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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-39733
Redwire Corporation
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 98-1550429 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
8226 Philips Highway, Suite 101 Jacksonville, Florida | | 32256 |
(Address of Principal Executive Offices) | | (Zip Code) |
(650) 701-7722
Registrant's telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | RDW | New York Stock Exchange |
Warrants, each to purchase one share of Common Stock | RDW WS | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had outstanding 63,253,836 shares of common stock as of August 9, 2022.
REDWIRE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2022
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Each of the terms the “Company,” “Redwire,” “we,” “our,” “us” and similar terms used herein refer collectively to Redwire Corporation, a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, concerning us and other matters. These statements generally may be identified by words such as “anticipate,” “forecast,” “believe,” “outlook,” “trends,” “goals,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, among other things, statements relating to our future financial condition, results of operations and/or cash flows, and our projects and related timelines. Forward-looking statements are based upon assumptions, expectations, plans and projections that we believe to be reasonable when made, but which may change over time. These statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict.
Redwire believes it is important to communicate its expectations to its security holders. However, there may be events in the future that Redwire’s management is not able to predict accurately or over which Redwire has no control. The risk factors and cautionary language contained in this Report, and other reports and documents filed by Redwire with the Securities and Exchange Commission (the “SEC”), provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described in such forward-looking statements, including among other things:
•our limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter;
•our ability to grow our business depends on the successful development and continued refinement of many of our proprietary technologies, products, and service offerings;
•competition with existing or new companies could cause downward pressure on prices, fewer customer orders, reduced margins, the inability to take advantage of new business opportunities, and the loss of market share;
•our projections of future financial results are based on a number of assumptions by our management, some or all of which may prove to be incorrect, and actual results may differ materially and adversely from such projections;
•if we are unable to successfully integrate recently completed and future acquisitions or successfully select, execute or integrate future acquisitions into the business, our operations and financial condition could be materially and adversely affected;
•we have been and may continue to be adversely affected by macroeconomic, business, and/or competitive factors, including inflationary and supply chain pressures as well as rising interest rates and market volatility;
•the COVID-19 pandemic could continue to adversely affect our business;
•unsatisfactory performance of our products and services could have a material adverse effect on our business, financial condition and results of operations;
•the market for in-space infrastructure services has not been established with precision, is still emerging and may not achieve the growth potential that we expect or may grow more slowly than expected;
•we may in the future invest significant resources in developing new offerings and exploring the application of our technologies for other uses and those opportunities may never materialize;
•we may not be able to convert our orders in backlog into revenue;
•a portion of our business model is related to the in-space manufacture and robotic assembly of space structures, a technology that is still in development and has not been fully validated through in-space deployment and testing;
•our reliance on third-party launch vehicles to launch our spacecraft and customer payloads into space;
•protecting and defending against intellectual property claims could have a material adverse effect on our business;
•data breaches or incidents involving our technology could damage our business, reputation and brand and substantially harm our business and results of operations;
•we are highly dependent on our senior management team and other highly skilled personnel, and if we are not successful in attracting or retaining highly qualified personnel, we may not be able to successfully implement our business strategy;
•we will incur significant expenses and capital expenditures in the future to execute our business plan and we may be unable to adequately control our expenses;
•our ability to successfully implement our business plan will depend on a number of factors outside of our control;
•we may not be able to successfully develop our technology and services;
•we may not be able to adapt to and satisfy customer demands in a timely and cost-effective manner;
•we may not be able to respond to commercial industry cycles in terms of cost structure, manufacturing capacity, and/or personnel needs;
•any delays in the development, design, engineering and manufacturing of our products and services may adversely affect our business, financial condition and results of operations;
•the benefits of our merger with Genesis Park Acquisition Corp. (the “Merger”) may not be realized to the extent currently anticipated by us, or at all. The ability to recognize any such benefits may be affected by, among other things, competition, the ability of us to grow and manage growth profitably, maintain relationships with customers and suppliers and retain our management and key employees;
•the costs related to the Merger could be significantly higher than currently anticipated;
•we are subject to the requirements of the National Industrial Security Program Operating Manual (“NISPOM”) for our facility security clearance, which is a prerequisite to our ability to perform on classified contracts for the U.S. government;
•the U.S. government’s budget deficit and the national debt, as well as any inability of the U.S. government to complete its budget process for any government fiscal year and consequently having to shut down or operate on funding levels equivalent to its prior fiscal year pursuant to a “continuing resolution,” could have an adverse impact on our business, financial condition, results of operations and cash flows;
•we depend significantly on U.S. government contracts, which often are only partially funded, subject to immediate termination, and heavily regulated and audited;
•we are subject to stringent U.S. economic sanctions, and trade control laws and regulations;
•we have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties;
•if we fail to adequately protect our intellectual property rights, our competitive position could be impaired and our intellectual property applications for registration may not be issued or be registered;
•our management team has limited experience managing a public company;
•we have identified material weaknesses in our internal control over financial reporting that, if not remediated, may not allow us to report our financial condition or results of operations accurately or timely. Additionally, if we were to identify additional material weaknesses or other deficiencies, or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately and timely report our financial results, in which case our business may be harmed and investors may lose confidence in the accuracy and completeness of our financial reports;
•we may be unable to meet or maintain stock exchange listing standards;
•substantial future sales or other issuances of our common stock may adversely affect the market price of our common stock;
•our level of indebtedness and the potential need for substantial funding to finance our operations, which may not be available when we need it, on acceptable terms or at all;
•we may require substantial additional funding to finance our operations, but adequate additional financing may not be available when we need it, on acceptable terms or at all;
•our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance that we may provide; and
•adverse publicity stemming from any incident involving Redwire or our competitors could have a material adverse effect on our business, financial condition and results of operations.
Undue reliance should not be placed on these forward-looking statements. The forward-looking statements contained in this Report are based on current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Item 1. Financial Statements
REDWIRE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of U.S. dollars, except share data)
| | | | | | | | | | | |
| |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 10,879 | | | $ | 20,523 | |
Accounts receivable, net | 12,702 | | | 16,262 | |
Contract assets | 14,747 | | | 11,748 | |
Inventory | 1,681 | | | 688 | |
Income tax receivable | 688 | | | 688 | |
| | | |
Prepaid insurance | 692 | | | 2,819 | |
Prepaid expenses and other current assets | 4,073 | | | 2,488 | |
Total current assets | 45,462 | | | 55,216 | |
Property, plant and equipment, net | 5,824 | | | 19,384 | |
Right-of-use assets | 12,080 | | | — | |
Intangible assets, net | 57,724 | | | 90,842 | |
Goodwill | 56,752 | | | 96,314 | |
| | | |
Other non-current assets | 756 | | | — | |
Total assets | $ | 178,598 | | | $ | 261,756 | |
| | | |
Liabilities and Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 18,408 | | | $ | 13,131 | |
Notes payable to sellers | 1,000 | | | 1,000 | |
Short-term debt, including current portion of long-term debt | 780 | | | 2,684 | |
Short-term lease liabilities | 2,904 | | | — | |
Accrued expenses | 14,588 | | | 17,118 | |
Deferred revenue | 15,823 | | | 15,734 | |
Other current liabilities | 1,829 | | | 1,571 | |
Total current liabilities | 55,332 | | | 51,238 | |
Long-term debt | 84,625 | | | 74,867 | |
Long-term lease liabilities | 9,503 | | | — | |
Warrant liabilities | 3,943 | | | 19,098 | |
Deferred tax liabilities | 3,772 | | | 8,601 | |
Other non-current liabilities | 325 | | | 730 | |
Total liabilities | 157,500 | | | 154,534 | |
Shareholders’ Equity: | | | |
Preferred stock, $0.0001 par value, 100,000,000 shares authorized; none issued and outstanding as of June 30, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.0001 par value, 500,000,000 shares authorized; 63,253,836 and 62,690,869 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | 6 | | | 6 | |
Additional paid-in capital | 191,707 | | | 183,024 | |
Accumulated deficit | (170,232) | | | (75,911) | |
Accumulated other comprehensive income (loss) | (383) | | | 103 | |
Shareholders’ equity | 21,098 | | | 107,222 | |
Total liabilities and shareholders’ equity | $ | 178,598 | | | $ | 261,756 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
REDWIRE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| Three Months Ended | | Six Months Ended | | | |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | | |
Revenues | $ | 36,728 | | | $ | 32,148 | | | $ | 69,595 | | | $ | 63,846 | | | | |
Cost of sales | 29,746 | | | 23,534 | | | 57,442 | | | 47,755 | | | | |
Gross margin | 6,982 | | | 8,614 | | | 12,153 | | | 16,091 | | | | |
Operating expenses: | | | | | | | | | | |
Selling, general and administrative expenses | 17,562 | | | 12,143 | | | 38,513 | | | 23,399 | | | | |
Contingent earnout expense | — | | | 11,114 | | | — | | | 11,114 | | | | |
Transaction expenses | 48 | | | 2 | | | 94 | | | 2,419 | | | | |
| | | | | | | | | | |
Impairment expense(1) | 80,462 | | | — | | | 80,462 | | | — | | | | |
Research and development | 1,708 | | | 958 | | | 3,432 | | | 1,954 | | | | |
Operating income (loss) | (92,798) | | | (15,603) | | | (110,348) | | | (22,795) | | | | |
Interest expense, net | 1,670 | | | 1,770 | | | 3,122 | | | 3,191 | | | | |
Other (income) expense, net | (15,515) | | | (110) | | | (14,335) | | | (23) | | | | |
Income (loss) before income taxes | (78,953) | | | (17,263) | | | (99,135) | | | (25,963) | | | | |
Income tax expense (benefit) | (1,925) | | | (1,362) | | | (4,814) | | | (2,388) | | | | |
Net income (loss) | $ | (77,028) | | | $ | (15,901) | | | $ | (94,321) | | | $ | (23,575) | | | | |
| | | | | | | | | | |
Net income (loss) per share, basic and diluted | $ | (1.22) | | | $ | (0.43) | | | $ | (1.50) | | | $ | (0.63) | | | | |
Weighted-average shares outstanding: | | | | | | | | | | |
Basic and diluted | 62,992,454 | | | 37,200,000 | | | 62,842,495 | | | 37,200,000 | | | | |
| | | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | | |
Net income (loss) | $ | (77,028) | | | $ | (15,901) | | | $ | (94,321) | | | $ | (23,575) | | | | |
Foreign currency translation gain (loss), net of tax | (358) | | | 52 | | | (486) | | | (179) | | | | |
Total other comprehensive income (loss), net of tax | (358) | | | 52 | | | (486) | | | (179) | | | | |
Total comprehensive income (loss) | $ | (77,386) | | | $ | (15,849) | | | $ | (94,807) | | | $ | (23,754) | | | | |
(1) Please refer to Note G, Note H, and Note I for additional information.
The accompanying notes are an integral part of the condensed consolidated financial statements.
REDWIRE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands of U.S. dollars, except share and unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity (Deficit) |
Three Months Ended June 30, 2021 | | | | | Shares | | Amount | | | | |
Balance as of March 31, 2021(1) | | | | | 37,200,000 | | | $ | 4 | | | $ | 55,169 | | | (22,048) | | | $ | 275 | | | $ | 33,400 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Foreign currency translation, net of tax | | | | | — | | | — | | | — | | | — | | | 52 | | | 52 | |
Net income (loss) | | | | | — | | | — | | | — | | | (15,901) | | | — | | | (15,901) | |
Balance as of June 30, 2021(1) | | | | | 37,200,000 | | | $ | 4 | | | $ | 55,169 | | | (37,949) | | | $ | 327 | | | $ | 17,551 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Six Months Ended June 30, 2021 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | |
Balance as of December 31, 2020(1) | | | | | 37,200,000 | | | $ | 4 | | | $ | 53,059 | | | $ | (14,374) | | | $ | 506 | | | $ | 39,195 | |
| | | | | | | | | | | | | | | |
Parent’s contributions | | | | | — | | | — | | | 2,110 | | | — | | | — | | | 2,110 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Foreign currency translation, net of tax | | | | | — | | | — | | | — | | | — | | | (179) | | | (179) | |
Net income (loss) | | | | | — | | | — | | | — | | | (23,575) | | | — | | | (23,575) | |
Balance as of June 30, 2021(1) | | | | | 37,200,000 | | | $ | 4 | | | $ | 55,169 | | | $ | (37,949) | | | $ | 327 | | | $ | 17,551 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity (Deficit) |
Three Months Ended June 30, 2022 | Shares | | Amount | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance as of March 31, 2022 | 62,690,869 | | | $ | 6 | | | 187,435 | | | $ | (93,204) | | | $ | (25) | | | $ | 94,212 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Equity-based compensation expense | — | | | — | | | 1,743 | | | — | | | — | | | 1,743 | |
Common stock issued under the committed equity facility | 310,815 | | | — | | | 1,260 | | | — | | | — | | | 1,260 | |
Committed equity facility fee settled in common stock | 127,751 | | | — | | | 756 | | | — | | | — | | | 756 | |
Foreign currency translation, net of tax | — | | | — | | | — | | | — | | | (358) | | | (358) | |
Net income (loss) | — | | | — | | | — | | | (77,028) | | | — | | | (77,028) | |
Other | 124,401 | | | — | | | 513 | | | — | | | — | | | 513 | |
Balance as of June 30, 2022 | 63,253,836 | | | $ | 6 | | | $ | 191,707 | | | $ | (170,232) | | | $ | (383) | | | $ | 21,098 | |
| | | | | | | | | | | |
Six Months Ended June 30, 2022 | | | | | | | | | | | |
Balance as of December 31, 2021 | 62,690,869 | | | 6 | | | 183,024 | | | (75,911) | | | 103 | | | 107,222 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Equity-based compensation expense | — | | | — | | | 6,154 | | | — | | | — | | | 6,154 | |
Common stock issued under the committed equity facility | 310,815 | | | — | | | 1,260 | | | — | | | — | | | 1,260 | |
Committed equity facility fee settled in common stock | 127,751 | | | — | | | 756 | | | — | | | — | | | 756 | |
Foreign currency translation, net of tax | — | | | — | | | — | | | — | | | (486) | | | (486) | |
Net income (loss) | — | | | — | | | — | | | (94,321) | | | — | | | (94,321) | |
Other | 124,401 | | | — | | | 513 | | | — | | | — | | | 513 | |
Balance as of June 30, 2022 | 63,253,836 | | | $ | 6 | | | $ | 191,707 | | | $ | (170,232) | | | $ | (383) | | | $ | 21,098 | |
(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).
The accompanying notes are an integral part of the condensed consolidated financial statements.
REDWIRE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of U.S. dollars)
| | | | | | | | | | | | | | |
| | | | |
| Six Months Ended | | | |
| June 30, 2022 | | June 30, 2021 | | | |
Cash flows from operating activities: | | | | | | |
Net income (loss) | $ | (94,321) | | | $ | (23,575) | | | | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | |
Depreciation and amortization expense | 7,060 | | | 4,889 | | | | |
Amortization of debt issuance costs and discount | 207 | | | 132 | | | | |
| | | | | | |
Equity-based compensation expense | 6,154 | | | — | | | | |
| | | | | | |
Contingent earnout expense not yet settled | — | | | 11,114 | | | | |
| | | | | | |
| | | | | | |
Discount on common stock issued under the committed equity facility | 38 | | | — | | | | |
Change in fair value of warrants | (15,155) | | | — | | | | |
Deferred provision (benefit) for income taxes | (4,828) | | | (2,476) | | | | |
Impairment expense | 80,462 | | | — | | | | |
Non-cash lease expense | 187 | | | — | | | | |
Other | 31 | | | 65 | | | | |
Changes in assets and liabilities: | | | | | | |
(Increase) decrease in accounts receivable | 3,546 | | | (3,361) | | | | |
(Increase) decrease in contract assets | (3,009) | | | (3,535) | | | | |
(Increase) decrease in inventory | (1,003) | | | (104) | | | | |
(Increase) decrease in prepaid insurance | 2,127 | | | — | | | | |
(Increase) decrease in prepaid expenses and other assets | (827) | | | (3,446) | | | | |
Increase (decrease) in accounts payable and accrued expenses | 3,514 | | | 5,916 | | | | |
Increase (decrease) in deferred revenue | 101 | | | (4,289) | | | | |
Increase (decrease) in other liabilities | 132 | | | (1,413) | | | | |
| | | | | | |
Net cash provided by (used in) by operating activities | (15,584) | | | (20,083) | | | | |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Acquisition of businesses, net of cash acquired | — | | | (38,735) | | | | |
Purchases of property, plant and equipment, net | (1,898) | | | (1,324) | | | | |
Purchase of intangible assets | (175) | | | — | | | | |
| | | | | | |
Settlement of related party receivable | — | | | 4,874 | | | | |
Net cash provided by (used in) investing activities | (2,073) | | | (35,185) | | | | |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Repayments of debt | (2,294) | | | (5,194) | | | | |
Payment of debt issuance fees to third parties | (770) | | | (62) | | | | |
Proceeds received from debt | 10,000 | | | 45,970 | | | | |
Proceeds from issuance of common stock | 1,222 | | | — | | | | |
Payment of committed equity facility transaction costs | (81) | | | — | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net cash provided by (used in) financing activities | 8,077 | | | 40,714 | | | | |
Effect of foreign currency rate changes on cash and cash equivalents | (64) | | | (132) | | | | |
Net increase (decrease) in cash and cash equivalents | (9,644) | | | (14,686) | | | | |
Cash and cash equivalents at beginning of period | 20,523 | | | 22,076 | | | | |
Cash and cash equivalents at end of period | $ | 10,879 | | | $ | 7,390 | | | | |
| | | | | | |
Cash paid (received) during the period for: | | | | | | |
Interest | $ | 2,759 | | | $ | 2,892 | | | | |
Income taxes | — | | | — | | | | |
| | | | | | |
Supplemental Schedule of Non-Cash Investing and Financing Activities: | | | | | | |
Holdings’ contribution for acquisition of businesses | — | | | 2,110 | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Capital expenditures not yet paid | 1,252 | | | 154 | | | | |
Committed equity facility transaction costs not yet paid | 651 | | | — | | | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(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. The Company has completed eight acquisitions since March 2020, which collectively have provided a wide variety of complementary technologies and solutions to serve the Company’s target markets and customers. 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”), and LoadPath, LLC (“LoadPath”), Oakman Aerospace, Inc. (“Oakman”), Deployable Space Systems, Inc. (“DPSS”) and Techshot, Inc. (“Techshot”) as of December 31, 2021.
On September 2, 2021, the previously announced 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 cancelled 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).
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 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
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
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 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 D and Note N for additional information.
Chief Financial Officer Transition
On June 1, 2022 (the “Effective Date”), William Read stepped down from the position of Chief Financial Officer (CFO) and entered into a separation and release agreement (“Separation and Release Agreement”) which ended his employment with the Company as of the Effective Date. On the same date, Jonathan E. Baliff, a member of the Company’s board of directors (the “Board”), assumed the role of CFO of the Company. Mr. Baliff stepped down from his service on the Board’s Audit Committee and Nominating and Corporate Governance Committee as of the Effective Date, but remains a member of the Board. Please refer to Note P for additional information.
Note B – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial statement information and the rules of the SEC. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated balance sheet as of December 31, 2021 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of adjustments associated with acquisition accounting and normal recurring adjustments, necessary for the fair statement of such financial statements. All intercompany balances and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements should be read in conjunction with the information contained in the Company’s 2021 Annual Report on Form 10-K. Interim results are not necessarily indicative of the results that may be expected for a full year.
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.
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
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
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 condensed consolidated statements of operations and comprehensive income (loss).
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 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
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
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 the customer based on the control transferred to the customer. For over time 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 condensed 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 those contracts accounted for under the “right to invoice” practical expedient.
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
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.
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; |
Level 2: | Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
Level 3: | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
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 $10.9 million and $20.5 million, as of June 30, 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 condensed consolidated statements of operations and comprehensive income (loss).
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.
Goodwill and Intangible Assets
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 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
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
value. The Company has three reporting units, Mission Solutions, Space Components, and Engineering Services, which were determined based on similar economic characteristics, financial metrics and product and servicing offerings.
The Company assesses impairment first on a qualitative basis to determine if a quantitative assessment is necessary. In circumstances where the qualitative analysis 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 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. During the second quarter of 2022, the Company identified certain triggering events and performed an interim goodwill impairment assessment for all reporting units. Please refer to Note I for additional information regarding the results of this assessment.
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.
All indefinite-lived assets are reviewed for impairment annually, and as necessary if indicators of impairment are present. Similar to goodwill, the Company identified certain triggering events and performed an interim impairment assessment for all indefinite-lived intangible assets. Please refer to Note H for additional information regarding the results of this assessment.
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 incurred.
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 useful life in years |
Computer equipment | 3 |
Furniture and fixtures | 7 |
Laboratory equipment | 3-10 |
Software | 3-5 |
Leasehold improvements | 5 or 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 condensed consolidated statements of operations and comprehensive income (loss).
Leases
The Company is obligated under certain operating leases for its facilities 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 records a
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
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.
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. 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 excluded from lease payments in the measurement of the ROU asset and lease liability and 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 condensed consolidated balance sheets and are recognized as lease expense on a straight-line basis in the condensed consolidated statements of operations and comprehensive income (loss).
Long-Lived Assets
The Company regularly evaluates its property, plant and equipment and finite-lived 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.
During the second quarter of 2022, the Company identified triggering events and performed an impairment assessment on its finite-lived asset groups. As a result, the Company determined that the estimated fair value of certain long-lived asset groups was lower than their carrying value as of June 30, 2022. Please refer to Note G and Note H for additional information regarding the results of this assessment.
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes (“ASC 740”). The Company computes its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are calculated based on the basis difference for financial reporting and tax basis of assets and liabilities using enacted tax rates for the year in which the differences are expected to reverse. All deferred income taxes are classified as non-current in the Company’s condensed consolidated balance sheets. The Company records a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
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. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Research and Development Costs
Research and development costs are primarily made up of labor charges, prototype material, and development expenses. Research and development costs are expensed in the period incurred.
Advertising Costs
All advertising, promotional and marketing costs are expensed when incurred and are included in Selling, general and administrative expenses within the condensed consolidated statements of operations and comprehensive income (loss).
Equity-based Compensation
The Company’s equity-based compensation plans are classified as equity plans and compensation expense is generally recognized over the vesting period of stock awards. The Company issues stock awards in the form of incentive units, non-qualified stock options and restricted stock units. The fair value of incentive units and stock options are calculated on the grant date using the Black-Scholes Option Pricing Model (“OPM”). Given the absence of adequate historical data, the Company uses the Simplified Method to estimate the term of stock options granted to employees. The fair value of the restricted stock units are calculated based on the closing market price of the Company’s common stock on the grant date.
The vesting of the incentive units is contingent on service-based, performance-based, and market conditions and, as such, the recognition of compensation expense is deferred until it is probable the performance conditions will be satisfied. Once it is probable that the performance conditions will be satisfied, unrecognized compensation expense is recognized based on the portion of the requisite service period that has been rendered. If the requisite period is complete, compensation expense is recognized regardless of market conditions being met and recognizes forfeitures as they occur.
For non-qualified stock options and restricted stock units, the Company recognizes the grant date fair value as compensation expense on a straight-line method over the vesting period (typically three years) and recognizes forfeitures as they occur.
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 stock in order to classify the derivative instrument as equity. Otherwise, the derivative asset or liability is recognized at fair value with subsequent changes in fair value recognized in the condensed consolidated statements of operations and comprehensive income (loss).
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 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 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 measured the private warrant liability at fair value at the closing of the Merger and then at each reporting period with changes in fair value recognized as other (income) expense, net in the condensed consolidated statements of operations and comprehensive income (loss).
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Committed Equity Facility
During the second quarter of 2022, the Company evaluated the Purchase Agreement with B. Riley and determined that the committed equity facility was not indexed to the Company’s own stock. As a result, it was recognized as a derivative asset with changes in fair value recognized as other (income) expense, net in the condensed consolidated statements of operations and comprehensive income (loss). Please refer to Note D and Note N for additional information.
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, the euro, is considered to be the functional currency of that operation. 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 condensed consolidated statements of operations and comprehensive income (loss).
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
This may make comparison of the Company’s financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which supersedes the current lease requirements in ASC 840, Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the condensed consolidated statements of operations and comprehensive income (loss). Under ASC 840, leases are classified as either capital or operating, with any capital leases recognized on the condensed consolidated balance sheets. The reporting of lease-related expenses in the condensed consolidated statements of operations and comprehensive income (loss) and consolidated statements of cash flows will be generally consistent with the ASC 840 guidance. Effective January 1, 2022, the Company adopted the new lease standard using a modified retrospective transition method with a cumulative effect adjustment in the period of adoption. In accordance with ASC 842, the Company elected the following package of practical expedients: (i) to use hindsight analysis on expired or existing leases as of the effective date; (ii) to not apply this standard to short-term leases (i.e., with a term less than 12 months); and (iii) to not reassess the lease classification for existing or expired contracts. As a result of adoption, the Company recognized right of use assets and lease liabilities of $10.1 million and $10.2 million, respectively. Adoption of this standard is not expected to have a material impact on the Company’s results of operations or cash flows.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), an amendment of the FASB ASC. Subsequent to the issuance of ASU 2016-13, there were various updates that amended and clarified the impact of ASU 2016-13. ASU 2016-13 broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The amendments in ASU 2016-13 will require an entity to record an allowance for
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
credit losses for certain financial instruments and financial assets, including accounts receivable, based on expected losses rather than incurred losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The use of forecasted information incorporates more timely information in the estimate of expected credit losses. The new guidance will be effective for the year beginning January 1, 2023. The Company does not expect this guidance to have a material impact on its condensed consolidated financial statements or related disclosures.
Note C – Business Combinations
Oakman Acquisition
On January 15, 2021, the Company acquired 100% of the equity interest of Oakman for cash and 1,000,000 units of Holdings’ equity. This acquisition supports the Company’s growth in its offering of engineering solutions. The fair value of assets acquired and liabilities assumed as of the acquisition date was $10.0 million and $4.5 million, respectively, for total purchase consideration, after certain adjustments, of $14.3 million, comprised of $12.2 million cash paid and $2.1 million common stock issued. The acquisition was accounted for as a business combination, whereby the excess of the consideration paid over the fair value of identifiable net assets was allocated to goodwill. The amount of goodwill for Oakman as of June 30, 2022 and December 31, 2021 was $8.8 million.
DPSS Acquisition
On February 17, 2021, the Company acquired 100% of the equity interest of DPSS in exchange for cash. The acquisition supports the Company’s growth in its offering of deployable technology. The fair value of assets acquired and liabilities assumed as of the acquisition date was $28.7 million and $12.7 million, respectively, for total purchase consideration, after certain adjustments, of $27.3 million. The acquisition was accounted for as a business combination, whereby the excess of the consideration paid over the fair value of identifiable net assets was allocated to goodwill. The amount of goodwill for DPSS as of June 30, 2022 and December 31, 2021 was $11.3 million.
Techshot Acquisition
On November 1, 2021, the Company acquired 100% of the equity interest of Techshot in exchange for cash and 3,029,596 shares of common stock. The acquisition supports the Company’s growth in its offering of mission solutions.
The following table summarizes the fair value of the consideration transferred and the estimated fair values of the major classes of assets acquired and liabilities assumed as of the acquisition date.
| | | | | |
| November 1, 2021 |
Cash paid | $ | 2,228 | |
Common stock issued | 38,493 | |
Purchase consideration | $ | 40,721 | |
Assets: | |
Cash | $ | 406 | |
Accounts receivable and other receivable | 287 | |
Contract assets | 926 | |
Inventory | 120 | |
Prepaid expenses and other current assets | 86 | |
Property, plant and equipment | 14,818 | |
Intangible assets | 4,120 | |
| |
Total assets | 20,763 | |
| |
Liabilities: | |
Accounts payable | 39 | |
Accrued expenses | 293 | |
Deferred revenue | 675 | |
Other current liabilities | 35 | |
Deferred tax liabilities | 5,521 | |
Total liabilities | 6,563 | |
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
| | | | | |
Fair value of net identifiable assets acquired | 14,200 | |
Goodwill | $ | 26,521 | |
The following table summarizes the intangible assets acquired by class:
| | | | | | | | | | | |
| November 1, 2021 | | Weighted average useful life in years |
Trademark | $ | 240 | | | 3 |
Technology | 1,800 | | | 10 |
Customer relationships | 1,400 | | | 9 |
IPR&D | 680 | | | |
Total intangible assets | $ | 4,120 | | | |
The fair value of the acquired trademark, technology, and IPR&D was estimated using the relief from royalty (“RFR”) method. The fair value of the acquired customer relationships was estimated using the excess earnings method.
The acquisition was accounted for as a business combination, whereby the excess of the consideration paid over the fair value of identifiable net assets was 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. For tax purposes, the goodwill is not deductible.
Pro Forma Financial Data (Unaudited)
The table below presents the pro forma combined results of operations for the business combinations for the three and six months ended June 30, 2021 as though the acquisitions of Oakman, DPSS, and Techshot (the “2021 Business Combinations”) had been completed as of January 1, 2020.
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2021 |
Revenues | $ | 34,283 | | | $ | 72,309 | |
Net income (loss) | (17,872) | | | (22,615) | |
The amounts included in the pro forma information are based on the historical results and do not necessarily represent what would have occurred if the 2021 business combinations had taken place as of January 1, 2020, nor do they represent the results that may occur in the future. Accordingly, the pro forma financial information should not be relied upon as being indicative of the results that would have been realized had the business combination occurred as of the date indicated or that may be achieved in the future.
The Company incurred $94 thousand and $2.4 million of acquisition related costs during the six months ended June 30, 2022 and June 30, 2021, respectively. Acquisition related costs in 2022 were attributable to the Techshot business combination, while such costs in 2021 were attributable to the Oakman and DPSS business combinations. These expenses are included in transaction expenses on the condensed consolidated statements of operations and comprehensive income (loss) and are also reflected in the pro forma results for the periods presented in the table above.
Note D – Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, salaries and benefits payable, accrued interest, other accrued expenses and current liabilities are reflected on the condensed consolidated balance sheets at amounts that approximate fair value because of the short-term nature of these financial assets and liabilities.
The fair value of the Company’s debt approximates its carrying value and is classified as Level 2 within the fair value hierarchy as it is based on discounted cash flows using a current borrowing rate.
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Contingent Consideration
As of June 30, 2022 and December 31, 2021, contingent consideration consisted of estimated future payments related to the Company’s acquisition of Roccor. As certain inputs are not observable in the market, contingent consideration payments are classified as Level 3 instruments and included in notes payable to seller on the condensed consolidated balance sheets. Significant changes in the significant unobservable inputs used in the Black-Scholes OPM to determine the fair value of contingent consideration would result in a significantly lower or higher fair value measurement. The Company adjusts the previous fair value estimate of contingent consideration at each reporting period based on changes in forecasted financial performance and overall risk as well as the period of time elapsed.
The purchase agreement with the sellers of Roccor awarded such sellers with a contingent right to an earnout payment from the Company upon the achievement of certain revenue milestones for the year ended December 31, 2021. The fair value of the Roccor contingent earnout was estimated using the Black-Scholes OPM.
The assumptions used in the Black-Scholes OPM were as follows:
| | | | | |
Roccor Black-Scholes OPM Assumptions | |
Risk-free interest rate | 0.1 | % |
Revenue discount rate | 7.0 | % |
Revenue volatility | 30.0 | % |
Earnout payment discount rate | 4.0 | % |
As of June 30, 2022, the Company expects to pay the Roccor contingent earnout during the second half of 2022 in accordance with the acquisition agreement.
Committed Equity Facility
During the second quarter of 2022, the Company evaluated the Purchase Agreement with B. Riley and determined that the committed equity facility should be accounted for in accordance with ASC 815. Accordingly, the Company recorded a derivative asset with an initial fair value of $0.8 million based on the 127,751 shares of common stock issued to B. Riley as consideration for its irrevocable commitment to purchase up to $80.0 million in shares of the Company’s common stock. Subsequent changes in the fair value of the derivative asset are dependent upon, among other things, changes in the closing share price of the Company’s common stock, the quantity and purchase price of shares purchased by B. Riley during the reporting period, the unused capacity under the committed equity facility as of the balance sheet date and the cost of raising other forms of capital.
Pursuant to the Purchase Agreement, the purchase price for each share of common stock is equal to 97% of the volume weighted average price (“VWAP”) on the applicable purchase date, which effectuates a 3% fee on the purchase of the Company’s common stock. During the three months ended June 30, 2022, the VWAP of shares purchased by B. Riley ranged from $3.87 to $4.29 per share. Changes in the fair value of the committed equity facility are included in other (income) expense, net on the condensed consolidated statements of operations and comprehensive income (loss).
Based on the June 30, 2022 closing price of $3.04 per share and registered shares available for purchase under the committed equity facility of 8,689,185, the Company had $26.4 million of unused capacity under the committed equity facility as of June 30, 2022. Please refer to Note N for additional information.
REDWIRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts in thousands of U.S. dollars, except percentages, unit, share, and warrant amounts)
Private Warrants
The private warrants were valued using a modified Black-Scholes OPM, which is classified as Level 3 within the fair value hierarchy. The following table presents the fair value per warrant and the valuation assumptions under the Black-Scholes OPM as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
Fair value | | | $ | 0.51 | | | $ | 2.47 | |
Exercise price | | | $ | 11.50 | | | $ | 11.50 | |
Common stock price | | | $ | 3.04 | | | $ | 6.75 | |
Expected option term (years) | | | 4.18 years | | 4.67 years |
Expected volatility | | | 59.50 | % | | 60.50 | % |
Risk-free rate of return | | | 2.98 | % | | 1.21 | % |
Expected annual dividend yield | | | — | % | | — | % |
The following table presents information about the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 were as follows:
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| | | June 30, 2022 |
| Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | |
Committed equity facility | Other non-current assets | | $ | — | | | $ | — | | | $ | 756 | | | $ | 756 | |
Total assets | | | $ | — | | | $ | — | | | $ | 756 | | | $ | 756 | |
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Liabilities: | | | | | | | | | |
Private warrants | Warrant liabilities | | $ | — | | | $ | — | | | $ | 3,943 | | | $ | 3,943 | |
Contingent consideration | Notes payable to sellers | | — | | | — | | | 1,000 | | | 1,000 | |
Total liabilities | | | $ | — | | | $ | — | | | $ | 4,943 | | | $ | 4,943 | |
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| | | December 31, 2021 |
| Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Liabilities: | | | | | | | | | |
Private warrants | Warrant liabilities | | $ | — | | | $ | — | | | $ | 19,098 | | | $ | 19,098 | |
Contingent consideration | Notes payable to sellers | | — | | | — | | | 1,000 | | | 1,000 | |
Total liabilities | | | $ | — | | | $ | — | | | $ | 20,098 | | | $ | 20,098 | |
Changes in the fair value of Level 3 financial assets and liabilities during the six months ended June 30, 2022 were as follows: | | | | | | | | | | | | | | | |
Assets: | Committed Equity Facility | | | | | | Total Level 3 |
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December 31, 2021 | $ | — | | | | | | | $ | — | |
Additions | 756 | | | | | | | 756 | |
Changes in fair value | — | | | | | | | — | |
Settlements | — | | | | | | | — | |
June 30, 2022 | $ | 756 | | | | | | | $ | |