Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
The following discussion and analysis of our financial condition and results of operations and cash flows should be read in conjunction with our condensed consolidated financial statements, and the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements as of and for the years ended December 31, 2021 and 2020 included in our registration statement on Form S-1, as amended, which was originally filed with the United States Securities and Exchange Commission (the “SEC”) on April 22, 2022 (the “Form S-1”). The Form S-1, as amended, was declared effective by the SEC on June 23, 2022. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in the Form S-1. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.
OVERVIEW
Terran Orbital Corporation, formerly known as Tailwind Two Acquisition Corp. (“Tailwind Two”), together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “Terran Orbital”), is a leading manufacturer of small satellites primarily serving the United States (“U.S.”) aerospace and defense industry. We provide end-to-end satellite solutions by combining satellite design, production, launch planning, mission operations, and in-orbit support to meet the needs of our military, civil, and commercial customers. We have a foreign subsidiary based in Torino, Italy.
BASIS OF PRESENTATION
All financial information presented in this section includes the accounts of Terran Orbital Corporation and its subsidiaries, and has been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany transactions have been eliminated.
Our Chief Executive Officer is our chief operating decision maker (the “CODM”). We report segment information based on how the CODM evaluates performance and makes decisions about how to allocate resources. Accordingly, we have two operating and reportable segments: Satellite Solutions and Earth Observation Solutions.
The reportable segments are defined as follows:
The Satellite Solutions segment is a vertically integrated satellite provider with modern facilities and a global ground station network that delivers end-to-end satellite solutions, including spacecraft design, development, launch services, and on-orbit operations for critical missions across a number of applications in a variety of orbits to governmental agencies and commercial businesses.
•Earth Observation Solutions
Through the Satellite Solutions segment, the Earth Observation Solutions segment has commenced developing satellites featuring synthetic aperture radar capabilities to provide Earth observation data and mission solutions. These capabilities are intended to provide the ability to observe and detect during day and night and through clouds and other interference. The Earth Observation Solutions segment is still in its developmental stage and does not yet generate any material revenue.
We initially intended to develop, build, launch, and operate a constellation of company-owned Earth observation satellites. In connection with a financing transaction in October 2022 and the allocation of production capacity to fulfill existing customer programs, we determined the most financially efficient method of providing advanced satellite imagery is to offer our Earth observation satellites as a product as opposed to a company-owned and operated constellation. We are currently evaluating our options related to our constellation construction-in-process assets, which may result in an impairment in future reporting periods. Accordingly, we will re-evaluate the manner in which the CODM evaluates performance and
37
makes decisions about how to allocate resources during the fourth quarter of 2022, which may result in a change in our operating and reportable segment structure.
The CODM uses income (loss) from operations by segment as the segment profitability measure in order to evaluate segment performance. Income (loss) from operations by segment excludes share-based compensation expense and corporate and other costs included within the Company’s consolidated income (loss) from operations.
FACTORS AFFECTING OPERATING RESULTS
Our financial success is based on our ability to deliver high quality products and services on a timely basis and at a cost-effective price for our customers. With the majority of our contracts with customers reflecting firm fixed pricing structures, our gross profit is dependent on the efficient and effective execution of our contracts. Our ability to maximize gross profit may be impacted by, but not limited to, unanticipated cost overruns, disruptions in our supply chains, and learning curve costs related to developing new and innovative technology, including the expansion of our offerings to include additional satellite bus designs, payload solutions, satellite subassemblies and components, and other defense-related products.
From time to time, we may strategically enter into contracts with low or negative margins relative to other contracts or that are at risk of cost overruns. This may occur due to strategic decisions built around positioning ourselves for future contracts or to enhance our product and service offerings. However, in some instances, loss contracts may occur from unforeseen cost overruns which are not recoverable from the customer. We establish loss reserves on contracts in which the estimated cost-at-completion exceeds the estimated revenue. The loss reserves are recorded in the period in which a loss is determined.
We are actively executing on our growth initiatives with significant increases in headcount as well as the expansion of manufacturing and assembly facilities and office space at our Irvine, California location (which manufacturing facilities were originally planned to be located at Florida’s Space Coast), in order to position ourselves to be awarded larger contracts with recurring revenue opportunities. Our portfolio of contracts includes several technology demonstrations, studies, and prototypes with the potential for option exercises or follow-on contracts for multiple-satellite constellations. As of September 30, 2022, we have identified over 140 opportunities representing approximately $15 billion in potential revenue for our Satellite Solutions segment. However, these opportunities are subject to numerous uncertainties, including but not limited to: the customer may withdraw the opportunity, we may not submit a proposal, or we may not win a contract award or the full value of the award. Accordingly, we expect these opportunities to result in only a fraction of the potential revenue, which amount is not determinable with any degree of certainty.
We may experience variability in the profitability of our contracts in the future and such future variability may occur at levels and frequencies different from historical experience. Such variability in profitability may be due to strategic decisions, cost overruns or other circumstances within or outside of our control. Accordingly, our historical experience with profitability on our contracts is not indicative or predictive of future experience.
COVID-19 Pandemic
During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has become increasingly widespread across the globe. The COVID-19 Pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in the financial and capital markets.
The COVID-19 Pandemic has contributed to a worldwide shortage of electronic components which has resulted in longer than historically experienced lead times for such electronic components. The reduced availability to receive electronic components used in our operations has negatively affected our timing and ability to deliver products and services to customers as well as increased costs in recent periods. We have considered the emergence and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the three and nine months ended September 30, 2022. Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that the effects of the COVID-19 Pandemic could materially impact our estimates and condensed consolidated financial statements in future reporting periods.
RECENT DEVELOPMENTS
The comparability of our results of operations has been impacted by the following events:
Tailwind Two Merger
Prior to March 25, 2022, Tailwind Two was a publicly listed special purpose acquisition company incorporated as a Cayman Islands exempted company. On March 25, 2022, Tailwind Two acquired Terran Orbital Operating Corporation, formerly known as Terran
38
Orbital Corporation (“Legacy Terran Orbital”) (the “Tailwind Two Merger”). In connection with the Tailwind Two Merger, Tailwind Two filed a notice of deregistration with the Cayman Islands Registrar of Companies and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, resulting in Tailwind Two becoming a Delaware corporation and changing its name from Tailwind Two to Terran Orbital Corporation. The Tailwind Two Merger resulted in Legacy Terran Orbital becoming a wholly-owned subsidiary of Terran Orbital Corporation.
As a result of the Tailwind Two Merger, all of Legacy Terran Orbital's issued and outstanding common stock was converted into shares of Terran Orbital Corporation's common stock using an exchange ratio of 27.585 shares of Terran Orbital Corporation's common stock per each share of Legacy Terran Orbital's common stock. In addition, Legacy Terran Orbital's convertible preferred stock and certain warrants were exercised and converted into shares of Legacy Terran Orbital's common stock immediately prior to the Tailwind Two Merger, and in turn, were converted into shares of Terran Orbital Corporation's common stock as a result of the Tailwind Two Merger. Further, in connection with the Tailwind Two Merger, Legacy Terran Orbital's share-based compensation plan and related share-based compensation awards were cancelled and exchanged or converted, as applicable, with a new share-based compensation plan and related share-based compensation awards of Terran Orbital Corporation.
While Legacy Terran Orbital became a wholly-owned subsidiary of Terran Orbital Corporation, Legacy Terran Orbital was deemed to be the acquirer in the Tailwind Two Merger for accounting purposes. Accordingly, the Tailwind Two Merger was accounted for as a reverse recapitalization, in which case the condensed consolidated financial statements of the Company represent a continuation of Legacy Terran Orbital and the issuance of common stock in exchange for the net assets of Tailwind Two recognized at historical cost and no recognition of goodwill or other intangible assets. Operations prior to the Tailwind Two Merger are those of Legacy Terran Orbital and all share and per-share data included in these condensed consolidated financial statements have been retroactively adjusted to give effect to the Tailwind Two Merger. In addition, the number of shares subject to, and the exercise price of, the Company’s outstanding options and warrants were adjusted to reflect the Tailwind Two Merger. The treatment of the Tailwind Two Merger as a reverse recapitalization was based upon the pre-merger shareholders of Legacy Terran Orbital holding the majority of the voting interests of Terran Orbital Corporation, Legacy Terran Orbital's existing management team serving as the initial management team of Terran Orbital Corporation, Legacy Terran Orbital's appointment of the majority of the initial board of directors of Terran Orbital Corporation, and Legacy Terran Orbital's operations comprising the ongoing operations of the Company.
In connection with the Tailwind Two Merger, approximately $29 million of cash and marketable securities held in trust, net of redemptions by Tailwind Two's public shareholders, became available for use by the Company as well as proceeds received from the contemporaneous sale of common stock in connection with the closing of a PIPE investment with a contractual amount of $51 million (the “PIPE Investment”). In addition, the Company received additional proceeds from the issuance of debt contemporaneously with the Tailwind Two Merger. The cash raised was used for general corporate purposes, the partial paydown of debt, the payment of transaction costs and the payment of other costs directly or indirectly attributable to the Tailwind Two Merger.
Beginning on March 28, 2022, the Company's common stock and public warrants began trading on the New York Stock Exchange (the "NYSE") under the symbols “LLAP” and "LLAP WS," respectively.
Refer to the discussions below under “Liquidity and Capital Resources” for further details regarding our financing transactions which occurred in connection with the Tailwind Two Merger.
Public Company Costs
As a result of the Tailwind Two Merger, we have incurred and will continue to incur additional legal, accounting, board compensation, and other expenses that we did not previously incur, including costs associated with SEC reporting and corporate governance requirements. These requirements include compliance with the Sarbanes-Oxley Act of 2002 as well as other rules implemented by the
39
SEC and the national securities exchanges. Our financial statements for the periods following the Tailwind Two Merger will reflect the impact of these expenses.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table presents our consolidated results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Revenue |
|
$ |
27,830 |
|
|
$ |
10,255 |
|
|
$ |
17,575 |
|
Cost of sales |
|
|
27,793 |
|
|
|
8,768 |
|
|
|
19,025 |
|
Gross profit |
|
|
37 |
|
|
|
1,487 |
|
|
|
(1,450 |
) |
Selling, general, and administrative expenses |
|
|
24,696 |
|
|
|
11,432 |
|
|
|
13,264 |
|
Loss from operations |
|
|
(24,659 |
) |
|
|
(9,945 |
) |
|
|
(14,714 |
) |
Interest expense, net |
|
|
7,147 |
|
|
|
2,630 |
|
|
|
4,517 |
|
Change in fair value of warrant and derivative liabilities |
|
|
(6,001 |
) |
|
|
(205 |
) |
|
|
(5,796 |
) |
Other expense (income) |
|
|
1,496 |
|
|
|
(5 |
) |
|
|
1,501 |
|
Loss before income taxes |
|
|
(27,301 |
) |
|
|
(12,365 |
) |
|
|
(14,936 |
) |
Provision for income taxes |
|
|
54 |
|
|
|
- |
|
|
|
54 |
|
Net loss |
|
$ |
(27,355 |
) |
|
$ |
(12,365 |
) |
|
$ |
(14,990 |
) |
Revenue
The following table presents revenue by segment for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Satellite Solutions |
|
$ |
27,286 |
|
|
$ |
10,230 |
|
|
$ |
17,056 |
|
Earth Observation Solutions |
|
|
544 |
|
|
|
25 |
|
|
|
519 |
|
Revenue |
|
$ |
27,830 |
|
|
$ |
10,255 |
|
|
$ |
17,575 |
|
The increase in revenue attributable to the Satellite Solutions segment was primarily due to the continued and increased level of progress made in satisfying our customer contracts and reflects the ongoing favorable impact from significant contract wins and modifications in recent periods.
During the three months ended September 30, 2022, we adjusted the estimate-at-completion (“EAC”) on certain firm fixed price contracts as costs incurred exceeded amounts previously estimated, which had an estimated $100 thousand negative impact to revenue in the Satellite Solutions segment. While we believe our estimates as of September 30, 2022 consider all relevant and known information, such as supply chain and related production challenges, additional adjustments to our EACs could occur and have an impact on our revenue in future reporting periods.
The Earth Observation Solutions segment was still in its developmental stage during the reporting period and generated limited revenue from studies and technology demonstrations.
Cost of Sales
The following table presents cost of sales by segment and other components for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Satellite Solutions |
|
$ |
24,698 |
|
|
$ |
8,675 |
|
|
$ |
16,023 |
|
Earth Observation Solutions |
|
|
380 |
|
|
|
25 |
|
|
|
355 |
|
Share-based compensation expense |
|
|
2,715 |
|
|
|
68 |
|
|
|
2,647 |
|
Cost of Sales |
|
$ |
27,793 |
|
|
$ |
8,768 |
|
|
$ |
19,025 |
|
40
The increase in cost of sales was primarily due to (i) an increase of $15.0 million in labor, materials, third-party services, overhead, and other direct costs incurred in satisfying our customer contracts in the Satellite Solutions segment, (ii) an increase in share-based compensation expense due to the ongoing recognition of expense associated with awards that included a liquidity event, such as the Tailwind Two Merger in March 2022, as a vesting condition, (iii) an increase of $584 thousand related to reserves for anticipated losses on contracts, and (iv) an increase of $320 thousand related to our ground station network.
During the three months ended September 30, 2022, we adjusted the EAC on certain firm fixed price contracts as costs incurred exceeded amounts previously estimated, which had an estimated $1.9 million negative impact to cost of sales in the Satellite Solutions segment. While we believe our estimates as of September 30, 2022 consider all relevant and known information, such as supply chain and related production challenges, additional adjustments to our EACs could occur and have an impact on our cost of sales in future reporting periods.
The Earth Observation Solutions segment was still in its developmental stage during the reporting period and generated limited revenue from studies and technology demonstrations, incurring limited cost of sales.
Selling, General, and Administrative Expenses
The following table presents selling, general, and administrative expenses by segment and other components for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Satellite Solutions |
|
$ |
8,710 |
|
|
$ |
2,347 |
|
|
$ |
6,363 |
|
Earth Observation Solutions |
|
|
654 |
|
|
|
846 |
|
|
|
(192 |
) |
Corporate and other |
|
|
8,843 |
|
|
|
8,130 |
|
|
|
713 |
|
Share-based compensation expense |
|
|
6,489 |
|
|
|
109 |
|
|
|
6,380 |
|
Selling, general, and administrative expenses |
|
$ |
24,696 |
|
|
$ |
11,432 |
|
|
$ |
13,264 |
|
41
The increase in selling, general, and administrative expenses was primarily due to the following:
•an increase in share-based compensation expense due to the ongoing recognition of share-based compensation expense associated with awards that included a liquidity event, such as the Tailwind Two Merger in March 2022, as a vesting condition;
•an increase in research and development activities, exclusive of allocated share-based compensation and depreciation, in the Satellite Solutions segment of $3.3 million related to the development of new and improved future customer offerings;
•an increase in expenses, net of overhead allocations, of $3.1 million in the Satellite Solutions segment due to incremental headcount, additional leases for manufacturing facilities and office space, incremental technology solutions utilized, and other selling, general, and administrative expenses as part of the Company's growth initiatives;
•an increase in corporate insurance expense of $1.3 million as a result of the Company becoming a public company in March 2022;
•an increase in corporate technology costs of $567 thousand due to an increase in overall headcount and solutions utilized;
•an increase in corporate facility costs of $384 thousand due to leases for office locations that commenced throughout 2021; and
•an increase of $184 thousand in depreciation and amortization expense in the Earth Observation Solutions segment due to a company-owned satellite that was placed in service in 2021.
The increase in selling, general, and administrative expenses was partially offset due to the following:
•a decrease in corporate accounting, legal, and other professional fees of $1.5 million primarily driven by a decrease in non-recurring costs of becoming a public company, partially offset by an increase in recurring costs of being a public company;
•a reduction in salaries and wages of $367 thousand in the Earth Observation Solutions as a result of the prioritization of resources to focus on U.S. Government programs during the three months ended September 30, 2022; and
•a reduction in corporate salaries and wages of $306 thousand driven by turnover in the management team.
Interest Expense, net
The increase in interest expense, net was due to an increase in amortization related to discount on debt of $3.3 million and an increase in contractual interest of $1.5 million as a result of higher debt balances with lower interest rates each due to our financing transactions during 2021 and 2022. These increases were partially offset by an increase in capitalized interest of $288 thousand associated with the development of our Earth observation constellation.
Change in Fair Value of Warrant and Derivative Liabilities
The change in fair value of warrant and derivative liabilities relates to the periodic fair value remeasurement of liability-classified warrants and derivatives issued in connection with our financing transactions.
During the three months ended September 30, 2022, the gain on change in fair value was due to the decrease in fair value of outstanding warrant liabilities driven by a decrease in the Company’s price per warrant and price per share of common stock.
During the three months ended September 30, 2021, the gain on change in fair value was not material.
Other Expense (Income)
During the three months ended September 30, 2022, other expense primarily related to $1 million of expense associated with the fair value of common stock issued as consideration for the execution of our committed equity facility and $380 thousand of non-recurring legal and accounting fees associated with this transaction.
During the three months ended September 30, 2021, other income was not material.
Provision for Income Taxes
Provision for income taxes for the three months ended September 30, 2022 was $54 thousand, resulting in an effective tax rate for the period of 0.0%. We had a minimal effective tax rate as a result of the continued generation of net operating losses (“NOLs”) offset by a
42
full valuation allowance recorded on such NOLs as we determined it is more-likely-than-not that our NOLs will not be utilized. The remainder of the provision for income taxes was related to taxable income from our foreign subsidiary.
Provision for income taxes for the three months ended September 30, 2021 was $0, resulting in an effective tax rate for the period of 0.0%. We had a minimal effective tax rate as a result of the continued generation of NOLs offset by a full valuation allowance recorded on such NOLs as we determined it is more-likely-than-not that our NOLs will not be utilized.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table presents our consolidated results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Revenue |
|
$ |
62,314 |
|
|
$ |
30,158 |
|
|
$ |
32,156 |
|
Cost of sales |
|
|
68,784 |
|
|
|
23,905 |
|
|
|
44,879 |
|
Gross (loss) profit |
|
|
(6,470 |
) |
|
|
6,253 |
|
|
|
(12,723 |
) |
Selling, general, and administrative expenses |
|
|
84,283 |
|
|
|
30,580 |
|
|
|
53,703 |
|
Loss from operations |
|
|
(90,753 |
) |
|
|
(24,327 |
) |
|
|
(66,426 |
) |
Interest expense, net |
|
|
17,007 |
|
|
|
6,174 |
|
|
|
10,833 |
|
Loss on extinguishment of debt |
|
|
23,141 |
|
|
|
68,102 |
|
|
|
(44,961 |
) |
Change in fair value of warrant and derivative liabilities |
|
|
(2,325 |
) |
|
|
76 |
|
|
|
(2,401 |
) |
Other expense |
|
|
2,367 |
|
|
|
28 |
|
|
|
2,339 |
|
Loss before income taxes |
|
|
(130,943 |
) |
|
|
(98,707 |
) |
|
|
(32,236 |
) |
Provision for income taxes |
|
|
58 |
|
|
|
22 |
|
|
|
36 |
|
Net loss |
|
$ |
(131,001 |
) |
|
$ |
(98,729 |
) |
|
$ |
(32,272 |
) |
Revenue
The following table presents revenue by segment for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Satellite Solutions |
|
$ |
61,149 |
|
|
$ |
30,133 |
|
|
$ |
31,016 |
|
Earth Observation Solutions |
|
|
1,165 |
|
|
|
25 |
|
|
|
1,140 |
|
Revenue |
|
$ |
62,314 |
|
|
$ |
30,158 |
|
|
$ |
32,156 |
|
The increase in revenue attributable to the Satellite Solutions segment was primarily due to the continued and increased level of progress made in satisfying our customer contracts and reflects the ongoing favorable impact from significant contract wins and modifications in recent periods.
During the nine months ended September 30, 2022, we adjusted the EAC on certain firm fixed price contracts as costs incurred exceeded amounts previously estimated, which had an estimated $5 million negative impact to revenue in the Satellite Solutions segment. While
43
we believe our estimates as of September 30, 2022 consider all relevant and known information, such as supply chain and related production challenges, additional adjustments to our EACs could occur and have an impact on our revenue in future reporting periods.
The Earth Observation Solutions segment was still in its developmental stage during the reporting period and generated limited revenue from studies and technology demonstrations.
Cost of Sales
The following table presents cost of sales by segment and other components for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Satellite Solutions |
|
$ |
58,050 |
|
|
$ |
23,778 |
|
|
$ |
34,272 |
|
Earth Observation Solutions |
|
|
677 |
|
|
|
25 |
|
|
|
652 |
|
Share-based compensation expense |
|
|
10,057 |
|
|
|
102 |
|
|
|
9,955 |
|
Cost of Sales |
|
$ |
68,784 |
|
|
$ |
23,905 |
|
|
$ |
44,879 |
|
The increase in cost of sales was primarily due to (i) an increase of $32.0 million in labor, materials, third-party services, overhead, and other direct costs incurred in satisfying our customer contracts in the Satellite Solutions segment, (ii) an increase in share-based compensation expense due to the ongoing recognition and a $2.1 million non-recurring cumulative recognition of share-based compensation expense associated with awards that included a liquidity event, such as the Tailwind Two Merger in March 2022, as a vesting condition, (iii) an increase of $1.9 million related to reserves for anticipated losses on contracts, and (iv) an increase of $906 thousand related to our ground station network.
During the nine months ended September 30, 2022, we adjusted the EAC on certain firm fixed price contracts as costs incurred exceeded amounts previously estimated, which had an estimated $4.8 million negative impact to cost of sales in the Satellite Solutions segment. While we believe our estimates as of September 30, 2022 consider all relevant and known information, such as supply chain and related production challenges, additional adjustments to our EACs could occur and have an impact on our cost of sales in future reporting periods.
The Earth Observation Solutions segment was still in its developmental stage during the reporting period and generated limited revenue from studies and technology demonstrations, incurring limited cost of sales.
Selling, General, and Administrative Expenses
The following table presents selling, general, and administrative expenses by segment and other components for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Satellite Solutions |
|
$ |
20,927 |
|
|
$ |
6,594 |
|
|
$ |
14,333 |
|
Earth Observation Solutions |
|
|
2,054 |
|
|
|
2,961 |
|
|
|
(907 |
) |
Corporate and other |
|
|
31,005 |
|
|
|
20,596 |
|
|
|
10,409 |
|
Share-based compensation expense |
|
|
30,297 |
|
|
|
429 |
|
|
|
29,868 |
|
Selling, general, and administrative expenses |
|
$ |
84,283 |
|
|
$ |
30,580 |
|
|
$ |
53,703 |
|
44
The increase in selling, general, and administrative expenses was primarily due to the following:
•an increase in share-based compensation expense due to the ongoing recognition and a $15.1 million non-recurring cumulative recognition of share-based compensation expense associated with awards that included a liquidity event, such as the Tailwind Two Merger in March 2022, as a vesting condition;
•an increase in expenses, net of overhead allocations, of $7.3 million in the Satellite Solutions segment due to incremental headcount, additional leases for manufacturing facilities and office space, incremental technology solutions utilized, and other selling, general, and administrative expenses as part of the Company's growth initiatives;
•an increase in research and development activities, exclusive of allocated share-based compensation and depreciation, in the Satellite Solutions segment of $7.0 million related to the development of new and improved future customer offerings;
•an increase in corporate salaries and wages of $4.5 million in connection with the Company’s expansion of corporate functions;
•an increase in corporate insurance expense of $2.7 million as a result of the Company becoming a public company in March 2022;
•an increase in corporate technology costs of $1.5 million due to an increase in overall headcount and solutions utilized;
•an increase in corporate facility costs of $1.4 million due to leases for office locations that commenced throughout 2021;
•an increase in corporate travel and marketing expenses of $745 thousand; and
•an increase of $552 thousand in depreciation and amortization expense in the Earth Observation Solutions segment due to a company-owned satellite that was placed in service in 2021.
The increase in selling, general, and administrative expenses was partially offset due to the following:
•a decrease in corporate accounting, legal, and other professional fees of $1.0 million primarily driven by a decrease in non-recurring costs of becoming a public company, partially offset by an increase in recurring costs of being a public company; and
•a reduction in salaries and wages of $932 thousand in the Earth Observation Solutions as a result of the prioritization of resources to focus on U.S. Government programs during the nine months ended September 30, 2022.
Interest Expense, net
The increase in interest expense, net was due to an increase in amortization related to discount on debt of $6.9 million and an increase in contractual interest of $5.0 million primarily as a result of higher debt balances each due to our financing transactions during 2021 and 2022. These increases were partially offset by an increase in capitalized interest of $991 thousand associated with the development of our Earth observation constellation.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2022, loss on extinguishment of debt totaled $23 million and related to the refinancing and extinguishment of our debt obligations in connection with the Tailwind Two Merger.
During the nine months ended September 30, 2021, loss on extinguishment of debt totaled $68 million and related to a $71 million loss associated with the refinancing of convertible note instruments, partially offset by a $2.6 million gain related to the extinguishment of a loan related to the Paycheck Protection Program.
Change in Fair Value of Warrant and Derivative Liabilities
The change in fair value of warrant and derivative liabilities relates to the periodic fair value remeasurement of liability-classified warrants and derivatives issued in connection with our financing transactions.
During the nine months ended September 30, 2022, the gain on change in fair value was due to a decrease in fair value of $19.3 million related to warrant liabilities subsequent to the Tailwind Two Merger driven by a decrease in the Company’s price per warrant and price
45
share of common stock, partially offset by a net increase in fair value of $17 million related to warrant and derivative instruments that were ultimately settled as part of the Tailwind Two Merger.
During the nine months ended September 30, 2021, the loss on change in fair value was not material.
Other Expense
During the nine months ended September 30, 2022, other expense primarily related to $1.1 million of non-recurring legal and accounting fees expensed in connection with our financing transactions and $1 million of expense associated with the fair value of common stock issued as consideration for the execution of our committed equity facility.
During the nine months ended September 30, 2021, other expense was not material.
Provision for Income Taxes
Provision for income taxes for the nine months ended September 30, 2022 was $58 thousand, resulting in an effective tax rate for the period of 0.0%. We had a minimal effective tax rate as a result of the continued generation of NOLs offset by a full valuation allowance recorded on such NOLs as we determined it is more-likely-than-not that our NOLs will not be utilized. The remainder of the provision for income taxes was primarily related to taxable income from our foreign subsidiary.
Provision for income taxes for the nine months ended September 30, 2021 was $22 thousand, resulting in an effective tax rate for the period of 0.0%. We had a minimal effective tax rate as a result of the continued generation of NOLs offset by a full valuation allowance recorded on such NOLs as we determined it is more-likely-than-not that our NOLs will not be utilized. The remainder of the provision for income taxes was related to our foreign subsidiary as well as a nominal income tax refund received during the period.
NON-GAAP MEASURES
To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose the non-GAAP financial measures Adjusted Gross Profit and Adjusted EBITDA. These non-GAAP measures may be different from non-GAAP measures made by other companies. These measures may exclude items that are significant in understanding and assessing our financial results. Therefore, these measures should not be considered in isolation or as an alternative to net income or other measures of financial performance or liquidity under GAAP.
Adjusted Gross Profit
We define Adjusted Gross Profit as gross profit or loss adjusted for (i) share-based compensation expense included in cost of sales and (ii) depreciation and amortization included in cost of sales.
We believe that the presentation of Adjusted Gross Profit is appropriate to provide additional information to investors about our gross profit adjusted for certain non-cash items. Further, we believe Adjusted Gross Profit provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures.
There are material limitations to using Adjusted Gross Profit. Adjusted Gross Profit does not take into account all items which directly affect our gross profit or loss. These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted Gross Profit in conjunction with gross profit or loss as calculated in accordance with GAAP.
The following table reconciles Adjusted Gross Profit to gross profit or loss (the most comparable GAAP measure) for the three months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Gross profit |
|
$ |
37 |
|
|
$ |
1,487 |
|
|
$ |
(1,450 |
) |
Share-based compensation expense |
|
|
2,715 |
|
|
|
68 |
|
|
|
2,647 |
|
Depreciation and amortization |
|
|
486 |
|
|
|
518 |
|
|
|
(32 |
) |
Adjusted gross profit |
|
$ |
3,238 |
|
|
$ |
2,073 |
|
|
$ |
1,165 |
|
46
The increase in Adjusted Gross Profit was largely due to the continued and increased level of progress made in satisfying our customer contracts and reflects the ongoing favorable impact from significant contract wins and modifications in recent periods, partially offset by adjustments to the EAC on certain firm fixed price contracts as costs incurred exceeded amounts previously estimated, which had an estimated $2 million negative impact to Adjusted Gross Profit. While we believe our estimates as of September 30, 2022 consider all relevant and known information, such as supply chain and related production challenges, additional adjustments to our EACs could occur and have an impact on our Adjusted Gross Profit in future reporting periods.
The following table reconciles Adjusted Gross Profit to gross profit or loss (the most comparable GAAP measure) for the nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Gross (loss) profit |
|
$ |
(6,470 |
) |
|
$ |
6,253 |
|
|
$ |
(12,723 |
) |
Share-based compensation expense |
|
|
10,057 |
|
|
|
102 |
|
|
|
9,955 |
|
Depreciation and amortization |
|
|
1,529 |
|
|
|
1,415 |
|
|
|
114 |
|
Adjusted gross profit |
|
$ |
5,116 |
|
|
$ |
7,770 |
|
|
$ |
(2,654 |
) |
The decrease in Adjusted Gross Profit was largely due to adjustments to the EAC on certain firm fixed price contracts as costs incurred exceeded amounts previously estimated, which had an estimated $9.8 million negative impact to Adjusted Gross Profit, partially offset by the continued and increased level of progress made in satisfying our customer contracts and reflects the ongoing favorable impact from significant contract wins and modifications in recent periods. While we believe our estimates as of September 30, 2022 consider all relevant and known information, such as supply chain and related production challenges, additional adjustments to our EACs could occur and have an impact on our Adjusted Gross Profit in future reporting periods.
Adjusted EBITDA
We define Adjusted EBITDA as net income or loss adjusted for (i) interest, (ii) taxes, (iii) depreciation and amortization, (iv) share-based compensation expense, (v) loss on extinguishment of debt, (vi) change in fair value of warrant and derivative liabilities, and (vii) other non-recurring and/or non-cash items.
We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue at the same level in the future, as well as other items that are not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures.
There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income or loss. These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP.
The following table reconciles Adjusted EBITDA to net loss (the most comparable GAAP measure) for the three months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Net loss |
|
$ |
(27,355 |
) |
|
$ |
(12,365 |
) |
|
$ |
(14,990 |
) |
Interest expense, net |
|
|
7,147 |
|
|
|
2,630 |
|
|
|
4,517 |
|
Provision for income taxes |
|
|
54 |
|
|
|
- |
|
|
|
54 |
|
Depreciation and amortization |
|
|
911 |
|
|
|
885 |
|
|
|
26 |
|
Share-based compensation expense |
|
|
9,204 |
|
|
|
177 |
|
|
|
9,027 |
|
Change in fair value of warrant and derivative liabilities |
|
|
(6,001 |
) |
|
|
(205 |
) |
|
|
(5,796 |
) |
Other, net(a) |
|
|
2,134 |
|
|
|
200 |
|
|
|
1,934 |
|
Adjusted EBITDA |
|
$ |
(13,906 |
) |
|
$ |
(8,678 |
) |
|
$ |
(5,228 |
) |
(a) - Represents other expense and other charges and items. Non-recurring legal and accounting fees related to our transition to a public company and financing transactions are included herein.
47
The decrease in Adjusted EBITDA was primarily due to an increase in selling, general, and administrative expenses related to salaries and wages, research and development, facility expenses, and other operating costs as a result of our growth initiatives, partially offset by an increase in gross profit. Refer to the discussions above under “Results of Operations” for further details.
The following table reconciles Adjusted EBITDA to net loss (the most comparable GAAP measure) for the nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Net loss |
|
$ |
(131,001 |
) |
|
$ |
(98,729 |
) |
|
$ |
(32,272 |
) |
Interest expense, net |
|
|
17,007 |
|
|
|
6,174 |
|
|
|
10,833 |
|
Provision for income taxes |
|
|
58 |
|
|
|
22 |
|
|
|
36 |
|
Depreciation and amortization |
|
|
2,612 |
|
|
|
2,217 |
|
|
|
395 |
|
Share-based compensation expense |
|
|
40,354 |
|
|
|
531 |
|
|
|
39,823 |
|
Loss on extinguishment of debt |
|
|
23,141 |
|
|
|
68,102 |
|
|
|
(44,961 |
) |
Change in fair value of warrant and derivative liabilities |
|
|
(2,325 |
) |
|
|
76 |
|
|
|
(2,401 |
) |
Other, net(a) |
|
|
6,755 |
|
|
|
6,754 |
|
|
|
1 |
|
Adjusted EBITDA |
|
$ |
(43,399 |
) |
|
$ |
(14,853 |
) |
|
$ |
(28,546 |
) |
(a) - Represents other expense and other charges and items. Non-recurring legal and accounting fees related to our transition to a public company and financing transactions are included herein.
The decrease in Adjusted EBITDA was primarily due to a decrease in gross profit and an increase in selling, general, and administrative expenses related to salaries and wages, research and development, facility expenses, legal and accounting fees, and other operating costs as a result of our growth initiatives. Refer to the discussions above under “Results of Operations” for further details.
KEY PERFORMANCE INDICATORS
We view growth in backlog as a key measure of our business growth. Backlog represents the estimated dollar value of executed contracts and exercised contract options, including both funded (firm orders for which funding is authorized and appropriated) and unfunded portions of such contracts, for which work has not been performed (also known as the remaining performance obligations on a contract). Order backlog excludes contracts in which we recognize revenue in proportion to the amount we have the right to invoice for services performed and does not include unexercised contract options and potential orders under indefinite delivery/indefinite quantity contracts. Although backlog reflects business associated with contracts that are considered to be firm, terminations, amendments or contract cancellations may occur, which could result in a reduction in our total backlog.
Our backlog totaled $198.0 million and $73.9 million as of September 30, 2022 and December 31, 2021, respectively. The increase in backlog was primarily due to a new award to build 42 satellites for the U.S. Space Development Agency's ("SDA") Tranche 1 of the Transport Layer. The award is in addition to the 10 satellites we are building for the SDA's Tranche 0 of the Transport Layer.
As of September 30, 2022, programs associated with Lockheed Martin represented approximately 82% of the Company’s backlog.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We have historically funded our operations primarily through the issuance of debt and equity securities. Our short-term liquidity requirements include initiatives related to (i) expansion of existing facilities and upgrade of equipment in order to increase operational capacity, (ii) recruitment of additional employees to meet operational needs, (iii) upgrade of information technology, (iv) research and development initiatives, and (v) continued buildout of corporate functions and public company compliance requirements, inclusive of accounting and legal fees. Our long-term liquidity requirements include initiatives related to (i) design and development of payload solutions, (ii) expansion of advanced manufacturing and assembly facilities and capabilities, and (iii) development of new satellite components, infrastructure, and software. The timing and amount of spend on these initiatives may be materially delayed, reduced, and cancelled as a result of the level of our financial resources and available financing opportunities. Additionally, our liquidity requirements include the repayment of debt and other payment obligations incurred as a result of the Tailwind Two Merger. Our sources of liquidity include cash generated from operations, potential proceeds from the exercise of warrants, and potential proceeds from the issuance of
48
debt and/or equity securities, inclusive of sales of common stock through our Committed Equity Facility (as defined below) and the issuance of the Convertible Notes due 2027 (as defined below).
Certain warrants issued to affiliates of Francisco Partners provide the right to require us to exchange such warrants (in full but not in part) for $25 million in cash on March 25, 2025. If such warrant holders exercise their exchange right on March 25, 2025, then it will require us to make a $25 million cash payment, which would reduce the amount of cash available at such time to fund our operations and execute our business plan, and the amount of such future cash payment could have a material adverse effect on our financial position and cash flows at such time. Further, in the event such warrant holders exercise their right and we are unable to make the cash redemption payment on March 25, 2025, such failure for us to pay would constitute an event of default under our outstanding debt instruments, which, if not cured or waived could result in the acceleration of all outstanding indebtedness under such debt instruments. Other than such warrants, no investors have the right to sell back shares or other securities to us or have any forward purchase agreements with us.
We believe that there are no assurances that holders of our warrants will elect to exercise for cash any or all of such warrants and that the likelihood that warrant holders will exercise their warrants is dependent upon the market price of our common stock. As of November 7, 2022, the market price of our common stock is less than the exercise price for all warrants. Furthermore, the initial resale of our common stock by existing shareholders could result in a significant decline in the public trading price of our common stock. These sales, or the possibility that these sales may occur may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. We believe that based on the current trading prices of our common stock it is unlikely that we will receive cash proceeds from the exercise of warrants in the next twelve months. Accordingly, we have not relied upon, and are not dependent upon, the receipt of the cash proceeds from the exercise of warrants as a source of liquidity to fund our operations in the next twelve months. The exercise of any or all of the warrants outstanding as of September 30, 2022 for cash would result in an increase in our liquidity, with an aggregate maximum amount of proceeds to be received of approximately $332.5 million, excluding the 2027 Warrants (as defined below).
As of September 30, 2022, we had $35.8 million of cash and cash equivalents, which included $2.1 million of cash and cash equivalents held by our foreign subsidiary. We are not presently aware of any restrictions on the repatriation of our foreign cash and cash equivalents; however, the earnings of our foreign subsidiary are essentially considered permanently invested in the foreign subsidiary. If these funds were needed to fund operations or satisfy obligations in the U.S., they could be repatriated and their repatriation into the U.S. may cause us to incur additional foreign withholding taxes. We do not currently intend to repatriate these earnings.
In order to proceed with our strategic business plan, we may need to raise additional funds in the future through the issuance of additional debt, equity (including additional equity through our Committed Equity Facility, as defined below), or other commercial arrangements, which may not be available to us when needed or on terms that we deem to be favorable. To the extent we raise additional capital through the sale of equity or convertible securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common shareholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we are unable to obtain sufficient financial resources, our business, financial condition and results of operations may be materially and adversely affected. We may be required to delay, limit, reduce or terminate parts of our strategic business plan or future commercialization efforts. There can be no assurance that we will be able to obtain financing on acceptable terms.
Furthermore, our ability to meet our debt service obligations and other capital requirements depends on our future operating performance, which is subject to future general economic, financial, business, competitive, legislative, regulatory, and other conditions,
49
many of which are beyond our control. Changes in our operating plans, material changes in anticipated sales, increased expenses, acquisitions, or other events may cause us to seek equity and/or debt financing in future periods.
Long-term Debt
As of September 30, 2022, long-term debt was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
|
|
Issued |
|
Maturity |
|
Interest Rate |
|
Interest Payable |
|
|
September 30, 2022 |
|
Francisco Partners Facility |
|
|
November 2021 |
|
April 2026 |
|
9.25% |
|
Quarterly |
|
|
$ |
120,023 |
|
Senior Secured Notes due 2026(1) |
|
|
March 2021 |
|
April 2026 |
|
9.25% and 11.25% |
|
Quarterly |
|
|
|
56,581 |
|
PIPE Investment Obligation |
|
|
March 2022 |
|
December 2025 |
|
N/A |
|
N/A |
|
|
|
24,375 |
|
Equipment Financings(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895 |
|
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
432 |
|
Unamortized deferred issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,989 |
) |
Unamortized discount on debt |
|
|
|
|
|
|
|
|
|
|
|
|
(93,245 |
) |
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
107,072 |
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
7,735 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
$ |
99,337 |
|
(1) - Includes the Lockheed Martin Rollover Debt and Beach Point Rollover Debt, each as defined below.
(2) - Consists of equipment financing debt agreements with maturities through July 2028, annual interest rates ranging from 6.25% to 6.50%, and requiring monthly payments of interest and principal.
N/A - Not meaningful or applicable.
Significant changes in our long-term debt during the nine months ended September 30, 2022 were as follows:
Francisco Partners Facility
On March 9, 2022, we amended the note purchase agreement (the “FP Note Purchase Agreement”) governing the issuance and sale of senior secured notes due on November 24, 2026 (the “Francisco Partners Facility”) to, among other things, (i) increase the principal amount of senior secured notes that may be issued under the FP Note Purchase Agreement to up to $154 million, (ii) increase the second tranche of the Francisco Partners Facility (the “Delayed Draw Notes”) to $24 million of senior secured notes, and (iii) accelerate the funding of the Delayed Draw Notes. The Delayed Draw Notes were issued net of a $4 million original issue discount and resulted in proceeds received of $20 million, before allocations for accounting purposes.
On March 25, 2022, we further amended the FP Note Purchase Agreement to, among other things, (i) decrease the principal amount of senior secured notes that may be issued under the Francisco Partners Facility to up to $119 million, (ii) amend certain existing covenants, as described below, (iii) add an additional covenant, as described below, (iv) revise the maturity date to April 1, 2026, and (v) change the timing of quarterly interest payments to May 15th, August 15th, November 15th and February 15th of each calendar year, with the first such interest payment required to be made on May 15, 2022. As consideration for the amendment on March 25, 2022, Francisco Partners received an additional 1.9 million shares of Terran Orbital Corporation's common stock in connection with the Tailwind Two Merger. Upon closing of the Tailwind Two Merger, we issued $65 million of senior secured notes as the third tranche of the Francisco Partners Facility (the “Conditional Notes”). The Conditional Notes were issued net of a $5 million original issue discount and resulted in proceeds received of $60 million, before allocations for accounting purposes.
As part of the amendment on March 25, 2022, the liquidity maintenance financial covenant of the Francisco Partners Facility was modified to require that as of the last day of each fiscal quarter, we must have an aggregate amount of unrestricted cash and cash equivalents of at least (i) $20 million in the case of the fiscal quarters ending March 31, 2022, June 30, 2022 and September 30, 2022, (ii) $10 million in the case of the fiscal quarter ending December 31, 2022 and (iii) $20 million plus 15% of certain aggregate funded indebtedness of the Company in the case of each fiscal quarter thereafter. In addition, a new covenant was added requiring us to at least break even on an EBITDA basis (as defined in the FP Note Purchase Agreement) by December 31, 2023, subject to certain extensions.
Senior Secured Notes due 2026
On March 25, 2022, the senior secured notes issued on March 8, 2021 and due April 1, 2026 (the "Senior Secured Notes due 2026") were impacted as described below.
50
In connection with the PIPE Investment, two holders of the Senior Secured Notes due 2026 agreed to, in substance, exchange the outstanding amount of principal and interest for common stock of Terran Orbital Corporation with any residual amounts settled in cash, resulting in a loss on extinguishment of debt of $727 thousand. The consideration transferred as part of the extinguishment included common stock with a fair value of $4.6 million and a cash payment of $703 thousand, of which $293 thousand represents the repayment of debt and $410 thousand represents the payment of interest in the condensed consolidated statements of cash flows.
On March 25, 2022, the note purchase agreement governing the Senior Secured Notes due 2026 was amended to, among other things, (i) set the amount of senior secured notes that will remain outstanding with Lockheed Martin Corporation ("Lockheed Martin") subsequent to the Tailwind Two Merger to $25 million (the "Lockheed Martin Rollover Debt"), (ii) increase and set the amount of senior secured notes that will remain outstanding with Beach Point Capital ("Beach Point") subsequent to the Tailwind Two Merger to $31.3 million (the "Beach Point Rollover Debt"), (iii) set the terms of the Lockheed Martin Rollover Debt and the Beach Point Rollover Debt to have substantially similar terms as the terms of the Francisco Partners Facility, excluding call protection and the Beach Point Rollover Debt bearing interest at 11.25% (9.25% of which is payable in cash and 2.0% of which is payable in kind), and (iv) cause the Beach Point Rollover Debt to be subordinated in right of payment to the Francisco Partners Facility.
In connection with the Tailwind Two Merger, we partially extinguished Lockheed Martin's portion of the Senior Secured Notes due 2026, resulting in a gain on extinguishment of debt of $1.8 million, with the remainder representing the Lockheed Martin Rollover Debt. The consideration transferred as part of the partial extinguishment included a cash payment of $30.8 million, of which $25 million represents the repayment of debt and $5.8 million represents the payment of interest in the condensed consolidated statements of cash flows.
In connection with the PIPE Investment and the amendment on March 25, 2022, Beach Point agreed to, in substance, exchange a portion of the outstanding amount of principal and interest for common stock of Terran Orbital Corporation with the remainder representing the Beach Point Rollover Debt. As consideration for the amendment on March 25, 2022, Beach Point received an additional 2.4 million shares of Terran Orbital Corporation's common stock as part of the Tailwind Two Merger. Accordingly, Beach Point's portion of the Senior Secured Notes due 2026 was deemed to have been extinguished for the issuance of the Beach Point Rollover Debt and common stock of Terran Orbital Corporation, resulting in a loss on extinguishment of debt of $24.2 million.
PIPE Investment Obligation
An affiliate of a director and shareholder of the Terran Orbital Corporation invested $30 million, before allocations for accounting purposes, as part of the PIPE Investment (the "Insider PIPE Investment"). The subscription agreement for the Insider PIPE Investment included a provision that obligates us to pay the affiliate a quarterly fee of $1.875 million for sixteen quarters beginning with the period ending March 31, 2022 (the "PIPE Investment Obligation"). The first four quarterly payments are to be paid in cash and the remaining payments are to be paid, at our option, in cash or common stock of Terran Orbital Corporation, subject to subordination to and compliance with our debt facilities.
Subsequent Event: Convertible Notes due 2027
On October 31, 2022, we entered into a convertible note and warrant purchase agreement (the “Convertible Note and Warrant Purchase Agreement”) for the issuance and sale of second lien secured convertible notes in an aggregate principal amount of $100 million to Lockheed Martin (the “Convertible Notes due 2027”). The Convertible Notes due 2027 will mature on October 31, 2027 and bear interest at a rate of 10% per annum. Interest is payable quarterly on May 15th, August 15th, November 15th and February 15th of each calendar year, with the first such interest payment required to be made on February 15, 2023, and may be paid in cash or in kind at the election of the Company subject to the satisfaction of certain conditions. We intend to use the net proceeds from this transaction for general corporate purposes, including acquiring additional satellite assembly space, increasing our module production and for operating and working capital needs related to the manufacture and sale of small satellites to existing government, civil, and commercial customers, including Lockheed Martin.
The Convertible Notes due 2027 are convertible by their holders at any time prior to maturity into the number of shares of our common stock on the date of conversion obtained by dividing (i) the outstanding principal amount of the Convertible Notes due 2027, plus any accrued but unpaid interest, by (ii) a conversion price equal to $2.898 per share, representing the average of the closing price of our common stock from October 24, 2022 through October 28, 2022 plus a 15% premium. The conversion price is subject to anti-dilution adjustments customary for convertible debt securities. We have agreed to use reasonable best efforts to obtain shareholder approval for the issuance of shares of common stock issuable upon conversion of the Convertible Notes due 2027 and the exercise of the related 2027 Warrants (as defined below) by the holders that would exceed 30% of the common stock then outstanding at our next annual meeting; provided that, if such approval is not obtained and the holders seek to convert Convertible Notes due 2027 or exercise any related 2027 Warrants, we may settle the excess above any limit on said conversion and exercise of the warrants set by applicable stock exchange
51
rules in cash, as permitted by our Existing Debt Agreements (as defined below). Shares of common stock issuable upon conversion of the Convertible Notes due 2027 are subject to customary registration rights.
On or after May 1, 2024, we may redeem, at our option, for cash, all or any portion of the Convertible Notes due 2027, at a redemption price equal to 100% of then applicable principal amount to be redeemed, plus accrued and unpaid interest, subject to certain conditions. Upon the occurrence of a fundamental change, including certain change of control transactions involving us, holders may require us to repurchase all or a portion of their Convertible Notes due 2027 at a repurchase price equal to 100% of then applicable principal amount to be repurchased, plus accrued and unpaid interest, subject to the satisfaction of certain conditions.
The Convertible Notes due 2027 are secured by a second lien on substantially all of our assets and are guaranteed, jointly and severally, by each of our wholly-owned domestic subsidiaries.
The Convertible Notes due 2027 include financial covenants that require that as of the last day of each fiscal quarter, we must have an aggregate amount of unrestricted cash and cash equivalents of at least (i) $10 million in the case of the fiscal quarter ending December 31, 2022 and (ii) $20 million plus 15% of certain of our aggregate funded indebtedness in the case of each fiscal quarter thereafter. In addition, we are required to at least break even on an EBITDA basis (as defined in the Convertible Note and Warrant Purchase Agreement) by June 30, 2024, subject to certain extensions.
In connection with the Convertible Note and Warrant Purchase Agreement, we entered into amendments to the FP Note Purchase Agreement and the note purchase agreements governing the Lockheed Martin Rollover Debt and Beach Point Rollover Debt (collectively, the “Existing Debt Agreements”), to among other things, provide consent for us to enter into the Convertible Note and Warrant Purchase Agreement as well as a First Lien/Second Lien Intercreditor Agreement to govern the relative priorities of the security interests and certain other matters related to the Existing Debt Agreements. In addition, these amendments made certain changes to our Existing Debt Agreements to conform them to the language of the Convertible Note and Warrant Purchase Agreement, including amending the existing financial covenants to require the Company to at least break even on an EBITDA basis (as defined in the Existing Debt Agreements) by June 30, 2024, subject to certain extensions.
Warrants and Derivatives
As of September 30, 2022, our liability-classified warrants were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share amounts) |
|
Number of Issuable Shares as of September 30, 2022 |
|
|
Issuance |
|
Maturity |
|
Exercise Price |
|
|
September 30, 2022 |
|
Public Warrants |
|
|
11,499,960 |
|
|
March 2021 |
|
March 2027 |
|
$ |
11.50 |
|
|
$ |
2,300 |
|
Private Placement Warrants |
|
|
7,800,000 |
|
|
March 2021 |
|
March 2027 |
|
$ |
11.50 |
|
|
|
1,560 |
|
FP Combination Warrants |
|
|
8,291,704 |
|
|
March 2022 |
|
March 2027 |
|
$ |
10.00 |
|
|
|
17,578 |
|
Warrant liabilities |
|
|
27,591,664 |
|
|
|
|
|
|
|
|
|
$ |
21,438 |
|
Significant changes in our warrants and derivative instruments during the nine months ended September 30, 2022 were as follows:
Inducement Warrants
As part of the Tailwind Two Merger, all of the warrants issued by Legacy Terran Orbital in connection with the issuance of the Senior Secured Notes due 2026 (the "Inducement Warrants") were ultimately net settled into approximately 695 thousand shares of Terran Orbital Corporation’s common stock.
We recorded a loss on change in fair value of the Inducement Warrants of $2.0 million during the nine months ended September 30, 2022.
Francisco Partners Warrants and Derivatives
As part of the Francisco Partners Facility, we issued warrants to Francisco Partners in November 2021 to purchase 1.5% of the fully diluted shares of Legacy Terran Orbital’s common stock (the "FP Pre-Combination Warrants"). The FP Pre-Combination Warrants terminated unexercised upon consummation of the Tailwind Two Merger pursuant to their contractual provisions.
52
We recorded a gain on change in fair value of the FP Pre-Combination Warrants of $2.5 million during the nine months ended September 30, 2022.
As additional consideration for the Francisco Partners Facility in November 2021, we committed to the issuance of (i) an equity grant package equal to 1.5% of the fully diluted shares of Terran Orbital Corporation’s common stock outstanding as of immediately following the closing of the Tailwind Two Merger, plus an additional one million shares of Terran Orbital Corporation's common stock (the “FP Combination Equity”), and (ii) warrants to purchase 5.0% of the Terran Orbital Corporation's common stock on a fully diluted basis as of immediately following the closing of the Tailwind Two Merger at a strike price of $10.00 per share, redeemable at the option of Francisco Partners for $25 million on the third anniversary of the closing of the Tailwind Two Merger, and expiring on March 25, 2027 (the “FP Combination Warrants”).
The FP Combination Equity and the FP Combination Warrants were contingently issuable upon closing of the Tailwind Two Merger. Upon consummation of the Tailwind Two Merger, approximately 3.3 million shares of Terran Orbital Corporation's common stock were issued related to the FP Combination Equity. In addition, approximately 8.3 million warrants were issued related to the FP Combination Warrants.
We recorded a loss on change in fair value of the FP Combination Equity of $12.3 million during the nine months ended September 30, 2022. We recorded a gain on change in fair value of the FP Combination Warrants of $404 thousand and $10.1 million during the three and nine months ended September 30, 2022, respectively.
Pre-Combination and Combination Warrants and Derivatives
Upon initial funding of the Francisco Partners Facility and in connection with the amendment to the Senior Secured Notes due 2026 note purchase agreement in November 2021, we issued warrants to each of Lockheed Martin and Beach Point to purchase 0.25% of the fully diluted shares of Legacy Terran Orbital’s common stock on the same valuation and terms and conditions as the FP Pre-Combination Warrants (the “Pre-Combination Warrants”). The Pre-Combination Warrants terminated unexercised upon consummation of the Tailwind Two Merger pursuant to their contractual provisions.
We recorded a gain on change in fair value of the Pre-Combination Warrants of $849 thousand during the nine months ended September 30, 2022.
In November 2021, we committed to issue to each of Lockheed Martin and Beach Point (i) an equity grant package equal to 0.25% of the fully diluted shares of Terran Orbital Corporation’s common stock outstanding as of immediately following the closing of the Tailwind Two Merger (the “Combination Equity”), and (ii) warrants to purchase 0.83333% of Terran Orbital Corporation's common stock on a fully diluted basis as of immediately following the closing of the Tailwind Two Merger at a strike price of $10.00 per share expiring on March 25, 2027 (the “Combination Warrants”).
The Combination Equity and the Combination Warrants were contingently issuable upon closing of the Tailwind Two Merger. Upon consummation of the Tailwind Two Merger, approximately 774 thousand shares of Terran Orbital Corporation's common stock were issued related to the Combination Equity. In addition, approximately 2.8 million warrants were issued related to the Combination Warrants. Subsequent to the Tailwind Two Merger, the Combination Warrants now represent equity-classified financial instruments.
We recorded a loss on change in fair value of the Combination Equity of $2.8 million and a loss on change in fair value of the Combination Warrants of $3.4 million during the nine months ended September 30, 2022, respectively.
Public Warrants
As part of the Tailwind Two Merger, we assumed outstanding warrants giving the holders the right to purchase an aggregate of 11.5 million shares of the Terran Orbital Corporation's common stock for $11.50 per share (the "Public Warrants"). The Public Warrants became exercisable on April 24, 2022, 30 days after the completion of the Tailwind Two Merger, and will expire five years from the completion of the Tailwind Two Merger.
We will not be obligated to deliver any shares of common stock pursuant to the exercise of a Public Warrant and will have no obligation to settle such warrant exercise unless a registration statement with respect to the shares underlying the warrants is then effective and a related prospectus is current, unless a valid exemption from registration is available. On April 22, 2022, we filed the Form S-1 with the SEC for, among other transactions, the registration of the shares of common stock issuable by us upon exercise of the Public Warrants. The Form S-1, as amended, was declared effective by the SEC on June 23, 2022. We will use our commercially reasonable efforts to maintain the effectiveness of the Form S-1, and a current prospectus relating thereto, until the expiration or redemption of the Public Warrants in accordance with the provisions of the warrant agreement. If the effectiveness of the Form S-1 or another registration
53
statement covering the issuance of the shares of common stock issuable upon exercise of the Public Warrants is not maintained, holders may exercise such Public Warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act of 1933, as amended, or another exemption. No Public Warrant will be exercisable for cash or on a cashless basis and we will not be obligated to issue shares upon exercise of a Public Warrant unless the underlying shares have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants.
Once the Public Warrants become exercisable, we may redeem the outstanding Public Warrants when the price per share of the Terran Orbital Corporation’s common stock equals or exceeds $18.00 as follows:
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
•if, and only if, the closing price of the Terran Orbital Corporation’s shares of common stock equals or exceeds $18.00 per share (as adjusted) for any 20 trading days within a 30-trading day period ending three trading days before we send the notice of redemption to the warrant holders.
In addition, we may redeem the outstanding Public Warrants when the price per share of Terran Orbital Corporation’s common stock equals or exceeds $10.00 as follows:
•in whole and not in part;
•at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption; provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares determined based on the redemption date and the fair market value of Terran Orbital Corporation’s shares of common stock;
•if, and only if, the closing price of the Terran Orbital Corporation’s shares of common stock equals or exceeds $10.00 per share (as adjusted) for any 20 trading days within the 30-trading day period ending three trading days before we send the notice of redemption of the warrant holders; and
•if the closing price of Terran Orbital Corporation’s shares of common stock for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which we send the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted), the Private Placement Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above.
If and when the Public Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If we call the Public Warrants for redemption, as described above, we will have the option to require any holder that wishes to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of common shares issuable upon exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, the Public Warrants will not be adjusted for issuances of common shares at a price below its exercise price. Additionally, in no event will we be required to net cash settle the Public Warrants.
We recorded a gain on change in fair value of the Public Warrants of $3.3 million and $5.5 million during the three and nine months ended September 30, 2022, respectively.
Private Placement Warrants
As part of the Tailwind Two Merger, we assumed outstanding warrants that were previously issued in a private placement and that give the holders thereof the right to purchase an aggregate of 7.8 million shares of Terran Orbital Corporation's common stock for $11.50 per share (the "Private Placement Warrants"). The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the common shares issuable upon their exercise will not be transferable, assignable or salable until 30 days after the completion of the Tailwind Two Merger. Additionally, the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by such holders on the same basis as the Public Warrants. During April 2022, we filed a registration statement for the registration of the Private Placement Warrants and the shares of common stock issuable upon exercise of the Private Placement Warrants., which was declared effective by the SEC on June 23, 2022.
54
We recorded a gain on change in fair value of the Private Placement Warrants of $2.3 million and $3.7 million during the three and nine months ended September 30, 2022, respectively.
Detachable Warrants
As part of the Tailwind Two Merger, all of the warrants issued by Legacy Terran Orbital in connection with the extinguishment of convertible notes (the "Detachable Warrants") were ultimately net settled into approximately 22.3 million shares of the Terran Orbital Corporation’s common stock.
Subsequent Event: 2027 Warrants
In connection with the Convertible Note and Warrant Purchase Agreement, we issued warrants to purchase 17,253,279 shares of our common stock at an exercise price of $2.898 per share, representing the average of the closing price of our common stock from October 24, 2022 through October 28, 2022 plus a 15% premium, and expiring five years after the issuance date to Lockheed Martin (the “2027 Warrants”). Shares of common stock issuable upon exercise of the 2027 Warrants are subject to customary registration rights.
Committed Equity Facility
On July 5, 2022, we entered into a common stock purchase agreement (the “Committed Equity Facility”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (”B. Riley”). Pursuant to the Committed Equity Facility, we have the right, but not the obligation, subject to certain conditions, to sell to B. Riley over a 24-month period up to the lesser of (i) $100 million of newly issued shares of our common stock and (ii) 27,500,000 shares of our common stock, which represents approximately 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Committed Equity Facility, unless we obtain shareholder approval to issue excess shares. In addition, we may not issue or sell any shares of common stock to B. Riley under the Committed Equity Facility that would result in B. Riley and its affiliates beneficially owning more than 4.99% of our outstanding shares of common stock. Pursuant to the Registration Rights Agreement, we filed a registration statement on Form S-1 with the SEC on July 8, 2022, registering the resale by B. Riley of up to 27,714,791 shares of common stock to be issued by us to B. Riley pursuant to the Committed Equity Facility. Such resale registration statement was declared effective by the SEC on July 15, 2022.
The price per share of common stock sold by us to B. Riley is determined by reference to the volume weighted average price of our common stock as defined within the Committed Equity Facility less a 3% discount, subject to certain limitations and conditions. The total net proceeds that we will receive under the Committed Equity Facility will depend on the frequency and prices at which we sell common stock to B. Riley. We intend to use the net proceeds from the Committed Equity Facility for investment in growth and general corporate purposes.
During the three and nine months ended September 30, 2022, we sold and issued 637,487 shares of common stock to B. Riley under the Committed Equity Facility, including 214,791 shares issued on July 5, 2022 as consideration for B. Riley’s commitment to enter into the Committed Equity Facility, resulting in proceeds received of $1.8 million and $1 million of other expense in the condensed consolidated statements of operations and comprehensive loss. In addition, we expensed third-party costs associated with the Committed Equity Facility of approximately $380 thousand and $773 thousand during the three and nine months ended September 30, 2022, respectively.
As of September 30, 2022, the remaining availability under the Committed Equity Facility was the lesser of 27,077,304 shares of common stock or $98.2 million of proceeds from the sale and issuance of common stock.
Dividends
We intend to retain future earnings, if any, for future operations, expansion, and debt repayment (if any) and there are no current plans to pay any cash dividends for the foreseeable future. In addition, our ability to pay dividends is limited by covenants of our existing and outstanding indebtedness, including the Francisco Partners Facility, and may be limited by covenants of any future indebtedness. There are no current restrictions in the covenants of our existing and outstanding indebtedness on our wholly-owned subsidiaries from
55
distributing earnings in the form of dividends, loans, or advances and through repayment of loans or advances to Terran Orbital Corporation.
Following the Tailwind Two Merger, the Company’s existing and outstanding indebtedness allows for the declaration and payment of dividends or prepayment of junior debt obligations in cash in an amount not to exceed $5 million.
Cash Flow Analysis
The following table is a summary of our cash flow activity for the nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
Net cash used in operating activities |
|
$ |
(54,133 |
) |
|
$ |
(27,886 |
) |
|
$ |
(26,247 |
) |
Net cash used in investing activities |
|
|
(15,013 |
) |
|
|
(10,523 |
) |
|
|
(4,490 |
) |
Net cash provided by financing activities |
|
|
77,678 |
|
|
|
43,729 |
|
|
|
33,949 |
|
Effect of exchange rate fluctuations on cash and cash equivalents |
|
|
(34 |
) |
|
|
(126 |
) |
|
|
92 |
|
Net increase in cash and cash equivalents |
|
$ |
8,498 |
|
|
$ |
5,194 |
|
|
$ |
3,304 |
|
Cash Flows from Operating Activities
The increase in net cash used in operating activities was primarily due to an increase in selling, general, and administrative expenses related to salaries and wages, research and development, facility expenses, legal and accounting fees, and other operating costs as a result of our growth initiatives, cash interest payments of $10.7 million, inclusive of interest paid related to the partial extinguishment of the Senior Secured Notes due 2026, and the buildup of raw materials to minimize the impact of supply chain challenges. The remainder of the activity in net cash used in operating activities is related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings.
Refer to the discussions above under “Results of Operations” for further details.
Cash Flows from Investing Activities
The increase in net cash used in investing activities was primarily due to the expansion of our manufacturing facilities and office space in connection with our growth initiatives as well as the payment of $1.9 million of capitalized interest. These increases were partially offset by a decrease in spending of $2.5 million associated with the development of company-owned satellites as a satellite was placed in service in the second half of 2021, coupled with our prioritization of production capacity for U.S. Government programs.
Cash Flows from Financing Activities
During the nine months ended September 30, 2022, net cash provided by financing activities primarily consisted of $58 million of proceeds received from the Tailwind Two Merger and the PIPE Investment, $42 million of proceeds received allocated to warrant and derivative instruments, $37 million of proceeds received allocated to the issuance of debt, $15 million of proceeds received allocated to the issuance of common stock in relation to our financing transactions, and $2 million of proceeds received related to the issuance of
56
common stock under the Committed Equity Facility. These increases were partially offset by $46 million of payments of issuance costs related to our financing transactions coupled with $31 million related to the repayment of long-term debt.
During the nine months ended September 30, 2021, net cash provided by financing activities primarily consisted of $47.5 million of proceeds received allocated to the issuance of debt and $2.5 million of proceeds received allocated to warrant and derivative instruments. These increases were partially offset by $6.4 million of payments of issuance costs related to our financing transactions.
Other Material Cash Requirements
In addition to debt service requirements on our long-term debt and any payment obligations on our warrants and derivatives, we have certain short-term and long-term cash requirements under operating leases and certain other contractual obligations and commitments.
Operating Leases
Refer to Note 15 "Leases" to the condensed consolidated financial statements for further information regarding our operating leases.
Purchase Commitments
We entered into commercial agreements to purchase $20 million of goods and services over three years from two affiliates of a PIPE investor. These commercial agreements became effective upon the closing of the Tailwind Two Merger. As of September 30, 2022, approximately $18 million of purchase obligations remained outstanding under said commercial agreements.
During the nine months ended September 30, 2022, we entered into a purchase commitment of $22.4 million associated with the procurement of components related to a customer program. As of September 30, 2022, approximately $17.9 million of the commitment was outstanding.
Off-Balance Sheet Arrangements
As of September 30, 2022, we do not have any material off-balance sheet arrangements other than the Combination Warrants, which are described above. Upon closing of the Tailwind Two Merger, the Combination Warrants became both indexed to and classified as equity under U.S. GAAP.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to the “Critical Accounting Policies and Estimates” section of “Terran Orbital's Management's Discussion and Analysis of Financial Condition and Results of Operations” under Exhibit 99.3 in the amendment to the current report on Form 8-K filed with the SEC on March 31, 2022. There were no material changes to these policies and estimates during the nine months ended September 30, 2022.
ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 “Organization and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for further information about recent accounting pronouncements and adoptions.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal securities laws. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements, other than statements of present or historical fact included in this report, regarding Terran Orbital’s future financial performance, as well as Terran Orbital’s business strategy, future operations, financial position, estimated revenues, and losses, projected costs, earning outlooks, prospects, expectations, plans and objectives of management are forward-looking statements. When used in this report, the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements are based on management’s current expectations, forecasts, assumptions, hopes, beliefs, intentions and strategies regarding future events and are based on currently available information as to the outcome and timing of future events. We caution you that these
57
forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to our business.
These forward-looking statements are based on information available as of the date of this report, and current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. There can be no assurance that future developments will be those that have been anticipated. Accordingly, forward-looking statements in this report should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, Terran Orbital’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to:
•expectations regarding our strategies and future financial performance, including our future business plans or objectives, anticipated cost, timing and level of deployment of satellites, prospective performance and commercial opportunities and competitors, the timing of obtaining regulatory approvals, the ability to finance our operations, research and development activities and capital expenditures, reliance on government contracts and a strategic cooperation agreement with a significant customer, retention and expansion of our customer base, product and service offerings, pricing, marketing plans, operating expenses, market trends, revenues, margins, liquidity, cash flows and uses of cash, capital expenditures, and our ability to invest in growth initiatives;
•the ability to implement business plans, forecasts, and other expectations, and to identify and realize additional opportunities;
•anticipated timing, cost, financing, and development of our satellite manufacturing capabilities;
•prospective performance and commercial opportunities and competitors;
•our ability to finance our operations, research and development activities, and capital expenditures;
•our success in retaining or recruiting, or changes required in, our officers, key employees, or directors;
•our expansion plans and opportunities;
•our ability to comply with domestic and foreign regulatory regimes and the timing of obtaining regulatory approvals;
•our ability to finance and invest in growth initiatives;
•our ability to deal appropriately with conflicts of interest in the ordinary course of our business;
•the outcome of any legal proceedings that may be instituted against us and others;
•the ability to maintain the listing of our common stock and the public warrants on the NYSE and the possibility of limited liquidity and trading of such securities;
•geopolitical risk and changes in applicable laws or regulations;
•the possibility that we may be adversely affected by other economic, business, and/or competitive factors;
•that we have identified material weaknesses in our internal control over financial reporting which, if not corrected, could affect the reliability of our condensed consolidated financial statements;
•the possibility that the COVID-19 Pandemic, or another major disease, disrupts our business;
•supply chain disruptions, including delays, increased costs, and supplier quality control challenges; the ability to attract and retain qualified labor and professionals and our reliance on a highly skilled workforce, including technicians, engineers, and other professionals;
•we do not expect to become profitable in the near future and may never achieve our profitability expectations, plus we expect to generate negative cash flow from operations and investments for the foreseeable future;
•our leverage and our ability to service cash debt payments and comply with debt maintenance covenants, including meeting minimum liquidity and operating profit covenants;
58
•limited access to equity and debt capital markets and other funding sources that will be needed to fund operations and make investments in capital-intensive strategic initiatives including expansion and improvement of our manufacturing facilities and development of new lines of business;
•delays and costs associated with our business initiatives, whether due to changes in demand, lack of funding, design changes, or other conditions or circumstances;
•litigation and regulatory enforcement risks, including the diversion of management time and attention and the additional costs and demands on our resources; and
•the other risk factors disclosed in our filings with the SEC from time to time including our Registration Statement on Form S-1 (File No. 333-264447), as amended, which was declared effective by the SEC on June 23, 2022.
These forward-looking statements are based on our current expectations, plans, forecasts, assumptions, and beliefs concerning future developments and their potential effects. There can be no assurance that the future developments affecting us will be those that we have anticipated and we may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. New risk factors and uncertainties may emerge from time to time and it is not possible 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. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results may be materially different from the expectations disclosed in the forward-looking statements we make. All forward-looking statements we make are qualified in their entirety by this cautionary statement. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this report, and we do not assume any obligation to update any forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as required by law.