Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. Certain information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to “Item 1A. Risk Factors” and the "Cautionary Note Regarding Forward-Looking Statements” sections of this Annual Report on Form 10-K. Unless the context otherwise requires, all references in this section to the “Company,” “Redwire,” “we,” “us” or “our” refer to Redwire Corporation and its consolidated subsidiaries.
Business Overview
Redwire is a global leader in space infrastructure - we provide the foundational building blocks that are enabling the most complex space missions. With decades of flight heritage combined with the agile and innovative culture of a commercial space platform, we are uniquely positioned to assist our customers in solving the complex challenges of future space missions.
With decades of proven flight heritage uniquely combined with innovative products and culture, Redwire is uniquely positioned to assist our customers in solving the complex challenges of future space missions and industries. Redwire has three primary areas of focus that form our business: (1) Enabling space mission providers, such as government agencies and large prime contractors, with a broad portfolio of space infrastructure, systems, subsystems, and components; (2) Providing the infrastructure and technology needed
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for people to permanently explore, live and work in space; and (3) assisting international spacefaring allies in the development of organic space capabilities.
Redwire is a global leader in space infrastructure enabling space mission providers with the foundational building blocks needed for their complex space missions to succeed.Space infrastructure is critical to our terrestrial economy in areas such as telecommunications, navigation and timing, climate monitoring, weather forecasting, Earth observation, national security, and even planetary defense. Redwire does not offer full mission solutions for all these areas, but our government and marquee customers such as government agencies and large prime contractors do.We offer a broad array of products and services, many of which have been enabling space missions since the 1960s and have been flight-proven on over 200 spaceflight missions, including missions such as the GPS constellation, New Horizons and Perseverance. We are also a provider of innovative technologies with the potential to help transform the economics of space and create new markets for its exploration and commercialization. One example of this is our proprietary roll out solar array (ROSA) systems. Other examples of our proprietary technologies include deployable structures, human-rated camera systems and digital engineering
Redwire plays a critical role for people to Explore, Live and Work in space.
•Explore:For decades, we have played a critical role in historic space exploration missions, such as NASA’s Mars Perseverance Rover. More recently, we served our partner Lockheed Martin and our customer NASA by providing the ”Eyes of Orion” for NASA’s Artemis I mission.
•Live:NASA has laid out a plan to decommission and deorbit the ISS by 2031. As a result, commercial space station development to replace the ISS is anticipated to occur over the next eight years. Redwire ROSA power solutions, berthing and docking mechanisms, robotics and other key technologies are expected to be major subsystems for this opportunity.
•Work: We are a leader in microgravity research and development on the ISS, with over 20 payloads developed and deployed. As commercial space stations and new space industries become a reality, demand is expected to increase for advanced in-space manufacturing and biotech facilities that generate new materials and breakthrough medical treatments manufactured in microgravity.
With the recently renewed global fascination with space, international spacefaring allies need a partner like Redwire to develop their organic space capabilities.With the acquisition of Belgium-based Redwire Space NV, we have a unique portfolio of highly synergistic and complementary core space infrastructure offerings that significantly enhance our access to addressable markets in Europe and the rest of the world. Redwire’s acquisition of Space NV comes as space budgets in Europe increase, with the European Space Agency receiving a 17% increase in budget compared to 2019. Across the globe, many nations see space as a unique opportunity to build national prestige and expand their economies. In addition to the U.S. and Europe, Saudi Arabia, the United Arab Emirates, Hungary, Poland, and India, are making notable investments in space technology, thereby significantly increasing the total addressable market for Redwire.
While Redwire has grown organically, we also continue to integrate several acquisitions from a fragmented landscape of space-focused technology companies with innovative capabilities and deep flight heritage. Many of our technologies are flight-proven and have been adopted by a broad range of customers across national security, civil and commercial space. Combining heritage and innovation has enabled us to accelerate the delivery of these disruptive technologies.
We believe the space economy is at an inflection point. The reduction of launch costs over the last decade has eliminated the single largest economic barrier to entry for the expanded utilization of space, and the increasing cadence of launches provides more flexible, reliable access. This lower cost access has resulted in both the expansion and modernization of traditional national security and civil uses of space and has enticed new commercial entrants to invest substantial capital to develop new space-based business models. Our goal is to provide a full suite of infrastructure solutions, including mission-critical components, services and systems that will contribute to a dramatic expansion of the space-based economy. We believe that our products and services are essential to the growth of space as a strategic military and commercial domain, as well as a frontier for science and exploration.
Recent Developments
During the year ended December 31, 2022, the Company continued to serve as a critical mission partner to commercial, civil, and national security customers with operational wins in areas such as power systems and structures, LEO commercialization and human space flight, as well as navigation, avionics and engineering solutions. Revenues, bookings and deliveries have gained momentum due to a virtuous cycle of quality performance leading to growing contracts in high-growth product lines. In addition, the Company’s go-to-market strategy has expanded work share with new and existing customers. These developments represent the Company’s continued enablement of the missions of today and demonstrate our dedication to accelerating humanity’s expansion into space by delivering reliable, economical, and sustainable infrastructure for future generations. Our products and technologies are enabling multiple constellations and multi-shipset, multi-year programs for commercial partners and government agencies, such as the Space
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Development Agency (“SDA”), the U.S. Space Force, National Aeronautics and Space Administration (“NASA”), and commercial customers.
Of particular note among our year-to-date accomplishments: in the first quarter of 2022, the Company successfully delivered multiple L-Band Link-16 Helical Antenna systems for the first generation of the SDA’s National Defense Space Architecture constellation’s Transport Layer. In the second quarter of 2022, Redwire engaged with an undisclosed customer to begin design and delivery of 42 high gain antennas. During the third quarter of 2022, the Company continued to deliver on expansion orders for this product offering to our National Security customers.
The Company continues to provide solar array solutions for a variety of customers, including early delivery relative to its baseline schedule of the fourth Roll-Out Solar Array (“ROSA”) solar array for augmentation of the International Space Station’s (“ISS”) power generation capabilities. Following up on the successful installation of wings 1 and 2 in 2021 and wings 3 and 4 in 2022, wings 5 and 6 are scheduled to be launched in 2023. In addition, wings 7 and 8 were awarded in 2022 to complete the ISS power system upgrade in 2024. During the second quarter of 2022, the Company also delivered additional shipsets of ROSA arrays to multiple commercial customers and expanded our ROSA product line backlog. ROSA is an innovative solar array technology proprietary to Redwire and is operating on a variety of missions such as NASA’s Double Asteroid Redirection Test (“DART”). In September 2022, NASA’s DART spacecraft, powered by two ROSA wings and guided by digital sun sensors produced by the Company, crashed into the asteroid moonlet Dimorphos and successfully completed the world’s first full-scale planetary defense test mission. The Company’s solar array product lines have a robust and growing backlog, including the Power and Propulsion Element of the Lunar Gateway and a variety of small low Earth orbit (“LEO”) satellites. To support anticipated growth of the ROSA, rigid panel solar arrays, and deployable structures product line, the Company opened a new facility in Goleta, CA in the third quarter of 2022.
During the year ended December 31, 2022, the Company introduced new product configurations and entered into new strategic relationships to expand its total addressable market and support future growth opportunities for the star trackers, sun sensors, and camera systems product lines. In addition, the Company’s digital engineering teams continued to deliver modeling and simulation demonstrations for multiple customers. Cost increases and additional research and development investment in this area impacted the Company’s performance for the year ended December 31, 2022. The Company expects to continue to invest in technologies and infrastructure to increase production capacity and operating leverage through the remainder of 2022.
Merger with Genesis Park Acquisition Corp. (“GPAC”)
On March 25, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among GPAC, Shepard Merger Sub Corporation, a Delaware corporation and direct, wholly owned subsidiary of GPAC (“Merger Sub”), Cosmos Intermediate, LLC (“Cosmos”) and AE Red Holdings, LLC formerly known as Redwire, LLC (“Holdings”).
Pursuant to the Merger Agreement, the parties completed a business combination transaction by which, (i) GPAC domesticated as a Delaware corporation in accordance with Section 388 of the Delaware General Corporation Law and the Companies Act of the Cayman Islands (the “Domestication”), (ii) Merger Sub merged with and into Cosmos, with Cosmos being the surviving entity in the merger (the “First Merger”), and (iii) immediately following the First Merger, Cosmos merged with and into GPAC, with GPAC being the surviving entity in the merger (the “Second Merger” and, together with the First Merger, the “Mergers” or the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”). In this Annual Report on Form 10-K, we refer to the Domestication and the Transactions, collectively, as the “Merger”.
On September 2, 2021, the Company consummated the Merger. Upon the closing of the Merger, GPAC was renamed to Redwire Corporation. The Merger was accounted for as a reverse recapitalization in which GPAC was treated as the acquired company. A reverse recapitalization does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of the Company in many respects. In Space Inc. (“MIS”) was deemed the accounting predecessor and the combined entity is the successor SEC registrant, Redwire Corporation.
The aggregate consideration paid to Holdings consisted of a combination of cash and stock. The cash consideration was comprised of $75.0 million (such amount, the “Closing Cash Consideration”). The remainder of the consideration was comprised of (i) 37,200,000 shares of common stock, par value $0.0001 per share, of GPAC (the “Closing Share Consideration”) and (ii) 2,000,000 warrants to purchase one share of common stock per warrant (the “Closing Warrant Consideration”), with such amount of warrants corresponding to the forfeiture of certain warrants acquired by GPAC’s Sponsor, Genesis Park Holdings, a Cayman Islands limited liability company and Jefferies LLC in connection with GPAC’s initial public offering. At the effective time of the First Merger, the units of Cosmos were canceled and automatically deemed for all purposes to represent the right to receive, in the aggregate, the Closing Cash Consideration, the Closing Share Consideration and the Closing Warrant Consideration.
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Impact of Macroeconomic Environment and COVID-19
We continue to evaluate the ongoing impact of the macroeconomic environment and COVID-19 pandemic. Adverse macroeconomic conditions including, among others, heightened inflation, rising interest rates, volatility in capital markets, supply chain disruptions, labor shortages, regulatory challenges, and the ongoing impact of COVID-19 pandemic have affected the Company’s cost of capital, financial condition and results of operations. Decreases in the availability, cost and delivery of supplies have caused shortages and delays for the procurement of raw materials, components and other supplies required to fulfill the Company’s performance obligations.
The macroeconomic environment and COVID-19 pandemic have impacted the cost and schedule of numerous programs in our existing backlog resulting in program execution delays. We are also observing stress in our domestic and foreign supplier base, which is tied to global supply chain constraints, labor shortages, inflationary pressures and financial market volatility. The near and long-term implication of these delays and the timing of new awards remains uncertain.
During 2022, inflation and supply chain pressures have resulted in unfavorable cost estimates at completion (“EAC”) adjustments related to increased production costs, which has impacted our revenues, primarily in the Mission Solutions reporting unit, increased research and development costs, and increased cost of capital. To date, these factors have had a material adverse effect on our results of operations including the impairment expense recorded in the second and fourth quarter of 2022. Please refer to Note G, Note H, Note I and Note T of the accompanying notes to the consolidated financial statements for additional information.
We will continue to monitor and assess the actual and potential impacts of these matters on employees, customers, suppliers, all of which, to some extent, have and will continue to impact revenues, estimated costs to complete projects, earnings and cash flow.
Committed Equity Facility
On April 14, 2022, the Company entered into an $80.0 million common stock purchase agreement (“Purchase Agreement”) with B. Riley Principal Capital, LLC (“B. Riley”) to further support its growth strategy through initiatives such as accretive acquisitions and internal investments, to bolster working capital, and/or for general corporate purposes. Please refer to Note P of the accompanying notes to the consolidated financial statements for additional information.
Convertible Preferred Stock Offering
On October 28, 2022, the Company filed a Certificate of Designation describing the terms and conditions of newly issued Series A convertible preferred stock of the Company, par value $0.0001 (the “Convertible Preferred Stock”), with 88,000 total shares constituting the series. On the same date, the Company entered into (i) an investment agreement (the “AEI Investment Agreement”) with AE Industrial Partners Fund II, LP (“AEI Fund II”) and AE Industrial Partners Structured Solutions I, LP (“AEI Structured Solutions”, and together with AEI Fund II, (“AEI”), and (ii) an investment agreement (the “Bain Capital Investment Agreement,” and together with the AEI Investment Agreement, the “Investment Agreements”) with BCC Redwire Aggregator, LP (“Bain Capital”). Pursuant to the Investment Agreements, the Company sold an aggregate of 80,000 shares (the “Purchased Shares”) of the Convertible Preferred Stock to AEI and Bain Capital, for an aggregate purchase price of $80.0 million.The Company used a portion of the proceeds from the sale to finance the acquisition of Space NV. In addition, the Company intends to utilize the remaining proceeds to continue capitalizing on the growing market for space infrastructure which may include (i) investing in current capabilities which the Company believes will assist in meeting customer demand and in expanding current Company offerings; (ii) expanding and diversifying the Company’s global infrastructure offerings; and (iii) increasing the total available liquidity of the Company.
Under the terms of the investment agreements with each of Bain Capital and AEI, they hold, in the aggregate, 80,000 shares of newly issued Convertible Preferred Stock, with Bain Capital holding 50,000 shares and AEI holding 30,000 shares. The Convertible Preferred Stock is convertible into shares of Common Stock at an initial conversion price of $3.05 per share, subject to customary anti-dilution and price protective adjustments. The Convertible Preferred Stock can be converted into Common Stock at any time, and is subject to mandatory conversion upon thresholds related to the Company’s market capitalization and profitability metrics.
In addition, on November 7 and 8, 2022, the Company entered into additional investment agreements (the “Additional Investment Agreements”) with various investors (collectively, the “Additional Investors”) pursuant to which the Company issued and sold a total of 1,250 shares of the Convertible Preferred Stock to the Additional Investors for an aggregate purchase price of $1.25 million. Please refer to Note O of the accompanying notes to the consolidated financial statements for additional information.
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Acquisition Activity
On October 31, 2022, the Company acquired 100% of the equity interests in Redwire Space NV (f/k/a QinetiQ Space NV) (“Space NV”) for $36.9 million (€36.8 million) in cash. Space NV was founded in 1983 and is a Belgium-based commercial space business providing design and integration of critical space infrastructure and other instruments for end-to-end space missions. Space NV has over 35 years of mission heritage in orbit, delivering observation, platforms, science, navigation and secure communications critical infrastructure to civil and commercial space customers, including the European Space Agency (“ESA”) and the Belgian Science Policy Office (“BELSPO”). Space NV’s core product offerings complement Redwire’s portfolio and include advanced payloads, small satellite technology, berthing and docking equipment and space instruments. Space NV is expected to provide Redwire with enhanced scale and innovation capabilities across numerous high-growth space areas, an expanded total addressable market and increased exposure to European customers. Please refer to Note C of the accompanying notes to the consolidated financial statements for additional information.
Results of Operations
Results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021
The following table presents our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 expressed in U.S. thousands of dollars, along with the percentage of revenues and the dollar and percent change compared to the prior period:
Year Ended $ Change from prior year period % Change from prior year period
Operating expenses:
Net income (loss) attributable to noncontrolling interests (3) — — — (3) (100)
For purposes of the following discussion and analysis, any financial impact related to the acquisition of Oakman Aerospace, Inc. (“Oakman”), Deployable Space Systems, Inc. (“DPSS”) and Techshot, Inc. (“Techshot”) is collectively referred to as the “2021 Acquisitions.”
Revenues
Revenues increased by $22.9 million, or 17%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The year-over-year increase in revenues was primarily driven by $8.8 million of contributed revenue from the Techshot acquisition and $11.7 million of contributed revenue from the Space NV acquisition as well as changes in contract mix and the timing of product deliveries in the deployables and engineering solutions space. This activity was partially offset by the timing of subcontracted work in addition to macroeconomic headwinds, including inflation and supply chain pressures, that resulted in unfavorable EAC adjustments and increased production costs, primarily in the Mission Solutions reporting unit.
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Cost of Sales
Cost of sales increased $23.6 million, or 22%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The year-over-year increase in cost of sales was primarily driven by increased costs associated with revenue growth for the period, $6.6 million of contributed cost of sales from the Techshot acquisition and $9.2 million of contributed cost of sales from the Space NV acquisition, as well as the macroeconomic factors discussed above, primarily in the Mission Solutions reporting unit.
Gross Margin
Gross margin decreased $0.7 million, or 2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. As a percentage of sales, gross margin was 18% and 21% for the year ended December 31, 2022 and December 31, 2021, respectively. The year-over-year decrease in gross margin was primarily driven by changes in contract mix and an increase in production costs due to macroeconomic factors discussed above, primarily in the Mission Solutions reporting unit.
Selling, General and Administrative Expenses
SG&A expenses decreased $8.4 million, or 11%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The year-over-year decrease in SG&A was primarily driven by a reduction in equity-based compensation expense of $16.8 million related to profit interest awards that were fully expended during the year ended December 31, 2021. This was partially offset by increased payroll costs related to our expanded workforce of $6.5 million and $2.6 million contributed SG&A from the Space NV acquisition.
Contingent Earnout Expense
Contingent earnout expenses decreased $11.3 million, or 100%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Earnout expense in the year ended December 31, 2021 related to a settlement agreement the Company executed with MIS regarding the contingent earnout payment set forth in the purchase agreement and a Roccor contingent earnout payment. There was no such expense or payment recognized during the year ended December 31, 2022.
Transaction Expenses
Transaction expenses decreased $1.8 million, or 35%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The transaction expenses incurred in the year ended December 31, 2022 were primarily related to the acquisitions of Techshot and Space NV, while transaction expenses incurred in the year ended December 31, 2021 included the 2021 Acquisitions.
Impairment Expense
Impairment expense increased $96.6 million, or 100%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. During the second and fourth quarter of 2022, the Company performed an interim and annual quantitative goodwill and long-lived asset impairment test and recorded a non-cash, pre-tax and post-tax impairment charge of $96.6 million. Of this amount, $13.1 million related to property, plant and equipment, $30.9 million related to intangible assets, $2.7 million related to right-of-use assets and $49.9 million related to goodwill. There was no such impairment charge during the year ended December 31, 2021. Please refer to Note G, Note H, Note I, Note K and Note T of the accompanying notes to the consolidated financial statements for additional information related to impairment.
Research and Development
Research and development expenses increased $0.4 million, or 9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by the strategic decision to invest in future technologies despite macroeconomic factors that increased the cost of research and development activities. The remaining increase was due to varied spending on projects related to solar arrays, modeling and simulation environments, and technologies related to low Earth orbit commercialization, including biofabrication, polymer and metal manufacturing, and cold stowage services. Contributed expenses from the Techshot acquisition was $1.1 million for the year ended December 31, 2022.
Interest Expense, net
Interest expense, net increased $1.8 million, or 27.3%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily related to an increase in the Company’s cost of capital due to the increase in variable interest rates as well as the debt financing activities undertaken during the year ended December 31, 2022. Please refer to Note J of the accompanying notes to the consolidated financial statements for additional information related to the Company’s debt obligations.
Other (Income) Expense, net
Other (income) expense, net increased $12.2 million, or 319%, for the year ended December 31, 2022 compared to the year ended
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December 31, 2021. The year-over-year increase was primarily due to a gain recognized as a result of a decrease in the fair value of the private warrant liability of $17.8 million for the year ended December 31, 2022 as compared to $2.6 million for the year ended December 31, 2021. The increase was partially offset by $0.8 million of costs incurred as a result of executing the Purchase Agreement with B. Riley and a $0.5 million loss recognized as a result of a decrease in the fair value of the Committed Equity Facility. Please refer to Note D of the accompanying notes to the consolidated financial statements for additional information related to the private warrants and the Committed Equity Facility. Please refer to Note P of the accompanying notes to the consolidated financial statements for further information related to the Purchase Agreement with B. Riley.
Income Tax Expense (Benefit)
The table below provides information regarding our income tax expense (benefit) for the following periods:
Year Ended
(in thousands, except percent) December 31, 2022 December 31, 2021
Income tax expense (benefit) $ (7,972) $ (11,269)
Effective tax rate 5.8 % 15.5 %
The decrease in our effective tax rate for the year ended December 31, 2022 compared to the year ended December 31, 2021 is primarily due to the impact of nondeductible impairment and the valuation of warrants during the year ended December 31, 2022. Please refer to Note M of the accompanying notes to the consolidated financial statements for further discussion.
Net Income (Loss) Attributable to Noncontrolling Interests
The decrease in net income (loss) attributable to noncontrolling interests for the year ended December 31, 2022 compared to the year ended December 31, 2021 is due to the noncontrolling portion of net income (loss) related to the Company’s variable interest in Redu Operations Services SA/NV (“ROS”) for 2022. There was no such comparable amounts during the prior year. Please refer to Note V of the accompanying notes to the consolidated financial statements for further information.
Supplemental Non-GAAP Information
We use Adjusted EBITDA and Pro Forma Adjusted EBITDA to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources which are not calculated in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and are considered to be Non-GAAP financial performance measures. These Non-GAAP financial performance measures are used to supplement the financial information presented on a U.S. GAAP basis and should not be considered in isolation or as a substitute for the relevant U.S. GAAP measures and should be read in conjunction with information presented on a U.S. GAAP basis. Because not all companies use identical calculations, our presentation of Non-GAAP measures may not be comparable to other similarly titled measures of other companies.
Adjusted EBITDA is defined as net income (loss) adjusted for interest expense (income), net, income tax (benefit) expense, depreciation and amortization, impairment expense, acquisition deal costs, acquisition integration costs, acquisition earnout costs, purchase accounting fair value adjustment related to deferred revenue, severance costs, capital market and advisory fees, litigation-related expenses, write-off of long-lived assets, equity-based compensation, committed equity facility transaction costs, debt financing costs, and warrant liability fair value adjustments. Pro Forma Adjusted EBITDA is defined as Adjusted EBITDA further adjusted for the incremental Adjusted EBITDA that acquired businesses would have contributed for the periods presented if such acquisitions had occurred on January 1 of the year in which they occurred. Accordingly, historical financial information for the businesses acquired includes pro forma adjustments calculated in a manner consistent with the concepts of Article 8 of Regulation S-X, which are ultimately added back in the calculation of Adjusted EBITDA. As an emerging growth company that has completed a significant number of acquisitions in 2021 and 2022, we believe Pro Forma Adjusted EBITDA provides meaningful insights into the impact of strategic acquisitions as well as an indicative run rate of the Company’s future operating performance.
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The table below presents a reconciliation of Adjusted EBITDA and Pro Forma Adjusted EBITDA to net income (loss), computed in accordance with U.S. GAAP for the following periods:
Year Ended
Impairment expense 96,623 —
Acquisition integration costs (i) 3,915 2,383
Acquisition earnout costs (ii) — 11,337
Severance costs (iii) 1,311 —
Capital market and advisory fees (iv) 5,547 10,258
Litigation-related expenses (v) 2,877 2,978
Committed equity facility transaction costs (vii) 1,364 —
Debt financing costs (viii) 102 48
Warrant liability change in fair value adjustment (ix) (17,784) (2,629)
Pro forma impact on Adjusted EBITDA (x) 3,932 1,979
Pro Forma Adjusted EBITDA $ (7,035) $ 3,249
i.Redwire incurred acquisition costs including due diligence, integration costs and additional expenses related to pre-acquisition activity.
ii.Redwire incurred acquisition costs related to the Roccor and MIS contingent earnout payments and purchase accounting fair value adjustments to unwind deferred revenue for MIS and DPSS.
iii.Redwire incurred severance costs related to separation agreements entered into with former employees, including, but not limited to, the Company’s former CFO and COO.
iv.Redwire incurred capital market and advisory fees related to advisors assisting with preparation for the Merger and transitional costs associated with becoming a public company.
v.Redwire incurred expenses related to the Audit Committee investigation and securities litigation as further described in Note N of the accompanying notes to the consolidated financial statements.
vi.Redwire incurred expenses related to equity-based compensation under Redwire’s equity-based compensation plan.
vii.Redwire incurred expenses related to the committed equity facility with B. Riley, which includes consideration paid to enter into the Purchase Agreement as well as changes in the fair value of the associated derivative asset.
viii.Redwire incurred expenses related to debt financing agreements, including amendment related fees paid to third parties that are expensed in accordance with ASC 470, Debt. Amounts presented for the year ended December 31, 2021 were previously reported under capital market and advisory fees.
ix.Redwire adjusted the fair value of the private warrant liability with changes in fair value recognized as a gain or loss during the respective periods.
x.Pro forma impact is computed in a manner consistent with the concepts of Article 8 of Regulation S-X and represents the incremental results of a full period of operations assuming the entities acquired during the periods presented were acquired from January 1 of the year in which they occurred. For the year ended December 31, 2021, the pro forma impact included the results of Oakman, DPSS and Techshot, while the year ended December 31, 2022 included the results of Space NV.
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Key Performance Indicators
Book-to-Bill
Our book-to-bill ratio was as follows for the periods presented:
Year Ended
(in thousands, except ratio) December 31, 2022 December 31, 2021
Book-to-bill is the ratio of total contracts awarded to revenues recorded in the same period. The contracts awarded balance includes firm contract orders including time and material contracts which were awarded during the period and does not include unexercised contract options or potential orders under indefinite delivery/indefinite quantity contracts. Although the contracts awarded balance reflects firm contract orders, terminations, amendments, or contract cancellations may occur which could result in a reduction to the contracts awarded balance.
We view book-to-bill as an indicator of future revenue growth potential. To drive future revenue growth, our goal is for the level of contracts awarded in a given period to exceed the revenue recorded, thus yielding a book-to-bill ratio greater than 1.0.
Our book-to-bill ratio was 2.04 for the year ended December 31, 2022, as compared to 1.13 for the year ended December 31, 2021. For the year ended December 31, 2022, $109.8 million of the contracts awarded balance relates to acquired contract value from the Space NV acquisition. For the year ended December 31, 2021, $41.5 million of the contracts awarded balance relates to acquired contract value from the Oakman, DPSS and Techshot acquisitions.
Backlog
Our total backlog, which includes both contracted and uncontracted backlog, was as follows for the periods presented:
Organic revenue recognized during the period (148,891) (137,601)
Foreign currency translation (478) (174)
Acquisition-related contract value, beginning balance — —
Acquisition-related contract value acquired during the period 109,765 —
Acquisition-related additions during the period 22,731 —
Acquisition-related revenue recognized during the period (11,658) —
Foreign currency translation 7,307 —
Acquisition-related backlog, ending balance 128,145 —
We view growth in backlog as a key measure of our business growth. Contracted backlog represents the estimated dollar value of firm funded executed contracts for which work has not been performed (also known as the remaining performance obligations on a contract). Our contracted backlog includes $37.4 million and $10.7 million in remaining contract value from time and materials contracts as of December 31, 2022 and as of December 31, 2021, respectively.
Organic contracted backlog change excludes backlog activity from acquisitions for the first four full quarters since the entities’ acquisition date. Contracted backlog activity for the first four full quarters since the entities’ acquisition date is included in acquisition-related contracted backlog change. After the completion of four fiscal quarters, acquired entities are treated as organic for current and comparable historical periods.
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Organic contract value includes the remaining contract value as of January 1 not yet recognized as revenue and additional orders awarded during the period for those entities treated as organic. Acquisition-related contract value includes remaining contract value as of the acquisition date not yet recognized as revenue and additional orders awarded during the period for entities not treated as organic. The acquisition-related contract backlog activity presented in the table above includes only the contracted backlog of Space NV. Similarly, organic revenue includes revenue earned during the period presented for those entities treated as organic, while acquisition-related revenue includes the same for all other entities, excluding any pre-acquisition revenue earned during the period.
Uncontracted backlog represents the anticipated contract value, or portion thereof, of goods and services to be delivered under existing contracts which have not been appropriated or otherwise authorized. Uncontracted backlog includes $37.4 million and $67.8 million of contract extensions under negotiation that were priced, fully scoped, verbally awarded, and expected to be executed shortly as of December 31, 2022 and as of December 31, 2021, respectively.
Although contracted backlog reflects business associated with contracts that are considered to be firm, terminations, amendments or contract cancellations may occur, which could result in a reduction in our total backlog. In addition, some of our multi-year contracts are subject to annual funding. Management fully expects all amounts reflected in contracted backlog to ultimately be fully funded. Contracted backlog from foreign operations in Luxembourg and Belgium was $129.9 million and $5.3 million as of December 31, 2022 and December 31, 2021, respectively. These amounts are subject to foreign exchange rate translations from euros to U.S. dollars that could cause the remaining backlog balance to fluctuate with the foreign exchange rate at the time of measurement.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows provided by our operations, access to existing credit facilities, proceeds from the issuance of common stock under the B. Riley committed equity facility and proceeds from the sale of Convertible Preferred Stock. Since its inception, the Company has incurred net losses and negative operating cash flow, and has used its cash to fund capital expenditures, costs associated with the Company’s acquisitions, and costs associated with the Merger, among other uses. While some of these cash outflows have been non-recurring in nature, the Company has continued to experience net cash outflows from operating activities. While the Company believes its continued growth and cash flow management will result in improvements in cash from operating activities going forward, there can be no assurance these improvements will be achieved.
Our primary short-term cash requirements are to fund working capital, operating lease obligations, and short-term debt, including current maturities of long-term debt. Working capital requirements can vary significantly from period to period, particularly as a result of the timing of receipts and disbursements related to long-term contracts. Significant fluctuations in working capital could adversely impact the Company’s cash position and short-term liquidity needs.
Our medium-term to long-term cash requirements are to service and repay debt, expand our breadth and footprint through acquisitions as well as invest in facilities, equipment, technologies, and research and development for our growth initiatives. To support these initiatives, we expect to continue to make significant investments in our business, including hiring additional staff, implementing processes and procedures to address public company requirements and other customary practices as well as evaluating strategic acquisitions. As a result, we will likely incur additional operating expenses and capital expenditures.
Our ability to fund our cash needs is dependent upon the successful execution of our business strategy and future operating results. Our future operating results are subject to, among others, general economic conditions, including as a result of the COVID-19 pandemic, heightened inflation, rising interest rates and supply chain pressures, competitive dynamics in our target markets as well as legislative and regulatory factors that may be outside of our control. As part of our business and debt management strategy, we continuously evaluate opportunities to further strengthen our financial and liquidity position including the issuance of additional equity or debt securities, refinance or otherwise restructure our existing credit facilities, or enter into new financing arrangements. On April 14, 2022, the Company entered into a committed equity facility and during the fourth quarter of 2022 sold shares of Convertible Preferred Stock. See below for more information. In addition, the Company has been executing on certain cost reduction actions including, among others, integration-related workforce rationalizations, real estate synergies, business unit optimization initiatives, and cost savings associated with certain Corporate level employment costs. There can be no assurance that any of these actions will be sufficient to allow us to service our debt obligations, meet our debt covenants, or that such actions will not result in an adverse impact on our business.
On October 28, 2022, the Company entered into the Investment Agreements. Pursuant to the Investment Agreements, the Company sold an aggregate of 80,000 shares of the Convertible Preferred Stock to AEI and Bain Capital, for an aggregate purchase price of $80.0 million. The closing of the purchase and sale to AEI occurred simultaneously with the signing of the AEI Investment Agreement on October 28, 2022. The closing of the purchase and sale to Bain Capital occurred on November 3, 2022. In addition, on November 7 and 8, 2022, the Company entered into the Additional Investment Agreements with the Additional Investors, pursuant to which the Company issued and sold a total of 1,250 shares of the Convertible Preferred Stock to the Additional Investors for an aggregate purchase price of $1.25 million.
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The Company used a portion of the proceeds from the sale of the Purchased Shares to finance the acquisition of Space NV. In addition, the Company intends to use the remaining proceeds for certain corporate purposes, which may include (i) investing in current capabilities which the Company believes will assist in meeting customer demand and in expanding current Company offerings; (ii) expanding and diversifying the Company’s global infrastructure offerings; and (iii) increasing the total available liquidity of the Company. Please refer to Note J of the accompanying notes to the consolidated financial statements for additional information.
As of December 31, 2022, our available liquidity totaled $53.3 million, which was comprised of $28.3 million in cash and cash equivalents, and $25.0 million in available borrowings from our existing credit facilities. We believe that our existing sources of liquidity will be sufficient to meet our working capital needs and comply with our debt covenants for at least the next twelve months from the date on which our consolidated financial statements were issued. However, the Company’s current liquidity may not be sufficient to meet the required long-term liquidity needs associated with continued use of cash from operating activities at historical levels, in addition to its other liquidity needs associated with its capital expenditures, debt payments, and other investing and financing requirements.
The table below summarizes our outstanding debt as of the following periods:
Adams Street Revolving Credit Facility — —
Less: unamortized discounts and issuance costs 1,615 1,653
Less: Short-term debt, including current portion of long-term debt 2,578 2,684
Adams Street Credit Agreement
On October 28, 2020, we entered into the Adams Street Credit Agreement, which included the following:
i.$31.0 million term loan (the “Adams Street Term Loan”). Proceeds from the Adams Street Term Loan were used to finance the acquisition of Roccor, pay acquisition-related costs, fund working capital needs (including the payment of any working capital adjustment pursuant to the Roccor acquisition agreement) and other general corporate purposes;
ii.$5.0 million revolving credit facility (the “Adams Street Revolving Credit Facility”), which has been increased as set forth below; and
iii.$15.0 million delayed draw term loan (the “Adams Street Delayed Draw Term Loan”).
On January 15, 2021, we drew $15.0 million on the delayed draw term loan to finance the Oakman acquisition. On February 17, 2021, we amended the Adams Street Credit Agreement to increase the principal amount of the Adams Street Term Loan by an additional $32.0 million to finance the DPSS acquisition. On July 30, 2021, we drew $3.0 million on the revolving credit facility and repaid the $3.0 million draw down on September 23, 2021. During the year ended December 31, 2022, the Company made $1.0 million of net payments on the total debt outstanding, including repayments on borrowings under the revolving credit facility. As of December 31, 2022, there were no borrowings outstanding on the revolving credit facility.
On September 2, 2021, the Adams Street Credit Agreement was amended to provide that the consolidated total net leverage ratio not exceed 6.50:1.00 on the last day of any quarter (“the Financial Covenant”), to remove the cap on the amount of unrestricted cash which may be netted for purposes of the Financial Covenant, to redefine “Consolidated EBITDA”, and to reset the call protection terms.
On March 25, 2022, the Company entered into a Third Amendment (the “Third Amendment”) to the Adams Street Capital Credit Agreement to, among other things, increase commitments under the revolving credit facility from $5.0 million to $25.0 million.
The Third Amendment also modified certain negative covenants and increased the per annum interest rate (i) with respect to revolving loans in an aggregate principal amount of $5.0 million or less, to 6.00% for Eurocurrency rate loans and 5.00% for Base Rate Loans,
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and (ii) with respect to revolving loans in an aggregate principal amount in excess of $5.0 million, to 7.50% for Eurocurrency rate loans and 6.50% for Base Rate Loans.
The Adams Street Credit Agreement has a maturity date of October 28, 2026. The Adams Street Credit Agreement is secured by a first lien security interest in all right, title or interest in or to certain assets and properties owned by us and the guarantors included in the Adams Street Credit Agreement. The Adams Street Credit Agreement requires us to meet customary affirmative and negative covenants, default provisions, representations and warranties and other terms and conditions. We are required to make mandatory prepayments of the outstanding principal and accrued interest under the Adams Street Credit Agreement (i) upon the occurrence of certain events and (ii) to the extent a specified net leverage ratio is exceeded as evaluated on any test period ending date. The test period ending dates are March 31, June 30, September 30 and December 31 each year, starting on March 31, 2021, through the maturity of the agreement.
The Adams Street Capital Credit Agreement, as amended, contains certain customary representations and warranties, affirmative and other covenants and events of default, including among other things, payment defaults, breach of representations and warranties, and covenant defaults.
In connection with the entry into the Third Amendment, AEI and certain of its affiliates (the “AEI Guarantors”), provided a limited guarantee for the payment of outstanding revolving loans in excess of $10.0 million, with a $15.0 million cap in the aggregate. In the event that the AEI Guarantors are required to make payments to the lenders under the Adams Street Capital Credit Agreement pursuant to the terms of the limited guarantee, each AEI Guarantor would be subrogated to the rights of the lenders. In connection with the limited guarantee, the Lead Borrower agreed to pay to the AEI Guarantors, a fee equal to 2% of any amount actually paid by such guarantors under the limited guarantee. The fee is waivable by the AEI Guarantors in their discretion.
In August 2022, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to the Adams Street Capital Credit Agreement, which, among other things, suspended certain covenant compliance requirements commencing with the quarter ended December 31, 2022 through June 30, 2023, and resuming with the first test period ending September 30, 2023. Please refer to Note J of the accompanying notes to the consolidated financial statements for additional information on the Fourth Amendment.
On October 28, 2022, the Company entered into a Fifth Amendment (the “Fifth Amendment”) to the Adams Street Capital Credit Agreement, which among other things, further suspended certain covenant compliance requirements through September 30, 2023 with such compliance resuming with the fiscal quarter ending December 31, 2023 and providing that the consolidated total net leverage ratio not exceed 7.50:1.00 on the last day of any testing period through the quarter ending September 30, 2024 and not to exceed 6.5:1.00 for testing periods thereafter. Pursuant to the Fifth Amendment, the limited guarantees by the AEI Guarantors are no longer effective. Please refer to Note J of the accompanying notes to the consolidated financial statements for additional information.
As of December 31, 2022, we were in compliance with our debt covenants under the Adams Street Credit Agreement, as amended by the Fifth Amendment.
SVB Loan Agreement
On August 31, 2020, the Company entered into a $45.4 million loan agreement with Silicon Valley Bank, which was subsequently modified to increase the principal to $51.1 million on October 28, 2020 (the “SVB Loan”). On April 2, 2021, the Company amended the SVB Loan Agreement to extend the term from August 2021 to September 30, 2022. On September 2, 2021, the Company repaid the full outstanding principal and interest on the SVB Loan. Subsequent to the repayment, the Company does not have any other financial dealings with SVB.
Paycheck Protection Program Loan
On May 1, 2020, prior to its acquisition by the Company, Deep Space Systems, Inc. (“DSS”) received a Paycheck Protection Program (“PPP”) loan for $1.1 million (the “DSS PPP Loan”), with a maturity date of May 1, 2022. Under the terms of the DSS PPP Loan, DSS could apply for forgiveness under the PPP regulations if DSS used the proceeds of the loan for its payroll costs and other expenses in accordance with the requirements of the PPP. As the funds were disbursed to DSS prior to the acquisition, the Company intended to repay any unforgiven balance with funds held in a DSS savings account as of the date of the DSS acquisition. On June 18, 2021, $0.6 million of the DSS PPP Loan was forgiven and as a result reclassified as a note payable to the seller of DSS. During the Successor 2021 Period, we repaid the $0.6 million note payable to the seller of DSS and the remaining outstanding principal and interest of $0.5 million on the DSS PPP loan.
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D&O Financing Loans
On September 3, 2021, we entered into a $3.0 million loan with BankDirect Capital Finance (the “2021 D&O Financing Loan”) to finance our directors and officers insurance premium. The 2021 D&O Financing Loan has an interest rate of 1.74% per annum, an effective interest rate of 1.75%, and a maturity date of May 3, 2022. In May 2022, the Company repaid the full outstanding principal and interest on the 2021 D&O Financing Loan.
On September 3, 2022, the Company entered into a $2.7 million loan with ACFO Credit Corporation (the “2022 D&O Financing Loan”) to finance the Company’s directors and officers insurance premium. The 2022 D&O Financing Loan has an interest rate of 4.59% per annum and a maturity date of June 3, 2023.
Committed Equity Facility
On April 14, 2022, the Company entered into an $80.0 million Purchase Agreement with B. Riley. The Purchase Agreement governs a committed equity facility that provides the Company with the right, without obligation, to sell and issue up to $80.0 million of its common stock over a period of 24 months to B. Riley at the Company’s sole discretion, subject to certain limitations and conditions. Please refer to Note P of the accompanying notes to the consolidated financial statements for additional information.
Net proceeds under the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares of its common stock to B. Riley. The Company intends to use the net proceeds from this Purchase Agreement to further support its growth strategy through initiatives such as accretive acquisitions and internal investments, to bolster working capital and/or for general corporate purposes.
During the year ended December 31, 2022, the Company sold a total of 909,669 shares of the Company’s common stock for proceeds of $3.0 million pursuant to the Purchase Agreement. As of December 31, 2022, registered shares available for purchase under the committed equity facility were 8,090,331.
Contractual Obligations
The following table presents our contractual obligations as of December 31, 2022:
Adams Street Revolving Credit Facility — — — — — — —
The Company is obligated under certain operating leases for its facilities and office equipment. Certain facility leases contain predetermined fixed escalation of minimum rents at rates ranging from 1.96% to 4.00% per annum and renewal options that could extend certain leases up to an additional nine years; the office equipment lease contains a renewal option that could extend the lease to consecutive 60-day terms and a purchase option. As of December 31, 2022, the future annual minimum lease payments for operating leases for the year 2023 was estimated at $4.0 million with estimated aggregate minimum lease payments of $18.6 million through expiration of current leases. Refer to Note K of the accompanying notes to the consolidated financial statements for further information.
As of December 31, 2022, the Company had one facility lease that had not yet commenced but created significant future lease obligations in the amount of $1.5 million. The contract was determined to be an operating lease, whereby the Company is not required to make rent payments prior to the lease commencement date while construction is completed on the underlying asset. Due to the nature of the work and the amount of the Company’s contribution to construction period costs, the Company was determined not to be the accounting owner of the asset under construction as the landlord had substantially all of the construction period risks.
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Cash Flows
The table below summarizes certain information from the consolidated statements of cash flows for the following periods:
Year Ended
Net cash provided by (used in) operating activities $ (31,657) $ (37,358)
Net cash provided by (used in) investing activities (37,382) (38,541)
Net cash provided by (used in) financing activities 76,560 74,210
Effect of foreign currency rate changes on cash and cash equivalents 272 136
Net increase (decrease) in cash and cash equivalents 7,793 (1,553)
Cash and cash equivalents at end of period $ 28,316 $ 20,523
Operating activities
For the year ended December 31, 2022, net cash used in operating activities was $31.7 million. Net loss before deducting depreciation, amortization and other non-cash items generated a cash outflow of $35.7 million and was partially offset by a favorable change in net working capital of $4.1 million during this period. The change in net working capital was largely driven by an increase in deferred revenue of $8.3 million, partially offset by an increase in accounts receivable of $6.6 million. The changes in deferred revenue and accounts receivable relates to the timing of newly awarded contracts and billable milestones occurring during the year ended December 31, 2022.
For the year ended December 31, 2021, net cash used in operating activities was $37.4 million. Net loss before deducting depreciation, amortization and other non-cash items generated a cash outflow of $27.8 million and was further impacted by an unfavorable change in net working capital of $9.5 million during this period. The change in net working capital was largely driven by the increases in accounts receivable of $6.8 million, contract assets of $5.0 million, and prepaid insurance of $2.8 million, and decreases in deferred revenue of $4.5 million and notes payable of $0.6 million, partially offset by the increase in accounts payable and accrued expenses of $10.4 million. The change in prepaid insurance relates to the Company’s directors and officers insurance policy purchased and prepaid and the changes in accounts receivable, contract assets and deferred revenue relates to the timing of billable milestones occurring during the year ended December 31, 2021. The change in accounts payable and accrued expenses is primarily a result of increase accrued payroll related costs and accounts payable due to acquisitions.
Investing activities
For the year ended December 31, 2022, net cash used in investing activities was $37.4 million, consisting of $33.2 million for the acquisition of Space NV, $3.6 million used for the purchase of property, plant and equipment and $0.5 million used for the purchase of software related intangible assets.
For the year ended December 31, 2021, net cash used in investing activities was $38.5 million, consisting of $40.6 million used for the acquisition of Oakman, DPSS and Techshot, $2.1 million used for the purchase of property, plant and equipment and $0.8 million used for the purchase of software related intangible assets. This was partially offset by the settlement of related party receivables resulting in cash received of $4.9 million.
Financing activities
For the year ended December 31, 2022, net cash provided by financing activities was $76.6 million, consisting of $81.3 million proceeds received from the issuance of convertible preferred stock and $22.7 million of proceeds from the Adams Street Revolving Credit Facility and the 2022 D&O Financing Loan, partially offset by $23.7 million used for the repayment of debt, $4.8 million for the payment of issuance costs on the convertible preferred stock, and $1.3 million of loan fees paid to third parties for the amendments made to the Adams Street Credit Agreement. Additionally, $3.0 million was provided by proceeds from the committed equity facility with B. Riley, partially offset by $0.2 million of deal costs paid in relation to executing the Purchase Agreement.
For the year ended December 31, 2021 net cash provided by financing activities was $74.2 million, consisting of proceeds from debt of $53.0 million and proceeds from the Merger of $110.6 million offset by the repayment of debt of $52.8 million and Merger costs of $35.9 million.
Foreign Currency Exposures
Our operations in Belgium and Luxembourg conduct transactions that are primarily denominated in euros, which limits our foreign currency exposure. However, changes in exchange rates, and in particular a strengthening of euros, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars.
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Critical Accounting Estimates
For the critical accounting estimates used in preparing our consolidated financial statements, we make assumptions and judgments that can have a significant impact on net revenues, cost and expenses, and other (income) expense, net, in our consolidated statements of operations and comprehensive income (loss), as well as, on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.
In accordance with the Company’s policies, we regularly evaluate estimates, assumptions, and judgments. The results of which involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results the Company reports may differ from these estimates.
Business Combinations
Under the acquisition method of accounting, the Company recognizes tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at acquisition date. The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to goodwill, intangible assets, and contingent consideration.
Goodwill
The Company recognizes the goodwill for business combinations in which the acquisition method of accounting is applied, whereby the excess of the purchase consideration over the fair value of identifiable net assets acquired and liabilities assumed is allocated to goodwill. The goodwill reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to its existing products and markets.
The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has four reporting units, Mission Solutions, Space Components, Engineering Services, and Redwire Europe, which were determined based on similar economic characteristics, financial metrics and product and servicing offerings. Goodwill is tested annually for impairment as of October 1, or more frequently if events or circumstances indicate the carrying value may be impaired. In circumstances where a qualitative analysis indicates that the fair value of a reporting unit does not exceed its carrying value, a quantitative analysis is performed using an income approach.
Impairment testing requires management to make certain assumptions based upon information available at the time and have been deemed reasonable by management as of the measurement date. The fair value of the Company’s reporting units are generally determined using a combination of an income approach based on a discounted cash flow model as well as a market approach based on guideline public company revenues and earnings before interest, tax, depreciation and amortization multiples. Actual results could differ from these assumptions.
Additional risks for goodwill across all reporting units include, but are not limited to:
•our failure to reach our internal forecasts could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted value of our reporting units;
•adverse technological events that could impact our performance;
•volatility in equity and debt markets resulting in higher discount rates; and
•significant adverse changes in the regulatory environment or markets in which we operate.
During 2022, the Company performed its annual impairment tests as well as an interim assessment on its intangible assets, including goodwill, in accordance with ASC 350 and ASC 360. Please refer to Note G, Note H, Note I and Note T of the accompanying notes to the consolidated financial statements. During 2021, the Company performed its annual impairment tests, which indicated that no impairment existed.
Intangible Assets
Identifiable finite-lived intangible assets, including technology, trademarks, and customer relationships, have been acquired through the Company’s various business combinations. Finite-lived intangible assets are reported at cost, net of accumulated amortization, and are either amortized on a straight-line basis over their estimated useful lives or over the period the economic benefits of the intangible asset are consumed. Significant judgment is also required in assigning the respective useful lives of intangible assets. Our assessment of intangible assets that have a finite life is based on a number of factors including the competitive environment, market share, brand history, underlying product life cycles, attrition rate, operating plans, cash flows (i.e., economic life based on the discounted and
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undiscounted cash flows), future usage of intangible assets and the macroeconomic environment. The costs of finite-lived intangible assets are amortized to expense over the estimated useful life.
The fair value of acquired trademarks, technology, and customer relationships are estimated using various underlying judgments, assumptions, and estimates. Potential changes in the underlying judgments, assumptions, and estimates used in our valuations of acquired intangible assets could result in different estimates of the future fair values. A potential increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. The approaches used for determining the fair value of finite-lived technology, trademarks and customer relationships acquired depends on the circumstances; the Company has used the income approach (within the income approach, various methods are available such as multi-period excess earnings, with and without, incremental and relief from royalty methods). Within each income approach method, a tax amortization benefit is included, which represents the tax benefit resulting from the amortization of that intangible asset depending on the tax jurisdiction where the intangible asset is held.
The Company evaluates its intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable, in accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”) and ASC 350, Intangibles—Goodwill and Other (“ASC 350”). If the Company determines that the carrying amount of an asset or asset group is not recoverable based upon the undiscounted expected future cash flows of the asset or asset group, the Company records an impairment loss equal to the excess of carrying amount over the estimated fair value of the asset or asset group.
Contingent Consideration
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. The fair value of any contingent consideration is calculated considering the probability of occurrence of an earnout payment. The fair value of contingent consideration is estimated using the Black-Scholes options pricing model, which uses assumptions such as risk-free interest rates, discount rates and volatility rates.
Revenue Recognition
The recognition and measurement of revenue requires the use of judgments and estimates. Specifically, judgment is used in interpreting complex arrangements with nonstandard terms and conditions and determining when all criteria for revenue recognition have been met. The Company’s revenues are derived from the sales of products and services.
The Company engages in long-term contracts for production and service activities and recognizes revenue for performance obligations over time. The Company’s contracts generally do not contain penalties, credits, price concessions or other types of potential variable consideration. Prices are fixed at contract inception and are not contingent on performance or any other criteria. Revenue is recognized over time (versus point in time recognition), due to the fact that the Company’s performance creates an asset with no alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. The Company considers the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. These contracts include both fixed-price and cost reimbursable contracts. The Company’s cost reimbursable contracts typically include cost-plus fixed fee and time and material (“T&M”) contracts. The portion of the payments retained by the customer or advance payment is not considered a significant financing component because it is used to facilitate inventory demands at the onset of a contract and to safeguard the Company from the failure of the other party to abide by some or all of their obligations under the contract.
The Company recognizes revenue over time using the cost-to-cost method to measure progress on fixed-price and cost-plus fixed fee contracts. Under the cost-to-cost method, revenue is recognized based on the proportion of total costs incurred to estimated total costs-at-completion (“EAC”). An EAC includes all direct costs and indirect costs directly attributable to a program or allocable based on our program cost pooling arrangements. Estimates regarding the Company’s cost associated with the design, manufacture and delivery of products and services are used in determining the EAC. Changes in EAC are applied retrospectively and when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earnings applicable to performance in prior periods. Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” Accordingly, for acquisitions since adoption, contracts were recognized and measured in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” which does not prescribe a reset as of the date of acquisition. For T&M contracts, the Company recognizes revenue reflecting the number of direct labor hours expended in the performance of a contract multiplied by the contract billing rate, as well as reimbursement of other direct billable costs.
Our cost estimation process is based on the professional knowledge of our engineering, program management and financial professionals and draws on their significant experience and judgment. We prepare EACs for our contracts and calculate estimated
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revenues and costs over the life of our contracts. Accounting for long-term contracts requires significant judgment relative to estimating total contract revenues and costs, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed. The Company’s estimates are based upon the professional knowledge and experience of its engineers, program managers and other personnel, who review each long-term contract monthly to assess the contract’s schedule, performance, technical matters and estimated cost at completion. Subsequent to the adoption of ASU 2021-08, all changes in estimates are retrospectively applied. When adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earnings applicable to performance in prior periods.
Factors considered in these estimates include our historical performance, the availability, productivity and cost of labor, the nature and complexity of work to be performed, availability and cost of materials, components and subcontracts, the risk and impact of delayed performance and the level of indirect cost allocations.
Post-retirement Benefit Plans
Through the Space NV acquisition, the Company sponsors various post-retirement benefit plans for certain non-U.S. employees including two cash balance plans: (i) a defined benefit pension plan with risk-based coverage for death and disability benefits (collectively, the “Base Plan”) and (ii) a supplementary pension bonus plan that provides variable remuneration linked to employees’ performance (the “Performance Plan”). These cash balance plans are defined benefit plans which provide for post-retirement benefits based on employee and employer contributions and prescribed rates of return in accordance with Belgium Regulation. Accordingly, all Space NV employees are eligible to participate in the supplementary pensions immediately upon entry into service and until the legal retirement age of 65 years (in 2022). The Company is also required to maintain dormant accounts for former employees who have elected not to transfer plan contributions to their new employer. In addition, Belgium Regulation currently provides for statutory minimum guaranteed returns on employee and employer contributions up to a specified annual rate.
It is the Company’s policy to cover 100% of all benefit obligations associated with supplementary pensions, bonus pensions, and other post-retirement benefits (i.e., death and disability) through group insurance policies. Pursuant to the group insurance policies, the insurance entities unconditionally undertakes a legal obligation to provide specified benefits to specific individuals in return for a fixed consideration or premium. This transfer of the benefit obligation is irrevocable and involves the transfer of substantially all risk from the Company to the insurance entity. Accordingly, the Base Plan and Performance Plan are accounted for as insurance contracts in accordance with ASC 715-30. Under the Company’s group insurance policies, the insurance company guarantees minimum statutory reserves, employee and employer contributions, and specified annual rates of return. Combined employee and employer premiums are invested by the insurance company in Branch 21 investment funds in accordance with Belgium Regulation, which are mainly comprised of fixed income assets, which are commingled with the plan assets of other group insurances for the purpose of providing guaranteed returns. The insurance company has fiduciary responsibility for making investment decisions related to Branch 21 and there is no contractual requirement to legally separate the plan assets by individual account or group policy.
As a result of the foregoing, the Company has determined that the unit of account is the insurance contract and therefore, on a plan-by-plan basis, recognizes the net funded status as either a net asset recorded within other non-current assets or a net liability recorded within other non-current liabilities within the consolidated balance sheets. The funded status is measured as the difference between the fair value of each plan’s assets and the benefit obligation. The fair value of each plan’s assets and benefit obligation is measured on December 31st (the “Measurement Date”), consistent with the Company’s fiscal year end, or more frequently, upon the occurrence of certain events such as a significant plan amendment, settlement, or curtailment. Fair value is determined on a plan-by-plan basis and reflects key assumptions in effect as of the Measurement Date.
Actuarial Assumptions
The benefit obligations and assets of the Company’s defined benefit pension plans are measured using actuarial valuations, which are derived based on the terms of the insurance contract and other key assumptions provided for under Belgium Regulation. The assumptions made in this analysis affect both the calculation of the benefit obligations as of the measurement date and the calculation of net periodic pension costs in subsequent periods. When reassessing these assumptions, the Company considers past and current market conditions and makes judgments about future market trends. The Company also considers factors such as the timing and amounts of expected contributions to the plans and expected benefit payments to plan participants. The following disclosures include information related to key assumptions used to determine the projected benefit obligation and plan assets, which drive the net funded status recognized on the Company’s consolidated balance sheets.
For the calculation of the projected benefit obligation, all statutory minimum reserves are based on premiums paid by the employee and employer, plus guaranteed returns provided for under Belgium Regulation. Under the terms of the insurance contracts, all minimum reserves are provided 100% coverage while the return on plan assets is guaranteed for an additional amount plus opportunities for profit sharing as determined by the insurance entity. The difference between historical guaranteed rates of return and the guarantee provided by the insurance entity plus any profit sharing allocated to the participant accounts results in an unfunded or funded status that represents the Company’s projected benefit obligation for the respective plans.
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The amount of plan assets includes amounts contributed by the employee and employer and amounts earned from investing the contributions, less benefits paid. In accordance with the Company’s group insurance policies, contributions are invested in commingled investment funds, consisting of underlying equity and fixed income securities, respectively. In accordance with Belgium Regulation, a member of a supplementary pension plan whose employment contract comes to an end has the right to transfer their vested reserves to the pension institution of their new employer, contingent upon certain conditions. Accordingly, for ASC 715 purposes, the best evidence of fair value for plan assets is the cash surrender value as of the Measurement Date.
Differences between the actual return and expected return on plan assets during the year and changes in the benefit obligation for the Company’s defined benefit pension plans due to changes in the annual valuation assumptions generate actuarial gains or losses. Additionally, the benefit obligation for the Company’s defined benefit pension plans may increase or decrease as a result of plan amendments that affect the benefits to plan participants related to service for periods prior to the effective date of the amendment, which generates prior service costs or credits. The Company has elected to immediately recognize actuarial gains and losses as a component of net periodic pension cost for both plan assets and obligations.
Net Periodic Benefit Cost
Net periodic benefit cost is estimated at the beginning of the year, based on beginning-of-the-year (or end-of-prior-year) plan balances and assumptions. These costs are presented in the consolidated statements of operations as follows:
•Service cost are included with other employee compensation costs within cost of sales and selling, general and administrative expenses.
•The other components of net benefit cost are presented within other (income) expense, net, outside of operating expenses.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows to which the asset relates is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Using a discounted cash flow method involves significant judgment and requires the Company to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information. If facts and circumstances change, the use of different estimates and assumptions could result in a materially different outcome. The Company generally develops these forecasts based on recent sales data for existing products, acquisitions, and estimated future growth of the market in which it operates.
During 2022, the Company identified triggering events and performed impairment assessments on its long-lived assets, including right-of-used assets, in accordance with ASC 360. Please refer to Note K and Note T of the accompanying notes to the consolidated financial statements for additional information.
Income Taxes
Significant judgments are required in order to determine the realizability of tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future sources of taxable income, carry-forward periods available, the existence of prudent and feasible tax planning strategies and other relevant factors. The Company recognizes a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
Warrants
As part of the Merger, public warrants were established as equity and private warrants were established as a liability. Classification of the public warrants as equity instruments and the private warrants as liability instruments is based on management’s analysis of the guidance in ASC 815 Derivatives and Hedging and in a statement issued by the Staff of the SEC regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies.” Management determined that while the public warrants meet the definition of a derivative, they meet the equity scope exception in ASC 815-10-15-74(a) to be classified in stockholders’ equity and are not subject to remeasurement provided that the Company continues to meet the criteria for equity classification. Management considered whether the private warrants display the three characteristics of a derivative under ASC 815, and concluded that the private warrants meet the definition of a derivative. However, the private warrants fail to meet the equity scope
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exception in ASC 815-10-15-74(a) and thus are classified as a liability measured at fair value, subject to remeasurement at each reporting period. The Company measures the private warrant liability at fair value each reporting period with the change in fair value recorded as other (income) expense, net in the consolidated statements of operations and comprehensive income (loss). The Company measured public warrants at the fair value of the equity instruments as of the date of the Merger.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company and is not required to provide the information required under this Item 7A.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 238) 68
Consolidated Balance Sheets 69
Consolidated Statements of Operations and Comprehensive Income (Loss) 71
Consolidated Statements of Changes in Shareholders' Equity (Deficit) 72
Consolidated Statements of Cash Flows 73
Notes to Consolidated Financial Statements 74
Note A – Description of the Business 74
Note B – Summary of Significant Accounting Policies 75
Note C – Business Combinations 85
Note D – Fair Value of Financial Instruments 90
Note E – Accounts Receivable, net 93
Note F – Inventory 93
Note G – Property, Plant and Equipment 94
Note H – Intangible Assets, net 95
Note I – Goodwill 96
Note J – Debt 96
Note K – Leases 99
Note L – Warrants 101
Note M – Income Taxes 102
Note N – Commitments and Contingencies 104
Note O – Convertible Preferred Stock 105
Note P – Shareholders’ Equity 107
Note Q – Revenues 108
Note R – Employee Benefit Plans 110
Note S – Equity-Based Compensation 114
Note T – Impairment Expense 117
Note U – Net Income (Loss) per Common Share 119
Note V – Joint Venture 120
Note W – Related Parties 121
Note X – Subsequent Events 121
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Redwire Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Redwire Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive income (loss), of changes in shareholders’ equity (deficit) and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note K to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2022.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Jacksonville, Florida
March 31, 2023
We have served as the Company's auditor since 2020.
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REDWIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
Assets
Current assets:
Prepaid expenses and other current assets 5,687 2,488
Right-of-use assets 13,103 —
Equity method investments 3,269 —
Other non-current assets 909 —
Liabilities, Convertible Preferred Stock and Equity (Deficit)
Current liabilities:
Short-term debt, including current portion of long-term debt 2,578 2,684
Short-term operating lease liabilities 3,214 —
Short-term finance lease liabilities 299 —
Long-term operating lease liabilities 12,670 —
Long-term finance lease liabilities 579 —
Other non-current liabilities 506 730
Commitments and contingencies (Note N)
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Shareholders’ Equity (Deficit):
Treasury stock (381) —
Accumulated other comprehensive income (loss) 2,076 103
Total shareholders’ equity (deficit) (6,701) 107,222
Noncontrolling interests 226 —
(1)Please refer to Note O for additional information.
The accompanying notes are an integral part of the consolidated financial statements.
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REDWIRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars, except share and per share data)
Year Ended
Operating expenses:
Selling, general and administrative expenses 70,342 78,695
Contingent earnout expense — 11,337
Net income (loss) attributable to noncontrolling interests (3) —
Net income (loss) attributable to Redwire Corporation $ (130,617) $ (61,537)
Net income (loss) per common share(2):
Basic and diluted $ (2.09) $ (1.36)
Comprehensive income (loss):
Net income (loss) attributable to Redwire Corporation $ (130,617) $ (61,537)
Foreign currency translation gain (loss), net of tax 1,987 (403)
Total other comprehensive income (loss), net of tax 1,987 (403)
Total comprehensive income (loss) $ (128,630) $ (61,940)
(1)Please refer to Note G, Note H, Note I, Note K and Note T for additional information.
(2)Please refer to Note U for additional information.
The accompanying notes are an integral part of the consolidated financial statements.
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REDWIRE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands of U.S. dollars, except share and unit data)
Shares Amount
Earnout settlement in Parent’s equity — — 9,288 — — 9,288
Equity-based compensation expense — — 27,112 — — 27,112
Foreign currency translation, net of tax — — — — (403) (403)
(1) The units of the Company prior to the Merger (as defined in Note A) have been retroactively restated to reflect the exchange ratio established in the Merger (computed as 37,200,000 shares of common stock to 100 Company units).
Shares Amount Shares Amount
Common stock issued for share-based awards 427,941 — — — — — — — — —
Foreign currency translation, net of tax — — — — — — 1,973 1,973 14 1,987
The accompanying notes are an integral part of the consolidated financial statements.
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REDWIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Year Ended
Cash flows from operating activities:
Net income (loss) attributable to Redwire Corporation $ (130,617) $ (61,537)
Net income (loss) attributable to noncontrolling interests (3) —
Depreciation and amortization expense 11,288 10,584
Amortization of debt issuance costs and discount 490 304
Contingent earnout expense not yet settled — 448
Earnout settlement in Holdings’ equity — 9,288
Loss on change in fair value of committed equity facility 631 —
Gain on change in fair value of warrants (17,784) (2,629)
Deferred provision (benefit) for income taxes (8,238) (11,405)
Impairment expense 96,623 —
Income from equity method investments (58) —
Non-cash lease expense 264 —
Non-cash interest expense 690 —
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (6,646) (6,819)
(Increase) decrease in contract assets 813 (4,995)
(Increase) decrease in inventory (978) (195)
(Increase) decrease in prepaid insurance 579 (2,819)
(Increase) decrease in prepaid expenses and other assets 266 (527)
Increase (decrease) in accounts payable and accrued expenses (1) 10,379
Increase (decrease) in deferred revenue 8,270 (4,497)
Increase (decrease) in other liabilities 1,760 564
Increase (decrease) in notes payable to seller — (608)
Net cash provided by (used in) by operating activities (31,657) (37,358)
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (33,230) (40,558)
Purchases of property, plant and equipment, net (3,626) (2,094)
Purchase of intangible assets (526) (763)
Settlement of related party receivable — 4,874
Net cash provided by (used in) investing activities (37,382) (38,541)
Cash flows from financing activities:
Payment of debt issuance fees to third parties (1,254) (62)
Repayment of finance leases (55) —
Proceeds from issuance of common stock 2,956 —
Payment of committed equity facility transaction costs (161) —
Proceeds from issuance of convertible preferred stock 81,250 —
Payments of issuance costs related to convertible preferred stock (4,833) —
Payments for the Merger transaction costs — (35,935)
Proceeds from the Merger — 110,583
Payment of contingent earnout — (600)
Net cash provided by (used in) financing activities 76,560 74,210
Effect of foreign currency rate changes on cash and cash equivalents 272 136
Net increase (decrease) in cash and cash equivalents 7,793 (1,553)
Cash and cash equivalents at beginning of period 20,523 22,076
Cash and cash equivalents at end of period $ 28,316 $ 20,523
The accompanying notes are an integral part of the consolidated financial statements.
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REDWIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Note A – Description of the Business
Redwire Corporation develops and manufactures mission critical space solutions and high reliability components for the next generation space economy. With decades of flight heritage combined with the agile and innovative culture of a commercial space platform, Redwire Corporation is uniquely positioned to assist our customers in solving the complex challenges of future space missions.
AE Industrial Partners Fund II, LP (“AEI”), a private equity firm specializing in aerospace, defense, and government services, formed a series of acquisition vehicles on February 10, 2020, which included Cosmos Parent, LLC, Cosmos Intermediate, LLC, Cosmos Finance, LLC and Cosmos Acquisition, LLC, with Cosmos Parent, LLC being the top holding company. Cosmos Parent, LLC owned 100% of the equity in Cosmos Intermediate, LLC; Cosmos Intermediate, LLC owned 100% of the equity in Cosmos Finance, LLC; Cosmos Finance, LLC owned 100% of the equity in Cosmos Acquisition, LLC. Upon the formation of these acquisition vehicles, Cosmos Intermediate, LLC (“Successor”) effected a number of acquisitions through its wholly owned subsidiary, Cosmos Acquisition, LLC. Following the acquisitions, the Successor became a wholly owned subsidiary of AE Red Holdings, LLC formerly known as Redwire, LLC (“Holdings”).
Strategic acquisitions that augment our technology and product offerings are a key part of our growth strategy. From March 2020 through December 31, 2022, the Company has completed nine acquisitions, which collectively have provided a wide variety of complementary technologies and solutions to serve the Company’s target markets and customers. As of December 31, 2021, these acquisitions included: Adcole Space, LLC (“Adcole”), Deep Space Systems, Inc. (“DSS”), In Space Group, Inc. and its subsidiaries (collectively, “MIS” or “Predecessor”), Roccor, LLC (“Roccor”), LoadPath, LLC (“LoadPath”), Oakman Aerospace, Inc. (“Oakman”), Deployable Space Systems, Inc. (“DPSS”) and Techshot, Inc. (“Techshot”). On October 31, 2022, the Company completed the acquisition of Redwire Space NV (f/k/a Qinetiq Space NV) (“Space NV”) as described in Note C.
Through the acquisition of Space NV, the Company participates in a joint venture operation with SES Techcom S.A.for the purpose of performing maintenance and operations services (“M&O Services”) to the European Space Agency, among others. Pursuant to a shareholders agreement dated June 28, 2007, this joint venture was created under the form of two companies: Redu Space Service SA/NV (“RSS”) and Redu Operations Services SA/NV (“ROS”), both governed by Belgian law. Please refer to Note V for additional information.
Merger with Genesis Park Acquisition Corp. (“GPAC”)
On September 2, 2021, the merger (the “Merger”) with Genesis Park Acquisition Corp. (“GPAC”) was consummated pursuant to the Agreement and Plan of Merger dated March 25, 2021 by and among GPAC, Shepard Merger Sub Corporation, a Delaware corporation and direct, wholly owned subsidiary of GPAC, Cosmos Intermediate, LLC and Holdings. Upon the closing of the Merger, GPAC was renamed to Redwire Corporation (“Redwire” or the “Company”), the SEC registrant. As a result of the Merger, the Company received aggregate gross proceeds of $110.6 million from the trust account of GPAC and PIPE proceeds. Proceeds from the Merger were partially used to repay the $41.6 million outstanding under the Silicon Valley Bank (“SVB”) Loan, including interest of $0.1 million, and Merger transaction costs and other costs paid through the funds flow of $38.7 million, consisting of marketing, legal and other professional fees.
The Merger was accounted for as a reverse recapitalization in which GPAC was treated as the acquired company. A reverse recapitalization does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of Cosmos Intermediate, LLC in many respects. Immediately prior to the closing of the Merger, but following the consummation of the Company’s domestication to a Delaware corporation, the authorized capital stock of the Company consisted of 600,000,000 shares of capital stock, including (i) 500,000,000 shares of Redwire common stock with a par value $0.0001 per share and (ii) 100,000,000 shares of Redwire preferred stock. At the effective time of the Merger, the 100 company units of Cosmos Intermediate, LLC were canceled and automatically deemed for all purposes to represent Holdings’ right to receive, in the aggregate, $75.0 million of cash, 37,200,000 shares of common stock and 2,000,000 warrants to purchase one share of common stock per warrant (with such amount of warrants corresponding to the forfeiture of certain private placement warrants acquired by Genesis Park Holdings (the “Sponsor”) and Jefferies LLC (“Jefferies”) in connection with GPAC’s initial public offering). The exchanged 37,200,000 shares of common stock consideration to Holdings, the GPAC common stock shares outstanding at the time of closing of 13,961,273, and the PIPE financing shares issued at closing of 8,500,000 made up the total of the 59,661,273 shares of common stock outstanding as of September 2, 2021. The 100 units of the Company prior to the Merger were retroactively restated to reflect the exchange ratio established in the Merger (computed as 37,200,000 shares of common stock to 100 Company units).
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REDWIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Impact of Macroeconomic Environment and COVID-19
Adverse macroeconomic conditions including, among others, heightened inflation, rising interest rates, volatility in capital markets, supply chain disruptions, labor shortages, regulatory challenges, and the ongoing impact of the COVID-19 pandemic have affected the Company’s cost of capital, financial condition and results of operations. Decreases in the availability, cost and delivery of supplies have caused shortages and delays for the procurement of raw materials, components and other supplies required to fulfill the Company’s performance obligations. The long-term impacts of macroeconomic conditions and COVID-19 on government budgets and other funding priorities are difficult to predict and could continue to adversely affect the Company’s operations and financial results. There can be no assurances that actions or responsive measures taken on the part of the Company or governmental authorities will be successful in mitigating increased risks associated with macroeconomic conditions and COVID-19.
Committed Equity Facility
On April 14, 2022, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital, LLC (“B. Riley”). Pursuant to the Purchase Agreement, the Company has the right to sell to B. Riley up to $80.0 million of newly issued shares of the Company’s common stock, subject to certain conditions and limitations. The Purchase Agreement governs a committed equity facility that will be used to further support the Company’s growth strategy through initiatives such as accretive acquisitions and internal investments, to bolster working capital, and/or for general corporate purposes. Please refer to Note D and Note P for additional information.
Convertible Preferred Stock Offering
On October 28, 2022, the Company filed a Certificate of Designation describing the terms and conditions of newly issued Series A convertible preferred stock of the Company, par value $0.0001 (the “Convertible Preferred Stock”), with 88,000 total shares constituting the series. On the same date, the Company entered into (i) an investment agreement (the “AEI Investment Agreement”) with AE Industrial Partners Fund II, LP (“AEI Fund II”) and AE Industrial Partners Structured Solutions I, LP (“AEI Structured Solutions”, and together with AEI Fund II, (“AEI”), and (ii) an investment agreement (the “Bain Capital Investment Agreement,” and together with the AEI Investment Agreement, the “Investment Agreements”) with BCC Redwire Aggregator, LP (“Bain Capital”). Pursuant to the Investment Agreements, the Company sold an aggregate of 80,000 shares (the “Purchased Shares”) of the Convertible Preferred Stock to AEI and Bain Capital, for an aggregate purchase price of $80.0 million. The Company used a portion of the proceeds from the sale of the Purchased Shares to finance the acquisition of Space NV. In addition, the Company intends to use the remaining proceeds for certain corporate purposes, which may include (i) investing in current capabilities which the Company believes will assist in meeting customer demand and in expanding current Company offerings; (ii) expanding and diversifying the Company’s global infrastructure offerings; and (iii) increasing the total available liquidity of the Company.
In addition, on November 7 and 8, 2022, the Company entered into additional investment agreements (the “Additional Investment Agreements”) with various investors (collectively, the “Additional Investors,” and together with AEI and Bain Capital, the “Investors”) pursuant to which the Company issued and sold a total of 1,250 shares of the Convertible Preferred Stock to the Additional Investors for an aggregate purchase price of $1.25 million.
Please refer to Note P for additional information.
Note B – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation.
The Company uses a fiscal year ending on December 31st of each year. The Company consolidates all entities that are controlled by ownership of a majority voting interest. Additionally, there are situations in which consolidation is required even though the usual condition of consolidation does not apply. Generally, this occurs when an entity holds an interest in another business entity that was achieved through arrangements that do not involve voting interests, which results in a disproportionate relationship between such entity’s voting interests in, and its exposure to the economic risks and potential rewards of, the other business entity. This disproportionate relationship results in what is known as a variable interest, and the entity in which the Company has the variable interest is referred to as a Variable Interest Entity (“VIE”). An entity must consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Please refer to Note V for additional information.
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REDWIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.
Management has prepared the estimates using the most current and best available information that are considered reasonable under the circumstances. However, actual results could differ materially from those estimates. Accounting policies subject to estimates include, but are not limited to, valuation of goodwill and intangible assets, contingent consideration, revenue recognition, income taxes, and warrant liabilities.
Segment Information
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has concluded that it operates in one operating segment and one reportable segment, space infrastructure, as the CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
Business Combinations
The Company utilizes the acquisition method of accounting in Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), for all transactions and events in which it obtains control over one or more other businesses (even if less than 100% ownership is acquired), to recognize the fair value of all assets acquired and liabilities assumed and to establish the acquisition date fair value as of the measurement date.
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business combination date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the measurement period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is identified. Transaction costs that are incurred in connection with a business combination, other than costs associated with the issuance of debt or equity securities, are expensed as incurred.
Contingent consideration is classified as a liability or as equity on the basis of the definitions of a financial liability and an equity instrument; contingent consideration payable in cash is classified as a liability. The Company recognizes the fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control of the acquiree is obtained. Contingent consideration payments related to acquisitions are measured at fair value each reporting period using Level 3 unobservable inputs (as defined in the Fair Value of Financial Instruments policy below). When reported, any changes in the fair value of these contingent consideration payments are included in contingent earnout expense on the consolidated statements of operations and comprehensive income (loss).
Please refer to Note C for additional information related to the Company’s business combinations.
Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities, including, but not limited to, contingent consideration, at fair value. ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.These two types of inputs have created the following fair-value hierarchy:
Level 1: Quoted prices for identical instruments in active markets;
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REDWIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Foreign Currency Translation
The Company’s consolidated financial statements are presented in United States dollars (“USD”), which is the functional currency of the Company. The local currency of our operations in Luxembourg and Belgium, the euro, is considered to be the functional currency of those operations. Assets and liabilities of the Company's foreign subsidiaries, where the functional currency is the local currency, are translated into USD at exchange rates effective as of the balance sheet date. Revenues and expenses are translated using average exchange rates in effect for the periods presented.
Balance sheet translation adjustments are reported in accumulated other comprehensive income (loss). Realized gains and losses on foreign currency transactions are included in other (income) expense, net on the consolidated statements of operations and comprehensive income (loss).
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, cash balances with banks and similar institutions and all highly liquid investments with an original maturity of three months or less.
The table below presents supplemental cash flow information during the following periods:
Year Ended
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes — —
Earnout settlement — 1,602
Non-Cash Investing and Financing Activities:
Holdings’ contribution for acquisition of businesses $ — $ 40,646
Initial fair value of warrants at closing of Merger — 21,727
Capital expenditures not yet paid 1,209 1,576
Equity financing transaction costs not yet paid 622 —
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, certificates of deposit, and accounts receivable. The Company places its cash and cash equivalents with financial institutions of high-credit quality. At times, such amounts may exceed federally insured limits. Cash and cash equivalents on deposit or invested with financial and lending institutions was $28.3 million and $20.5 million, as of December 31, 2022 and December 31, 2021, respectively.
The Company provides credit to customers in the normal course of business. The carrying amount of current accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be fully collected. The allowance is based on the assessment of the following factors: customer creditworthiness, historical payment experience, age of outstanding accounts receivable and any applicable collateral.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is calculated on a first-in, first-out (“FIFO”) basis. Inventory may consist of raw materials, work-in-process, and finished goods. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expense. Inventory is impaired when it is probable that inventory values exceed their net realizable value. Changes in these estimates are included in cost of sales in the consolidated statements of operations and comprehensive income (loss).
Property, Plant and Equipment
Property, plant and equipment are the long-lived, physical assets of the Company, acquired for use in the Company’s normal business operations and not intended for resale by the Company. These assets are recorded at cost. Renewals and betterments that increase the useful lives of the assets are capitalized. Repair and maintenance expenditures that increase the efficiency of the assets are expensed as
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REDWIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
incurred. The Company occasionally designs and builds its own machinery. The cost of these projects, including direct material and labor, and other indirect costs attributable to the construction, are capitalized as construction in progress. No provision for depreciation is made on construction in progress until the related assets are completed and placed in service.
Depreciation is based on the estimated useful lives of the assets using the straight-line method and is included in selling, general and administrative expenses or cost of sales based upon the asset; depreciation and amortization expense includes the amortization of assets under finance leases.
Expected useful lives for property, plant and equipment are reviewed at least annually. Estimated useful lives are as follows:
Estimated usefullife in years
Computer equipment 3
Furniture and fixtures 7
Laboratory equipment 3-10
Leasehold improvements shorter of 5 or lease term
Assets subject to finance lease lease term
As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in other (income) expense, net in the consolidated statements of operations and comprehensive income (loss).
The Company regularly evaluates its property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable, in accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”). If the Company determines that the carrying amount of an asset or asset group is not recoverable based upon the undiscounted expected future cash flows of the asset or asset group, the Company records an impairment loss equal to the excess of carrying amount over the estimated fair value of the asset or asset group.
During 2022, the Company identified triggering events and performed impairment assessments on its long-lived asset groups in accordance with ASC 360. Please refer to Note G and Note T for additional information.
Leases
The Company is obligated under certain operating and finance leases for its facilities, vehicles and office equipment. The Company assesses whether an arrangement is a lease or contains a lease at inception of the arrangement. For arrangements considered leases, the Company assesses the lease for finance or operating classification and records a right-of-use (ROU) asset and lease liability as of the commencement date. The Company uses the date of initial possession as the lease commencement date, which is generally when the underlying asset becomes available for the Company’s specific use. The Company’s operating leases are included in right-of-use assets, short-term operating lease liabilities and long-term operating lease liabilities on the consolidated balance sheets. The Company’s finance leases consist primarily of vehicles and are included in property, plant and equipment, net, short-term finance lease liabilities and long-term finance lease liabilities on the consolidated balance sheets.
ROU assets represent the Company’s right to use the underlying asset for the lease term and are depreciated over the shorter of the useful life of the asset and the lease term. Lease liabilities represent the present value of the Company’s obligations to make payments arising over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate as of the lease commencement date, which reflects the fixed rate the Company would have to pay to borrow an amount equal to the future minimum lease payments over a similar term. Operating lease expense includes the sum of imputed interest expense and depreciation. For finance leases, interest is recognized and presented separately in Interest expense, net on the consolidated statements of operations and comprehensive income (loss). The lease term includes renewal options which are reasonably certain to be exercised.
Lease and non-lease related components, such as common area maintenance costs, obligations to return the underlying asset to its original condition, or costs to dismantle and remove the underlying asset at the end of the term, are accounted for separately. Certain leasing arrangements contain predetermined fixed escalation of minimum rents and/or require variable payments, such as insurance and tax payments. Variable lease payments which depend on an index or other rate are initially measured using the index or rate at the
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(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
commencement date and included in the measurement of the ROU asset and lease liability. The subsequent change in lease payments as a result of a change in the index or other rate are recognized as expense in the period in which the payment occurs.
The Company does not have any material restrictions or covenants in its lease agreements, sale leaseback transactions or residual value guarantees. Leases with an initial term of twelve months or less are not recorded on the Company’s consolidated balance sheets and are recognized as lease expense on a straight-line basis in the consolidated statements of operations and comprehensive income (loss).
During 2022, the Company identified triggering events and performed impairment assessments on its long-lived asset groups, including right-of-used assets, in accordance with ASC 360. Please refer to Note K and Note T for additional information.
IntangibleAssets, including Goodwill
The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition.
Intangible assets include those acquired from the Company’s various business combinations as well as licensed software for internal-use. Licensed software is acquired solely to meet the Company’s internal needs which provides the right to take possession of the software and is hosted on the Company’s specific hardware components as well as the capitalization of qualifying costs during the application development stage. Indefinite-lived intangible assets include tradenames and in-process research and development (“IPR&D”). Finite-lived intangible assets include customer relationships, technology, trademarks, and internal-use software. Finite-lived intangible assets are reported at cost, net of accumulated amortization, and are either amortized on a straight-line basis over their estimated useful lives or over the period the economic benefits of the intangible assets are consumed. IPR&D is recognized as an indefinite-lived intangible asset until completion or abandonment of the related project, then reclassified as a finite-lived intangible asset and amortized over the remaining useful life.
Acquired intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing or more frequently if events or a change in circumstance indicate that it is more likely than not that the asset is impaired. This testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value. The Company performs an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired, consistent with the methodologies previously disclosed for Property, plant and equipment.
Goodwill is the amount by which the purchase price exceeded the fair value of the net identifiable assets acquired and liabilities assumed in a business combination on the date of acquisition. The Company’s goodwill has been allocated to and is tested for impairment at a level referred to as the reporting unit. The Company has four reporting units, Mission Solutions, Space Components, Engineering Services and Redwire Europe, which were determined based on similar economic characteristics, financial metrics and product and servicing offerings.
The Company tests goodwill for impairment annually as of October 1st or when events and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. The Company first assesses goodwill for impairment on a qualitative basis to determine if a quantitative assessment is necessary. In circumstances where the qualitative analysis (Step 0) indicates that it is more likely than not that the fair value of a reporting unit does not exceed its carrying value, the Company would perform a quantitative analysis (Step 1) and the goodwill impairment loss, if any, is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. In general, the Company performs a quantitative test for most reporting units at least once every three years, or more frequently if deemed necessary by Management.
For Step 1, the Company compares the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in an amount equal to that excess. In general, the Company estimates the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and market-based valuation methodologies such as comparable public company trading values and values observed in recent business acquisitions. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings multiples and transaction multiples. The cash flows employed in the DCF analysis are based on the Company best estimate of future revenues, gross margins, operating expenses, and cash flows with consideration for other factors, such as general market conditions, U.S. and foreign Government budgets, existing contracted and uncontracted backlog, subcontractor agreements, changes in working capital, long-term business plans and historical operating performance. The discount rates utilized in the DCF analysis are based on the respective reporting unit’s weighted average
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(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
cost of capital, which takes into account the relative weights of debt and equity components within the Company’s existing capital structure and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and allocations of certain assets and liabilities held at the corporate level.
During 2022, the Company performed its annual impairment tests as well as an interim assessment on its intangible assets, including goodwill, in accordance with ASC 350 and ASC 360. Please refer to Note H, Note K and Note T for additional information. During 2021, the Company performed its annual impairment tests, which indicated that no impairment existed.
Equity Method Investments
Investments where the Company has the ability to exercise significant influence, but does not have control of the investee, are accounted for under the equity method of accounting and presented as equity method investments on the consolidated balance sheets. Significant influence typically exists if the Company has a 20% to 50% ownership interest in the investee. Under this method of accounting, the Company’s share of the net earnings or losses of the investee is included in other income, net on the consolidated statements of operations and comprehensive income (loss) since the activities of the investee are not closely aligned with the operations of the business.
The Company evaluates its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. Please refer to Note V for additional information.
Derivative Financial Instruments
The Company evaluates its convertible instruments, options, warrants and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC 815, Derivatives and Hedging. The classification of derivative instruments, including whether such instruments should be recorded as assets, liabilities, or equity, is reassessed at the end of each reporting period. For equity-linked financial instruments, the Company must determine whether the underlying instrument is indexed to its own common stock in order to classify the derivative instrument as equity. Otherwise, the derivative asset or liability, including embedded derivatives discussed below, is recognized at fair value with subsequent changes in fair value recognized in the consolidated statements of operations and comprehensive income (loss).
For hybrid instruments issued in the form of a share, ASC 815-15 requires bifurcation of embedded features if (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The nature of the host instrument is therefore evaluated to determine if it is more akin to a debt-like or equity-like host. In this assessment, the Company considers the stated and implied substantive features of the contract as well as the economic characteristics and risks of the hybrid instrument. Each term and feature is then weighed based on the relevant facts and circumstances to determine the nature of the host contract. Terms and features of the hybrid instrument (i.e. embedded derivatives) are then assessed to determine if they must be bifurcated and separately accounted for as freestanding derivatives. Examples of embedded derivatives include, among others, conversion options, redemption features, make-whole provisions, contingent increases in dividend rates and participation rights.
Convertible Preferred Stock
Accounting for convertible instruments and contracts in the Company’s own equity, requires an evaluation of the hybrid security to determine if liability classification is required under ASC 480-10. Liability classification is required for freestanding financial instruments that are not debt in legal form and are: (1) subject to an unconditional obligation requiring the issuer to redeem the instrument by transferring assets (i.e. mandatorily redeemable), (2) instruments other than equity shares that embody an obligation of the issuer to repurchase its equity shares, or (3) certain types of instruments that obligate the issuer to issue a variable number of equity shares. Securities classified in temporary equity are initially measured at the proceeds received, net of issuance costs and excluding the fair value of bifurcated embedded derivatives (if any). Subsequent measurement of the carrying value is not required until such time that the contingencies are resolved and reclassification as a liability is required.
Revenue Recognition
Based on the specific analysis of its contracts, the Company has determined that its contracts are subject to revenue recognition in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). Recognition under the ASC 606 five-step model
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(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
involves (i) identification of the contract, (ii) identification of performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the previously identified performance obligations, and (v) revenue recognition as the performance obligations are satisfied.
During step one of the five step model, the Company considers whether contracts should be combined or separated, and based on this assessment, the Company combines closely related contracts when all the applicable criteria are met. The combination of two or more contracts requires judgment in determining whether the intent of entering into the contracts was effectively to enter into a single contract, which should be combined to reflect an overall profit rate. Similarly, the Company may separate an arrangement, which may consist of a single contract or group of contracts, with varying rates of profitability, only if the applicable criteria are met. Judgment is involved in determining whether a group of contracts may be combined or separated based on how the arrangement and the related performance criteria were negotiated. The conclusion to combine a group of contracts or separate a contract could change the amount of revenue and gross profit recorded in a given period.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. The Company’s contracts with customers generally do not include a right of return relative to delivered products. In certain cases, contracts are modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are accounted for as part of the existing contract. Certain contracts with customers have options for the customer to acquire additional goods or services. In most cases, the pricing of these options are reflective of the standalone selling price of the good or service. These options do not provide the customer with a material right and are accounted for only when the customer exercises the option to purchase the additional goods or services. If the option on the customer contract was not indicative of the standalone selling price of the good or service, the material right would be accounted for as a separate performance obligation.
The Company’s revenues are derived from the design and sales of components for spacecraft and satellites and the performance of engineering, modeling and simulation services related to spacecraft design and mission execution. Each promised good or service within a contract is accounted for separately under the guidance of ASC 606, if they are distinct. Promised goods or services not meeting the criteria for being a distinct performance obligation are bundled into a single performance obligation with other goods or services that together meet the criteria for being distinct. The appropriate allocation of the transaction price and recognition of revenue is then applied for the bundled performance obligation. The Company has concluded that its service contracts generally contain a single performance obligation given the interrelated nature of the activities which are significantly customized and not distinct within the context of the contract.
Once the Company identifies the performance obligations, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company’s contracts generally do not contain penalties, credits, price concessions, or other types of potential variable consideration. Prices are fixed at contract inception and are not contingent on performance or any other criteria.
The Company engages in long-term contracts for production and service activities and recognizes revenue for performance obligations over time. These long-term contracts involve the design, development, manufacture, or modification of components for spacecraft and satellites. Revenue is recognized over time (versus point in time recognition), as the Company’s performance creates an asset with no alternative use to the Company and the Company has an enforceable right to payment for performance completed to date, and the customer receives the benefit as the Company builds the asset. The Company considers the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. These contracts include both fixed-price and cost reimbursable contracts. The Company’s cost reimbursable contracts typically include cost-plus fixed fee and time and material (“T&M”) contracts.
For long-term contracts, the Company typically recognizes revenue using the input method, using a cost-to-cost measure of progress. The Company believes that this method represents the most faithful depiction of the Company’s performance because it directly measures value transferred to the customer. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include, but are not limited to, the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed; the cost and availability of materials; the availability of subcontractor services and materials; and the availability and timing of funding from the customer. The Company bears the risk of changes in estimates to complete on a fixed-price contract, which may cause profit levels to vary from period to period. For cost reimbursable contracts, the Company is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. In the limited instances where the Company enters into T&M contracts, revenue recognized reflects the number of direct labor hours expended in the performance of a contract multiplied by the contract billing rate, as well as reimbursement of other direct billable costs. For T&M contracts, the Company recognizes revenue in the amount for which the Company has a right to invoice
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the customer based on the control transferred to the customer. For long term contracts, the Company recognizes anticipated contract losses as soon as they become known and estimable.
Accounting for long-term contracts requires significant judgment relative to estimating total contract revenues and costs, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed. The Company’s estimates are based upon the professional knowledge and experience of its engineers, program managers and other personnel, who review each long-term contract monthly to assess the contract’s schedule, performance, technical matters and estimated cost at completion. Changes in estimates are applied retrospectively and when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earnings applicable to performance in prior periods.
On long-term contracts, the portion of the payments retained by the customer is not considered a significant financing component. At contract inception, the Company also expects that the lag period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will not constitute a significant financing component. Many of the Company’s long-term contracts have milestone payments, which align the payment schedule with the progress towards completion on the performance obligation. On some contracts, the Company may be entitled to receive an advance payment, which is not considered a significant financing component because it is used to facilitate inventory demands at the onset of a contract and to safeguard the Company from the failure of the other party to abide by some or all of their obligations under the contract.
Contract Balances
Contract balances result from the timing of revenue recognized, billings and cash collections, and the generation of contract assets and liabilities.
Contract assets represent revenue recognized in excess of amounts invoiced to the customer and the right to payment is not solely subject to the passage of time. Contract liabilities are presented as deferred revenue on the Company’s consolidated balance sheets and consist of deferred product revenue, billings in excess of revenues, deferred service revenue, and customer advances. Deferred product revenue represents amounts that have been invoiced to customers but are not yet recognizable as revenue because the Company has not satisfied its performance obligations under the contract. Billings in excess of revenues represent milestone billing contracts where the billings of the contract exceed recognized revenues.
Remaining Performance Obligations
The Company includes in its computation of remaining performance obligations customer orders for which it has accepted signed sales orders. The definition of remaining performance obligations excludes T&M contracts accounted for under the “right to invoice” practical expedient.
Advertising Costs