Bulletin
Investor Alert

New York Markets Open in:

Aug. 10, 2022, 6:37 a.m. EDT

10-Q: TERRAN ORBITAL CORP

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- 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. Through our subsidiary Tyvak Nano-Satellite Systems, Inc. ("Tyvak"), 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 customers. We access the international market through both Tyvak and our Torino, Italy based subsidiary, Tyvak International S.R.L. ("Tyvak International"). Through our subsidiary PredaSAR Corporation ("PredaSAR"), we are developing what we believe will be the world's largest, most advanced NextGen Earth observation constellation to provide near persistent, near real-time Earth imagery.

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.

Through the Satellite Solutions segment, the Earth Observation Solutions segment has commenced developing satellites and intends to continue to develop, build, launch, and operate a constellation of Earth observation satellites that will feature Synthetic Aperture Radar ("SAR") and electro-optical capabilities to provide Earth observation data and mission solutions that it believes will be distinguished by breadth of coverage, revisit rates, and ability to observe and detect during day and night and through clouds and other interference. In addition, the Earth Observation Solutions segment plans to provide

secondary payload solutions and onboard data processing capabilities on its satellite constellation, including sensors, optical links, or other mission solutions.

The Earth Observation Solutions segment is still in its developmental stage and does not yet generate any material revenue. The scope and timing of the satellite constellation is subject to continuing assessments of customer demand and our financial and other resources. We anticipate on completing two satellites of the constellation currently under construction, which we anticipate launching in 2023, while the remainder of the satellites of the constellation will be temporarily delayed based on our prioritization of production capacity to U.S. Government programs coupled with the level of our financial resources as of June 30, 2022.

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

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 an economical 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 customer contracts based on new technology, including the expansion of our offerings to include micro-satellites and payload solutions.

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 facilities and office space in order to position ourselves to be awarded larger contracts with recurring revenue opportunities that will lay the foundation for our long-term success. Our portfolio of contracts includes several technology demonstrations, studies, and prototypes with the potential to convert into contracts to support future constellations. As of June 30, 2022, we have identified over 140 opportunities representing approximately $16 billion in potential revenue for our Satellite Solutions segment.

We may experience variability in the profitability of our contracts in the future and that 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 six months ended June 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 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

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 June, 2022 Compared to Three Months Ended June 30, 2021
        The following table presents our consolidated results of operations for the
        periods presented:
                                                               Three Months Ended June 30,
        (in thousands)                                      2022           2021         $ Change
        Revenue                                          $   21,364     $    9,409     $   11,955
        Cost of sales                                        25,038          5,403         19,635
        Gross (loss) profit                                  (3,674 )        4,006         (7,680 )
        Selling, general, and administrative expenses        29,370         12,475         16,895
        Loss from operations                                (33,044 )       (8,469 )      (24,575 )
        Interest expense, net                                 6,937          2,637          4,300
        Gain on extinguishment of debt                            -         (2,565 )        2,565
        Change in fair value of warrant and derivative
        liabilities                                          (8,177 )          315         (8,492 )
        Other expense                                           468             18            450
        Loss before income taxes                            (32,272 )       (8,874 )      (23,398 )
        Provision for (benefit from) income taxes                 2             (6 )            8
        Net loss                                         $  (32,274 )   $   (8,868 )   $  (23,406 )
        








        Revenue
        The following table presents revenue by segment for the periods presented:
                                           Three Months Ended June 30,
        (in thousands)                   2022          2021       $ Change
        Satellite Solutions           $   20,889      $ 9,409     $  11,480
        Earth Observation Solutions          475            -           475
        Revenue                       $   21,364      $ 9,409     $  11,955
        


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 June 30, 2022, we adjusted the estimate-at-completion ("EAC") on certain firm fixed price contracts, which had an estimated $1.3 million negative impact to revenue in the Satellite Solutions segment. While we believe our estimates as of June 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 and generated limited revenue by providing expert analyses and progressing on planned technology demonstrations.







        Cost of Sales
        The following table presents cost of sales by segment and other components for
        the periods presented:
                                                Three Months Ended June 30,
        (in thousands)                        2022          2021       $ Change
        Satellite Solutions                $   19,549      $ 5,383     $  14,166
        Earth Observation Solutions               260            -           260
        Share-based compensation expense        5,229           20         5,209
        Cost of Sales                      $   25,038      $ 5,403     $  19,635
        


The increase in cost of sales was primarily due to an increase of $12.9 million in labor, materials, third-party services, overhead, and other direct costs incurred in satisfying our customer contracts in the Satellite Solutions segment, 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, and an increase of $1.2 million related to reserves for anticipated losses on contracts.

During the three months ended June 30, 2022, we adjusted the EAC on certain firm fixed price contracts, which had an estimated $2.5 million negative impact to cost of sales in the Satellite Solutions segment. While we believe our estimates as of June 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 and generated limited revenue by providing expert analyses and progressing on planned 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 June 30,
        (in thousands)                                     2022          2021       $ Change
        Satellite Solutions                             $    6,998     $  2,493     $   4,505
        Earth Observation Solutions                            632        1,203          (571 )
        Corporate and other                                 13,154        8,613         4,541
        Share-based compensation expense                     8,586          166         8,420
        Selling, general, and administrative expenses   $   29,370     $ 12,475     $  16,895
        


The increase in selling, general, and administrative expenses was primarily due to the following:

The increase in selling, general, and administrative expenses was partially offset due to the following:

Interest Expense, net

The increase in interest expense, net was due to an increase in amortization related to discount on debt of $3.1 million as a result of our financing transactions and an increase in contractual interest of $1.4 million as a result of higher debt balances with lower interest rates

due to our financing transactions during 2021 and 2022. These increases were partially offset by an increase in capitalized interest of $269 thousand associated with the development of our Earth observation constellation.

Gain on Extinguishment of Debt

There was no gain on extinguishment of debt during the three months ended June 30, 2022.

During the three months ended June 30, 2021, gain on extinguishment of debt totaled $2.6 million and related to the extinguishment of a loan related to the Paycheck Protection Program (the "PPP Loan").

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 June 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 share of common stock.

During the three months ended June 30, 2021, the loss on change in fair value was due to an increase in the estimated value of outstanding warrant liabilities driven by an increase in the estimated value of the Company's price per share of common stock.

Other Expense

The increase in other expense was primarily related to an increase of $393 thousand for third-party professional fees expensed in connection with our financing transactions.

Provision for Income Taxes

Provision for income taxes for the three months ended June 30, 2022 was $2 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 full valuation allowance recorded on such NOLs as we determined it is more-likely-than-not that our NOLs will not be utilized.

Benefit from income taxes for the three months ended June 30, 2021 was $6 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 nominal benefit from income taxes was related to an income tax refund received during the period.







        Six Months Ended June, 2022 Compared to Six Months Ended June 30, 2021
        The following table presents our consolidated results of operations for the
        periods presented:
                                                               Six Months Ended June 30,
        (in thousands)                                     2022           2021         $ Change
        Revenue                                         $   34,484     $   19,903     $   14,581
        Cost of sales                                       40,991         15,137         25,854
        Gross (loss) profit                                 (6,507 )        4,766        (11,273 )
        Selling, general, and administrative expenses       59,587         19,148         40,439
        Loss from operations                               (66,094 )      (14,382 )      (51,712 )
        Interest expense, net                                9,860          3,544          6,316
        Loss on extinguishment of debt                      23,141         68,102        (44,961 )
        Change in fair value of warrant and
        derivative liabilities                               3,676            281          3,395
        Other expense                                          871             33            838
        Loss before income taxes                          (103,642 )      (86,342 )      (17,300 )
        Provision for income taxes                               4             22            (18 )
        Net loss                                        $ (103,646 )   $  (86,364 )   $  (17,282 )
        








        Revenue
        The following table presents revenue by segment for the periods presented:
                                           Six Months Ended June 30,
        (in thousands)                  2022         2021       $ Change
        Satellite Solutions           $ 33,863     $ 19,903     $  13,960
        Earth Observation Solutions        621            -           621
        Revenue                       $ 34,484     $ 19,903     $  14,581
        


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 six months ended June 30, 2022, we adjusted the EAC on certain firm fixed price contracts, which had an estimated $4.2 million negative impact to . . .

Aug 10, 2022

COMTEX_411989051/2041/2022-08-10T06:37:23

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2022 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.