Terran Orbital - Q1 2024

Executive Summary

• Q1 revenue was $27.2M, down 3% YoY, driven by a $13.1M negative EAC adjustment on a single fixed-price program due to a propulsion subcontractor issue; management expects the delayed revenue to be recognized by the end of Q3 2024. Gross loss widened to $6.2M and Adjusted EBITDA declined to $(28.2)M as EACs compressed margins.
• Backlog stood at $2.7B as of March 31 (including $2.4B Rivada), and is “over $2.8B” as of May 14 with non‑Rivada programs rising to ~$400M; Q2 awards exceed $100M to date.
• Strategic update: Lockheed Martin selected Terran to build 18 space vehicles for SDA’s Tranche 2 Tracking Layer, expanding collaboration; special committee’s strategic review remains ongoing after Lockheed withdrew a $1.00/share proposal.
• Guidance withheld for FY24 amid timing uncertainty and ongoing strategic review; management targets Adjusted EBITDA positive in 2024 (potentially Q4) and sees a 2H revenue ramp as ~50 satellites are delivered in 2024, incl. T1 deliveries by August.

What Went Well and What Went Wrong

What Went Well

• Lockheed Martin expansion: Award for 18 space vehicles for SDA’s Tranche 2 Tracking Layer, broadening relationship under the Strategic Cooperation Agreement through 2035. CEO: “We value Lockheed Martin’s partnership and look forward to continued collaboration...”.
• Backlog momentum and awards: Q2 awards exceed $100M, backlog moved from $2.7B at 3/31 to “over $2.8B” by 5/14 as non‑Rivada backlog increased to ~$400M.
• Vertical integration/throughput: Management highlighted proactive pivot from a problematic propulsion supplier and continued push to bring manufacturing in‑house to reduce reliance on subcontractors; ~50 satellites expected to be delivered in 2024.

What Went Wrong

• Negative EAC impact: $13.1M negative EAC adjustment reduced revenue and margins in Q1; gross loss increased to $6.2M and Adjusted EBITDA fell to $(28.2)M, with EACs negatively impacting gross loss and Adjusted Gross Loss by ~$13.6M.
• Subcontractor disruption: A propulsion supplier’s inability to deliver forced a redesign and supplier switch, delaying revenue into later quarters; first eight propulsion units expected by end of May with cadence thereafter.
• Guidance withheld and covenant risk: FY24 outlook withheld given timing uncertainty/strategic review; debt covenants require LTM EBITDA positive by YE24 absent waivers—management notes options but no guarantees.

Transcript

Operator (participant)

Welcome to the Terran Orbital Q1 2024 Earnings Call. My name is Carla, and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star, followed by one on your telephone keypad. If you change your mind, please press star, followed by two. I would now like to turn the call over to John Siegmann, Senior Vice President of Corporate Development at Terran Orbital, to begin. Please go ahead.

Jon Siegmann (SVP of Corporate Development)

Thank you, Carla. Good morning, everyone, and thank you for joining Terran Orbital's first quarter 2024 earnings call. With me this morning are Marc Bell, Co-Founder, Chairman, and Chief Executive Officer of Terran Orbital Corporation, and Matt Riffel, Acting Chief Financial Officer, Corporate Controller at Terran Orbital. Marc will provide a business update and highlights for the past quarter, and then Matt will review the quarterly results. Terran Orbital's executive team will then be available to answer your questions. During today's call, we will make certain forward-looking statements. These statements are based on our current expectations and assumptions, and as a result, are subject to risk and uncertainties. Many factors could cause actual events to differ materially from forward-looking statements made on this call.

For more information about these risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, each of which can be found on our website, www.terranorbital.com. Readers are cautioned not to put any undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Please also note that we will refer to certain non-GAAP financial information on today's call. You can find reconciliations of these non-GAAP financial measures with the most comparable GAAP measures in our earnings press release. With that, I will turn it over to Marc.

Marc Bell (CEO and Chairman)

I just realized there's a thing called a mute button, so I'm going to start totally from scratch again. Apologies. Thank you, John, and welcome, and thank you, everyone, to joining our first quarter 2024 earnings call. In light of the company's strategic review, management decided to cancel the previously scheduled fourth quarter and full year 2023 earnings conference call. Although the strategic review is still ongoing, we are hosting today's conference call to keep our stakeholders up to date on recent events and first quarter results. I'm going to go a little off-script here for a minute, if you don't mind. I don't think people are realizing we have Rivada, which is this amazing program that we won last year, but people aren't realizing we have $400 million of signed backlog, which becomes revenue, and it becomes revenue over the course of the next 18 months-24 months.

So that's money that we'll bill. The bulk of it is from Lockheed Martin, and we're very appreciative of our relationship with Lockheed Martin and the continuity to go stronger every day. We are rapidly changing our workforce here a little bit. Until we've gone from only 675 to 695 people, yet our throughput has gone up dramatically in what we're able to produce. Our workforce is changing. It's now just under 20% of our workforce is now cleared, as we're going to be moving more and more into doing more classified work, more and more work for the government and the DoD. I think these are important metrics to see how that $400 million becomes revenue.

I don't think people are quite grasping that because we realize it looks like revenues were down this quarter, but we have just under 50 space vehicles that will be delivered in 2024 alone. With that, I'm going to get back to the script, but I just want to make some quick points up front to hopefully give you some context to the rest of the conversation. Let me remind you that the critical mission of Terran team is pursuing historically space domain, of which we all know of in a few nations, states, with the cabal in time to build bespoke billion-dollar satellites that took 5 years-10 years to manufacture. Today, Terran Orbital is strategically investing in manufacturing capacity to enable production at a mass scale with the efficiencies and significant improvement in speed. That efficiency comes without significant headcount expansion.

So we could dramatically increase the amount we can manufacture with only increasing our headcount just 20 people over the course of the past three months. We are utilizing modular design, automation, component standardization, to drive synchronized improvements in speed, cost, and quality. Our automation is expanding beyond satellite components to satellite assembly and integration. We are realizing both cost savings and quality improvement from our recent investments in production capacity and automation. A proof of our success was clearly our early delivery of the 10 satellites for Transport Layer Tranche 0 to our customer and partner, Lockheed Martin, and support of the Space Development Agency. It took only 26 months from contract award to delivery of our space vehicles from our facility in California. While 26 months is a significant improvement relative to the years it traditionally would take to complete a new satellite program, we're not stopping here.

We have plans to further reduce manufacturing time to just weeks and have announced plans to be able to accommodate 30-day lead times for standard space vehicles. The successful collaboration between Terran Orbital and Lockheed Martin has blossomed into a significant relationship. We are proud to announce additional contracts following our initial success, including the award contract we announced last night. This is just the beginning, as we see a vast opportunity set as the Department of Defense increasingly relies on commercial space companies for national security missions. As of March 31st, we have over $25 billion identified pipeline, over 140 programs across a globally diverse customer set. End-use markets include defense, intelligence, remote sensing, broadband communications, 5G, direct-to-handset, and span orbits from GEO to lunar and beyond.

Our current capacity, we are positioned to execute on multiple mega-constellations of space vehicles such as the SDA and Rivada and many others, and maintain the ability to flex our resources to rapidly match customer demand. Equally important, our design and capabilities uniquely position Terran Orbital to deliver highly engineered space vehicles in high volume within compressed time frames to meet each other's mission needs, and we do this at a fraction of historical costs. Disrupting an industry has its challenges. A key pillar of our strategic vision has been vertical integration. As I've always said, if you control your supply chain, you control your destiny. The benefits of vertical integration are best evidenced by our recent replacement of a propulsion subcontractor to protect the program schedule. I am proud of our team's proactive decision to pivot to an alternative propulsion solution.

Matt will provide further detail on the accounting impact of the first quarter, but I want none of our valued shareholders to doubt our long-term consequences of this decision. At the end of the day, our goal is to deliver customers' missions on time and on budget. And unfortunately, with the supply chain as today, 85% of our supply chain we manufacture in-house. 85% of our components and modules are manufactured in-house. We have our own CNC shops, printed circuit board assembly facilities, our own testing facility, shaker tables, TVACs. We have our own torque rod assembly in our harness shop. But the reality is anything we have to outsource we're at the mercy of subcontractors. And that, unfortunately, is getting more and more difficult in this environment, which is why we continue to bring things in-house.

We realize over the past few years, we've invested hundreds of millions of dollars in building and designing our own components and modules, bringing things in-house. But the future, over the next $400 million of orders that we're delivering and beyond, the impact of that will be significant on our financial statements as we drive to become even a positive. But other challenges have been the timing of orders in fickle capital markets, which have constrained available capital for our customers' constellation plans. Our customers have to raise money on the commercial space, not the DoD space, and we're very cognizant of that. We share our shareholders' frustration with some delays our company and industry have experienced. With that, we are steadfast in our confidence in long-term prospects for the industry and our company's positioning.

As a result of these delays, our team responsibly throttled back capital expenditures, tightened discretionary expenditures. The intent was to flex appropriately to the delays while preserving the option to ramp capacity as demand from these pending mega-constellations may require. What I'd like to talk about is specific operational highlights. We did make substantial investments in our design and manufacturing capabilities over the past few years. We just completed our 60,000 sq ft addition to our original manufacturing facility. As we speak, we have well over 40 space vehicles in the final stages of assembly on the manufacturing floor, and we expect to launch just under 50 space vehicles this year. That is a record for us. Late last year, we opened our advanced printed circuit board assembly lines. We now have the capacity to assemble over 5,000 printed circuit boards per month.

Yields have exceeded our original optimistic expectations, and we were thrilled with the progress we were making. We are seeing an estimated 30% reduction to certain elements of our standard satellite bus costs, and PCBA lines alone are yielding almost 100% every time. Our next capacity addition, which we prudently announced, is our new 94,000 sq ft facility here in Irvine, which we expect to be handed over to us in the coming months as physical construction is nearly complete. The facility offers us the ability to scale and add capacity on the frequency and magnitude of new customer awards. We are actively pursuing other constellation opportunities that would depend on this capacity, and we expect to open this facility no later than Q1 2025.

I am proud of the progress Terran Orbital has made in building the infrastructure to supply space vehicles at mass scale with the speed, quality, and pricing that our customers desire. I am also happy to update you the progress in support of the Space Development Agency programs. Yesterday, we announced our selection by our partner, Lockheed Martin, to build 18 space vehicles for Transport Layer Tranche 2 of Tracking Layer tranche 2 of the SDA's proliferated warfighter Tracking Layer. sorry. 16 of these satellites are planned to be wide field of view missile warning, missile tracking space vehicles with infrared sensors, and the remaining two space vehicles will carry missile defense infrared sensors. This award expands our participation to an entirely new layer of the SDA's mission architecture.

Our team's near-term priority is completing the 42 space vehicles of the Tranche 1 Transport Layer, which aims to deliver as many as 8 vehicles this month, then 10 vehicles per month thereafter. I am proud of our nimble supply chain management to protect our customer schedule by being able to pivot quickly to replace contractors who were unable to deliver. Regarding the company's program with Rivada, we continue to execute on the program, although it was a modest contribution to our first quarter revenue. We have agreed in principle on a payment schedule that we believe will keep the program on track and meet the launch timetable. For further information, please contact Rivada directly at the customer's request. Now, I'd like to provide an update on our strategic review process.

On March 1st, we received an all-cash proposal from Lockheed Martin, one of our largest stakeholders and partners, Lockheed, who already owns or has the right to acquire approximately 27.7% of Terran shares, proposed buying all Terran shares at a price of $1 a share, which represented a 6.5% discount to the then-current market price of $1.07. In response, Terran Orbital adopted a shareholder rights plan. The shareholders' rights plan was intended to encourage anyone seeking to acquire the company, including Lockheed Martin, to negotiate in the board, but prior to attempting to oppose a transaction, that is not in the best interest of stakeholders. A special committee of the board was diligently evaluating the Lockheed Martin proposal as part of the company's ongoing strategic review alternatives, including direct engagement with Lockheed Martin. On April 30th, Lockheed Martin withdrew the proposal.

However, the strategic review is still ongoing and allows us to explore all options. There is no guarantee, however, that this will result in any transaction or a strategic alternative. The special committee does not intend to provide any updates on the review unless and until it deems further disclosure is appropriate. We value Lockheed Martin as a customer, investor, and strategic partner, and look forward to continued our collaboration under our strategic cooperation agreement, which runs through 2035. We believe this continuing partnership was reinforced by this week's Tranche 2 tracking award, which shows that we are still working together on programs across the board. Overall, I am proud of what we've accomplished and where we're heading. With that, I'll hand the call over to Matt to review our financial performance in the quarter and the year-end. Matt?

Matt Riffel (Acting CFO and Corporate Controller)

Thank you, Marc, and good morning, everyone. Now on to the financial results for the quarter. Revenue for the first quarter of 2024 was $27.2 million, down 3% relative to the same quarter in 2023. The decrease in revenue was primarily driven by unfavorable EAC adjustments on a single program due to challenges with a subcontractor, partially offset by an increase in revenue due to the continued and increased level of progress made in satisfying our customer contracts. As a reminder, EAC adjustments represent net changes during the period in our aggregate program contract values, estimated costs at completion, program estimates and changes, and include the cost overruns and recognition of lost reserves. As disclosed in our third quarter 2023 earnings call, our team made a strategic decision to arrange for an alternative subcontractor as a contingency plan.

Unfortunately, our intuition proved correct as evidenced by ongoing challenges by the subcontractor in 2024. The majority of our $13.1 million negative EAC adjustments to the first quarter revenue reflects our complete pivot away from the initial subcontractors. This event ultimately added a significant amount of estimated cost to the program, negatively impacting our cumulative revenue recognized on a percent completion basis to the program. Though this revenue will be recognized in future reporting periods. While we are disappointed with the negative impact on this quarter's results, the proactive decision last year has at least helped mitigate this program schedule and financial impact from being worse. Gross loss for the first quarter of 2024 was $6.2 million compared to $1.4 million in the prior year.

Excluding share-based compensation and depreciation and amortization included in cost of sales, adjusted gross loss was $3.4 million for the first quarter compared to adjusted gross profit of $2.3 million in the same period in 2023. EAC adjustments, primarily related to the subcontractor discussed earlier, negatively impacted gross loss and adjusted gross profit by an estimated $13.6 million during the period. Selling general and administrative expenses were $28.3 million in the first quarter of 2024 compared to $32.5 million in the same period in the prior year. The decrease in selling general and administrative expenses was primarily due to a decrease in share-based compensation expense and a decrease in research and development activities. These decreases were partially offset by an increase in administrative labor and benefits due to the increase in headcount on a comparative basis.

Overall, we're at a point where our selling general and administrative expenses should be materially stabilized compared to our historical growth trends. Adjusted EBITDA was -$28.2 million for the first quarter of 2024 compared to $22.6 million in the same quarter of 2023. The decrease in adjusted EBITDA was primarily due to a decrease in our adjusted gross profit. Our backlog at the end of the quarter was $2.7 billion, of which $2.4 billion was related to our contract with Rivada, and approximately $300 million was related to non-Rivada programs. As of today, backlog is estimated to be over $2.8 billion, inclusive of approximately $400 million of non-Rivada programs due to our second quarter awards, which have exceeded $100 million so far. Our programs generally take 18 months-24 months to complete, and our backlog is expected to be fully recognized as revenue by the end of 2026.

Capital expenditures were slightly down during the first quarter of 2024 and primarily relate to our finishing touches on 50 Tech. Our capital expenditures going forward will largely be related to our new facility, and the timing and extent of our capital expenditures is flexible in relation to the addition of new awards that require the level of increased capacity that facility can offer. Finally, as of March 31st, we had approximately $43.7 million of cash on hand and approximately $316.7 million of gross debt obligations. We remain excited about building on our success from 2023 into a strong 2024, as we have numerous large opportunities we are actively working on or waiting to hear back on. Efficient and successful execution of our new and existing contracts and becoming Adjusted EBITDA positive in 2024 are our top priorities for our team.

As highlighted in our previous calls, the exact timing of execution of our new contracts is an important variable impacting near-term results. Given this timing uncertainty, as well as our ongoing strategic review, we are withholding from providing guidance for the current year. I'll now turn the call back over to Marc for his concluding remarks.

Marc Bell (CEO and Chairman)

Thank you. Thank you, Matt. Thank you, everyone on the call, for your continued support of Terran Orbital. The future of space is responsive, and Terran Orbital is at the forefront. We are not just driving growth. We plan on shaping the future of the space economy. We are committed to becoming the undisputed leader in responsive space solutions. I now look forward to taking your questions, and I'll turn it over to the operator.

Operator (participant)

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your questions, please ensure your device is unmuted locally. Our first question comes from Erik Rasmussen from Stifel. Your line is now open.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Yeah, thanks for taking the questions, and good to see the step up in the backlog. Maybe on the new award. Maybe on the new contract that you signed with Lockheed for the 18 satellites. The value per satellite for Lockheed, when we looked at it, was almost three times what it was awarded per satellite for the Transport Layer. How should we think about your value on this latest award, given you were at roughly $3.5 million per satellite on the previous awards?

Marc Bell (CEO and Chairman)

So Tracking Layer of the Transport Layer, Tracking Layer is a far more sophisticated solution than what you would see on the Transport Layer. There are different kinds of satellites. The buses that we provide have some similar components and some unique components on that. So we're not allowed to go into the detail and price for bus that we're selling it for.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Okay, but you'd say it would be higher than what we've sold previously just because of the content and it's a little more sophisticated?

Marc Bell (CEO and Chairman)

It's higher as it's more sophisticated, as you have more stability needed for the payloads that are on board to do their mission.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Okay. And I appreciate it's probably difficult given the complexity around Rivada and given sort of guidance, but is there any color you can provide to help sort of structure the revenue ramp this year? We know the backlog was $2.7 billion. I think the disclosures in the 10-Q suggest 80% realized by the end of next year and then the remainder in 2026, but not really sure how this will layer into sort of this year and next. So if any sort of commentary you could give would be helpful.

Marc Bell (CEO and Chairman)

Well, think about it. We have just under 50 space vehicles being delivered this year alone. So you'll probably see the revenue ramp. Q2 is going to, you'll see a little bit, but really Q3 and Q4 especially is when you'll see the big revenue ramp will start to hit because we're delivering the satellites through the end of the year.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Okay. And part of that is also the T1 that's sort of been pushed out if you were to think about the delays you talked about.

Marc Bell (CEO and Chairman)

We expect all of T1 to be delivered by August of this year, the absolute latest. If we can make some contracts move faster, we'll move faster. But August, and that's 42 space vehicles right there alone.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Okay. Great. And then maybe just on Rivada, you received several milestone payments, I think smaller amounts thus far. Are you still in the PDR stage? And then maybe what's holding things up for Rivada and Terran at this point? And then maybe just with that, what sort of payment would you need from Rivada to begin the next steps? And what is that next step? Is it the beginning of the design phase?

Marc Bell (CEO and Chairman)

For the first and foremost, we've defined PDR. We're still in the PDR stage. Once we complete PDR, then that'll trigger the next payment. We expect PDR to be done by the end of this quarter.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Okay.

Marc Bell (CEO and Chairman)

Remember, they've got to be able to transfer payments made over time in order to make sure they keep schedule.

Erik Rasmussen (VP and Senior Equity Research Analyst)

Okay. I'll jump back into the queue. Thank you.

Jon Siegmann (SVP of Corporate Development)

Our next question comes from Scott Buck from H.C. Wainwright. Your line is now open.

Scott Buck (Managing Director and Senior Technology Analyst)

Hey, good morning, guys. Thanks for taking my questions. Marc, since it's been a minute or two since we've had a call like this, I was hoping you might be able to kind of update us on your thoughts around path to profitability. It sounds like with the ramp in the second half, maybe even by Q4, we could see something on a quarterly basis. Is that fair?

Marc Bell (CEO and Chairman)

I think it's fair. I think it'll get cute. We're thinking of Q4. We're looking at maybe a little bit beyond. It all depends on when we have some other programs coming in. But the goal is Q4 to be there. You're seeing as our headcount ramp has slowed dramatically, but our yield is increasing dramatically. And this has to do with all the automation. We still have to deal with some subcontractor issues, as we've talked about earlier. But as we bring new subcontractors on board and we bring some more components and modules in-house, we see no reason why we wouldn't be the goal to get EBITDA positive before the end of the year. That is the goal.

Scott Buck (Managing Director and Senior Technology Analyst)

Great. I appreciate that. And then I just want to double-check. The delayed revenue, you're expecting to receive 100% of that, right? There's not any kind of loss there?

Marc Bell (CEO and Chairman)

Correct. The $400 million of backlog excluding Rivada is fully funded backlog that is almost all Lockheed Martin or DoD work.

Scott Buck (Managing Director and Senior Technology Analyst)

I was referencing the EAC adjustments that took place this quarter that you're expected to kind of recoup here in the third quarter.

Marc Bell (CEO and Chairman)

No. Matt, you want to tackle that?

Matt Riffel (Acting CFO and Corporate Controller)

Yeah, sure. Yeah, it's just a timing issue. Since our accounting model, it's effectively percentage completion. The percentage just changed because we now have additional costs of the program. We just had to have a clawback of revenue, which will be recognized in future periods. Fortunately, the total contract value that we are getting paid on is fixed. We will eventually re-recognize that revenue.

Scott Buck (Managing Director and Senior Technology Analyst)

Okay. Perfect. And then last one for me. Given it's an election year, I'm sure you guys have kind of handicapped potential outcomes. Any programs you're working on or bidding on that could potentially be at risk given election outcome?

Marc Bell (CEO and Chairman)

We're lucky to be in a space. I mean, NASA, of course, is always at risk as they're spending a lot of money on very few things. They put a lot of their eggs in one basket. And we have bid on a number of NASA programs. But our core DoD work, we think, is pretty solid and safe. This stuff is necessary, and it's very low cost compared to other programs that are out there. So the Proliferated Warfighter Space Architecture is something the DoD is committed to. We are working on ways to diversify our pipeline going forward. We have a very diverse pipeline. We historically have done it. But now we're reorganizing ourselves to help that pipeline convert into revenue. We haven't done a very good job historically of converting pipeline into revenue.

We're making some adjustments internally to ensure that that pipeline starts to convert into revenue.

Scott Buck (Managing Director and Senior Technology Analyst)

Great. I appreciate the color, guys. Thank you.

Marc Bell (CEO and Chairman)

Thank you.

Operator (participant)

Our next question comes from Josh Sullivan from Benchmark. Your line is now open.

Josh Sullivan (Managing Director and Equity Research Analyst)

Hey, good morning. Just a follow-up on that $400 million of non-Rivada backlog to convert over the next 18 months-24 months, what do you think the cash flow conversion of that looks like?

Marc Bell (CEO and Chairman)

It's all milestone-based. So it is very lumpy as cash converts on these programs. Some programs are front-loaded. Some programs are back-loaded. For example, Transport Layer Tranche 1 is a very back-loaded program, really upon delivery, actually 30 days net after delivery, versus other programs that have a lot of cash upfront. So it's lumpy per program depending on the type of satellite that we're building.

Josh Sullivan (Managing Director and Equity Research Analyst)

Then just a question on headcount. You mentioned some progress on the cleared personnel. Do you have enough cleared personnel to execute on that $400 million of non-Rivada backlog at this point, or is there a number you still need to get to?

Marc Bell (CEO and Chairman)

Well, if you ask my guys, we never have enough. But that said, we have more than enough to complete those programs. It's the work that we're going after now is we're going after more and more cleared, more and more classified programs. We feel we can be hyper-competitive in the classified marketplace.

Josh Sullivan (Managing Director and Equity Research Analyst)

Got it. Thank you for the time.

Marc Bell (CEO and Chairman)

Thank you.

Operator (participant)

Our next question comes from Robert Spingarn from Melius Research.

Robert Spingarn (Managing Director and Senior Equity Research Analyst)

Hey, good morning, everybody. I don't know, Mark, if this is for you or for Matt, but it's sort of a follow-on to the prior question on free cash cadence. I understand why it was asked before. We don't have a lot of visibility into Rivada. So ex-Rivada, what should be the free cash flow cadence as we look out maybe over the rest of this year and into next year?

Marc Bell (CEO and Chairman)

I'm going to turn it over to Matt. How's that?

Robert Spingarn (Managing Director and Senior Equity Research Analyst)

Fair enough.

Josh Sullivan (Managing Director and Equity Research Analyst)

Yeah. No, fair question. Yeah. So our liquidity and cash flow, it's really dependent on customer programs, us managing our expenses, and then to the extent necessary to make up the difference, we have capital transactions. So our path to profitability and free cash flow is dependent on having these larger programs coming online. So that's the best way to think about it.

Robert Spingarn (Managing Director and Senior Equity Research Analyst)

Okay. So moving away from that, but related, you've got a debt covenant that requires you to be EBITDA positive on an LTM basis by the end of this year. But if that doesn't happen, it sounds like you might inflect at the end of the year. So how do you deal with that particular covenant? Can you get a waiver?

Josh Sullivan (Managing Director and Equity Research Analyst)

Yeah. So in our disclosure in our SEC filings, there's a couple of mechanisms that we could explore to either get waivers or extend the deadline for when we have to be EBITDA positive. Unfortunately, we can't make any guarantees that any of those solutions are achievable. But we do have several options.

Robert Spingarn (Managing Director and Senior Equity Research Analyst)

Okay. Then just going back to this program, the fixed-price program, the one that's delayed, is that strictly due to just changing the propulsion supplier or are there any other issues? It's kind of asked before, but are there any other issues popping up during testing that might have contributed to the delay?

Marc Bell (CEO and Chairman)

No, the propulsion has been the number one problem child here. Unfortunately, we picked a propulsion manufacturer who was unable to deliver the product. That caused us to do some redesign to accommodate a new propulsion manufacturer. We are well on our way. We'll receive the first 8 units by the end of this month, and then we should have steady cadence from them going forward. We obviously are pushing them to move faster as we will be done with our space vehicles long before the propulsion guys are done. There was no issue with testing of the vehicles.

Robert Spingarn (Managing Director and Senior Equity Research Analyst)

Okay. Great. Thank you, Marc and Matt.

Operator (participant)

Our next question comes from Tassos Recachinas from Sorfis Investments, LLC.

Tassos Recachinas (Founder, President, and CIO)

Yes. Good morning. Congratulations on the Tranche Tracking Layer contract. Just wondering, in the past, when you announced some of these contracts, sometimes they come with down payments of cash or maybe an upfront cash payment. Just wondering if you believe that will come with an upfront cash payment and perhaps if you can talk about maybe what your cash levels are as of today or anticipated around this time this week.

Marc Bell (CEO and Chairman)

I mean, we don't normally disclose payments, but every program comes with what's called an ATP authorization to proceed. And usually, we get an ATP payment within the first 30 days of getting a contract. And then those payments can vary dramatically depending on the program and long lead items that have to be purchased for the program versus things that we manufacture in-house.

Tassos Recachinas (Founder, President, and CIO)

So in terms of looking at your cash balances at the end of the quarter and then maybe doing some math on what they might be around now, it would be safe to assume that you're comfortable with your liquidity position in part due to the ATP?

Marc Bell (CEO and Chairman)

Yeah. We feel very comfortable with our liquidity position as it stands today.

Tassos Recachinas (Founder, President, and CIO)

And then just a question on Rivada. So understanding that there's a small number of satellites that Rivada needs to launch by the end of this year to kind of stay on track on their program, just wondering if you're actively working on those or if Rivada would do those without Terran or if everything's on track with that.

Marc Bell (CEO and Chairman)

No. As of right now, everything is on track for what we're calling the precursor satellites with Rivada. They have asked that all detailed questions to Rivada go to them. They want to be able to control their own narrative on this. But right now, we're tracking based on the schedule we have.

Tassos Recachinas (Founder, President, and CIO)

And then with regard to the pipeline and commercial customers, is there anything that you can share with regard to any visibility, any near-term opportunities that you're working on on the commercial customers?

Marc Bell (CEO and Chairman)

So I will say that we have a number of commercial customers who we've made it to the final rounds. So commercial customers are not like DoD customers where DoD gets their budget every year. Commercial customers tend to move much slower, believe it or not, if that's even possible, than the DoD. But that said, when they start to move, there's a lot of inertia. We have a number of commercial programs we've been working on for over a year, starting with RFIs and RFPs. And then we go to co-engineering phases, which we're in now with some, which means we're in the final round. And we continue to aggressively work on those customers to get them from co-engineering to a contract.

It is a competitive marketplace on a global basis, but we feel we are very much price competitive, and we're very much schedule competitive, which are two very big deals nowadays, especially all these people who are looking at 5G, direct-to-handset, Internet of Things. There's a lot of companies around. And we're talking to our customer base is getting geographically immensely diverse in terms of foreign telephone companies, foreign internet providers. People who used to buy GEOs from other people are now talking to us. We have one customer, for example, who's been buying their entire time buying satellites from China and now looking to pivot to the United States to buy satellites for our SmallSat GEO offering. So we know we have the right products at the right time.

People are finally, as they come over to Irvine and they see what we're doing, they develop a huge amount of comfort in what we've built here and our manufacturing capabilities, which hopefully will lead to contracts later this year and beyond.

Tassos Recachinas (Founder, President, and CIO)

Final question. And appreciate all that color. Thank you. Just the final question would be, so Lockheed Martin offered $1 a share. The company essentially rejected that offer based on, presumably, its belief that intrinsic value is higher than the offer that was made. And just kind of wondering if you could talk a little bit about your views on intrinsic value or value of the company is. Clearly, you didn't believe the $1 properly reflected the value of the company. So just kind of wondering where the board believes fair value would reside. And how you would think about that.

Marc Bell (CEO and Chairman)

So there's a special committee of the board that does this. It's a great question. I am out of the process. Myself and my partner have recused ourselves from the process. So the committee is made up only of independent directors in order to maximize shareholder value and make sure there's a fair decision being made. That said, we are looking in our comments we made earlier, we said the special committee is going to be the ones talking about it. I have been told that the special committee is the only ones who will talk about it. So I have no comment, unfortunately. Whatever my personal opinion is irrelevant, it's all about the special committee.

Tassos Recachinas (Founder, President, and CIO)

All right. Thank you.

Marc Bell (CEO and Chairman)

Thank you very much. Appreciate it.

Operator (participant)

As a reminder, to ask a question, please press star followed by 1 on your telephone keypad. Our next question is from Phil Boswell, a private investor.

Speaker 9

Yes. I have a question about the recurring income. Is there any SaaS-type income or any other income that you'll be receiving as each satellite is deployed over the next several years?

Marc Bell (CEO and Chairman)

I mean, the only recurring income we get from satellites is if we do the mission operations for the satellites. We have six satellites currently in orbit that we do mission operations for. But the real thing that people miss and you actually asked a great question here. The real thing that people miss is we're in the recurring revenue business. So every satellite that we build and launch has to get replaced in approximately five years on average. That is a huge opportunity for us. So if we have $400 million of backlog today that we're fulfilling, five years from now, we're going to have that same $400 million plus more coming from new customers. So everything we build gets replaced over and over again. So our revenues will continue to climb as the satellites we build will get replaced. And that's the beauty of low Earth orbit.

On one hand, they're very low cost, but they have a very short lifespan. But it means always current technology is being used versus the big GEOs that cost $billions to build that were functionally obsolete the day they were launched that take 10 years to build. They last 25 years in space. They were around when the rotary telephone was around is when they were built. So it is a, and then the new SEC regs are talking about now every 5 years to deorbit to Low Earth Orbit. So we're in the recurring revenue business, and that's where we will get lots of recurring revenue down the road. But it's a great question. Thank you.

Speaker 9

As more satellites are put into orbit, the more of the revenue will increase as time goes on?

Marc Bell (CEO and Chairman)

That's right, sir.

Speaker 9

Fantastic. Thank you.

Marc Bell (CEO and Chairman)

Thank you, Phil. Appreciate it. Thank you for your support and interest.

Operator (participant)

Our next question comes from Sean Hollander, a private investor.

Speaker 10

Hi, Marc. Thanks for taking the call here. Congratulations on the performance for Q1. Can you throw some light on the required cash balance at the end of quarter two? That is part of the requirement under SCA agreement or Credit Agreement.

Marc Bell (CEO and Chairman)

Matt?

Matt Riffel (Acting CFO and Corporate Controller)

I'm sorry. What's the question again?

Speaker 10

Can you throw some light on the required minimum cash balance?

Matt Riffel (Acting CFO and Corporate Controller)

Oh, minimum cash balance. So we have financial covenants that require minimum cash balances from our debt arrangements, which is $20 million effectively as of quarter end.

Speaker 10

You think Terran will be okay to meet that requirement?

Matt Riffel (Acting CFO and Corporate Controller)

We do not have any concerns about that covenant at this time.

Marc Bell (CEO and Chairman)

The answer is yes. We'll meet the requirement. We're well positioned to meet it.

Speaker 10

Perfect. Awesome. That's good to know.

Marc Bell (CEO and Chairman)

Thank you for your time.

Jon Siegmann (SVP of Corporate Development)

Our next question comes from Robert Minisman from Personal Wealth Management.

Speaker 11

Good morning, everyone. This is a Rivada question. Evidently, they do not have all their financing in place to build the 600 satellite array that you will be constructing. That's my understanding. So therefore, are there concerns that this whole thing could fall apart and have a major impact on your business operations in the future because the capital is not available to pay for the build-out of the satellites for which you've contracted?

Marc Bell (CEO and Chairman)

All right. So there are really two different questions there. As far as Rivada goes, I can't comment on what they have and don't have. That's a question for Rivada. But I can comment on, does it affect us? And no, it doesn't have any impact on us going forward. We have lots of other customers. As you can think of it this way, Rivada is building 300 space vehicles with us. Lockheed alone has already placed orders for over 100 space vehicles with us. So it's just upside for us at the end of the day.

Speaker 11

Thank you.

Marc Bell (CEO and Chairman)

Thank you. Thank you very much. I think we don't have any other. Oh, go ahead.

Operator (participant)

We currently haven't any further questions. I will hand back over to Marc Bell.

Marc Bell (CEO and Chairman)

Great. Well, listen, I want to thank everybody coming today. I'd like to thank some of the new people asking questions today. I really appreciate the interaction. I encourage people on the calls to ask as many questions as they'd like and participate. We think it is wonderful to have more participation. We appreciate everybody's support. We look forward to the quarter ahead. Thank you very much.

Operator (participant)

This concludes today's call. Thank you for joining. You may now disconnect your line.