Rocket Lab Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. You should read this discussion and analysis in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. For additional context with which to understand our financial condition and results of operations, see the audited consolidated financial statements and accompanying notes contained therein as of December 31, 2022 and 2021 and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 7, 2023. Certain amounts may not foot due to rounding. Certain information in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements that involve numerous risks and uncertainties, including, but not limited to, those described under the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 7, 2023. We assume no obligation to update any of these forward-looking statements. Actual results may differ materially from those contained in any forward-looking statements.

Overview

Rocket Lab is an end-to-end space company with an established track record of mission success. We deliver reliable launch services, spacecraft design services, spacecraft components, spacecraft manufacturing and other spacecraft and on-orbit management solutions that make it faster, easier and more affordable to access space.

While our business has historically been centered on the development of small-class launch vehicles and the related sale of launch services, we are currently innovating in the areas of medium-class launch vehicles and launch services, spacecraft components, space systems design and manufacturing, and on-orbit management solutions. We continue to evaluate opportunities to participate in space data applications and services. Each of these initiatives addresses a critical component of the end-to-end solution and our value proposition for the space economy:

• Launch Services is the design, manufacture, and launch of orbital rockets to deploy payloads to various Earth orbits and interplanetary destinations.
• Space Systems is the design and manufacture of spacecraft, spacecraft components and software solutions and on-orbit mission operations.

Electron is our orbital small launch vehicle that was designed from the ground up to accommodate a high launch rate business model to meet the growing and dynamic needs of our customers for small launch services. Since its maiden launch in 2017, Electron has become the leading small dedicated spacecraft launch vehicle delivering 171 spacecraft to orbit and one suborbital launch for government and commercial customers across 37 successful missions through September 30, 2023. In 2022, Electron was the second most frequently launched rocket by companies operating in the United States and maintained Rocket Lab as the fourth most frequent launcher globally. Our launch services program has seen us develop many industry-leading innovations, including 3D printed electric turbo-pump rocket engines, fully carbon composite first stage fuel tanks, a private orbital launch complex, a rocket stage that can be configured to convert into a highly capable spacecraft on orbit, and the potential ability to successfully recover a stage from space, providing a path to reusability.

In March 2021, we announced plans to develop our reusable-ready medium-capacity Neutron launch vehicle which will increase the payload capacity of our space launch vehicles to approximately 15,000 kg for expendable launches to low Earth orbit and lighter payloads for reusable configurations and into higher orbits. Neutron will be tailored for commercial and U.S. government constellation launches and ultimately configurable for and capable of interplanetary and human space flight, enabling us to provide crew and cargo resupply to the International Space Station and beyond. Neutron will also provide a dedicated service to orbit for larger civil, defense and commercial payloads that need a level of schedule control and high-flight cadence. Neutron is expected to have the capability of launching nearly all of the spacecraft configurations that we expect to be launched through 2029 and we expect to be able to leverage Electron’s flight heritage across various vehicle subsystems designs, launch complexes and ground station infrastructure.

In June 2023, the Company acquired certain assets of Virgin Orbit Holdings, Inc., including a real property lease for a property located in Long Beach, California and certain production assets, machinery and equipment, in order to augment development of Neutron and provide for further expansion of our existing Electron and Space Systems businesses.

Our space systems initiatives are supported by the design and manufacture of our Photon family of spacecraft along with a range of merchant market components, software and services for spacecraft, including reaction wheels, star trackers, radios, separation systems, solar solutions, command and control spacecraft software, high voltage space grade battery solutions, and additional products in development to serve a wide variety of sub-system functions. We entered this market with our acquisition of leading spacecraft components manufacturer Sinclair Interplanetary, and have since expanded our market participation with the acquisitions of Planetary Systems Corporation, SolAero Holdings, Inc. and aerospace software firm Advanced Solutions, Inc. Each of these strategic acquisitions brought incremental vertically-integrated capabilities for our own Photon family of spacecraft and also enabled Rocket Lab to deliver high-volume manufacturing of critical spacecraft components and software solutions at scale prices to the broader spacecraft merchant market. The Photon family of spacecraft, which are configurable for a range of low Earth orbit, medium Earth orbit, geosynchronous orbit and interplanetary missions enable us to offer an end-to-end mission solution encompassing launch, full spacecraft manufacturing, ground services and mission operations to provide customers with streamlined access to orbit with Rocket Lab as a single mission partner.

Recent Developments

Electron Launch Anomaly Investigation

On September 19, 2023, the Company experienced an anomaly during the launch of the Company’s 41st Electron mission. Following lift-off of the Electron rocket from Launch Complex 1, the rocket completed lift-off, clearance through Max Q, and stage separation between the rocket’s first and second stage. At 151 seconds into the mission, high voltage from the second stage’s power supply system anomalously fell sharply. In less than a second, the stage experienced a total loss of power and was unable to reach orbital velocity to deliver the mission’s payload, subsequently re-entering the atmosphere and ending the mission. In accordance with Rocket Lab’s safety protocols, public safety was not affected.

The Company led the anomaly investigation with oversight from the U.S. Federal Aviation Administration (the “FAA”). The Company received authorization from the FAA to resume Electron launches from Launch Complex 1. The FAA, the federal licensing body for U.S. launch vehicles, has now confirmed that Rocket Lab’s launch license remains active, which is the first step to enable launches to resume.

After more than seven weeks of extensive analysis of the mission’s manufacturing, test, and flight data, the findings of the Rocket Lab investigation team overwhelmingly indicate that an unexpected electrical arc occurred within the power supply system that provides high voltage to the Rutherford engine’s motor controllers, shorting the battery packs which provide power to the launch vehicle’s second stage. All parts of the power supply system passed extensive pre-launch testing, including in vacuum conditions designed to simulate the space environment to the extent possible on Earth.

To ensure the fault does not present again, Rocket Lab is implementing two key corrective measures -- one designed to improve testing on the ground and another to eliminate the possibility of comparable arcs occurring in flight should similar faults evade the new enhanced testing process.

Rocket Lab will return to the pad at Launch Complex 1 with a dedicated Electron mission for Japan-based Earth imaging company iQPS (Institute for Q-shu Pioneers of Space, Inc) during a launch window which opens on November 28th, 2023.

The September 19th flight anomaly and resulting extensive investigation caused the postponement or delay of scheduled Electron launches at the end of our third fiscal quarter and into the beginning of the fourth quarter of 2023, and negatively impacted our launch revenue in the quarter ended September 30, 2023. While we currently expect to resume Electron launches as soon as the end of November 2023, the investigation process is not yet complete, and any further delay in return to launch as a result of the investigation or implementation of corrective measures could further negatively impact our future launch revenue in the near term.

Key Metrics and Select Financial Data

We monitor the following key financial and operational metrics that assist us in evaluating our business, measuring our performance, identifying trends and making strategic decisions.

Launch Vehicle Build-Rate and Launch Cadence

We built approximately eight launch vehicles in 2021 and approximately 12 launch vehicles in 2022. We anticipate we will build approximately 13 launch vehicles in 2023. We launched six vehicles in 2021 and nine vehicles in 2022. We have launched nine vehicles through the nine months ended September 30, 2023. The number of launches is an indicator of our ability to convert mission awards into revenue in a timely manner and demonstrate the scalability of our launch operations. Growth rates between launches and total launch service revenue are not perfectly correlated because our total revenue is affected by other variables, such as the revenue per launch, which can vary considerably based on factors such as unique orbit and insertion requirements, payload handling needs, launch location, time sensitivity of mission completion and other factors. We believe that the growth in our build rate and launch rate is a positive indicator of our ability to scale our launch operations.

Revenue Growth

Three Months Ended September 30, 2023 and 2022

We generated $67.7 million and $63.1 million in revenue for the three months ended September 30, 2023 and 2022, respectively, representing a year-on-year increase in revenue of approximately 7%. This year-on-year increase primarily resulted from space systems growth of $6.3 million, partially offset by lower revenue per launch that resulted in a year-on-year launch revenue decrease of $1.7 million.

Nine Months Ended September 30, 2023 and 2022

We generated $184.6 million and $159.2 million in revenue for the nine months ended September 30, 2023 and 2022, respectively, representing a year-on-year increase in revenue of approximately 16%. This year-on-year increase primarily resulted from a higher launch cadence that delivered growth of $14.8 million and space systems growth of $10.6 million.

Revenue and Cost Value Per Launch

Revenue and cost value per launch represents the average revenue and cost per launch contract attributable to launches that occurred during a period, regardless of when the revenue or cost was recognized. Revenue and cost value per launch can be a useful metric to provide insight into general competitiveness and price sensitivity in the marketplace. Revenue and cost value per launch can vary considerably, based on factors such as unique orbit and insertion requirements, payload handling needs, launch location, time sensitivity of mission completion and other factors, and as such may not provide absolute clarity with regards to pricing and competitive dynamics in the marketplace.

Three Months Ended September 30, 2023 and 2022

In the three months ended September 30, 2023 and 2022, our revenue value per launch was $7.1 million and $7.7 million, respectively. Meanwhile, cost per launch for the three months ended September 30, 2023 and 2022 was $5.2 million and $7.3 million, respectively.

Nine Months Ended September 30, 2023 and 2022

In the nine months ended September 30, 2023 and 2022, our revenue value per launch was $7.0 million and $6.9 million, respectively. Meanwhile, cost per launch was $6.6 million and $7.2 million for the nine months ended September 30, 2023 and 2022, respectively, excluding a $2.1 million benefit from non-recurring employee retention credit to Launch Services cost of revenue and a $4.1 million benefit from non-recurring reversal of provision made for contract losses that were credited to Launch Services cost of revenue in the nine months ended September 30, 2023.

Backlog

Backlog represents future revenues that we would recognize in connection with the completion of all contracts and purchase orders that have been entered into by our customers but have not yet been fulfilled, excluding any customer options for future products or services that have not yet been exercised. Contracts for launch services and spacecraft builds typically include termination rights that may be exercised by customers upon advanced notice and payment of a specified termination fee. Our backlog increased from $503.6 million as of December 31, 2022 to $582.4 million as of September 30, 2023, of which $250.7 million is related to Launch Services and $331.7 million is related to Space Systems. The increase was a result of bookings during the period, offset by recognizing revenue on contracts during the period.

Key Factors Affecting Our Performance

Ability to sell additional launch services, space systems service and spacecraft components to new and existing customers

Our results will be impacted by our ability to sell our launch services, space systems services, and spacecraft components to new and existing customers. We have successfully launched Electron 37 times delivering 171 spacecraft to orbit and one suborbital launch through September 30, 2023. We have flight hardware and spacecraft that have flown on over 1,700 missions, including legacy missions enabled by Sinclair Interplanetary (acquired April 2020), Advanced Space Solutions, Inc (acquired October 2021), Planetary Space Corporation (acquired November 2021) and SolAero Technologies (acquired January 2022). Our growth opportunity is dependent on our ability to expand our addressable launch services market with larger volumetric and higher mass payload capabilities of our in-development medium-capacity Neutron launch vehicle, which will address large commercial and government constellation launch opportunities. Our growth opportunity is also dependent on our ability to win spacecraft constellation missions and expand our portfolio of strategic spacecraft components. Our ability to sell additional products to existing customers is a key part of our success, as follow-on purchases indicate customer satisfaction and decrease the likelihood of competitive substitution. To sell additional products and services to new and existing customers, we will need to continue to invest significant resources in our products and services.

Ability to improve profit margins and scale our business

We intend to continue to invest in initiatives to improve our operating leverage and significantly ramp production. We believe continued reduction in costs and an increase in production volumes will enable the cost of launch vehicles to decline and expand our gross margins. Our ability to achieve our production-efficiency objectives could be negatively impacted by a variety of factors including, among other things, lower-than-expected facility utilization rates, manufacturing and production cost overruns, increased purchased material costs and unexpected supply-chain quality issues or interruptions.

Government expenditures and private enterprise investment into the space economy

Government expenditures and private enterprise investment has fueled the growth in our target markets. We expect the continued availability of government expenditures and private investment for our customers to help fund purchases of our products and services will remain. This is an important factor in our company’s growth prospects.

Components of Results of Operations

Revenue

Our revenues are derived from a combination of long-term fixed price contracts for launch services and spacecraft builds, and purchase order based spacecraft components sales. Revenues from long-term contracts are recognized using either the “point-in-time” or “over-time” method of revenue recognition. Point-in-time revenue recognition results in cash payments being initially accrued to the balance sheet as deferred revenue as contractual milestones are accomplished and then recognized as revenue once the final contractual obligation is completed. Over-time revenue recognition is based on an input measure of progress based on costs incurred compared to estimated total costs at completion. Each project has a contractual revenue value and an estimated cost. The over-time revenue is recognized based on the percentage of the total project cost that has been realized.

Estimating future revenues and associated costs and profit is a process requiring a high degree of management judgment, including management’s assumptions regarding our future operational performance as well as general economic conditions. Frequently, the period of performance of a contract extends over a long period of time and, as such, revenue recognition and our profitability from a particular contract may be affected to the extent that estimated costs to complete are revised, delivery schedules are delayed, performance-based milestones are not achieved or progress under a contract is otherwise impeded. Accordingly, our recorded revenues and operating profit from period to period can fluctuate significantly depending on when the point-in-time or over-time contractual obligations are achieved. In the event cost estimates indicate a loss on a contract, the total amount of such loss is recorded in the period in which the loss is first estimated.

Cost of Revenues

Cost of revenues consists primarily of direct material and labor costs, manufacturing overhead, other personnel-related expenses, which include salaries, bonuses, benefits and stock-based compensation expense, reserves for estimated warranty costs, freight expense and depreciation expense. Cost of revenues also includes charges to write-down the carrying value of inventory when it exceeds its estimated net realizable value, including on-hand inventory that is either obsolete or in excess of forecasted demand. We expect our cost of revenues to increase in absolute dollars in future periods as we sell more launch services and space systems solutions. As we grow into our current capacity and execute on cost-reduction initiatives, we expect our cost of revenues as a percentage of revenue to decrease over time.

Because direct labor costs and manufacturing overhead comprise a significant portion of cost of revenues, increasing our production rate resulting in greater absorption of these costs is our most critical cost reduction initiative. Increasing our production rate is a cross-functional effort involving sales and business development, manufacturing, engineering, supply chain and finance.

Operating Expenses

Our operating expenses consist of research and development and selling, general and administrative expenses.

Research and Development, net

Research and development expense consists primarily of personnel-related expenses, consulting and contractor expenses, design software licenses, validation and testing expense, prototype parts and materials, facilities and depreciation expense. We intend to continue to make significant investments in developing new products and enhancing existing products, including but not limited to our medium capacity Neutron launch vehicle, Electron’s first stage recovery, Photon spacecraft features and capabilities, as well as on expanding our portfolio of Spacecraft components and subsystems. Research and development expense will be variable relative to the number of products that are in development, validation or testing. However, we expect it to decline as a percentage of total revenue over time.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of personnel-related expenses for our sales, marketing, supply chain, finance, legal, human resources and administrative personnel, as well as the costs of customer service, information technology, risk management and related insurance, travel, allocated overhead and other marketing, communications and administrative expenses. We also expect to further invest in our corporate infrastructure and incur additional expenses associated with operating as a public company, including increased legal and accounting costs, investor relations and compliance costs. As a result, we expect that selling, general and administrative expenses will increase in absolute dollars in future periods but decline as a percentage of total revenue over time.

Interest Income (Expense), Net

Interest income (expense), net consists primarily of interest expense incurred on debt and interest income earned on our cash and cash equivalents, short-term investments balances and marketable securities.

Gain (Loss) on Foreign Exchange

Gain (loss) on foreign exchange relates to currency fluctuations that generate foreign exchange gains or losses on invoices denominated in currencies other than the United States (“U.S.”) Dollar.

Change in Fair Value of Liability Classified Warrants

Change in fair value of liability classified warrants relates to changes in the fair value of warrant liabilities.

Results of Operations

Comparison of the Three Months Ended September 30, 2023 and 2022

The following table sets forth our consolidated statements of operations information and data as a percentage of revenue for the three months ended September 30, 2023 and 2022 (in thousands, except percentages):

Revenues

(in thousands, except percentages)

Revenue increased by $4.6 million, or 7%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Launch Services revenue was $21.3 million for the three months ended September 30, 2023, a decrease of $1.7 million, or 7%, primarily due to a lower revenue per launch, with three launch missions completed in each of the three months ended September 30, 2023 and 2022. Space systems revenue was $46.3 million for the three months ended September 30, 2023, an increase of $6.3 million, or 16%, primarily due to growth in our Photon spacecraft manufacturing product line.

Cost of Revenues

(in thousands, except percentages)

Cost of revenues decreased by $1.9 million, or 3%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Launch Services cost of revenues was $15.5 million in the three months ended September 30, 2023, a decrease of $8.3 million, or 35%, primarily due to a decrease in labor and overhead costs and stock-based compensation. Space systems cost of revenue was $37.2 million in the three months ended September 30, 2023, an increase of $6.4 million, or 21%, primarily due to a product mix fluctuation with growth primarily in our Photon spacecraft manufacturing product line. Cost of revenues for the three months ended September 30, 2023 decreased to 78% of total revenue as compared to 87% during the three months ended September 30, 2022.

Research and Development, Net

(in thousands, except percentages)

Research and development expense increased by $9.1 million, or 52%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to Neutron development progress, and increased staff cost as a result of hiring and prototype spend focused on expanding our Photon and spacecraft components product portfolio.

Selling, General and Administrative

(in thousands, except percentages)

Selling, general and administrative expense increased by $4.2 million, or 18%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to expanding our business development initiatives which drove higher staff related costs, increased professional services costs associated with our recent transition to large accelerated filer status and facility related expense.

Interest Income (Expense), Net

(in thousands, except percentages)

Interest expense, net of interest income decreased by $0.1 million, or 5%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to an increase of interest income on marketable securities and money market funds, partially offset by increased interest expense on our floating rate term loan from Hercules.

Loss on Foreign Exchange

(in thousands, except percentages)

Loss on foreign exchange increased by $0.1 million, or 135%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to our New Zealand intercompany loan denominated in New Zealand Dollar.

Other Income, Net

(in thousands, except percentages)

Other income increased by $0.6 million, or 89%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to accretion of marketable securities purchased at a discount.

Provision for Income Taxes

(in thousands, except percentages)

We recorded income tax expense of $1.4 million for the three months ended September 30, 2023 and income tax expense of $1.7 million for the three months ended September 30, 2022. The effective tax rate was (3.4)% for the three months ended September 30, 2023, compared to (5.1)% for the three months ended September 30, 2022. The effective tax rate differs from the federal statutory rate due primarily to a full valuation allowance against our U.S. deferred tax assets, as well as the impact of discrete items that may occur in any given year but which are not consistent from year-to-year.

Comparison of the Nine Months Ended September 30, 2023 and 2022

The following table sets forth our consolidated statements of operations information and data as a percentage of revenue for the nine months ended September 30, 2023 and 2022 (in thousands, except percentages):

Revenues

(in thousands, except percentages)

Revenue increased by $25.4 million, or 16%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Launch Services revenue was $63.4 million for the nine months ended September 30, 2023, an increase of $14.8 million, or 30%, primarily due to a higher launch cadence, with nine launch missions completed in the nine months ended September 30, 2023, versus seven launch missions completed in the nine months ended September 30, 2022. Space systems revenue was $121.2 million for the nine months ended September 30, 2023, an increase of $10.6 million, or 10%, primarily due to spacecraft manufacturing growth.

Cost of Revenues

(in thousands, except percentages)

Cost of revenues increased by $6.6 million, or 5%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Launch Services cost of revenues was $53.4 million in the nine months ended September 30, 2023, an increase of $0.8 million, or 1%, primarily due to the higher launch cadence referenced above, offset by a release of a $4.1 million provision for contract losses and a $2.1 million benefit from non-recurring employee retention credit. Space systems cost of revenue was $95.3 million in the nine months ended September 30, 2023, an increase of $5.8 million, or 7%, primarily due to spacecraft manufacturing growth. Cost of revenues for the nine months ended September 30, 2023 decreased to 81% of total revenue as compared to 89% during the nine months ended September 30, 2022.

Research and Development, Net

(in thousands, except percentages)

Research and development expense increased by $31.4 million, or 63%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to Neutron development progress, and increased staff cost as a result of hiring and prototype spend focused on expanding our Photon and spacecraft components product portfolio.

Selling, General and Administrative

(in thousands, except percentages)

Selling, general and administrative expense increased by $19.4 million, or 30%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to expanding our business development initiatives which drove higher staff related costs, increased professional services costs associated with our recent transition to large accelerated filer status, a $2.6 million increase in stock-based compensation and facility related expense.

Interest Income (Expense), Net

(in thousands, except percentages)

Interest expense, net of interest income decreased by $4.1 million, or 59%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to an increase of interest income on marketable securities and money market funds, partially offset by increased interest expense on our floating rate term loan from Hercules.

Loss on Foreign Exchange

(in thousands, except percentages)

Loss on foreign exchange decreased by $3.9 million, or 98%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to our New Zealand intercompany loan denominated in New Zealand Dollar. On July 1, 2022, the Company determined the New Zealand intercompany loan was not expected to be repaid and started recording foreign exchange impact on this intercompany loan to foreign currency translation adjustments.

Change in Fair Value of Liability Classified Warrants

(in thousands, except percentages)

Change in fair value of liability classified warrants income was $13.5 million for the nine months ended September 30, 2022 as a result of the change in fair value of liability classified warrants assumed in connection with the Business Combination that were redeemed by January 31, 2022. The Company had no liability classified warrants as of September 30, 2023.

Other Income, Net

(in thousands, except percentages)

Other income increased by $2.9 million, or 463%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to accretion of marketable securities purchased at a discount.

Provision for Income Taxes

(in thousands, except percentages)

We recorded income tax expense of $2.6 million for the nine months ended September 30, 2023 and income tax expense of $4.0 million for the nine months ended September 30, 2022. The effective tax rate was (2.0)% for the nine months ended September 30, 2023, compared to (4.2)% for the nine months ended September 30, 2022. The effective tax rate differs from the federal statutory rate due primarily to a full valuation allowance against our U.S. deferred tax assets, as well as the impact of discrete items that may occur in any given year but which are not consistent from year-to-year.

Liquidity and Capital Resources

Since inception, we have funded our operations with proceeds from sales of our capital stock, term note debt, research and development grant proceeds, and cash flows from the sale of our products and services. As of September 30, 2023, we had $140.9 million of cash and cash equivalents and $229.5 million of marketable securities. Our primary requirements for liquidity and capital are for investment in new products and technologies, the expansion of existing manufacturing facilities, working capital, debt service, acquisitions of complementary businesses, products or technologies and general corporate needs. Historically, these cash requirements have been met through the net proceeds we received through private sales of equity securities, borrowings under our credit facilities, net proceeds received in the Business Combination and payments received from customers.

We believe that our existing cash and cash equivalents and payments from customers will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months, although we may choose to take advantage of opportunistic capital raising or refinancing transactions at any time. We will continue to invest in increasing production and expanding our product offerings through acquisitions.

Our future capital requirements will depend on many factors, including our launch cadence, traction in the market with our space systems offerings, the expansion of sales and marketing activities, the timing and extent of spending to support product development efforts, the introduction of new and enhanced products, the continuing market adoption of our products, the timing and extent of additional capital expenditures to invest in existing and new office spaces and the number of acquisitions of complementary businesses, products or technologies we pursue, if any. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

Additionally, we expect our capital and operating expenditures will increase significantly in connection with ongoing activities as we:

• increase our investment in marketing, advertising, sales and distribution infrastructure for our existing and future products and services;
• develop additional new products and enhancements to existing products;
• obtain, maintain and improve our operational, financial and management performance;
• hire additional personnel;
• obtain, maintain, expand and protect our intellectual property portfolio; and
• continue to operate as a public company.

Indebtedness

Hercules Capital Secured Term Loan

On June 10, 2021, the Company entered into a $100 million secured term loan agreement with Hercules Capital, Inc. (the “Hercules Capital Secured Term Loan”) and borrowed the full amount under the secured term loan agreement. The term loan has a maturity date of June 1, 2024 and is secured by substantially all of the assets of the Company. Payments due for the term loan are interest-only until the maturity date with interest payable monthly in arrears. The outstanding principal bears (i) cash interest at the greater of (a) 8.15% or (b) 8.15% plus the prime rate minus 3.25% and (ii) payment-in-kind interest of 1.25% which is accrued and added to the outstanding principal balance. Prepayment of the outstanding principal is permitted under the loan agreement and subject to certain prepayment fees. In connection with the secured term loan, the Company paid an initial facility charge of $1 million and the Company will be required to pay an end of term charge of $3.25 million upon repayment of the loan. The secured term loan agreement contains customary representations, warranties, non-financial covenants, and events of default. The Company is in compliance with all debt covenants related to its long-term borrowings as of September 30, 2023. As of September 30, 2023, there was $105.1 million outstanding under the Hercules Capital Secured Term Loan, which was classified as current in the Company’s condensed consolidated balance sheets. As of September 30, 2023, the Company had no availability under the Hercules Capital Secured Term Loan.

Cash Flows

The following table summarizes our cash flows for the periods presented:

(in thousands)

Cash Flows from Operating Activities

Net cash used in operating activities was $56.7 million for the nine months ended September 30, 2023 and consisted of $132.1 million in operating loss, $69.8 million in non-cash activities and $5.6 million in cash provided by operating assets and liabilities. Included in the non-cash activities are $43.4 million in stock-based compensation expense and $21.6 million in depreciation and amortization. Included in the cash provided by operating assets and liabilities are $25.5 million in contract liabilities, $13.8 million in accounts receivable and $12.0 million in trade payables, offset by cash used in operating assets and liabilities including $15.8 million in prepaids and other assets, $10.9 million in inventory and $10.7 million in other non-current assets.

Cash Flows from Investing Activities

Cash used in investing activities for the nine months ended September 30, 2023 of $49.2 million was primarily driven by capital equipment and infrastructure investments of $44.3 million and $16.9 million cash paid in connection with the assets acquired pursuant to the Virgin APA. These investments included the purchases of equipment, including additive manufacturing or 3D printers and milling machines, and tenant improvements to support Neutron production and Space Systems infrastructure. Cash used in investing activities was partially offset by $12.1 million of net cash provided by investing activities related to purchases and maturities of marketable securities.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2023 of $4.9 million was primarily related to $6.1 million of net proceeds from our equity offerings which includes proceeds from sale of employees restricted stock units to cover taxes, stock options and employee stock purchase plan and applicable tax withholdings and payments, offset by $1.0 million payment of contingent consideration related to the Planetary Space Corporation acquisition.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates as disclosed in our audited financial statements included in our Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 7, 2023.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates, interest rates and inflation.

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar, and the functional currency of each of our subsidiaries is either its local currency or the U.S. dollar. The assets and liabilities of each of our subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date and operations accounts are translated using the average exchange rate for the relevant period. Increases or decreases in the relative value of the U.S. dollar to other currencies may positively or negatively affect revenue and other operating results as expressed in U.S. dollars. Foreign currency translation adjustments are accounted for as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Gains or losses due to transactions in foreign currencies are reflected in the condensed consolidated statements of operations under the line item “Loss on foreign exchange.” Materially all of our revenues are denominated in U.S. dollars and we have not engaged in the hedging of foreign currency risk to date, although we may choose to do so in the future. As such, a 10% or greater move in exchange rates versus the U.S. dollar could have a material impact on our financial results and position.

Interest Rate Risk

As of September 30, 2023, we had cash and cash equivalents of $140.9 million, comprised primarily of operating accounts and money market instruments and $229.5 million invested in marketable securities, comprised of commercial paper, corporate debt securities, bank certificates of deposit, U.S. Treasury bills and notes and asset backed securities. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

Impact of Inflation

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures it could diminish our margin thereby limiting our profits, especially if we are not able to fully offset such higher costs. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), as appropriate to allow timely decisions regarding required disclosures.

As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, concluded that, as of September 30, 2023, due to material weaknesses in internal control over financial reporting at its wholly owned subsidiary, SolAero, which the Company acquired on January 18, 2022, the Company’s disclosure controls and procedures were not effective. In accordance with interpretive guidance issued by SEC staff, the Company excluded SolAero from its assessment of disclosure controls and procedures and internal control over financial reporting during the first year after completion of the acquisition. As of September 30, 2023, the SolAero subsidiary is included in the above assessment regarding the effectiveness of the Company’s disclosure controls and procedures. Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses in its SolAero subsidiary, management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.

Previously Identified Material Weaknesses in Internal Control over Financial Reporting

In connection with the audit of Rocket Lab as of and for the year ended December 31, 2022, we previously identified material weaknesses related to systematic controls over segregation of duties for recording journal entries, limiting privileged-level access and change management for general IT systems at SolAero. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis. At December 31, 2022 and for the period from acquisition through December 31, 2022, total assets and total revenues subject to SolAero’s internal control over financial reporting represented 14% and 38% of consolidated total assets and total revenues, as of and for the year ended December 31, 2022.

Management has implemented a remediation plan for the following items:

• systematic controls to ensure appropriate segregation of duties;
• effective controls to limit privileged-level access; and
• effective controls to test and approve changes to IT systems before changes are put into production environment.

While these actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal controls over financial reporting and will continue to diligently review our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

We assessed, with the participation of our Chief Executive Officer and Chief Financial Officer, any change in our internal control over financial reporting as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q.Other than as discussed above with respect to the integration of SolAero, identified material weaknesses and remediation efforts, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Other than the risk factors previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2023, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 7, 2023.