restricted cash(128,068)187,099 
Cash, cash equivalents, and restricted cash – beginning of year168,104 10,573 
Cash, cash equivalents, and restricted cash – end of period$40,036 $197,672 

See notes to unaudited condensed consolidated financial statements

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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same such amounts shown in the unaudited condensed consolidated statements of cash flows:
September 30,
20222021
Cash and cash equivalents$37,201 $194,942 
Restricted cash2,835 2,730 
Total cash, cash equivalents, and restricted cash$40,036 $197,672 
Nine Months Ended September 30,
20222021
(in thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest$5 $398 
Supplemental disclosures of non-cash financing and investing information:
Property and equipment additions accrued but not paid$4,329 $1,184 
Capitalized stock-based compensation1,261  
Capitalized interest for property and equipment placed into service220 735 
Accretion of short-term investments' discounts and premiums357  
Repurchase and retirement of common stock30  
Equity costs accrued but not paid 388 
Issuance of common stock due to Bridge Notes, net of issuance costs 106,353 
Issuance of common stock warrants due to Bridge Notes 18,800 
Net exercise of common stock warrants 210 
Net exercise of common stock warrants in connection with merger 1,324 
Conversion of Bridge Notes 77,097 
Net exercise of Bridge Note warrants 38,329 
Contingent liability for working capital adjustment and use taxes to M&Y Space Co. Ltd707 1,022 
See notes to unaudited condensed consolidated financial statements
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BLACKSKY TECHNOLOGY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022

1. Organization and Business
On September 9, 2021, Osprey Technology Acquisition Corp. (“Osprey”) consummated the previously announced merger (the “Merger”) with BlackSky Holdings, Inc. (f/k/a Spaceflight Industries, Inc.), a Delaware corporation (“Legacy BlackSky”), pursuant to the agreement and plan of merger, dated February 17, 2021, by and among Osprey, Osprey Technology Merger Sub, Inc., a direct, wholly owned subsidiary of Osprey, and Legacy BlackSky. Immediately following the Merger, Osprey changed its name to BlackSky Technology Inc. (“BlackSky” or the “Company”). Legacy BlackSky survived the Merger and is now a wholly owned subsidiary of BlackSky. As a special purpose acquisition corporation, Osprey had no pre-Merger operations other than to identify and consummate a merger. Therefore, BlackSky’s operations post-Merger are attributable to those of Legacy BlackSky and its subsidiaries, and references to “BlackSky” or the “Company” should be read to include BlackSky’s wholly owned subsidiaries. References in this report to Company actions, assets/liabilities, or contracts may be references to actions taken, assets/liabilities held, or contracts entered into by one or more current Company subsidiaries; however, the Company has distinguished between actions taken by Legacy BlackSky or Osprey for certain time based, historical transactions.
BlackSky, headquartered in Herndon, Virginia, is a leading provider of real-time geospatial intelligence. The Company owns and operates one of the industry's leading high-performance low earth orbit small satellite constellations. Our constellation is optimized to cost-efficiently capture imagery at high revisit rates where and when our customers need it. BlackSky’s Spectra AI software platform processes millions of observations a day from our proprietary satellite constellation and from multiple external data sources including imaging, radar and radio frequency satellites, environmental sensors, asset tracking sensors, Internet of Things (“IoT”) connected devices, internet-enabled narrative sources, and a variety of geotemporal data feeds. Spectra AI employs advanced, proprietary artificial intelligence ("AI") and machine learning (“ML”) techniques to process, analyze, and transform these data feeds into alerts, information, and insights. Customers can access Spectra AI’s data and analytics through easy-to-use web services or through platform application programming interfaces.
As of September 30, 2022, BlackSky had 14 satellites in commercial operation. BlackSky has two primary operating subsidiaries, BlackSky Global LLC and BlackSky Geospatial Solutions, Inc. The Company also owns fifty percent of LeoStella LLC (“LeoStella”), its joint venture with Thales Alenia Space US Investment LLC (“Thales”). LeoStella is a vertically-integrated small satellite design and manufacturer based in Tukwila, Washington, from which the Company procures satellites to operate its business. The Company accounts for LeoStella and X-Bow Launch Systems Inc. (“X-Bow”), a space technology company specializing in additive manufacturing of solid rocket motors of which BlackSky owns less than 20%, as equity method investments (Note 6).

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Preparation
The Company has prepared its unaudited condensed consolidated financial statements in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) and the instructions to Form 10-K and Article 8 of Regulation S-X of the Securities and Exchange Commission (the "SEC"). The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. In addition, the unaudited condensed consolidated financial statements include the Company’s proportionate share of the earnings or losses of its equity method investments and a corresponding increase or decrease to its investment, with recorded losses limited to the carrying value of the Company’s investment. All intercompany transactions and balances have been eliminated upon consolidation.
The Company’s unaudited condensed consolidated financial statements have been prepared on a historical cost basis, except for certain financial assets and liabilities, including equity warrants and other equity
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instruments classified as derivative liabilities, which are stated at fair value. The Company also incurred debt in the year ended December 31, 2021, which was stated at fair value and subsequently converted to equity in the Merger. Unless otherwise indicated, amounts presented in the Notes pertain to the Company’s continuing operations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes included in the Company’s Form 10-K filed with the SEC on March 31, 2022. In management’s opinion, all adjustments of a normal recurring nature that are necessary for a fair statement of the accompanying unaudited condensed consolidated financial statements have been included.

Use of Estimates
The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies at the reporting date, and the reported amounts of revenue and expenses during the reporting period. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results could materially differ from these estimates. Significant estimates made by the Company include, but are not limited to, revenue and associated cost recognition, the collectability of accounts receivable, the recoverability and useful lives of property and equipment, the valuation of equity warrants and warrant liabilities, fair value estimates, the recoverability of goodwill and intangible assets, the provision for income taxes, and stock-based compensation.

Investments
The Company’s investments generally consist of A-1, or higher, rated corporate debt and governmental securities as short-term investments. Our investments are classified as held-to-maturity and have a stated maturity date of one year or less from the balance sheet date. Any investments with original maturities less than three months are considered as cash equivalents.

Property and Equipment - net
The Company capitalizes internal and external costs incurred to develop and implement internal-use software, which consist primarily of costs related to design, coding, and testing. Internal costs include salaries and allocations of fringe and stock-based compensation. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated life to either depreciation or cost of sales depending on the nature of the software. Costs incurred prior to and after the application development stage are charged to development costs as part of selling, general, and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss. The Company regularly reviews its capitalized software projects for impairment.

Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The process for analyzing the fair value measurement of certain financial instruments on a recurring, or non-recurring, basis includes significant judgment and estimates of inputs including, but not limited to, share price, volatility, discount for lack of marketability, application of an appropriate discount rate, and probability of liquidating events. The Company utilizes the market valuation methodology and specific option pricing methodology, such as the Monte Carlo simulation, method to value the more complex financial instruments and the Black-Scholes option-pricing model to value standard common stock warrants and common stock options.
The framework for measuring fair value specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions. The
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hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 Inputs. Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2 Inputs. Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3 Inputs. Inputs are unobservable inputs which reflect the Company’s own assumptions on what assumptions market participants would use in pricing the asset or liability based on the best available information.

Revenue Recognition
The Company generates revenue from the sale of imagery and software analytical services and engineering and systems integration. Imagery and software analytical services revenue includes imagery, data, software, and analytics, including professional services. This revenue is recognized from services rendered under cost-plus-fixed-fee contracts, firm fixed price contracts, a time and materials basis or non-cancellable subscription order agreements. Engineering and systems integration revenue is from fixed price long-term construction contracts.
The Company generates revenue primarily through contracts with government agencies. Most of the fixed price contracts include multiple promises, which are generally separated as distinct performance obligations. The Company allocates the transaction price to each performance obligation based on the relative standalone selling prices using observable sales transactions where applicable.
In accordance with Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606) (“ASC 606”), the Company uses the five-step model of identifying the performance obligations contained in a contract, determining transaction price, allocating transaction price, and determining when performance obligations are satisfied can require the application of significant judgment, as further discussed below.
Revenue is measured at the fair value of consideration received or receivable and net of discounts. The Company applies a policy election to exclude transaction taxes collected from customer sales when the tax is both imposed on and concurrent with a specific revenue-producing transaction. The Company estimates any variable consideration, and whether the transaction price is constrained, upon execution of each contract. The Company did not have any active contracts with significant variable consideration as of September 30, 2022.

Imagery & Software Analytical Services Revenue
Imagery
Imagery services include imagery delivered from the Company’s satellites in orbit via its Spectra AI platform and in limited cases directly uploaded to certain customers. Customers can directly task our proprietary satellite constellation to collect and deliver imagery over specific locations, sites and regions that are critical to their operations. We offer customers several service level options that include basic plans for on-demand tasking or multi-year assured access programs, where customers can secure priority access and imaging capacity at a premium over a region of interest on a take or pay basis. Imagery performance obligations are recognized ratably over the fixed price subscription period for the right to access imagery or as revenue at the point-in-time when the Company delivers images to the Spectra AI platform.

Data, Software, and Analytics
The Company leverages proprietary AI and ML algorithms to analyze data coming from both the Company’s proprietary sensor network and third-party space and terrestrial sources to provide hard-to-get data,
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insights, and analytics for customers. The Company continues to integrate and enhance its offerings by performing contract development, while retaining the intellectual property rights. The Company also provides technology enabled professional service solutions to support customer-specific software development requests, integration, testing, and training. The Company uses system engineers to support customer efforts to manage mass quantities of data. The Company also offers professional service solutions related to object, change and anomaly detection, site monitoring, and enhanced analytics, through which the Company can detect key pattern of life changes in critical locations such as ports, airports, and construction sites; retail activity; commodities stockpiles; and other sites that contain critical commodities and supply chain information.
Our analytics services are also offered on a consumption or subscription basis and provide customers with access to our site monitoring, event monitoring and global data services. Imagery and software analytical services revenue from data, software, and analytics contracts is recognized from the rendering of services over time on a cost-plus-fixed-fee, firm fixed price, or time and materials basis as well as, at the point-in-time the customer receives access to an analytic product. For firm fixed price professional service contracts, the Company recognizes revenue using total estimated costs to complete the performance obligation, ("Estimate at Completion" or "EAC"). A performance obligation’s EAC includes all direct costs such as labor, materials, subcontract costs and overhead. In addition, an EAC of a performance obligation includes future losses estimated to be incurred on contracts, as and when known. For contracts structured as cost-plus-fixed-fee or on a time and materials basis, the Company generally recognizes revenue based on the right-to-invoice when practically expedient, as the Company is contractually able to invoice the customer based on the control transferred to the customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date.

Engineering and Systems Integration Revenue
The Company develops and delivers advanced launch vehicle, satellite and payload systems for a limited number of customers that leverage the Company’s capabilities in mission systems engineering and operations, ground station operations, and software and systems development. These systems are sold to government customers under fixed price contracts. The Company generally recognizes revenue over time using the cost-to-cost method to measure progress, pursuant to which the extent of progress towards completion is measured based on the ratio of costs incurred to date to the EAC. The estimation of total estimated costs at completion is subject to many variables and requires judgment. The Company recognizes changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in a prior period. If at any time, the estimate of profitability for a performance obligation indicates a probable anticipated loss, the Company recognizes the total loss for the performance obligation in the period it is identified. Changes in estimates related to contracts accounted for using the cost-to-cost measure of progress are recognized in the period in which such changes are made for the inception-to-date effect of the changes. For the three and nine months ended September 30, 2022, the Company recognized $0.3 million and $2.0 million, respectively, of unfavorable cumulative adjustments to revenue directly from estimated cost increases on two engineering and systems integration contracts (Note 5). All, or a portion, of this cumulative adjustment will be recognized in future revenue as the percentage of completion increases over time. During the three and nine months ended September 30, 2021, the Company recognized a $1.6 million unfavorable impact to revenue attributable to changes in estimates for two engineering and systems integration contracts. During the three and nine months ended September 30, 2022, there was no revenue recognized from performance obligations satisfied in previous periods.

Imagery and Software Analytical Service and Engineering and Systems Integration Costs
Imagery and software analytical service costs primarily include internal aerospace and geospatial software development labor, third-party data and imagery, internal labor to support the ground stations and space operations, and cloud computing and hosting services. The Company recognizes stock-based compensation expense for those employees whose work supports the imagery and software analytical service costs we provide to customers, under imagery and software analytical service costs, excluding depreciation and amortization. For those employees who provide engineering and systems support to customers, the stock-based compensation
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expense is classified under engineering and systems integration costs. For the remaining employees who generally support the Company and its business, the stock-based compensation expense is recognized under selling, general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss.

Engineering and systems integration costs primarily include the cost of internal labor for product design, integration and engineering in support of long-term development contracts for launch vehicle, satellite and payload systems. The Company also incurs subcontract direct materials and external labor costs to build and test specific components such as the communications system, payload demands and sensor integration.

Stock-Based Compensation
Restricted Stock Awards and Restricted Stock Units
We have granted RSAs and we grant RSUs to certain employees, for which the grant date fair value is equal to the trading price fair value of the Class A common stock on the date of grant. In order to determine the fair value of its Class A common stock on the date of grant and prior to the Merger, Legacy BlackSky historically performed a valuation analysis using a combination of market and income approaches. Subsequent to the Merger, the Company uses the New York Stock Exchange (“NYSE”) trading price as the fair value of the Class A common stock for valuation purposes. For all awards for which vesting is only subject to a service condition, including those subject to graded vesting, the Company has elected to use the straight-line method to recognize the fair value as compensation cost over the requisite service period.
Certain of the Company’s outstanding RSUs had performance vesting conditions that were triggered upon the consummation of the Merger. Therefore, since the performance conditions attributable to these RSUs had been met, the Company commenced recording the associated compensation expense, inclusive of a catch-up amount for the service period between their grant date and satisfaction of the performance condition, as of the closing of the Merger. The fair value of the RSUs that include a performance condition is recognized as compensation expense over the requisite service period using the accelerated attribution method, which accounts for RSUs with discrete vesting dates as if they were a separate award. Expense related to stock-based payments is classified in the unaudited condensed consolidated statements of operations and comprehensive loss based upon the classification of each employees’ cash compensation.
Stock Options
The Company uses the Black-Scholes option pricing model to value all options and the straight-line method to recognize the fair value as compensation cost over the requisite service period. The fair value of each option granted was estimated as of the date of grant. The Company granted options in the three and nine months ended September 30, 2022. The Company uses the following inputs when applying the Black-Scholes option pricing model:
Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as an input. The dividend yield is based on historical experience and expected future changes. The Company currently has no plans to pay dividends on its Class A common stock.
Expected Volatility. The Company does not have enough historical share price history, therefore, the expected volatility was estimated based upon the historical share price volatility of guideline comparable companies.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants.
Expected Term. For options granted in 2021 and 2022, since there is not a history of option exercises as a public company, the Company considered the option vesting terms and contractual period, as well as the demographics of the holders, in estimating the expected term. For options granted prior to 2021, the expected term was the estimated duration to a liquidation event based on a weighted average consideration of the most likely exit prospects for that stage of development. Legacy BlackSky was privately funded and, accordingly, the
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lack of marketability was factored into the expected term of options granted. The Company will review its estimate in the future and adjust it, if necessary, due to changes in the Company’s historical exercises.
The most significant assumption used to determine the fair value of the Legacy BlackSky equity-based awards was the estimated fair value of the Class A common stock on the grant date. In order to determine the fair value of its Class A common stock on the date of grant and prior to the Merger, Legacy BlackSky historically performed a valuation analysis using a combination of market and income approaches. Subsequent to the Merger, the Company uses the NYSE trading price as the fair value of the Class A common stock for valuation purposes.
Legacy BlackSky historically adjusted the exercise price of certain outstanding stock options. For each award with an adjusted exercise price, Legacy BlackSky calculated the incremental fair value, which was the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The incremental fair value was recognized as stock-based compensation expense immediately to the extent that the modified stock option already had vested, and for stock options that were not yet vested, the incremental fair value has been recognized as stock-based compensation expense over the remaining vesting period.

Common Stock Repurchases and Retirements
The Company may repurchase common stock from employees or former employees and recognizes any excess of the repurchase price over the fair value of the instruments repurchased as additional compensation cost. Further, when that same common stock is retired, the excess is charged entirely to retained earnings. During the three and nine months ended September 30, 2022, the Company repurchased and retired 14,603 shares of common stock. The Company recorded $30 thousand to retained earnings in the unaudited condensed consolidated balance sheets as of September 30, 2022 and $18 thousand to stock-based compensation as part of selling, general, and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022.

Sponsor Shares
Osprey pre-Merger class B common shares were exchanged for the Company’s class A common shares upon the consummation of the merger (“Sponsor Shares”). The Company accounted for the Sponsor Shares in accordance with the guidance contained in ASC 815-40, under which the Sponsor Shares did not meet the criteria for equity treatment and were recorded as derivative liabilities in the Company’s unaudited condensed consolidated balance sheets as of September 30, 2022. The Sponsor Shares are adjusted to fair value at each reporting period and the change in fair value is recognized in gain (loss) on derivatives in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.

3. Accounting Standards Updates (“ASU”)

Accounting Standards Recently Adopted
In May 2021, the FASB issued ASU 2021-04, “Earnings per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified upon modification or exchange. This ASU is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. The Company adopted this guidance as of January 1, 2022 and this guidance is not expected to impact the Company unless it modifies or exchanges freestanding financial instruments within the scope of the guidance subsequent to adoption.

Accounting Standards Recently Issued But Not Yet Adopted
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In February 2016, the FASB issued ASU 2016-02 Leases. The amendments in this update require the recognition of lease assets and lease liabilities on the balance sheet, as well as certain qualitative disclosures regarding leasing arrangements. The guidance requires the use of the modified retrospective method, with the cumulative effect of initially applying these updates recognized at the date of initial application. The guidance was effective for public business entities for annual periods, including interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022, with early adoption permitted. As of September 30, 2022, the Company holds emerging growth company status and as such, it is permitted to present the impact of the new guidance in its annual statements as of December 31, 2022 and interim statements thereafter. The Company is currently in the process of finalizing the adoption impact and expects the adoption of the standard to have a material impact to the unaudited condensed consolidated balance sheets since the Company will be required to report operating leases in the unaudited condensed consolidated balance sheets for the first time. Upon adoption, the Company estimates it will recognize between $3 million and $4 million of right-of-use (“ROU”) assets and lease liabilities for operating leases. The difference between the ROU assets and lease liabilities results from deferred rent liability balances that will be reclassified to ROU assets upon adoption. The Company currently has no finance leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this update are primarily for entities holding financial assets and net investment leases measured under an incurred loss impairment methodology. A new methodology must be adopted to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates, which would include losses on trade accounts receivable. This ASU requires modified retrospective application. The guidance is effective for public business entities that are not smaller reporting companies for fiscal years beginning after December 15, 2019, including interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2022, including interim periods therein. The Company is currently in the planning stage and, as an emerging growth company, will adopt the guidance on January 1, 2023. The Company does not expect this guidance to have an impact on its consolidated financial statements upon adoption.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this update are intended to simplify various aspects related to accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU can be applied on a retrospective, modified retrospective or prospective basis. The guidance is effective for all public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022. Early adoption is also permitted. As of September 30, 2022, the Company holds emerging growth company status, as such it is permitted to present the impact of the new guidance in its annual statement as of December 31, 2022 and interim statements thereafter. The Company does not expect this guidance to have an impact on its consolidated financial statements upon adoption.

4. Revenue
Disaggregation of Revenue
The Company earns revenue through the sale of imagery and software analytical services and engineering and systems integration. The Company’s management primarily disaggregates revenue as follows: (i) imagery; (ii) data, software and analytics; and (iii) engineering and integration. This disaggregation allows the Company to evaluate market trends in certain imagery and software analytical services and engineering and systems integration services. These offerings currently have both recurring and non-recurring price attributes, particularly the engineering and systems integration offerings.
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The following table disaggregates revenue by type of imagery and software analytical services and engineering and integration for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Imagery$10,769 $2,773 $21,212 $5,621 
Data, software and analytics4,222 3,756 16,901 12,024 
Engineering & integration1,944 1,408 7,820 4,951 
Total revenue$16,935 $7,937 $45,933 $22,596 
The approximate revenue based on geographic location of customers is as follows for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
US$14,996 $6,704 $38,580 $19,063