Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. You should read this discussion and analysis in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. For additional context with which to understand our financial condition and results of operations, see the audited consolidated financial statements and accompanying notes contained therein as of December 31, 2022 and 2021 and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 7, 2023. Certain amounts may not foot due to rounding. Certain information in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements that involve numerous risks and uncertainties, including, but not limited to, those described under the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 7, 2023. We assume no obligation to update any of these forward-looking statements. Actual results may differ materially from those contained in any forward-looking statements.
Overview
Rocket Lab is an end-to-end space company with an established track record of mission success. We deliver reliable launch services, spacecraft design services, spacecraft components, spacecraft manufacturing and other spacecraft and on-orbit management solutions that make it faster, easier and more affordable to access space.
While our business has historically been centered on the development of small-class launch vehicles and the related sale of launch services, we are currently innovating in the areas of medium-class launch vehicles and launch services, space systems design and manufacturing, and on-orbit management solutions. We continue to evaluate opportunities to participate in space data applications and services. Each of these initiatives addresses a critical component of the end-to-end solution and our value proposition for the space economy:
•Launch Services is the design, manufacture, and launch of orbital rockets to deploy payloads to various Earth orbits and interplanetary destinations.
•Space Systems is the design and manufacture of spacecraft, spacecraft components and spacecraft program management services, space data applications and mission operations.
Electron is our orbital small launch vehicle that was designed from the ground up to accommodate a high launch rate business model to meet the growing and dynamic needs of our customers for small launch services. Since its maiden launch in 2017, Electron has become the leading small spacecraft launch vehicle delivering 159 spacecraft to orbit for government and commercial customers across 32 successful missions through March 31, 2023. In 2022, Electron was the second most frequently launched rocket by companies operating in the United States and maintained Rocket Lab as the fourth most frequent launcher globally. Our launch services program has seen us develop many industry-leading innovations, including 3D printed electric turbo-pump rocket engines, fully carbon composite first stage fuel tanks, a private orbital launch complex, a rocket stage that can be configured to convert into a highly capable spacecraft on orbit, and the potential ability to successfully recover a stage from space, providing a path to reusability.
In March 2021, we announced plans to develop our reusable-ready medium-capacity Neutron launch vehicle which will increase the payload capacity of our space launch vehicles to approximately 15,000 kg for expendable launches to low Earth orbit and lighter payloads for reusable configurations and into higher orbits. Neutron will be tailored for commercial and U.S. government constellation launches and ultimately configurable for and capable of human space flight, enabling us to provide crew and cargo resupply to the International Space Station. Neutron will also provide a dedicated service to orbit for larger civil, defense and commercial payloads that need a level of schedule control and high-flight cadence. Neutron is expected to have the capability of launching nearly all of the spacecraft configurations that we expect to be launched through 2029 and we expect to be able to leverage Electron’s flight heritage across various vehicle subsystems designs, launch complexes and ground station infrastructure.
Our space systems initiative is supported by the design and manufacture of our Photon family of small spacecraft along with a range of components, software and services for spacecraft, including reaction wheels, star trackers, radios, separation systems, solar solutions, command and control spacecraft software, high voltage space grade battery solutions, and additional products in development to serve a wide variety of sub-system functions. We entered this market with our acquisition of leading spacecraft components manufacturer Sinclair Interplanetary, and have since expanded our market participation with the acquisitions of Planetary Systems Corporation, SolAero Holdings, Inc. and aerospace software firm Advanced Solutions, Inc. Each of these strategic acquisitions brought incremental vertically-integrated capabilities for our own Photon family of spacecraft and also enabled Rocket Lab to deliver high-volume manufacturing of critical spacecraft components and software solutions at scale prices to the broader spacecraft merchant market. The Photon family of small spacecraft, which are configurable for a range of low Earth orbit, medium Earth orbit, geosynchronous orbit and interplanetary missions enable us to offer an end-to-end mission solution encompassing launch, spacecraft, ground services and mission operations to provide customers with streamlined access to orbit with Rocket Lab as a single mission partner.
22
Recent Developments
HASTE
We introduced the HASTE rocket (“Hypersonic Accelerator Suborbital Test Electron”), a suborbital testbed launch vehicle derived from Rocket Lab’s heritage Electron rocket. HASTE provides reliable, high-cadence flight test opportunities needed to advance hypersonic system technology development.
Key Metrics and Select Financial Data
We monitor the following key financial and operational metrics that assist us in evaluating our business, measuring our performance, identifying trends and making strategic decisions.
Launch Vehicle Build-Rate and Launch Cadence
We built approximately eight launch vehicles in 2021 and approximately 12 launch vehicles in 2022. We anticipate we will build approximately 15 launch vehicles in 2023. We launched six vehicles in 2021 and nine vehicles in 2022. We have launched three vehicles through the three months ended March 31, 2023 and launched four vehicles through May 9, 2023. The number of launches is an indicator of our ability to convert mission awards into revenue in a timely manner and demonstrate the scalability of our launch operations. Growth rates between launches and total launch service revenue are not perfectly correlated because our total revenue is affected by other variables, such as the revenue per launch, which can vary considerably based on factors such as unique orbit and insertion requirements, payload handling needs, launch location, time sensitivity of mission completion and other factors. We believe that the growth in our build rate and launch rate is a positive indicator of our ability to scale our launch operations.
Revenue Growth
Three Months Ended March 31, 2023 and 2022
We generated $54.9 million and $40.7 million in revenue for the three months ended March 31, 2023 and 2022, respectively, representing a year-on-year increase in revenue of approximately 35%. This year-on-year increase primarily resulted from a higher launch cadence that delivered growth of $13.0 million.
Revenue and Cost Value Per Launch
Revenue and cost value per launch represents the average revenue and cost per launch contract attributable to launches that occurred during a period, regardless of when the revenue or cost was recognized. Revenue and cost value per launch can be a useful metric to provide insight into general competitiveness and price sensitivity in the marketplace. Revenue and cost value per launch can vary considerably, based on factors such as unique orbit and insertion requirements, payload handling needs, launch location, time sensitivity of mission completion and other factors, and as such may not provide absolute clarity with regards to pricing and competitive dynamics in the marketplace.
Three Months Ended March 31, 2023 and 2022
In the three months ended March 31, 2023 and 2022, our revenue value per launch was $6.5 million and $6.3 million, respectively. Meanwhile, cost per launch for the three months ended March 31, 2023 and 2022 was $7.5 million and $7.5 million, respectively, excluding a $2.1 million benefit from non-recurring employee retention credit to Launch Services cost of revenue in the three months ended March 31, 2023.
Backlog
Backlog represents future revenues that we would recognize in connection with the completion of all contracts and purchase orders that have been entered into by our customers but have not yet been fulfilled, excluding any customer options for future products or services that have not yet been exercised. Contracts for launch services and spacecraft builds typically include termination rights that may be exercised by customers upon advanced notice and payment of a specified termination fee. Our backlog decreased from $503.6 million as of December 31, 2022 to $494.2 million as of March 31, 2023, of which $130.4 million is related to Launch and $363.8 million is related to Space Systems. The decrease was a result of recognizing revenue on contracts during the period, partially offset by additions to backlog.
23
Key Factors Affecting Our Performance
Ability to sell additional launch services, space systems service and spacecraft components to new and existing customers
Our results will be impacted by our ability to sell our launch services, space systems services, and spacecraft components to new and existing customers. We have successfully launched Electron 32 times delivering 159 spacecraft to orbit through March 31, 2023. Our spacecraft components have flown on more than 100 spacecraft and our family of Photon spacecraft has been selected for missions to the Moon, Mars and Venus. Our growth opportunity is dependent on our ability to expand our addressable launch services market with larger volumetric and higher mass payloads capabilities of our in-development medium-capacity Neutron launch vehicle, which will address large commercial and government constellation launch opportunities. Our growth opportunity is also dependent on our ability to win spacecraft constellation missions and expand our portfolio of strategic spacecraft components. Our ability to sell additional products to existing customers is a key part of our success, as follow-on purchases indicate customer satisfaction and decrease the likelihood of competitive substitution. To sell additional products and services to new and existing customers, we will need to continue to invest significant resources in our products and services.
Ability to improve profit margins and scale our business
We intend to continue to invest in initiatives to improve our operating leverage and significantly ramp production. We believe continued reduction in costs and an increase in production volumes will enable the cost of launch vehicles to decline and expand our gross margins. Our ability to achieve our production-efficiency objectives could be negatively impacted by a variety of factors including, among other things, lower-than-expected facility utilization rates, manufacturing and production cost overruns, increased purchased material costs and unexpected supply-chain quality issues or interruptions.
Government expenditures and private enterprise investment into the space economy
Government expenditures and private enterprise investment has fueled the growth in our target markets. We expect the continued availability of government expenditures and private investment for our customers to help fund purchases of our products and services will remain. This is an important factor in our company’s growth prospects.
Components of Results of Operations
Revenue
Our revenues are derived from a combination of long-term fixed price contracts for launch services and spacecraft builds, and purchase order spacecraft components sales. Revenues from long-term contracts are recognized using either the “point-in-time” or “over-time” method of revenue recognition. Point-in-time revenue recognition results in cash payments being initially accrued to the balance sheet as deferred revenue as contractual milestones are accomplished and then recognized as revenue once the final contractual obligation is completed. Over-time revenue recognition is based on an input measure of progress based on costs incurred compared to estimated total costs at completion. Each project has a contractual revenue value and an estimated cost. The over-time revenue is recognized based on the percentage of the total project cost that has been realized.
Estimating future revenues and associated costs and profit is a process requiring a high degree of management judgment, including management’s assumptions regarding our future operational performance as well as general economic conditions. Frequently, the period of performance of a contract extends over a long period of time and, as such, revenue recognition and our profitability from a particular contract may be affected to the extent that estimated costs to complete are revised, delivery schedules are delayed, performance-based milestones are not achieved or progress under a contract is otherwise impeded. Accordingly, our recorded revenues and operating profit from period to period can fluctuate significantly depending on when the point-in-time or over-time contractual obligations are achieved. In the event cost estimates indicate a loss on a contract, the total amount of such loss is recorded in the period in which the loss is first estimated.
Cost of Revenues
Cost of revenues consists primarily of direct material and labor costs, manufacturing overhead, other personnel-related expenses, which include salaries, bonuses, benefits and stock-based compensation expense, reserves for estimated warranty costs, freight expense and depreciation expense. Cost of revenues also includes charges to write-down the carrying value of inventory when it exceeds its estimated net realizable value, including on-hand inventory that is either obsolete or in excess of forecasted demand. We expect our cost of revenues to increase in absolute dollars in future periods as we sell more launch services, space systems and components. As we grow into our current capacity and execute on cost-reduction initiatives, we expect our cost of revenues as a percentage of revenue to decrease over time.
Because direct labor costs and manufacturing overhead comprise a significant portion of cost of revenues, increasing our production rate resulting in greater absorption of these costs is our most critical cost reduction initiative. Increasing our production rate is a cross-functional effort involving manufacturing, engineering, supply chain and finance.
24
Operating Expenses
Our operating expenses consist of research and development and selling, general and administrative expenses.
Research and Development, net
Research and development expense consists primarily of personnel-related expenses, consulting and contractor expenses, validation and testing expense, prototype parts and materials and depreciation expense. We intend to continue to make significant investments in developing new products and enhancing existing products, including but not limited to our medium lift Neutron launch vehicle, Electron’s first stage recovery, Photon spacecraft features and capabilities, as well as on expanding our portfolio of Spacecraft components and subsystems. Research and development expense will be variable relative to the number of products that are in development, validation or testing. However, we expect it to decline as a percentage of total revenue over time.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of personnel-related expenses for our sales, marketing, supply chain, finance, legal, human resources and administrative personnel, as well as the costs of customer service, information technology, professional services insurance, travel, allocated overhead and other marketing, communications and administrative expenses. We will continue to actively promote our products and therefore we expect to incur expenses related to sales and marketing. We also expect to further invest in our corporate organization and incur additional expenses associated with operating as a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs. As a result, we expect that selling, general and administrative expenses will increase in absolute dollars in future periods but decline as a percentage of total revenue over time.
Interest Expense, Net
Interest expense, net consists primarily of interest expense incurred on debt and interest income consists primarily of interest income earned on our cash and cash equivalents, short-term investments balances and marketable securities.
Gain (Loss) on Foreign Exchange
Gain (loss) on foreign exchange relates to currency fluctuations that generate foreign exchange gains or losses on invoices denominated in currencies other than the United States (“U.S.”) Dollar.
Change in Fair Value of Liability Classified Warrants
Change in fair value of liability classified warrants relates to changes in the fair value of warrant liabilities.
25
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table sets forth our consolidated statements of operations information and data as a percentage of revenue for the three months ended March 31, 2023 and 2022 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Revenues |
|
$ |
54,895 |
|
|
|
100.0 |
% |
|
$ |
40,703 |
|
|
|
100.0 |
% |
Cost of revenues |
|
|
48,538 |
|
|
|
88.4 |
% |
|
|
36,968 |
|
|
|
90.8 |
% |
Gross profit |
|
|
6,357 |
|
|
|
11.6 |
% |
|
|
3,735 |
|
|
|
9.2 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net |
|
|
23,905 |
|
|
|
43.5 |
% |
|
|
13,477 |
|
|
|
33.1 |
% |
Selling, general and administrative |
|
|
28,469 |
|
|
|
51.9 |
% |
|
|
23,078 |
|
|
|
56.7 |
% |
Total operating expenses |
|
|
52,374 |
|
|
|
95.4 |
% |
|
|
36,555 |
|
|
|
89.8 |
% |
Operating loss |
|
|
(46,017 |
) |
|
|
(83.8 |
)% |
|
|
(32,820 |
) |
|
|
(80.6 |
)% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(685 |
) |
|
|
(1.2 |
)% |
|
|
(2,989 |
) |
|
|
(7.3 |
)% |
Gain (loss) on foreign exchange |
|
|
134 |
|
|
|
0.2 |
% |
|
|
(20 |
) |
|
|
0.0 |
% |
Change in fair value of liability classified warrants |
|
|
— |
|
|
|
— |
% |
|
|
13,482 |
|
|
|
33.1 |
% |
Other income, net |
|
|
1,477 |
|
|
|
2.7 |
% |
|
|
26 |
|
|
|
0.1 |
% |
Total other income, net |
|
|
926 |
|
|
|
1.7 |
% |
|
|
10,499 |
|
|
|
25.9 |
% |
Loss before income taxes |
|
|
(45,091 |
) |
|
|
(82.1 |
)% |
|
|
(22,321 |
) |
|
|
(54.7 |
)% |
Provision for income taxes |
|
|
(526 |
) |
|
|
(1.0 |
)% |
|
|
(4,388 |
) |
|
|
(10.8 |
)% |
Net loss |
|
$ |
(45,617 |
) |
|
|
(83.1 |
)% |
|
$ |
(26,709 |
) |
|
|
(65.5 |
)% |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Revenues |
|
$ |
54,895 |
|
|
$ |
40,703 |
|
|
$ |
14,192 |
|
|
|
35 |
% |
Revenue increased by $14.2 million, or 35%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Launch services revenue was $19.6 million for the three months ended March 31, 2023, an increase of $13.0 million, or 198%, primarily due to a higher launch cadence, with three launch missions completed in the three months ended March 31, 2023, versus one launch mission completed in the three months ended March 31, 2022. Space systems revenue was $35.3 million for the three months ended March 31, 2023, an increase of $1.1 million, or 3%.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Cost of revenues |
|
$ |
48,538 |
|
|
$ |
36,968 |
|
|
$ |
11,570 |
|
|
|
31 |
% |
Cost of revenues increased by $11.6 million, or 31%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Launch Service cost of revenues was $20.4 million in the three months ended March 31, 2023, an increase of $13.0 million or 177%, primarily due to the higher launch cadence referenced above. Space systems cost of revenue was $28.2 million in the three months ended March 31, 2023, a decrease of $1.5 million or 5%, primarily due to the shift of engineering labor to research and development of Neutron. Cost of revenues for the three months ended March 31, 2023 decreased to 88% of total revenue as compared to 91% during the three months ended March 31, 2022.
Research and Development, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Research and development, net |
|
$ |
23,905 |
|
|
$ |
13,477 |
|
|
$ |
10,428 |
|
|
|
77 |
% |
Research and development expense increased by $10.4 million, or 77%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to Neutron development, the shift of engineering labor to development of Neutron, and increased staff cost as a result of hiring and prototype spend focused on broadening our spacecraft component product portfolio.
26
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Selling, general and administrative |
|
$ |
28,469 |
|
|
$ |
23,078 |
|
|
$ |
5,391 |
|
|
|
23 |
% |
Selling, general and administrative expense increased by $5.4 million, or 23%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to increased costs associated with being a public company including higher staff costs, facility related expense, professional services and a $1.6 million increase in stock-based compensation.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Interest expense, net |
|
$ |
(685 |
) |
|
$ |
(2,989 |
) |
|
$ |
2,304 |
|
|
|
(77 |
)% |
Interest expense decreased by $2.3 million, or 77%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to an increase of interest income on marketable securities and money market funds.
Gain (Loss) on Foreign Exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Gain (loss) on foreign exchange |
|
$ |
134 |
|
|
$ |
(20 |
) |
|
$ |
154 |
|
|
|
(770 |
)% |
Gain on foreign exchange increased by $0.2 million, or 770%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to fluctuations in the foreign exchange of the New Zealand Dollar.
Change in Fair Value of Liability Classified Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Change in fair value of liability classified warrants |
|
$ |
— |
|
|
$ |
13,482 |
|
|
$ |
(13,482 |
) |
|
|
(100 |
)% |
Change in fair value of liability classified warrants income was $13.5 million for the three months ended March 31, 2022 as a result of the change in fair value of liability classified warrants assumed in connection with the Business Combination that were redeemed by January 31, 2022. The Company had no liability classified warrants as of March 31, 2023.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Other income, net |
|
$ |
1,477 |
|
|
$ |
26 |
|
|
$ |
1,451 |
|
|
|
5581 |
% |
Other income increased by $1.5 million, or 5581%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to accretion of marketable securities purchased at a discount.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Provision for income taxes |
|
$ |
(526 |
) |
|
$ |
(4,388 |
) |
|
$ |
3,862 |
|
|
|
(88 |
)% |
We recorded income tax expense of $0.5 million for the three months ended March 31, 2023 and income tax expense of $4.4 million for the three months ended March 31, 2022. The effective tax rate was (1.2)% for the three months ended March 31, 2023, compared to (19.7)% for the three months ended March 31, 2022. The effective tax rate differs from the federal statutory rate due primarily to a full valuation allowance against our U.S. deferred tax assets, as well as the impact of discrete items that may occur in any given year but which are not consistent from year-to-year.
27
Liquidity and Capital Resources
Since inception, we have funded our operations with proceeds from sales of our capital stock, bank debt, research and development grant proceeds, and cash flows from the sale of our products and services. As of March 31, 2023, we had $208.4 million of cash and cash equivalents and $238.3 million of marketable securities. Our primary requirements for liquidity and capital are for investment in new products and technologies, the expansion of existing manufacturing facilities, working capital, debt service, acquisitions of complementary businesses, products or technologies and general corporate needs. Historically, these cash requirements have been met through the net proceeds we received through private sales of equity securities, borrowings under our credit facilities, net proceeds received in the Business Combination and payments received from customers.
We believe that our existing cash and cash equivalents and payments from customers will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months, although we may choose to take advantage of opportunistic capital raising or refinancing transactions at any time. We will continue to invest in increasing production and expanding our product offerings through acquisitions.
Our future capital requirements will depend on many factors, including our launch cadence, traction in the market with our space systems offerings, the expansion of sales and marketing activities, the timing and extent of spending to support product development efforts, the introduction of new and enhanced products, the continuing market adoption of our products, the timing and extent of additional capital expenditures to invest in existing and new office spaces and the number of acquisitions of complementary businesses, products or technologies we pursue, if any. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
Additionally, we expect our capital and operating expenditures will increase significantly in connection with ongoing activities as we:
•increase our investment in marketing, advertising, sales and distribution infrastructure for our existing and future products and services;
•develop additional new products and enhancements to existing products;
•obtain, maintain and improve our operational, financial and management performance;
•hire additional personnel;
•obtain, maintain, expand and protect our intellectual property portfolio; and
•continue to operate as a public company.
Indebtedness
Hercules Capital Secured Term Loan
On June 10, 2021, the Company entered into a $100 million secured term loan agreement with Hercules Capital, Inc. (the “Hercules Capital Secured Term Loan”) and borrowed the full amount under the secured term loan agreement. The term loan has a maturity date of June 1, 2024 and is secured by substantially all of the assets of the Company. Payments due for the term loan are interest-only until the maturity date with interest payable monthly in arrears. The outstanding principal bears (i) cash interest at the greater of (a) 8.15% or (b) 8.15% plus the prime rate minus 3.25% and (ii) payment-in-kind interest of 1.25% which is accrued and added to the outstanding principal balance. Prepayment of the outstanding principal is permitted under the loan agreement and subject to certain prepayment fees. In connection with the secured term loan, the Company paid an initial facility charge of $1 million and the Company will be required to pay an end of term charge of $3.25 million upon repayment of the loan. The secured term loan agreement contains customary representations, warranties, non-financial covenants, and events of default. The Company is in compliance with all debt covenants related to its long-term borrowings as of March 31, 2023. As of March 31, 2023, there was $103.7 million outstanding under the Hercules Capital Secured Term Loan, of which $2.9 million was classified as current in the Company’s condensed consolidated balance sheets, with the remainder classified as a long-term borrowing. As of March 31, 2023, the Company had no availability under the Hercules Capital Secured Term Loan.
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Cash Flows
The following table summarizes our cash flows for the periods presented:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
Net cash provided by (used in): |
|
|
|
|
|
|
Operating activities |
|
$ |
(25,385 |
) |
|
$ |
(26,339 |
) |
Investing activities |
|
|
(10,969 |
) |
|
|
(71,830 |
) |
Financing activities |
|
|
2,058 |
|
|
|
14,444 |
|
Effect of exchange rate changes |
|
|
127 |
|
|
|
(574 |
) |
Net decrease in cash, cash equivalents, and restricted cash |
|
$ |
(34,169 |
) |
|
$ |
(84,299 |
) |
Cash Flows from Operating Activities
Net cash used in operating activities was $25.4 million for the three months ended March 31, 2023 consisted of $45.6 million in operating loss, $22.3 million in non-cash expense and $2.1 million in cash used in operating assets and liabilities. Included in the non-cash expense are $14.0 million in stock-based compensation expense and $7.0 million in depreciation and amortization. Included in the cash used in operating assets and liabilities are $17.3 million increase in contract liabilities, $14.1 million increase in accounts receivable, $11.3 million increase in trade payables, $10.0 million increase in prepaids and other assets and $6.7 million increase in inventory.
Cash Flows from Investing Activities
Cash used in investing activities for the three months ended March 31, 2023 of $11.0 million was primarily driven by capital equipment and infrastructure investments of $12.7 million. These investments included the purchases of equipment, including printers and milling machines, and tenant improvements to support Neutron production and Space Systems infrastructure. Cash used in investing activities was partially offset by $1.7 million of net cash provided by investing activities related to purchases and maturities of marketable securities.
Cash Flows from Financing Activities
Cash provided by financing activities for the three months ended March 31, 2023 of $2.1 million was primarily related to $3.1 million of net proceeds from our equity offerings which includes proceeds from sale of employees restricted stock units to cover taxes, stock options and employee stock purchase plan and applicable tax withholdings and payments, offset by $1.0 million payment of contingent consideration related to an acquisition.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates as disclosed in our audited financial statements included in our Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 7, 2023.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.
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