Rocket Lab USA, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Dollar amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and reporting period
Rocket Lab provides launch services and space systems, including spacecraft, satellite components and mission operations. It reports two segments: Launch Services and Space Systems. On August 25, 2021, the company completed its business combination with Vector Acquisition Corporation and began trading as RKLB. The transaction was accounted for as a reverse recapitalization; comparative share and per-share data were retroactively adjusted.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.3 million | $10.7 million | $34.8 million | $19.4 million |
| Gross loss | $12.5 million | $1.9 million | $8.6 million | $7.8 million |
| Gross margin | -235.5% | -17.7% | -24.7% | -40.0% |
| Operating loss | $52.3 million | $12.8 million | $77.7 million | $36.2 million |
| Net loss | $88.0 million | $12.6 million | $120.5 million | $36.1 million |
| Operating cash used | Not stated for quarter | Not stated for quarter | $49.9 million | $21.4 million |
- Q3 segment revenue was $1.1 million for Launch Services and $4.2 million for Space Systems, versus $9.8 million and $0.9 million, respectively, in Q3 2020. Launch Services gross loss was $15.4 million; Space Systems gross profit was $2.9 million.
- For the first nine months, Launch Services revenue rose to $25.2 million from $18.2 million; Space Systems revenue rose to $9.6 million from $1.2 million. Launch Services still recorded a $15.0 million gross loss, while Space Systems generated $6.4 million of gross profit.
- Cash and cash equivalents were $792.7 million at September 30, compared with $52.8 million at December 31, 2020. Current assets were $855.0 million and current liabilities $76.7 million. Cash and restricted cash totaled $793.8 million at period-end.
- Long-term borrowings were $99.4 million, including $2.8 million classified as current. The secured term loan is due June 2024, bears cash interest of at least 8.15% plus 1.25% payment-in-kind interest, and is secured by substantially all company assets. Rocket Lab reported compliance with its debt covenants.
- Operating cash use was $49.9 million; investing cash use was $11.4 million. Financing provided $801.8 million, including $730.5 million net proceeds from the business combination and PIPE investment. The company also repurchased $30.4 million of management shares and options.
Material changes versus comparable periods
- Q3 revenue declined 50%, primarily due to lower launch activity associated with COVID-19 impacts; Space Systems growth partly offset the decline. The company launched one vehicle in Q3 and four in the first nine months of 2021.
- Nine-month revenue increased 79%, reflecting higher average contractual value per launch and broad growth in Space Systems.
- Q3 cost of revenue rose 41% despite lower revenue; stock-based compensation associated with the business combination and restricted stock units, and reduced production absorption, pressured costs. Q3 stock-based compensation expense was $21.8 million overall.
- Q3 net loss included a $33.9 million noncash loss from remeasurement of liability-classified warrants. Nine-month warrant remeasurement expense was $39.4 million. These warrant fair-value charges materially increased reported losses.
- Research and development and selling, general and administrative expenses increased substantially year over year, reflecting product development, stock-based compensation, business-combination-related charges and public-company costs.
Outlook, commentary, risks and unusual items
- Management said existing cash and expected customer payments should cover working capital and capital expenditure needs for at least the next 12 months; it stated that business-combination and PIPE proceeds were expected to fund the plan over that period. Future capital needs remain dependent on operations, investment plans and acquisitions.
- Management expected to build approximately eight launch vehicles by year-end 2021. It described Neutron as a planned medium-capacity launch vehicle with approximately 17,000-pound payload capacity to low Earth orbit; the filing gives no specific launch date.
- Backlog was $183.1 million at September 30, up from $82.0 million at December 31, 2020; approximately 52% was expected to be recognized within 12 months. Certain contracts may be terminated by customers subject to notice and fees.
- COVID-19 restrictions in New Zealand delayed launches and affected production utilization; management said the pandemic’s full impact remained uncertain. Other risks include launch or product failures, customer funding or cancellations, supply constraints, scaling and execution, competition, regulation, foreign-exchange exposure and access to capital. Approximately 50% of Q3 cash expenditures were in foreign currencies, while substantially all revenue was denominated in U.S. dollars; the company had not hedged this exposure.
- The company disclosed material weaknesses in internal control over financial reporting, including inadequate accounting resources and weaknesses in supporting schedules, review of third-party technical accounting work, account reconciliations and cash-flow statement preparation. Disclosure controls were deemed ineffective as of September 30; remediation was in progress.
- After quarter-end, Rocket Lab completed its $40 million acquisition of Advanced Solutions, Inc. on October 12, with a potential earnout of up to $5.5 million. It also signed an agreement to acquire Planetary Systems Corporation, expected to close in Q4 2021, for up to approximately $42 million cash plus shares and potential earnout shares.
- A $4.1 million provision remained for losses on three launches under an amended customer contract. Management said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether launch cadence and production utilization recover, and whether the planned 2021 vehicle build rate is achieved.
- How much of the reported loss reflects recurring operations versus stock compensation and noncash warrant remeasurement, and how margins develop as revenue scales.
- Backlog conversion, customer advance balances, contract termination terms and the timing of expected revenue recognition.
- Cash use, debt service and covenant compliance, including the cost and terms of the secured loan.
- Progress in remediating the disclosed internal-control weaknesses and any effects of acquisitions on cash, dilution and execution.