Sidus Space Inc

NASDAQ:SIDU

Earnings Call Analysis

Sidus Space Q3 2023: Earnings & Strategic Moves

Sidus Space had a transformative Q3 2023, advancing towards the LizzieSat launches aimed at generating high-margin, recurring revenue. Revenues dipped to $986,000 from $1.32 million the previous year, due to fixed-price milestone contracts timing, yet satellite revenues grew by 135%. Gross profit margin stood at 28% from January to September, up from 25% last year. A NASDAQ de-listing notice was received due to the stock trading under $0.10, prompting an upcoming reverse stock split. The company remains focused on executing its strategic plan, highlighted by the acquisition of AI firm Exo-Space and an increase of subscription-based, high-margin revenue streams, particularly in data services with 75% to 80% gross margins.

Financial Performance and Revenue Dive

Sidus Space's third-quarter earnings report tells a tale of strategic preparation and resource conservation in anticipation of their upcoming LizzieSat launches. Revenue for the quarter is reported at approximately $986,000, a decline from $1.32 million in the same quarter of the previous year, largely attributed to the timing of fixed-price milestone contracts. However, the silver lining is found in the satellite segment, with revenue boasting an impressive 135% increase in comparison with the same nine-month period prior.

Margin Dynamics and Cost Management

Gross profit presented a challenging picture, logging a negative $96,000 or a contraction of 10%, down from negative $86,000 or 7% in the third quarter of 2022. Despite the dwindling gross profit, which is down by 12% from the previous year, this occurred against a backdrop of a 25% revenue decrease, signifying the positive aspect of increased high-margin satellite-related revenue. Over a nine-month span, gross margin rose to 28% from 25%, netting an increase despite a sales drop of $344,000. This nine-month view smooths out the quarter-to-quarter lumpiness of gross margin figures. Sidus capped the quarter with an operating loss of $3.87 million, paralleling last year's results, and an insignificant operating expense trim of $11,000.

Capital Structure and Stock Performance

Adjustments to the capital structure occurred post-quarter with a registered direct offering, yielding $2 million from the sale of Series A convertible preferred stock and concurrent private placement of warrants. Diligent oversight of operating expenses continues with minimal debt shouldered by the company. However, stock performance has undergone strain, leading to a NASDAQ delisting notice triggered by share prices plummeting below $0.10 for consecutive trading days. A response involving a pending reverse stock split has been set in motion to maintain compliance with NASDAQ listing standards.

Acquisitions, AI Developments, and Technological Innovations

Sidus has integrated the recently acquired Exo-Space team, focusing on AI data services anticipated to generate revenue upon LizzieSat's deployment. The outreach spans substantial contracts, including those from NASA and the defense sector. The flexible FeatherEdge AI technology showcases the potential across diverse environments and applications, promising further usage growth. Three-dimensional printing technologies are currently employed to construct the LizzieSat satellite bus, with metal 3D printing options on the horizon pending necessity driven by client demands and design changes.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good morning, and welcome to the Sidus Space Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Valter Pinto, Managing Director, KCSA. Please go ahead.

[Valter Pinto]

Good morning, everyone, and thank you for joining us for the Sidus Space Third Quarter 2023 Earnings Conference Call. Joining us today from the company is Carol Craig, Founder and Chief Executive Officer; and Teresa Burchfield, Chief Financial Officer. 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 results to differ materially from the forward-looking statements made on this call. These factors include our ability to estimate operational expenses and liquidity needs, customer demand, supply chain delays including launch providers and extended sales cycles. For more information about these risks and uncertainties, please refer to the risk factors in the company's filings with the Securities and Exchange Commission, each of which can be found on our website www.sidusspace.com.

Listeners are cautioned not to put any 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. At the conclusion of our prepared remarks, we'll be answering questions submitted in advance. If we do not get to your question within the time frame allotted for this morning's call, please e-mail our team at [e-mail]. At this time, I would like to turn the call over to Carol. Carol, please go ahead.

[Carol Craig, executive]

Thank you, Valter, and welcome, everyone. I'm pleased to provide an update on Sidus today at a truly pivotal time for our company and the industry. We continue to execute our strategic plans as an innovative, multifaceted space and data as a service company, and we're laser focused on progressing towards the launch of LizzieSat. We expect the launch of LizzieSat to be a significant catalyst for our business as we believe it will provide us with the opportunity to develop additional high-margin revenue streams driven by the sale of both data and payloads on these missions.

We expect the enhanced capabilities of these satellites to provide space infrastructure as well as critical data that will create a high-margin, rapidly scalable recurring revenue business model. The company is continuously working to secure agreements that will provide us with a predictable business model. Our goal is to secure additional high-margin revenue generation opportunities through the revenue streams that we will develop even following our LizzieSat launch.

As we move towards 2024, we are targeting 3 areas that we feel will positively impact the share price, both in the short term and the long term. First, ensuring the success of not only the initial LizzieSat launch, but subsequent satellites as well. Second, securing agreements to sell the data that we plan to collect from this constellation.

And as mentioned above, we believe these agreements have significant revenue-generating potential. And third, securing agreements to sell technology payload space on our upcoming LizzieSat missions and then working at the same time to convert those payload customers to data customers. We recently completed initial environmental vibration testing of the LizzieSat satellite, which is one of the critical steps necessary to validate LizzieSat.

We've been concentrating on ensuring all necessary prelaunch requirements are met so that we will be well prepared for this transformative milestone. We're also continuing to secure additional data customers. We believe that data as a service will provide some of the highest margins of our revenue streams, which also include technology hosting aboard our LizzieSat and mission-critical hardware manufacturing. Delivery of that data is expected to begin 30 days after the deployment of LizzieSat.

For our Data as a Service offering, we're targeting gross margins of 75% to 80%, similar to Software as a Service margins. Our mission-critical hardware manufacturing, which we've been successfully operating for over 10 years, targets gross margins of approximately 25%.

During the third quarter, we took the significant step of acquiring the assets of Exo-Space a cutting-edge California-based firm specializing in Edge artificial intelligence software and hardware for space applications. The transaction provides the opportunity for us to enhance our presence in the earth and space observations markets by providing actionable solutions for our customers' needs rather than just raw data.

The acquisition of Exo-Space was highly complementary to our existing business model and also in line with our existing strategy. The additional revenue-generating opportunities that Exo-Space's technology presents are enhancements to our prior offerings that will position Sidus to compete in the current market where AI-led data-driven services give us a significant competitive advantage.

And in addition to raw data by applying our onboard FeatherEdge AI near real-time actionable intelligence will be available to our customers. This combination of advanced data collection parse from our adaptable LizzieSat provides organizations with a heightened decision-making capabilities. And this leads to increased confidence, precision and accelerated insights for those customers.

Sidus augments this distinctive and unique data collection with adaptable analytics tailored to our customers' own needs and then also offers that subscription-based access across multiple industries. Few companies know how to process data and with the additional AI functionality, Sidus is able to provide not just data, but that critical information that provides answers to our customers. This offering can be a stand-alone service as well as part of another service model.

Through these decisive steps to integrate AI, we're leveraging the potential of AI technologies within our own service offerings, which expand our services, amplifies our market presence and then also our customer relationships. One advantage of our business model that I want to highlight is our flexible, agile service offering that allows us to control our production and our launch cadence in coordination with customer demand.

As customer requirements and the industry landscape changes, we're able to strategically evaluate varying scenarios related to launches and orbits and focus on the most economical solutions that support our path to profitability. When combined with the inclusion of additional sensors and enhanced AI capabilities, we expect the new orbits to add value as we get closer to initiating these launches and developing these new high-margin business lines.

And therefore, our agile model ensures we're lining up our launches with the most valuable demand and doing what's in the best interest for company and shareholders. We also continue to progress on accelerating our manufacturing plans developing mission-critical hardware manufacturing to support multiple large organizations. During the third quarter, we continued to establish relationships with new and existing significant customers, and we announced several contracts that we were awarded further validating Sidus' ability to deliver mission-critical hardware to our key partners and vendors.

Earlier this month, we announced that we had signed an additional agreement to sell data that we expect to collect from LizzieSat. We believe we will continue to expand these opportunities as our constellation grows. While we're often prohibited from releasing the details of our client agreements, we plan to continue to update our shareholders on our progress as we build these new revenue streams that will result from the launch of our LizzieSat constellation. And in another complementary strategic move, we recently signed a contract to provide services to a U.S.-owned company in support of their commercial lunar program. This new contract will provide another revenue generation opportunity for the company.

And while the Lunar contract will not replace our lower earth orbit strategy, we do recognize the potential importance of Lunar missions to build an infrastructure that enables human permanence on the moon and the transition to commercial operations past lower Earth orbit and on to more distant destinations.

In line with these key areas of our strategic focus, we recently reorganized our leadership structure to ensure operational efficiency and resourcing in the right places. In September, we announced the appointment of Leonardo Riera to the position of Chair of the Board. Leo's significant board experience will be invaluable in managing governance and other related matters, and this will provide me with an increased ability to focus on the execution of our commercial development strategy to build value for our shareholders.

We also promoted Jared Novick to the role of Chief Operating Officer; Lindsay Waitt to LizzieSat Program Manager and appointed Jessica Curry as our Senior Vice President of Supply Chain. And as we gear up for the launch of LizzieSat in 2024 and scale up production of our LizzieSat satellite, these roles will be critical in ensuring our success. These changes will not only allow for more streamline and efficient management of technical and operational aspects within Sidus Space but also ensure that we're rightsized and efficiently resourced to achieve our launch program.

And I will now hand the call over to Teresa to discuss the financial highlights.

[Teresa Burchfield, executive]

Thanks, Carol. It's a pleasure to be here today to discuss our third quarter 2023 financial results. You can find more details on our results in our Q3 Form 10-Q filed with the SEC on Tuesday, November 14, 2023. As we progress towards the LizzieSat launches, we are focused on conserving capital to ensure that we have everything in place to execute upon our strategy.

Sidus achieved revenue of approximately $986,000 for the quarter ended September 30, 2023, compared to $1.32 million for the same period last year. While revenue declined period-over-period, primarily due to timing of fixed-price milestone contracts, our higher-margin satellite revenue continued to increase.

From a year-to-date perspective, it's important to note that for the 9 months ended September 30, 2023, our satellite revenue has continued to increase and was up 135% versus the same period last year. Our gross profit was approximately negative $96,000 or negative 10% for the quarter ended September 30, 2023 compared to approximately negative $86,000 or negative 7% for the third quarter of 2022.

It's key to note that although gross profit was down 12% versus prior year, this was based on 25% lower revenue and reflects the positive gross profit impact as we continue to increase the percentage of our higher-margin satellite-related revenue. As we've mentioned before, our gross margin will be lumpy when looked at quarter-to-quarter, which smooths out when looked at over time.

For the 9 months ended September 30, 2023, our gross margin as a percent of revenue was 28% versus 25% last year and was almost $68,000 higher on $344,000 less sales year-over-year. Again, a reflection of increased percentage of our overall revenue coming from our higher-margin satellite side of the business. Third quarter operating loss was $3.87 million, which was comparable with the third quarter of last year.

Overall, operating expenses decreased slightly $11,000 for the 3 months ended September 30, 2023 versus prior year. To provide investors with additional information in connection with our results as determined in accordance with GAAP, we also included in our Q3 Form 10-Q non-GAAP measures to determine our adjusted EBITDA.

We use adjusted EBITDA in order to evaluate our operating performance and make strategic decisions regarding the future direction of the company. We define adjusted EBITDA as net income as determined by U.S. GAAP, adjusted for interest expense, depreciation and amortization expense, acquisition deal costs, severance costs, capital market and advisory fees, equity based compensation and warrant costs.

These non-GAAP measures may be different from non-GAAP measures made by other companies since not all companies will use the same measures. Therefore, these non-GAAP measures should not be considered in isolation or as a substitute for relevant U.S. GAAP measures and should be read in conjunction with the information presented on a U.S. GAAP basis. Moving now to our capital structure. Post the end of the quarter, on October 11, 2023, the company executed a registered direct offering, in which the company sold an aggregate of 2,000 shares of Series A convertible preferred stock as well as a concurrent private placement of warrants to purchase up to approximately 19.7 million shares of Class A common stock.

The preferred shares are convertible into approximately 19.7 million shares of our Class A common stock. Gross proceeds from the offering were approximately $2 million. Please reference our September 30, 2023, 10-Q, for additional details. We are using the proceeds to continue to execute our strategic plan, including continued satellite development at an accelerated pace and to fulfill a steady launch cadence.

We remain focused on managing our operating expenses closely with only a small amount of debt on our balance sheet. And with that, I'll hand the call back over to Carol.

[Carol Craig, executive]

Thank you, Teresa. Before we move on to the Q&A portion of the call, I'll address the topic of our stock's performance. We recently received a delisting notice from NASDAQ since our Class A common stock was trading under $0.10 for 10 consecutive trading days. NASDAQ provides a hearing process, and we have requested a hearing, which will stay any delisting action by NASDAQ.

In order to comply with NASDAQ continuing listing rules, we've secured Board and shareholder approval for a reverse stock split of our outstanding common stock, which we expect to occur in December. We have filed an information statement with the SEC, which details the specifics of the proposed reverse split. I want to thank our shareholders for your continued support of Sidus. I wholeheartedly share your frustration with regards to the performance of our stock. I want to assure you that everyone at Sidus is laser focused on preparing for the upcoming LizzieSat launches, and we are working diligently to build new revenue streams which we believe will result in renewing shareholder value.

I believe that we are approaching a transformative event for our company with our first LizzieSat launch. And with it, we will begin to benefit from our hard work. We will now move to the Q&A portion of the call. We've received some submitted questions that we would like to address.

[Carol Craig, executive]

And so the first question is, how is the Exo-Space acquisition that you announced in August going? So the Sidus AI team, which is comprised of former Exo-Space employees is integrating seamlessly with our overall organization. They are currently focused on providing input for mission operations, customer onboarding and then also developing new sales leads.

And these efforts will ensure that the AI data services brought over from the former Exo-Space team will generate revenue as soon as LizzieSat on orbit and operational. And then in parallel to the AI technology integration, the team has continued to execute on the commercial and government contracts that were part of that asset purchase consideration.

And these contracts include a subcontract from NASA for rapid fire detection solutions and a subcontract from the defense innovation unit for payload hosting and then also the primary contracts with private organizations for computing hardware and on-orbit data.

Next question is, will you be able to use Exo-Space's Edge AI in other applications? And so yes, the underlying FeatherEdge technology can be implemented practically anywhere. And it's particularly useful in communication scarce or denied locations.

And there's a specific focus on unmanned craft which could be operated in aerial, ground or maritime environment in addition to space. And there's great value to be added by the FeatherEdge system anywhere that data is generated for these ultra-low latency insights.

Next question is also related to AI. Well, the team that you're acquiring required be able to do other AI projects beyond the Edge AI? And so our AI team's focus is primarily on the underlying technology that enables the implementation of intelligent data analytics applications at the Edge. And that being said, though, there are numerous ways in which this technology can be implemented and that ranges from situational awareness to predictive maintenance and then these use cases will continue to expand as the commercial space industry develops.

Next question is, how are you using 3D printing? Do you expect to see metal 3D printing becoming part of the offerings in the future? So 3D printing is currently being used to support development of our primary structure of the LizzieSat satellite bus? And it's comprised of a mixture of Onyx and carbon fiber to provide that necessary structural integrity required to withstand the launch vehicle launch loads while still providing a lightweight option comparable to metal.

And at present, though, metal 3D printing has not been used in the current bus configuration, but can be incorporated into future designs based on customer payloads and other subsystem changes that might necessitate it. And that's all the questions that we have. So I want to say thank you very much to everyone who submitted questions. And thank you to everyone for joining us today for Sidus Space's Third Quarter 2023 Earnings Conference Call.

[Operator]

Thank you. Ladies and gentlemen, the conference Sidus Space has now concluded. Thank you for your participation. You may now disconnect your lines.