Rocket Lab Corp 10-Q

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 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, as well as Rocket Labs’ audited consolidated financial statements and notes thereto included in the final prospectus dated October 7, 2021 (the “S-1 Prospectus”) and filed with the SEC. 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 Item II, Part 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in the S-1 Prospectus filed with the SEC. 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. Rocket Lab USA, Inc. entered into a merger agreement (the “Agreement”) with Vector Acquisition Corporation (“VACQ”), on March 1, 2021, as amended by Amendment No. 1 thereto, dated May 7, 2021 and Amendment No. 2 thereto, dated June 25, 2021. The transactions contemplated by the terms of the Agreement were completed on August 25, 2021 (the “Merger”), in conjunction with which VACQ changed its name to Rocket Lab USA, Inc. (hereafter referred to as “Rocket Lab”, the “Company”, “we”, “us” or “our”, unless the context otherwise requires). The transactions contemplated in the Agreement are collectively referred to as the “Business Combination”. Overview Rocket Lab is an end-to-end space company with an established track record of mission success. We deliver reliable launch services, satellites 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 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, on-orbit management solutions, and space data applications. 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 components and spacecraft, as well as on-orbit constellation management services and space data applications. 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 105 satellites to orbit for government and commercial customers across 18 successful missions through September 30, 2021. In 2020, Electron was the second most frequently launched rocket by companies operating in the United States and established Rocket Lab as the fourth most frequent launcher globally. Our launch services program has seen us develop many industry innovations, including 3D printed rocket engines, an electric-pump-fed rocket engine, fully carbon composite first stage fuel tanks, a private orbital launch complex, a rocket stage that converts into a spacecraft on orbit, and the 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 17,000 lbs (8,000 kg), for launches to low-Earth orbit and lighter payloads into higher orbits. Neutron will be tailored for commercial and U.S. government constellation launches and capable of human space flight and cargo and crew 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 not available on large and heavy lift rockets. Neutron is expected to have the capability of launching nearly all of the spacecraft that we expect to be launched through 2029 and we expect to be able to leverage Electron’s flight heritage, various vehicle subsystems designs, launch complexes and ground station infrastructure. 27 Table of Contents Our space systems initiative is centered on the design, manufacture, and sale of the Photon family of small spacecraft, which are configurable for a range of low Earth orbit, medium Earth orbit, geosynchronous orbit and interplanetary missions. Our Photon family of spacecraft 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. Our space systems initiative is also supported by the design and manufacture of a range of components for satellites and other spacecraft, including reaction wheels, star trackers, magnetic torque rods and batteries and has 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, which brought incremental vertically-integrated capabilities for our own spacecraft and also enabled Rocket Lab to deliver high-volume manufacturing of critical spacecraft components at scale prices to the broader spacecraft merchant market. Recent Developments On October 12, 2021, we entered into a membership interest purchase agreement (the “ASI Purchase Agreement”) with ASI Aerospace LLC (“ASI”), Willis Vern Holdings, Inc., the shareholders of ASI, and John A. Cuseo, as shareholder representative, pursuant to which we agreed to purchase 100% of the issued and outstanding equity interests of ASI for aggregate consideration of $40 million, subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness, and amounts placed in escrow. The ASI Purchase Agreement also includes an additional potential earn out payment of up to $5.5 million based on achievement of certain performance metrics for the business in its fiscal year ending December 31, 2021. The ASI Purchase Agreement contains representations, warranties and indemnification provisions customary for transactions of this kind. In connection with the acquisition, we entered into customary offer letters and non-competition and non-solicitation agreements with certain key employees of ASI. The transactions contemplated by the ASI Purchase Agreement closed on October 12, 2021. On November 15, 2021, we entered into an Agreement and Plan of Merger (the “PSC Merger Agreement”), by and among us, Platinum Merger Sub, Inc. (“PSC Merger Sub”), Planetary Systems Corporation (“PSC”), and Michael Whalen as shareholder representative, which provides for, among other things, the merger of PSC Merger Sub with and into PSC, with PSC being the surviving corporation of the merger and a direct, wholly owned subsidiary of us. Pursuant to the terms of the PSC Merger Agreement, all of the issued and outstanding shares of PSC will be cancelled in exchange for aggregate consideration of up to approximately $42 million in cash, 1,720,841 shares of the Company’s common stock, and up to 956,023 shares of our common stock that are subject to a performance based earn-out, subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness, and amounts held back by us (the “PSC Acquisition”). The PSC Merger Agreement contains representations, warranties and indemnification provisions customary for transactions of this kind. In connection with the PSC Acquisition, we have entered into customary offer letters or employment agreements with certain key employees of PSC. We have also agreed to file a resale registration statement with respect to the common stock issued or issuable in the PSC Acquisition prior to the six-month anniversary of the date of the PSC Merger Agreement. The transactions contemplated by the PSC Merger Agreement are expected to close in our fourth quarter of 2021. Public Company Costs As a consequence of the Business Combination, we are a Nasdaq listed company, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees. 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 • operate as a public company. 28 Table of Contents 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 three launch vehicles in 2019 and approximately eight launch vehicles in 2020. We anticipate we will build a total of approximately eight launch vehicles by the end of 2021. Although we experienced a negative impact in 2020 and 2021 as a result of the COVID-19 shutdowns and restrictions on our operations discussed in more detail below under “ Key Factors Affecting Our Performance—Covid-19 Pandemic,” we believe that the growth in build rate prior to such COVID-19 restrictions is a positive indicator of our ability to scale our manufacturing operations in support of our anticipated growth rate in revenue in the coming years. We launched six vehicles in 2019 and seven vehicles in 2020. We have launched four vehicles through the nine months ended September 30, 2021, including one vehicle in the three months ended September 30, 2021. 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. Although we experienced a negative impact in 2020 and 2021 as a result of the COVID-19 shutdowns and restrictions on our operations discussed in more detail below under “ Key Factors Affecting Our Performance—Covid-19 Pandemic,” we believe that the growth in launch rate prior to such COVID-19 restrictions is a positive indicator of our ability to scale our launch operations in support of our anticipated growth rate in revenue in the coming years. Revenue Growth Three Months Ended September 30, 2021 and 2020 We generated $5.3 million and $10.7 million in revenue for the three months ended September 30, 2021 and 2020, respectively, representing a year-on-year decrease in revenue of approximately 50%. This year-on-year decrease primarily resulted from impacts related to the novel coronavirus (“COVID-19”) affecting our ability to provide launch services to our customers, which was slightly offset by broad based growth across our space systems products and services. Nine Months Ended September 30, 2021 and 2020 We generated $34.8 million and $19.4 million in revenue for the nine months ended September 30, 2021 and 2020, respectively, representing a year-on-year increase in revenue of approximately 79%. This year-on-year increase primarily resulted from a higher average contractual price per launch service and broad based growth across our space systems products and services. Revenue Value Per Launch Revenue value per launch represents the average revenue per launch contract attributable to launches that occurred during a period, regardless of when the revenue was recognized. Revenue value per launch can be a useful metric to provide insight into general competitiveness and price sensitivity in the marketplace. Revenue 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 September 30, 2021 and 2020 In the three months ended September 30, 2021 and 2020, our revenue value per launch was $12.1 million and $4.7 million, respectively. Meanwhile, cost per launch was $21.3 million and $6.0 million for the three months ended September 30, 2021 and 2020, respectively. The increase in cost per launch in the three months ended September 30, 2021 was driven by stock based compensation charges related to the Business Combination and related stock units as well as lower manufacturing absorption driven by COVID-19 impacts. Nine Months Ended September 30, 2021 and 2020 In the nine months ended September 30, 2021 and 2020, our revenue value per launch was $8.8 million and $5.8 million, respectively. Meanwhile, cost per launch was $10.1 million and $6.7 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in cost per launch in the nine months ended September 30, 2021 was driven by stock based compensation charges related to the Business Combination and related stock units as well as lower manufacturing absorption driven by COVID-19 impacts. 29 Table of Contents 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, 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. As of September 30, 2021, our backlog totaled $183.1 million. We expect to recognize approximately 52% of our backlog over the next 12 months and the remainder recognized thereafter. Key Factors Affecting Our Performance COVID-19 Pandemic In December 2019, COVID-19 surfaced in Wuhan, China. The World Health Organization (“WHO”) declared a global emergency on January 30, 2020 with respect to the outbreak, and several countries have initiated travel restrictions, closed borders and given social distancing directives, including instructions requiring “shelter-in-place”. On March 11, 2020, the WHO declared the COVID-19 outbreak a pandemic. As a result of the pandemic, the United States and New Zealand governments shut down various sectors of the respective economies. In the United States, we were deemed an essential service and no pauses were made to our United States’ based operations. As a result of the shutdown in New Zealand, we had to delay certain scheduled launches to a later date. In addition to existing travel restrictions, some locales may impose prolonged quarantines and further restrict travel, which may significantly impact the ability of our employees to get to their places of work to produce products, may make it such that we are unable to obtain certain long lead time components on a timely basis or at a cost-effective price, or may significantly hamper our customers from traveling to our launch facilities to prepare payloads for launch. Rocket Lab has taken temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring some employees to work remotely and implementing social distancing protocols for all work conducted onsite. Rocket Lab has suspended non-essential travel worldwide for employees and is discouraging employee attendance at other gatherings. The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. At this time, it is not possible to determine the magnitude of the overall impact of COVID-19 on our business. However, it could have a material adverse effect on our business, financial condition, liquidity, results of operations and cash flows. Ability to sell additional launch services, space systems and service and spacecraft components to new and existing customers Our results will be impacted by our ability to sell our launch services, space systems and services, and spacecraft components to new and existing customers. We have had success with Electron successfully launching 18 times delivering 105 satellites to orbit through September 30, 2021. Our spacecraft components have flown on more than 100 spacecrafts and our family of Photon spacecraft has been awarded 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 recently announced 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 satellite 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. If we fail to make the right investment decisions, if customers do not adopt our products and service, or if our competitors are able to develop technology or products and services that are superior to ours, our business, prospects, financial condition and operating results could be adversely affected. 30 Table of Contents Ability to improve profit margins and scale our business We intend to continue investing 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. If we are unable to achieve our goals, we may not be able to reduce operating costs, which would negatively impact gross margin and profitability. 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. For a description of our revenue recognition policies, see the section titled “— Critical Accounting Policies and Estimates .” 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 more than 60% 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. 31 Table of Contents Operating Expenses Our operating expenses consist of research and development and selling, general and administrative expenses. Research and Development 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. 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. We also expect to invest in our corporate organization and incur additional expenses associated with transitioning to, and 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) income, net Interest expense consists primarily of interest expense incurred on debt and interest income consists primarily of interest income earned on our cash and cash equivalents and short-term investments balances. 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 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. Other expense (income), net Other expense (income), net relates to other expense and income. 32 Table of Contents Results of Operations The following table sets forth our consolidated statements of operations information and data as a percentage of revenue for each of the periods indicated (in thousands, except percentages): Three months ended September 30, 2021 September 30, 2020 $ % $ % Revenues $ 5,287 100.0 % $ 10,670 100.0 % Cost of revenues 17,738 335.5 % 12,555 117.7 % Gross loss (12,451 ) (235.5 )% (1,885 ) (17.7 )% Operating expenses: Research and development, net 14,189 268.4 % 4,903 46.0 % Selling, general and administrative 25,655 485.2 % 6,057 56.8 % Total operating expenses 39,844 753.6 % 10,960 102.8 % Operating loss (52,295 ) (989.1 )% (12,845 ) (120.5 )% Other income (expense): Interest income (expense), net (2,977 ) (56.3 )% (29 ) (0.3 )% Gain (loss) on foreign exchange 16 0.3 % (129 ) (1.2 )% Change in fair value of liability classified warrants (33,947 ) (642.1 )% (562 ) (5.3 )% Other income (expense), net (450 ) (8.5 )% (40 ) (0.4 )% Total other income (expense), net (37,358 ) (706.6 )% (760 ) (7.2 )% Loss before income taxes (89,653 ) (1,695.7 )% (13,605 ) (127.7 )% Benefit for income taxes 1,684 31.9 % 1,000 9.4 % Net loss $ (87,969 ) (1,663.8 )% $ (12,605 ) (118.3 )% Nine months ended September 30, 2021 September 30, 2020 $ % $ % Revenues $ 34,759 100.0 % $ 19,423 100.0 % Cost of revenues 43,337 124.7 % 27,186 140.0 % Gross loss (8,578 ) (24.7 )% (7,763 ) (40.0 )% Operating expenses: Research and development, net 29,797 85.7 % 11,009 56.7 % Selling, general and administrative 39,347 113.2 % 17,378 89.5 % Total operating expenses 69,144 198.9 % 28,387 146.2 % Operating loss (77,722 ) (223.6 )% (36,150 ) (186.2 )% Other income (expense): Interest income (expense), net (3,377 ) (9.7 )% 213 1.1 % Gain (loss) on foreign exchange (389 ) (1.1 )% (564 ) (2.9 )% Change in fair value of liability classified warrants (39,424 ) (113.4 )% (425 ) (2.2 )% Other income (expense), net (583 ) (1.7 )% 617 3.2 % Total other income (expense), net (43,773 ) (125.9 )% (159 ) (0.8 )% Loss before income taxes (121,495 ) (349.5 )% (36,309 ) (187.0 )% Benefit for income taxes 979 2.8 % 251 1.3 % Net loss $ (120,516 ) (346.7 )% $ (36,058 ) (185.7 )% 33 Table of Contents Comparison of the Three Months Ended September 30, 2021 and September 30, 2020 Revenues Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Revenues $ 5,287 $ 10,670 $ (5,383 ) (50 )% Revenue decreased by $5.4 million, or 50%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Launch services revenue was $1.1 million in the three months ended September 30, 2021, a decrease of $8.6 million, or 88%, primarily due to a lower launch cadence driven by COVID-19 related impacts to business operations and lower content due to over-time revenue recognition versus point-in-time revenue recognition in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Space systems revenue was $4.2 million in the three months ended September 30, 2021, an increase of $3.3 million, or 360% driven by broad based growth across all of our space systems products and services. Cost of Revenues Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Cost of revenues $ 17,738 $ 12,555 $ 5,183 41 % Cost of revenues increased by $5.2 million, or 41%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase in cost of revenue was primarily driven by a step-up related to our Business Combination and vesting of restricted stock units in stock-based compensation of $7.6 million during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Cost of revenues for the three months ended September 30, 2021 also increased to 336% of total revenue during the three months ended September 30, 2021 as compared to 118% during the three months ended September 30, 2020. Research and Development, Net Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Research and development, net $ 14,189 $ 4,903 $ 9,286 189 % Research and development expense increased by $9.3 million, or 189%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to a $5.6 million increase in a step-up related to our Business Combination and vesting of restricted stock units in stock-based compensation, Neutron development, a baseline low earth orbit and interplanetary spacecraft platform and increased labor and prototype spend focused on broadening our spacecraft component product portfolio. Selling, General and Administrative Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Selling, general and administrative $ 25,655 $ 6,057 $ 19,598 324 % Selling, general and administrative expense increased by $19.6 million, or 324%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to a $17.1 million increase in a step-up related to our Business Combination and vesting of restricted stock units in stock-based compensation and redemption compensation expense, increased costs associated with being a public company and third party professional fees related to the recently announced acquisition of ASI Aerospace LLC. 34 Table of Contents Interest Income (Expense), Net Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Interest income (expense), net $ (2,977 ) $ (29 ) $ (2,948 ) 10,166 % Interest expense increased by $2.9 million, or 10,166%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to borrowings under our secured term loan agreement. Gain (Loss) on Foreign Exchange Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Gain (loss) on foreign exchange $ 16 $ (129 ) $ 145 (112 )% Loss on foreign exchange declined by $0.1 million, or 112%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to fluctuations in the foreign exchange of the New Zealand Dollar and Canadian Dollar as compared to the U.S. Dollar. Change in Fair Value of Liability Classified Warrants Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Change in fair value of liability classified warrants $ (33,947 ) $ (562 ) $ (33,385) 5,940% Change in fair value of liability classified warrants expense increased by $33.4 million, or 5,940%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily as a result of the change in fair value of liability classified warrants assumed in connection with the Business Combination. Other Income (Expense), Net Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Other income (expense), net $ (450 ) $ (40 ) $ (410 ) 1,025 % Other expense increased by $0.4 million, or 1,025%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to bank fees related to our term loan initiation with Hercules and the termination of the SVB term loan. Benefit for Income Taxes Three months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Benefit for income taxes $ 1,684 $ 1,000 $ 684 68 % We recorded income tax benefit of $1.7 million and $1.0 million for the three months ended September 30, 2021 and September 30, 2020, respectively. The annual effective tax rate was 1.9% for the three months ended September 30, 2021, compared to 7.4% for the three months ended September 30, 2020. The annual effective tax rate was lower than the federal statutory rate due primarily to a full valuation allowance in the United States and was partially offset by recurring items such as foreign taxes based on local country statutory rates, excess tax benefits related to share-based compensation, and foreign withholding taxes, as well as by discrete items that may occur in any given year but are not consistent from year to year. 35 Table of Contents Comparison of the Nine Months Ended September 30, 2021 and September 30, 2020 Revenues Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Revenues $ 34,759 $ 19,423 $ 15,336 79 % Revenue increased by $15.3 million, or 79%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Launch services revenue was $25.2 million in the nine months ended September 30, 2021, an increase of $7.0 million, or 38%, primarily due to higher content per launch service agreement in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Space systems revenue was $9.6 million in the nine months ended September 30, 2021, an increase of $8.4 million, or 698%, primarily due to broad based growth across space systems products and service offerings. Cost of Revenues Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Cost of revenues $ 43,337 $ 27,186 $ 16,151 59 % Cost of revenues increased by $16.2 million, or 59%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase in cost of revenues was driven by a step-up related to our Business Combination and vesting of restricted stock units in stock-based compensation of $7.5 million and lower production utilization due to COVID-19 related impacts during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Cost of revenues for the nine months ended September 30, 2021 also decreased to 125% of total revenue from 140% for the nine months ended September 30, 2020 due to an increase in revenues, partially offset by the aforementioned step-up of stock-based compensation expense and COVID-19 related impacts. Research and Development, Net Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Research and development, net $ 29,797 $ 11,009 $ 18,788 171 % Research and development expense increased by $18.8 million, or 171%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to a step-up related to our Business Combination and vesting of restricted stock units in stock-based compensation of $6.1 million and increased labor and prototype spend focused on broadening our spacecraft component product portfolio and a baseline low earth orbit and interplanetary spacecraft platform. Selling, General and Administrative Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Selling, general and administrative $ 39,347 $ 17,378 $ 21,969 126 % Selling, general and administrative expense increased by $22.0 million, or 126%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to a $17.1 million increase in a step-up related to our Business Combination and vesting of restricted stock units in stock-based compensation and redemption compensation expense, increased costs associated with being a public company including third party services and higher staff cost related to supporting public company reporting requirements. 36 Table of Contents Interest Income (Expense), Net Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Interest income (expense), net $ (3,377 ) $ 213 $ (3,590 ) (1,685 )% Interest expense increased by $3.6 million, or 1,685%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to borrowings under our secured term loan agreement. Loss on Foreign Exchange Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Loss on foreign exchange $ (389 ) $ (564 ) $ 175 (31 )% Loss on foreign exchange declined by $0.2 million, or 31%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to fluctuations in the foreign exchange of New Zealand Dollar and Canadian Dollar as compared to the U.S. dollar. Change in Fair Value of Liability Classified Warrants Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Change in fair value of liability classified warrants $ (39,424 ) $ (425) $ (38,999) 9,176% Change in fair value of liability classified warrants expense increased by $39.0 million, or 9,176%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily as a result of the change in fair value of liability classified warrants assumed in connection with the Business Combination. Other Income (Expense), Net Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Other income (expense), net $ (583 ) $ 617 $ (1,200 ) (194 )% Other expense increased by $1.2 million, or 194%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to bank fees related to our term loan initiation with Hercules and the termination of the SVB term loan. Benefit for Income Taxes Nine months ended (in thousands, except percentages) September 30, 2021 September 30, 2020 $ Change % Change Benefit for income taxes $ 979 $ 251 $ 728 290 % We recorded income tax benefit of $1.0 million and $0.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The annual effective tax rate was 0.8% for the nine months ended September 30, 2021, compared to 0.7% for the nine months ended September 30, 2020. The annual effective tax rate was lower than the federal statutory rate due primarily to a full valuation allowance in the United States and was partially offset by recurring items such as foreign taxes based on local country statutory rates, excess tax benefits related to share-based compensation, and foreign withholding taxes, as well as by discrete items that may occur in any given year but are not consistent from year to year. 37 Table of Contents 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 September 30, 2021, we had $792.7 million of cash and cash equivalents. Our primary requirements for liquidity and capital are investment in new products and technologies, the expansion of existing manufacturing facilities, working capital, debt service, acquisitions 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, 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. With the funds raised in connection with the Business Combination and the PIPE financing, we expect no additional capital will be needed to execute our business plan over the next 12 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 space system, 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. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies. 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. 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 September 30, 2021. As of September 30, 2021, there was $99.4 million outstanding under the Hercules Capital Secured Term Loan, of which $2.8 million was classified as current in the Company’s condensed consolidated balance sheets, with the remainder classified as a long-term borrowing. As of September 30, 2021, the Company had no availability under the Hercules Capital Secured Term Loan. In connection with the $100 million Hercules Capital Secured Term Loan, the Company repaid the $15 million advance under the SVB Revolving Line and Term Loan Line and terminated the Loan and Security Agreement (see below). 38 Table of Contents Revolving Line and Term Loan Line On December 23, 2020, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Silicon Valley Bank for a maximum of $35 million in financing which included a warrant to purchase 121,689 shares of common stock at a price of $1.28 per share (after giving effect to the exchange ratio in the Business Combination) (see Note 11 to our condensed consolidated financial statements contained elsewhere in this report). The $35 million may be drawn upon utilizing the Revolving Line and Term Loan Line (the “Revolving Line and Term Loan Line”) subject to certain terms and conditions. On May 13, 2021, the Company borrowed $15 million as a Term Loan advance under its Loan and Security Agreement. On June 10, 2021, the Company repaid the $15 million as a Term Loan advance under its Loan and Security Agreement upon funding of the Hercules Capital Secured Term Loan and the Revolving Line was closed. Cash Flows The following table summarizes our cash flows for the periods presented: (in thousands) Nine months ended September 30, 2021 Nine months ended September 30, 2020 Net cash provided by (used in): Operating activities $ (49,877 ) $ (21,415 ) Investing activities (11,447 ) (29,985 ) Financing activities 801,779 20,869 Effect of exchange rate changes (599 ) (683 ) Net decrease in cash, cash equivalents, and restricted cash $ 739,856 $ (31,214 ) Cash Flows from Operating Activities Net cash used for operating activities was $49.9 million for the nine months ended September 30, 2021 consisted of $120.5 million in operating loss, $70.2 million in non-cash expense and $0.5 million in cash from operating assets and liabilities. Included in the non-cash expense are $39.4 million in liability-classified warrant expense, $24.2 million in stock-based compensation expense and $7.4 million in depreciation and amortization. Included in the cash generation from operating assets and liabilities are $25.0 million increase in deferred revenue offset by a $12.2 million increase in inventory and a $10.6 million increase in accounts receivable. Cash Flows from Investing Activities Cash used in investing activities for the nine months ended September 30, 2021 of $11.4 million was primarily driven by lab investments in Long Beach, California, which will be used to support classified government programs, Launch Complex 1 in Mahia, New Zealand, where we are nearing completion on our second launch pad and adding additional support facilities to support launch operations and safety, and our propulsion development and test facility near Auckland, New Zealand, which consolidates and supports all Curie engine development and hot fire testing. Cash Flows from Financing Activities Cash provided by financing activities for the nine months ended September 30, 2021 of $801.8 million was primarily related to the closing of our Business Combination with VACQ and PIPE proceeds of $730.5 million, $98.9 million in a long-term secured term loan, $2.8 million from the exercise of stock options offset by $30.4 million in the repurchase of shares and options from management. 39 Table of Contents 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 S-1 Prospectus filed with the Securities and Exchange Commission on October 7, 2021, besides the below addition of warrant liability. Warrant Liability We account for the warrants assumed in connection with the Business Combination in accordance with the guidance contained in ASC 815-40, Derivatives and Hedging , under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classify the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our Consolidated Statements of Operations and Comprehensive Loss. 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.