Optical fibre for the skies

Mynaric 30 October 2020 Initiation
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Mynaric

Optical fibre for the skies

Technology

Spotlight - Initiation

30 October 2020

Price

€58.0

Market cap

€232m

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Share details

Code

M0Y

Listing

Deutsche Börse Scale

Shares in issue (following October subscription)

4.0m

Last reported net cash at end June 2020 (excluding €6.4m lease liabilities and €52.8m fundraise in October)

€6.7m

Business description

Mynaric designs and manufactures laser communication terminals and ground stations for airborne and spaceborne networks and applications. Its objective is to become the world’s leading provider of network equipment for the aerospace communication industry using its serially produced and low-cost laser communication products.

Bull

Wireless laser technology gives faster data rates than conventional microwave transmission.

Wireless laser technology potentially brings internet connectivity to remote regions without installing fibre optic cable.

Tech is cost effective for mega-constellations.

Bear

Technology not proven in complete satellite or airborne communications networks yet.

Rate of roll-out dependent on network operators securing funding.

Limited number of potential network operators to which it can sell equipment.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Mynaric is a research client of Edison Investment Research Limited

Mynaric’s free space optical communications terminals are beginning to come off the production line just as government agencies and commercial operators are commissioning high-speed communications networks based on constellations of satellites. In the last quarter, the company has announced contracts to supply multiple terminals for deployment on pathfinder missions for two US government programmes: one with DARPA and the other, we have inferred, with the Space Development Agency (SDA).

Fibre speed in free space

Wireless laser technology is beginning to replace microwave links in satellite and aerial communications networks, providing fibre speed communications links to regions where there are limited or no terrestrial networks The technology is also being adopted by defence agencies as it enables them to provide internet connectivity to personnel and smart equipment when operating in hostile terrain and by emergency services, where it provides connectivity even when terrestrial networks have been damaged. The technology is also relevant to networks of earth observation satellites since increasing the speed at which data can be transmitted to earth ensures that all of the data collected can be used.

The Mynaric advantage

Only half a dozen companies globally offer laser communications terminals. From a technical standpoint, Mynaric’s key differentiator is its ability to transmit narrow laser beams between two moving aerial platforms, which is based on IP licensed on an exclusive basis for aerial applications. The other key differentiator is Mynaric’s focus on the creation of products that can be made in the volumes and at the cost point required for networks deploying hundreds of satellites or aerial platforms. Mynaric currently has more terminals in its production schedule (over 30 units) than have ever been launched by all of its commercial competitors combined. Moreover, it intends to expand production to 100–500 units/year by 2022.

Valuation: Analysis of potential revenue

Since Mynaric is not expected to start delivering significant numbers of commercial units until H221 and to generate an operating profit until FY22, we present a scenario analysis rather than a peer group comparison of multiples. This analysis shows that a constellation of 100 low earth orbit (LEO) satellites could require €75m of Mynaric’s laser communications terminals and a cluster of 250 airborne communications platforms could require €113m of equipment.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EBIT
(€m)

PAT
(€m)

DPS
(€)

P/E
(x)

12/18*

1.4

(7.4)

(7.8)

(7.8)

0.0

N/A

12/19

0.4

(6.5)

(7.7)

(7.8)

0.0

N/A

12/20e

3.9

(8.2)

(10.3)

(10.8)

0.0

N/A

12/21e

43.4

1.8

(2.3)

(2.7)

0.0

N/A

Source: Hauck & Aufhauser, Kepler Cheuvreux and MainFirst. Note: *Restated.

Company description: Internet-in-the-sky/eye-in-the-sky

Mynaric was founded in 2009 by former employees of the German Aerospace Center (DLR) to commercialise wireless laser communications technology for space and aerospace applications. The technology is being offered to companies for deployment in satellite and aerial communications networks, enabling the delivery of high-speed internet access and associated services to regions where there are limited or no terrestrial networks. The technology is also of interest to defence agencies as it enables them to provide internet connectivity to personnel and smart equipment when operating in hostile terrain and to emergency services, where it provides connectivity even when terrestrial networks have been damaged. The technology may also be used in networks of earth observation satellites, increasing the speed at which data can be transmitted to earth, thus ensuring that all of the data collected can be used.

The technology is based on IP licensed from the DLR on an exclusive basis for aircraft applications and a non-exclusive basis for space applications. Mynaric demonstrated the viability of its technology through a series of tests culminating in a 10Gbps air-to-ground transmission from a moving aircraft in 2017. Since then it has commenced pre-production and is currently preparing for the serial production phase. It has recently announced two high-profile contracts with US government bodies, one of which is DARPA (Defense Advanced Research Projects Agency) and the other we have previously inferred is the SDA, which intend to deploy Mynaric’s satellite terminals on their pathfinder missions in 2021 and 2022 respectively. This follows the announcement in January 2020 of a multi-million-euro contract from a European customer for terminals to be deployed as part of a product validation in 2022. Mynaric will start delivering airborne terminals to a customer for extensive trials in Q420.

The company’s headquarters are close to Munich in Germany with a subsidiary in Los Angeles. It employs more than 150 people. Mynaric listed on the Scale index of the Deutsche Börse in October 2017. Immediately prior to listing it raised €27.3m (gross) at €54.0/share.

Exhibit 1: Commencing serial production

Exhibit 2: German facility

Source: Mynaric

Source: Mynaric

Exhibit 1: Commencing serial production

Source: Mynaric

Exhibit 2: German facility

Source: Mynaric

Market and technology

Connecting the world’s remote places

According to data from Statista, in 2019 there were 4.13 billion internet users globally, representing 59% of the world’s population. Internet adoption varies from country to country, with Northern Europe recording the highest level of penetration at 95% and Central Africa the lowest at 22%. Moreover, even within regions such as North America, where penetration is 88%, actual download speeds in rural areas are often so slow that governments are intervening to try and reduce the digital divide. For example, in January 2020 the US Federal Communications Commission launched the Rural Digital Opportunity Fund, which will direct up to $16bn over 10 years to finance up to gigabit speed broadband networks in unserved and underserved rural areas. At least $4.4bn of this is allocated to improving access in areas where speed is less than 25Mbps for download and 3Mbps for upload. SpaceX, which is building one of the constellations intending to deploy optical communications links (see below), is bidding for an award from this fund.

It is not just people that that are being connected to the internet either – smart devices such as domestic boilers, office lighting, level sensors in remote reservoirs, and asset tracking units on transportation containers and mining vehicles all need internet connections too. Cisco Systems’ Annual Internet Report, which was updated in March 2020, predicts that between 2018 and 2023 the number of connected devices globally will grow at 10% CAGR, which is faster than either the global population (1.0% CAGR) or the number of people using the internet (6% CAGR). Growth in the number of connected devices is being driven primarily by machine-to-machine (M2M) applications such as smart meters, video surveillance, healthcare monitoring, transportation, and package or asset tracking. The report predicts that this category will exhibit 19% CAGR during the period, such that by 2023 there will be 14.7bn M2M connections, representing 50% of total connected devices. M2M applications like tracking containers while at sea need global coverage.

One solution for connecting remote places is to install additional fibre optic backbone, but this takes time to roll out and is uneconomic for areas of low population density or only a few connected devices. Installation may not even be feasible if the terrain is inhospitable because of natural causes such as mountain ranges or unhelpful human activity ranging from warfare to simple pilfering of the optical cable. A fibre optic cable linked to a mobile phone mast cannot provide connectivity to a vessel on the wide ocean, an aircraft in flight or a vehicle crossing a desert.

Communication providers such as Inmarsat use satellites to provide mobile safety and broadband voice and data services across the globe. Data are transmitted up from a ground station connected to the terrestrial internet backbone to a satellite and back down to a user with a satellite phone and vice versa. Up to now, communications links on satellites have deployed microwave (radio frequency) technology. These microwave radio links typically deliver data rates c 300 times slower than fibre optic cable, constraining the amount of data that an individual satellite can deliver and thus pushing up the cost per bit delivered.

Faster, more secure and lower power than microwave

Replacing the microwave transceivers on satellites with free space optical communications links would give transmission rates equivalent to those through fibre optic cable. The faster speed is clearly advantageous for internet-in-the-sky applications. It is also beneficial for downlinks from earth observation satellites, providing sufficient bandwidth to transmit all of the data that are collected rather than having to discard a substantial percentage, as is the case at present. Since wireless laser beams do not spread out like microwave links, they are much more difficult to intercept illegally and are thus much more secure. The narrowness of the laser beam also means that wireless laser links from one network are very much less likely to cause interference with wireless laser links in another network, meaning that it is not necessary to obtain an operating licence from the International Telecommunication Union (ITU) for a wireless laser network, although this is mandatory for most microwave networks. Additionally, laser links are significantly more power efficient than microwave links to transmit data over the same distance, which is an important advantage when transmitting from a solar-powered satellite, high-altitude pseudo-satellite (HAPS) or balloon where power consumption must be kept to a minimum.

Exhibit 3: Ubiquitous wireless laser communications links

Source: Mynaric

Overcoming the technical challenges

Since laser beams are essentially concentrated light, links between the ground and an aerial platform or satellite may degraded by fog and air turbulence, or by an aircraft, bird or construction crane temporarily cutting the beam. This is typically addressed by having multiple air-to-ground links, and cross-links between the platforms themselves so that each satellite is directly connected to several others and through those to potentially hundreds of others, depending on the size of the satellite constellation. If transmission down an individual air-to-ground link to a ground station is blocked, the signal can be sent from one satellite or airborne platform to another via the cross-links until it reaches a platform with a usable downlink to a ground station that will pass the signal to a terrestrial network. Temporary interruptions of the laser beam up to 10 milliseconds (msec) in duration may be addressed by using forward error correction (FEC) signal coding techniques. In addition, some satellite constellation owners are developing hybrid wireless laser/microwave systems for downlinks. These are more expensive that those which only use optical communications, but mean it is possible to fall back on the lower data rate microwave links if required.

Optical cross-links critical for difficult terrain

Cross-links between space-borne or airborne platforms are critical if a user is attempting to transmit data via a satellite which is unable to connect to a functional ground station. Following a disaster such as a hurricane, the local terrestrial network to which a ground station connects may be damaged. In this situation a temporary network of airborne platforms with optical links can transmit high-speed data from emergency services and relief workers across a chain of individual platforms to a functioning ground station outside the disaster zone. Similarly, a network of aerial platforms or LEO satellites can transmit high-speed data from a military vehicle operating in remote or hostile territories. As there is no issue with fog or air turbulence in space, it is likely that technology will be used for cross-links between satellites before any other applications. It is probable that satellite constellation operators will use the high data rate and low latency offered by optical cross-links to target sectors such as military intelligence and the finance industry, which are prepared to pay a premium for this capability.

Wireless laser an economic option

A communications network based on free space optical communications terminals deployed on aerial or space-borne platforms presents an economically attractive alternative to fibre optic cable because of the cost of installing the cable. Mynaric estimates that it costs around €10m to install and commission a 100km section of suburban optical fibre and would cost up to €1m for a laser communication link between two unmanned aircraft or balloons in the stratosphere, including the flight platforms. For a long-haul link of 1,000km, subsea optical fibre deployment and commission would cost €100m, while a laser communications link between two LEO satellites would cost up to €10m, including the cost of the satellites and their launch. This comparison excludes ongoing operating costs.

Market growth predictions

In February 2020, Northern Sky Research published the second edition of its Optical Satellite Communications report. This forecast a US$3.8bn cumulative revenue opportunity until 2029 for space-based laser communications, with a significant portion of the revenue flow going to lasercom terminal manufacturers. This growth is dependent on widespread deployment of the technology (nearly 11,000 units by 2029, with two to five terminals per satellite according to Northern Sky Research) in non-GEO (geostationary orbit) constellations.

Proposed deployments

Exhibit 4: Projects deploying optical communications links

Project

Platform

Application

Status

Analytical Space

LEO satellites

Relay network for transmitting data from sensing satellites

Demonstration satellite launched July 2018

Cloud Constellation

10 LEO satellites

Satellite network for secure data storage

In process of securing funding.

DARPA Blackjack

Up to 40 LEO satellites

Military communications network

Demonstration satellites to be launched in 2021

European Data Relay System

Two GEO satellites.

Relaying data from non-GEO satellites, spacecraft, other vehicles and fixed earth stations.

Satellites launched in 2016 and 2019

Facebook Aquila

Solar-powered high-altitude, long endurance aircraft

Internet

Abandoned development of in-house platform in 2018 in favour of working with partners such as Airbus

Galileo Second Generation (G2G)

Current generation is expected to include 30 MEO satellites

Global positioning system

Second generation to be introduced from early 2020s

Laser Light Communications

12 MEO satellites

High-volume, secure transmission of packet data for corporations

Funded through to operational network in 2023

Loon (Alphabet subsidiary)

Helium filled balloons made by Raven Aerostar 15m across and 12m high.

Internet

Providing connectivity across nearly 50,000 km2 in Kenya – though not with optical links

LeoSat

78–108 LEO satellites

Low-latency internet for government and corporate users

Shut down November 2019 because of financing issues

SpaceX Starlink

12.000+ satellites

Internet

Over 800 satellites in orbit. Currently recruiting beta-testers

Telesat LEO

298 satellites

Internet

Launches in 2018–23

US Space Development Agency

<1,000 satellites

Defence

Launches from 2022 onwards

Source: Edison Investment Research. Note: LEO = low earth orbit. MEO = medium earth orbit.

There are several satellite constellations being developed to deliver high-speed internet on a global basis, not all of which have stated their intention to deploy optical communications links. The one with the largest number of satellites in orbit at present and one which has stated its intention to deploy optical communications links, is SpaceX’s Starlink, which is part of Elon Musk’s programme to put humans on Mars. Some other constellations with high satellite counts such as LeoSat have been proposed but failed due to lack of financing. There are also several constellations being proposed by established space communications and imaging companies. SpaceX’s Starlink, Telesat’s LEO and the US Space Development Agency’s projects are profiled in more depth in our sector report on the small satellite market.

Some companies are evaluating the use of platforms in the stratosphere rather than satellites. These platforms, which include the large balloons developed by Alphabet’s Loon project and the Zephyr HAPS developed by Airbus, are less expensive to manufacture and launch than satellites. The solar-powered Zephyr S HAPS has been available from 2017/18, has been approved for civil and military flight and can carry a narrowband communications payload. It can fly for up to 30 days at a time. The larger Zephyr T is scheduled to be available from 2020 onwards, is certified for routine flight operations and can carry a broadband communications payload. Since these airborne platforms are closer to the Earth’s surface than even LEO satellites (21km vs 200–1,600km altitude), far more are required to cover the same area of the Earth’s surface. These platforms are therefore proposed for providing connectivity to smaller regions on either a permanent basis or following a disaster which destroys existing communications infrastructure. The ease and speed with which these stratospheric platforms may be launched makes them highly suitable for disaster recovery situations. For example, in 2017 Loon balloons equipped with microwave links were deployed to provide connectivity to hurricane-ravaged Puerto Rico.

Exhibit 5: Airbus’s Zephyr S

Exhibit 6: Loon communications balloon

Source: Airbus

Source: Loon (subsidiary of Alphabet)

Exhibit 5: Airbus’s Zephyr S

Source: Airbus

Exhibit 6: Loon communications balloon

Source: Loon (subsidiary of Alphabet)

Competitive environment

Limited number of market participants

There are relatively few companies working on wireless laser technology. These include:

Ball Aerospace (part of Ball Corporation, which had $11.5bn sales in 2019) pioneered development of airborne optical communications programmes by demonstrating some of the first operational systems on the Airborne Flight Test System flown on a KC-135 in 1981. It now provides airborne terminals that can be integrated onto Tier II Unmanned Aerial Vehicles like Global Hawk and is developing a commercial optical communications system for deployment on satellites and airborne platforms.

AIM-listed Gooch & Housego (GHH) has focused historically on laser components but deliberately moved up the value chain over the last decade through a sequence of acquisitions including that of Constellex in 2013. At the interim results presentation in June 2020 management mentioned that the group was working on a space satellite laser-based communication system that has been commissioned by an undisclosed third party. GHH received revenues from the project during FY19 and H120. The system is scheduled to be launched on a large satellite by the end of calendar 2020. The group has also produced a pilot system for Airbus, which Airbus paid for. This has been tested on a large wing unmanned aerial vehicle (UAV). The group is currently bidding for work on large constellations of satellite and UAV networks.

SA Photonics develops and deploys a wide range of photonics solutions for commercial and government customers. These include free space optical communications, fibre lasers, optical sensors, head-worn displays and vision systems. It has developed free space optical communication systems for terrestrial point-to-point links, satellite cross-links, satellite-to-ground links, airborne and underwater links. We infer (see below) that the company will be one of three, including Mynaric, that will be supplying terminals for the initial phase of the SDA’s satellite constellation.

Space Micro announced in March 2020 that the US Space Force’s Space and Missile Systems Center had awarded it a $3m contract for a laser communications terminal. At the time, the company had completed qualification of its terminal but had not flown the device, which was scheduled to launch on a satellite later this year for an undisclosed customer.

Tesat is an Airbus subsidiary with c 1,200 employees and over €300m annual revenues. Like Mynaric, it licenses wireless laser technology from the DLR on a non-exclusive basis for space options and has added its own IP to create a different solution. In September 2017, Tesat announced that it was working with BridgeComm to ensure compatibility between its laser communications terminal for direct-to-earth downlink applications and BridgeConmm’s optical communications ground network. As of August 2019, Tesat had 11 laser communications terminals in orbit, including the EDRS-A and EDRS-C satellites, which relay information from the Copernicus programme’s four Sentinel earth observation satellites and on several of the Sentinel satellites. In August 2019, Tesat announced that it had delivered its first ultra-lightweight optical data transmitter to an undisclosed US customer. We infer (see below) that the company will be one of three, including Mynaric, that will be supplying terminals for the initial phase of the SDA’s satellite constellation.

Thales Alenia Space Switzerland (formed from the acquisition of RUAG’s opto-electronics business in November 2016) delivered sub-systems for the EDRS project. It is moving away from government-sponsored programmes to more commercial activity with the development of the Optel range of terminals, which do not appear to be commercially available yet.

We are encouraged by the fact that there are several companies developing wireless laser communication systems because this gives us greater confidence that there will be a viable market for the products. We note also that the three US-based companies in the list are recipients of US defence contracts. This underscores the importance of Mynaric strengthening its position in the US over the last two years (see below).

Exclusive rights to IP gives Mynaric the edge in airborne applications

Exhibit 7: HAWK AIR terminal

Source: Mynaric

The key differentiator of Mynaric’s technology is its ability to transmit narrow laser beams between two moving aerial platforms. It is difficult enough to position a laser beam so that it lines up with a target only centimetres in diameter, which is several hundreds of kilometres away. The problem is compounded when the target is moving because it is located on an aircraft, where it is subject to incessant vibration, or on a UAV, airship or air balloon. Mynaric uses IP licensed from the DLR for its innovative pointing and tracking mechanism that is designed to solve this problem. This is licensed on an exclusive basis for aerial applications. Under the terms of the licence agreement, which extends until at least 2027, Mynaric will pay DLR 1–4% of commercial revenues. Since its founders left the DLR, Mynaric has also developed its own IP, which it alone has rights to. For example, it has developed techniques that ensure that the beam alignment system keeping the communication signal locked onto its target is not affected by changes in temperature. The IP is not protected by patents to avoid excessive disclosure and the legal fees related to patent defence. Management notes that Mynaric is the first and probably the only company to have transmitted at 10Gbps from a moving airborne terminal to a ground terminal.

Focus on volume production for large constellations

Mynaric’s competitors historically have been orientated towards providing expensive, one-off equipment for governments and research institutes for space programmes. Mynaric is unusual in having been focused for several years on product that is ultimately intended for volume production. For example, since the equipment transmits at 1,550 nanometers (nm), which is the same as conventional optical fibre, Mynaric is able to use widely available opto-electronic components, reducing the cost of production. It has formed an exclusive partnership with a French research institute for the supply of the next generation of avalanche photodiodes. These are expected to be around 10 times more sensitive than existing variants, enabling Mynaric to reduce the production costs, size, weight and power consumption of its laser communication units.

Being able to manufacture terminals in volume is likely to be a key differentiator going forward. For example, the initial phase of the SDA constellation of 20 satellites will require a total of 68 laser terminals, which management believes is around three times the entire number of laser terminals that have been built collectively by any supplier so far. The SDA has plans to expand the Transport part of the constellation to 300–500 satellites. These volumes are likely to present a challenge to Mynaric’s competitors, which have historically produced individual bespoke items. In contrast, Mynaric currently has more CONDOR space terminals and HAWK AIR flight terminals in its production schedule (over 30 units in total) than have ever been launched by all of its commercial competitors combined. Moreover, it intends to expand production to 100–500 units/year by 2022. This puts it in a good position to take market share as the SDA and others move from the pathfinder phase to full-scale deployment of hundreds of satellites.

Route to commercialisation

Expanding serial production to meet anticipated demand

In May 2019, Mynaric moved to larger, customised premises just outside Munich. These house a clean room, laboratories, R&D facilities and test equipment to support serial production. This includes a link testbed to simulate the extreme conditions experienced in space and equipment to simulate rocket launches. Serial production is critical because it enables Mynaric to meet the cost and volume requirements for mega-constellations. Now that the manufacturing and testing of the first HAWK AIR terminals has been completed, and the company is refining its production line processes and procedures to ensure it is able to cope with multi-unit demand in future.

German government bans deliveries to first customer

At the time of our May 2020 note, Mynaric had released information about two customers for its satellite terminals. The names of these customers were not disclosed. In October 2019, the first customer, which we now know is based in China, placed an order for multiple laser communication flight terminals under an initial contract valued at €1.7m for a product validation mission that was scheduled for H220. The second customer, which is based in Europe, signed a multi-million-euro contract in January 2020 for terminals to be deployed as part of a product validation in 2022. During H120, initial volumes of the CONDOR space terminals went through their final test and qualification phase ahead of planned H220 delivery to the Chinese customer. Mynaric had proactively sought clearance from the German government to export terminals to China but was advised by the German government at the end of July 2020 that exportation was banned. Since neither the country, customer nor application was on the government’s embargo list at the time, this prompted speculation that a US entity had put pressure on the German government.

The ban means that the step change in revenues attributable to product delivery has been deferred from FY20 to FY21. The terminals that were being prepared to ship to the Chinese customer will be sold to other customers, so there will not be any inventory or IP write-downs, although Mynaric will have to return the estimated €0.5m in down payments it has received so far. Prior to the ban, at which point it immediately terminated negotiations, Mynaric had been working on a buyout of its business in China. Management is pursuing claims for compensation from the German government with regards to both the lost contract and the potential buyout. Any potential settlement, which is likely to take some time, provides upside to the consensus estimates. In our opinion, the key issue with the ban is that it delays a working demonstration in space of the complete communications system by a year. However, the risk associated with the lack of a live test in space has been extensively reduced because the terminals have gone through lengthy tests in simulated conditions in Mynaric’s laboratory.

First wins in US governmental market

In August 2020, the SDA announced that it had awarded a $187m contract to build 10 satellites for the first phase of its LEO communications network to Lockheed Martin and a $94m contract to build 10 satellites to York Space Systems. Established satellite builder Lockheed is purchasing optical communications equipment from an undisclosed company in Backnang, Germany, where Tesat is based. Newcomer York Space is purchasing equipment from an undisclosed company in Los Angeles, which is the site of Mynaric’s US operation, and from an undisclosed company in Los Gatos, California, which is where SA Photonics is located. Shortly afterwards, Mynaric announced that it had secured its first win in the US governmental market, which was in the mid-seven-digit euros range, supporting our inference that it is supplying optical communications terminals for the first phase of the SDA programme.

Exhibit 8: CONDOR terminal

Exhibit 9: Testing communications links

Source: Mynaric

Source: Mynaric

Exhibit 8: CONDOR terminal

Source: Mynaric

Exhibit 9: Testing communications links

Source: Mynaric

In October 2020, Mynaric announced that it had been selected by Telesat to supply multiple units of its CONDOR optical inter-satellite link terminals to DARPA’s Blackjack Track B programme. The terminals are scheduled to be delivered in mid-2021 to DARPA’s Blackjack System Integrator, with satellites scheduled to launch in the latter part of 2021. Telesat aims to utilise the mission to demonstrate the capabilities, as well as the interoperability, of laser communication products from different vendors as part of the DARPA Blackjack programme. Mynaric will establish the industry’s first laser communication interoperability lab at its Los Angeles premises as part of the deal. This lab will be equipped with a link testbed capable of emulating conditions in space and testing inter-vendor operability, which is a key requirement of both the DAPRA and SDA programmes.

First shipment of airborne terminals imminent

During H120 Mynaric completed manufacture and initial testing of the pre-series volumes of its HAWK AIR airborne terminal. These units have gone through further extensive testing because the first customer, which is based in the US, intends to use the units in demonstrations to their potential customers. Mynaric intends to ship terminals to its first customer in this segment in Q420 and will then support it during an extensive demonstration campaign.

Coronavirus pandemic has negligible impact on Mynaric so far

As of September, when the H120 report was published, the global COVID-19 pandemic had a negligible effect on Mynaric’s day-to-day operations. The pandemic does not appear to have had any material impact on potential customers’ plans for launching satellite constellations. If anything, the pandemic has highlighted the importance of providing broadband-quality communications to people across the globe, including those in remote or rural locations where it is not economically practical to provide terrestrial optical communications networks. For these people, provision of broadband via a satellite-based or airborne-based optical communications network represents a viable alternative. This topic is explored in more detail in an interview with Bulent Altan, Mynaric’s CEO and SpaceX veteran.

Management

The management team has evolved to reflect the requirements of a customer-facing product manufacturer. Former SpaceX and Airbus VP Bulent Altan joined Mynaric’s management board to lead the space business and US activities in March 2019, becoming CEO during July 2020. Having graduated from Stanford University and the Technical University of Munich, Bulent began his career as one of the first employees at the then newly established SpaceX in 2004. He was central to growing SpaceX’s avionics department from seven people to over 200 and, as VP, was responsible for the avionics and control of the Falcon rockets and Dragon capsules. He was also VP of satellite mission assurance for the Starlink mega-constellation. Between 2014 and 2016, Bulent was a partner and mentor at the Munich area industrial start-up accelerator TechFounders and served as head of digital transformation and innovation at Airbus Defence and Space. Bulent is supported by

Bulent is supported by CFO Stefan Berndt-von Bülow, CTO Joachim Horwath, COO Sven Meyer-Brunswick and president of Mynaric USA, Tina Ghataore. Stefan possesses 20 years’ financial leadership experience and is a former head of finance of G&D Currency Technology. Joachim has more than 20 years of experience in laser communications and has led the company’s technical direction since its formation. Sven joined Mynaric in 2016, where he led the company’s fund-raising programme. With a background in technology and business, he was appointed COO in April 2020 to ensure alignment between Mynaric’s product roadmap and its implementation through the company’s engineering and production departments. Tina was appointed in August 2020. She is an aerospace industry veteran with 20 years’ experience in airborne and satellite communication and connectivity, including senior roles at Yahsat, Panasonic Avionics and The Boeing Company. She has also helped shape connectivity strategies at Airbus and Thales, as well as at new space satellite start-ups.

Shareholders

Exhibit 10: Shareholders

Name

% holding

Founders and management

26.6%

Family offices (<10% each)

17.8%

Others (<5% each)

55.6%

Name

Founders and management

Family offices (<10% each)

Others (<5% each)

% holding

26.6%

17.8%

55.6%

Source: Company data

The shareholder list post-IPO continues to be dominated by members of the previous management team and supervisory board.

Financials

Transition to pre-series production and test

The German accounting metric ‘operating output’ is more significant than revenue for Mynaric at this stage of its evolution because it includes the value of the increase in finished goods and work in progress, and the amount of development activity on projects that are not linked to specific customer contracts. Total operating performance during H120 was €6.5m, more than double the H119 level (€2.5m), reflecting intensifying work on preparing space and airborne terminals for customer deployment during H220.

Exhibit 11: Analysis of total operating performance

€m

H120

H119

Notes

Sales revenues

0.3

0.1

65% from customer in Asia and 35% from customers in Europe during H120 compared to 100% of revenues from customers in Europe during H119.

Increase in finished goods and work-in-progress

0.9

0.2

Primarily attributable to space and air terminals in production during H120 compared with optical ground stations in H119.

Other own work capitalised

4.8

1.8

Cost of development activity.

Other operating income)

0.5

0.4

H120 includes €0.2m grant income.

Total operating performance

6.5

2.5

Source: Mynaric data

The cost of materials (€2.7m) more than quadrupled (vs H119) as a result of intensified production activity. Personnel costs were almost double (€7.5m) as the total number of employees increased from 95 to over 150 during the period, with additions in testing, production, design, business development and marketing. Other operating expenses more than doubled to €3.1m as a consequence of higher rental costs following the move to larger premises during H119 and higher third-party costs. H120 losses after tax were double the prior year period at €8.0m.

Continuing to raise finance to support product development

Net cash reduced by €2.3m during H120 to €6.7m (excluding €6.4m IFRS 16 lease liabilities) at the period end. In addition to €7.9m cash consumed in operations, the company invested €4.8m in intangible assets, primarily the capitalised costs of developing the CONDOR and HAWK AIR terminals, and €1.7m in fixed assets, most of which related to test equipment. In February 2020, Mynaric raised €12.3m (gross) through a private placement, which was substantially oversubscribed, at €42.50/share. The funds raised are being used to increase production capabilities, to accelerate customer acquisition, particularly in the US, and to secure and strengthen Mynaric’s market position by investing in advanced developments underpinning next-generation technologies.

Post period end, in August Mynaric issued a convertible bond of €5.0m to a qualified investor. The bond has a term until end December 2020 and a fixed conversion price of €56.00/share, representing 0.09m new shares if fully converted. In October, Mynaric raised €52.8m (gross) through a subscription at €66/share. It has also taken out a €2.5m loan.

Exhibit 12: Financial summary

€'000s

2018

2019

Year end 31 December

IFRS restated

IFRS

Income Statement

Total operating performance

6,294

7,919

Profit Before Tax (as reported)

(7,778)

(7,667)

Net income (as reported)

(7,778)

(7,828)

EPS (as reported) – (€)

(2.88)

(2.76)

Dividend per share (€)

0.00

0.00

Balance Sheet

Total non-current assets

8,251

21,005

Total current assets

16,512

13,531

Total assets

24,763

34,536

Total non-current liabilities

26

6,105

Total current liabilities

2,700

3,580

Total liabilities

2,726

9,685

Net Assets

22,037

24,851

Shareholder equity

22,037

24,851

Cash flow

Net cash from operating activities

(8,035)

(7,422)

Net cash from investing activities

(7,443)

(6,528)

Net Cash from financing activities

0

9,984

Net Cash Flow

(15,600)

(4,072)

Cash & cash equivalent end of year

12,923

8,914

Source: Company accounts

Valuation

Since Mynaric is still at the pre-commercial phase and is not expected to generate operating profit until FY22, an analysis based on peer multiples is of limited use. We continue to present a scenario analysis (Exhibit 13) showing potential revenues achievable if the technology is deployed in communication systems of different sizes. We split the analysis into two types of systems. The first looks at communication networks based on smaller LEO satellites, which typically have more than 100 satellites each. The second looks at communication networks based on many more, less expensive platforms, which may be UAVs, aircraft or balloons. A communications satellite such as that used in the first scenario requires space-qualified terminals, which are more expensive than those on an airborne platform.

Exhibit 13: Analysis of potential revenues

Internet LEO system

Cost of payload* (€m)

2.0

1.5

1.0

0.75

% payload composed of Mynaric systems

50%

50%

50%

50%

Number of satellites in constellation

50

100

300

1000

Revenues attributable to Mynaric (€m)

50

75

150

375

UAV, aircraft, balloon-based system

Cost of payload (€m)

1.00

0.90

0.68

0.51

% payload composed of Mynaric systems

50%

50%

50%

50%

Number of platforms in constellation/cluster

50

250

500

1000

Revenues attributable to Mynaric (€m)

25

113

169

253

Source: Edison Investment Research. Note: *Payload is the part carrying out the communications or sensing function.

Sensitivities

Dependent on large internet projects being completed: While the proposals put forward by Alphabet and Amazon are exciting, there is no certainty that they will be technically or economically feasible and that financing will be forthcoming. Although SpaceX has already launched over 800 satellites, both the Alphabet and Amazon programmes are at fairly early stages of development. Moreover, there have been some high-profile business failures in the sector. For example LeoSat, which had intended to operate a constellation of 78–108 cross-linked, Ka-band satellites for high-speed internet, shut down in November 2019 after Spanish satellite operator Hispasat and SKY Perfect JSAT of Japan failed to follow up on their previous investments , rendering LeoSat’s US$50m Series A funding round incomplete. OneWeb (which was not proposing inter-satellite links) had already launched 74 satellites out of a planned 648 by March 2020, but was obliged to put its plans on hold when it was unable to complete a financing round and filed for Chapter 11 protection. It has since been purchased by the UK government and Bharti Global, and hopes to resume launching satellites later in 2020.

Dependent on large internet projects adopting laser technology: Although wireless laser transmission has significant advantages over microwave, so far it has only been adopted on a few government or military space platforms. Most satellite systems still use Ku- or Ka-band microwave links. The SDA and DARPA constellations discussed earlier demonstrate that free-space optical communications links are starting to be deployed in satellite networks. In the commercial arena, SpaceX’s initial beta test using microwave links on its Starlink constellation indicates that the LEO format can deliver the desired low latency, which is key for internet transmission: less than 30msecs compared with 600msecs to 2,000msecs for a traditional communications satellite in geostationary orbit. (Please refer to our report, The small satellite market – Small is beautiful, for more detail on why low latency is important.) However, the company is not deploying in-house optical communications terminals on its satellites until towards the end of 2020. If it can demonstrate enhanced data rates using optical rather than traditional microwave links, it is likely that other satellite operators will seek to adopt laser communications technology which, not being so vertically integrated, they will need to purchase from third parties. However, we note that successful completion of trials does not always lead to adoption, noting that the Loon communications balloons currently being deployed in Kenya are not using optical communications links, although subsequent Loon networks may do so.

Mynaric’s technology not completely proven: While Mynaric’s airborne technology has performed well in trials of individual elements of the system, it has not yet been demonstrated to work in a complete system. Customer trials of a complete system are scheduled to start in H220. Similarly, while elements of the space-borne technology have been tested on a satellite, the first complete space-borne units will not be launched into space by customers until 2021. While Mynaric has launched early commercial-stage variants of its airborne terminals, it has not yet completed work to reduce the finished cost of production of either the airborne or space-borne terminals, so there is no certainty that it will be able to achieve the price point required for deployment over a network with a thousand or more transmission nodes. Additionally, the economic case will be reduced if communications terminals have to include microwave links as well to provide low data rate back-up.

Small number of potential customers: Given the high cost of any airborne or space-borne communications network, it is likely that there will be a relatively small number of network operators to which Mynaric can sell its equipment. Moreover, once an operator has selected its preferred supplier for equipment, it will likely have no choice but to deploy this equipment over its entire network if there are no standards to ensure the interoperability of equipment from different vendors. We note that both DARPA and the SDA are keen to promote interoperability so they can source equipment from multiple vendors.

General disclaimer and copyright

This report has been commissioned by Mynaric and prepared and issued by Edison, in consideration of a fee payable by Mynaric. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Mynaric and prepared and issued by Edison, in consideration of a fee payable by Mynaric. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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