RDW 2022Q3

Greetings, and welcome to Redwire’s Third Quarter 2022 Earnings Conference Call. My name is Zico, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will take questions at the end of this presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today’s call, Nicole Taylor, Vice President, Financial Operations and Investor Relations. Ms. Taylor, you may begin your conference call.

Thank you, and good morning, everyone. Welcome to Redwire’s third quarter 2022 earnings call. We hope that you have seen our earnings release, which we issued yesterday afternoon after market close, and it is posted in the Investor Relations section of our website at redwirespace.com. Let me remind everyone that during the call, Redwire management may make forward-looking statements that reflect our beliefs, expectations, intentions or predictions of the future. Our forward-looking statements are subject to risks and uncertainties that are described in more detail on slide 2. Additionally, to the extent we discuss non-GAAP measures during the call, please see slide 3, our earnings release or the investor presentation on our website for the calculation of these measures and GAAP reconciliations. As previously mentioned, I am Nicole Taylor, Redwire's Vice President of Financial Operations and Investor Relations. Joining me on today's call are Peter Cannito, Chairman and Chief Executive Officer; Andrew Rush, President and Chief Operating Officer; and Jonathan Baliff, Chief Financial Officer. With that, I would like to turn the call over to Pete. Pete?

Great. Thank you, Nicole. During today's call, we'll start with a quarterly update from me, followed by Andrew, who will present operational highlights for the quarter, and then he will be followed by Jonathan, who will present the financial highlights for the third quarter. After we finish our presentation, we will then open the floor for Q&A. Before I begin, please note, all figures in this presentation do not include our recent acquisition of Space NV unless otherwise noted, as that acquisition closed in Q4. Next slide, please. Before we begin, as it is traditional with all quarterly presentations, I'd like to point out that the imagery used in this slide deck are of actual missions that use Redwire solutions. On this slide, we have the NASA Surface Water and Ocean Topography or SWOT satellite mission developed by JPL. SWOT is the first satellite mission that will observe nearly all waters on Earth's surface, measuring the height of water in the planet's lakes, rivers, reservoirs, and the oceans. Redwire is providing critical navigation components called Sun Sensors to enable this mission, and it is scheduled to launch next month on December 5. Please turn to slide 7. As we talked about in previous calls, we are at the early stages of a multi-decade new global space race with space agencies in Europe, the US, and around the world increasingly focused on space as a competitive domain. This broader geopolitical landscape has driven increased US governmental budgets on national defense with notably larger increases for space. However, despite this strong demand, we have experienced some delays in contract awards here at Redwire. These delays, combined with a tight labor market for space talent and subcontractor supply chain disruptions, have slowed our ability to ramp up and quickly realize revenue after contract selection and award. But regardless, I am proud to report that Redwire was recently selected for multiple land and expand opportunities that are expected to increase growth momentum for power systems and structures, LEO commercialization, and human space flight as well as navigation, avionics, and digital engineering. These new opportunities resulted in a sequential increase in our total backlog to $304 million as of Q3 2022, which is up from $251.7 million as of Q2 2022. This is a historic backlog level for the company. Redwire continues to deliver on the promise of space in the present today with multiple launches planned in Q4 2022, including the recently successful launch of NG-18 and upcoming planned launches that include Artemis 1, SpaceX CRS-26, JPSS-2 and SWOT, which I previously mentioned on an earlier slide. Most recently, in the beginning of the fourth quarter, Redwire completed the acquisition of Space NV, which is expected to immediately provide increased scale, broader access to addressable markets, and significant backlog to bolster our growth platform. So what's the bottom line upfront? As you will see in our update today, it was a successful third quarter as we saw sequential improvements across the board in revenues, gross margin, adjusted EBITDA, and total backlog. Please turn to Slide 8. Specifically, we saw continued revenue momentum in the third quarter, which was up 14% in comparison to 2021 and 1.4% sequentially. We anticipate sequential improvement to continue in Q4 2022. Efforts to streamline operations resulted in gross margin increasing 34.9% on a quarter-to-date basis in comparison to the prior year and sequentially as a percentage of revenue by 2.3% over Q2 2022. Focus on overhead and SG&A cost efficiencies resulted in a pro forma adjusted EBITDA in Q3 2022 of negative $1.5 million compared to $0.3 million in Q3 2021 and negative $4.1 million in Q2 2022. This is another sequential improvement over Q2 2022. Redwire will continue to focus on streamlining operations and reducing costs to achieve positive free cash flow in 2023. Additionally, early in the fourth quarter, we strengthened our balance sheet with an investment by Bain Capital and AE Industrial Partners, who together made an investment of $80 million in the form of a Series A convertible preferred stock, which was used to finance the QinetiQ Space NV acquisition as well as to support Redwire's future growth. The company is building momentum, and Redwire expects to achieve improved bookings during the fourth quarter of 2022, continuing to increase the total backlog. However, the delays I mentioned in contract awards and a tight labor market for space talent have pushed revenue execution into subsequent quarters. Therefore, Redwire is updating its previously provided 2022 full-year guidance to be in a range of approximately $140 million to $150 million in revenue and pro forma adjusted EBITDA to be in the range of negative $13 million and negative $6 million. This guidance does not include contributions anticipated from the acquisition of Space NV. Please turn to Slide 9. Now, a snapshot of this very exciting acquisition we just completed, Space NV from QinetiQ. This acquisition is important to Redwire from both an industry and financial standpoint, and it is expected to provide Redwire with broad access to addressable markets, significant contracted backlog to support our growth and increased public platform scale and profitability. Space NV is a leading pioneer of end-to-end space solutions with a multi-decade position supporting the European Space Agency. Their core product offering includes small satellite technology, berthing and docking equipment, and space instruments, all critical infrastructure for space, which complements Redwire's current offering, both in the US and Europe. Their technological and programmatic focus widens Redwire’s apertures and provides access to multiple significant global opportunities at a time when space budgets are growing in Europe. Space NV adds significant flight heritage, much like Redwire, as well as innovation and profitable top-line growth. Please turn to Slide 10. Joining Space NV's business with Redwire enhances our company's scale and innovative capabilities across numerous high-growth space areas and provides us expanded total addressable market and increased exposure to the European customer, including the European Space Agency and the Belgian Science Policy Office. The demand for space infrastructure in Europe is growing. The European Space Agency submits a budget request every three years, and in their upcoming ministerial meeting, they anticipate submitting a three-year budget with an increase of more than 25% from funding secured in 2019. Since the acquisition, we have renamed QinetiQ Space NV to Redwire Space N.V, and we will be combining the company with our Luxembourg business to create Redwire Europe. This new international platform positions us to be a global provider of critical space infrastructure with deep customer relationships with the world's premier space agencies. Also, it gives us decades of proven flight heritage, expands the product offering, and a very strong backlog to build on in 2023. And with that, I will turn it over to Andrew for an update on our third quarter operational highlights.

Thank you, Pete. Before we get into the details of our last quarter, I'd like to point out this image. What you see here is the LOFTID technology demonstrator being inspected in preparation for launch alongside the JPSS-2 satellite later this month. LOFTID is set to demonstrate an inflatable heat shield technology useful for both landing on Mars as well as economically recovering rockets. Redwire is proud to have provided both cameras and a deployable data recorder for this demonstration. Please turn to Slide 12. Redwire continues to be a trailblazer in space infrastructure for the next-generation space economy. As Pete mentioned, driven by continued progress in operational execution and subcontractor performance, we delivered more from both a revenue perspective and gross margin perspective in Q3 compared to Q2 2022, as well as compared to Q2 of 2021. Redwire continues to demonstrate operational excellence through our on-time and early delivery of products and solutions despite supply chain pressures and macroeconomic headwinds. As many of you may have seen on the news recently, Redwire was a participant in NASA's successful execution of the Planetary Defense, Double Asteroid Redirection Test, which most people know as DART. We supplied mission-critical navigation components and rollout solar arrays for that successful demonstration. NG-18 launched a few days ago and docked this morning with the International Space Station, delivering a Redwire-built update 3D bioprinter, BioFabrication Facility or BFF, the Advanced Space Experiment Processor, which we call the ADSEP facility, and a few other facilities, which will investigate new treatments to aid military service members, expand crop production research, and expand materials testing on orbit. Redwire also delivered some sensor components in advanced optical imaging technologies to NASA, which we anticipated for launch on NASA's historic Artemis 1 mission to the moon. And SpaceX CRS 26 is set to launch later this quarter with a second pair of ROSA wings to augment the power generation capabilities of the International Space Station, carrying that facility into the latter half of this decade. Please turn to slide 13. Our team's operational success and business development efforts have resulted in Redwire being selected for many strategic orders since our last earnings call. I'd like to highlight a few of them on today's call. First, let's turn to Spacecraft Power Systems and Structures. We continue to develop and deliver not only traditional rigid panel solar arrays but also our patented technologically differentiated rollout solar arrays for both small satellites and larger-scale spacecraft applications, such as the International Space Station and NASA's Lunar Gateway. We are also seeing more customers turn to ROSA as a solution for power generation on the lunar surface in support of future human and robotic exploration missions to the moon. Solar arrays are a significant portion of nearly every spacecraft operating today, but they are not the only part of a spacecraft's power system. Building on our expertise in satellite power systems and space-compatible robotics, we have begun offering Solar Array Drive Assemblies or SADAs. SADAs are used to orient the solar array, making the key piece of any satellite or spacecraft's power system. This product and work we perform in power distribution systems on satellites enable us to expand work share in spacecraft power systems across our organization. With respect to low Earth orbit commercialization and human spaceflight, we have recently been successful in securing multiple multiphase programs, which are set to expand capability and commercial opportunities on the International Space Station and other human-rated platforms in the future. Our heritage and innovative technology are enabling design, development, and outfitting of future commercial space stations. We have also had success in our navigation, avionics, and engineering solutions. Wins here are providing increased momentum for large multiyear, multi-ship Sun Sensor and Star Tracker programs. We are also testing and developing avionic software for commercial constellations, with healthy demand for critical thermal analysis, static load testing, and initial design and engineering services support. Please turn to slide 14. Redwire's strong backlog provides confidence in our long-term growth outlook and is further supported by consistent pipeline momentum. Contracted backlog stood at $158.9 million as of the end of Q3 2022, which is relatively consistent with our contracted backlog as of Q2 2022. There was a sequential increase in our total backlog to $304 million as of Q3 2022. That is up from $251.7 million as of the end of quarter two 2022. This represents a 20.8% growth and is a historic high for us. Also note that this does not take into account anticipated additions to contracted and total backlog from the acquisition of Space NV. Our 2022 year-to-date book-to-bill of 1.18 provides us with a strong tailwind for execution in quarter four of this year and beyond. Space is a growth market with a tremendous amount of opportunity available, as shown in our pipeline of more than $3.5 billion in opportunities. Year-to-date, we have submitted approximately $950 million in bids. We have approximately $342.6 million in bids that are submitted and expected to be selected in the next six months. I will now turn it over to Jonathan for a summary of our third quarter financial results.

Thank you, Andrew. Like last quarter, I will help clarify some of the key themes that Pete and Andrew just discussed. Before that, I want to point out our exceptional team members preparing the Solar Arrays for the DART impactor spacecraft in 2021, which led to the successful mission Andrew mentioned, where the spacecraft impacted Dimorphos on September 26, 2022. It was exciting yet a little bittersweet for Redwire to see two of our 28-foot Solar Arrays or ROSA Arrays contribute for Planet Earth. Now, let's move to slide 16 for some key financial highlights. To get straight to the points: First, Redwire continues to execute on proven critical infrastructure for our customers—DART, ARTEMIS, and NG-18 bioprinting, among others—leading to year-over-year revenue growth and strong sequential financial performance. Second, our total backlog has grown significantly, reaching historical highs due to increased demand for our infrastructure. Third, we made a financially beneficial acquisition of Space NV in the fourth quarter, which will further enhance our backlog and revenue growth while also streamlining our business for 2022 and 2023. Fourth, we are strengthening our balance sheet and liquidity with the addition of about $80 million in financing for Space NV, supporting future growth. In terms of revenue specifics, our third quarter of fiscal year 2022 saw an increase in revenues year-over-year and sequentially, totaling $37.2 million, despite previous delays in contract awards and supply chain issues mentioned by Pete. Revenue increased 14% year-over-year, comparing to third quarter 2021. We also maintained the positive trend from last quarter, showing sequential financial improvement, with a 1.4% revenue increase and a gross profit percentage boost of 2.3%. Our adjusted EBITDA improved by 63.7% sequentially. Our total backlog grew by 20.8%, driven by increased demand for our critical infrastructure in avionics, navigation components, power generation, and deployable solutions. As we ramped up to meet this total backlog, we utilized more working capital and saw greater cash usage this third quarter compared to the second quarter of 2022. The acquisition of Space NV, which we announced on October 3rd and completed on October 31st, expanded our operational scope and will significantly impact our quarterly performance and backlog. The transaction was financed by trusted investors in our sector, Bain Capital and AE Industrial Partners, providing $80 million to fund the acquisition and support the growth demonstrated by our record backlog. Our third quarter operating performance reflected improving commercial momentum and operating leverage, and we anticipate this will continue through the remainder of 2022. However, delays in contract awards and supply chain challenges have affected our capacity to swiftly realize revenue post-contract selection. Nevertheless, we expect to recognize this revenue associated with sizable contract awards within our $304 million backlog, which has led us to adjust our revenue guidance for the full fiscal year 2022 to between $140 million and $155 million. We are also revising our pro forma adjusted EBITDA range to between a negative $13 million and negative $6 million, not accounting for the anticipated positive contribution from the Space NV acquisition. We will provide updates on those financial impacts during our fiscal year-end earnings call. Now, let's look at slide 17 to dive deeper into Redwire's revenue growth, comparing year-to-date GAAP figures on the left with quarterly sequential data on the right. Our year-to-date revenues for the third quarter of 2022 were $96.5 million, an increase of 10.7% to $106.8 million compared to the same period in 2021. This growth is largely due to our deployable and engineering solutions benefiting from substantial wins with national security and commercial customers. While we saw a slight decline in the civil space sector, this was balanced out by performance gains in other areas. On a sequential basis, third quarter 2022 revenues increased by 1.4% from the second quarter, with mild increases across our business lines while considering contract start delays and a tight labor market. We expect to see this delayed revenue materialize in the fourth quarter of 2022 and into the first half of 2023. Moving to slide 18, we continue to detail Redwire’s adjusted EBITDA profile using a year-to-date comparison on the left and a sequential quarterly basis on the right. Year-over-year, adjusted EBITDA fell from a positive $1.8 million in the third quarter of 2021 to a loss of $10.2 million in the third quarter of 2022. Revenue growth contributed positively to adjusted EBITDA, allowing us to maintain momentum. However, gross margin issues from the first half obscured a quarterly gross margin improvement of 34.9%, up 13.8% from the second quarter. Our operating expenses, totaling negative $10 million, reflect investments in business development, R&D, and public company costs that expanded our contract opportunities but affected our EBITDA. Most of these expenses were incurred in the first quarter; however, in the second and third quarters, we've begun focusing on streamlining. In the third quarter of 2022, we managed to reduce SG&A to $15.3 million, the lowest in five quarters, down from $34.3 million in the third quarter of 2021 and $17.6 million in the second quarter of 2022. This is a significant decrease before considering Space NV. The nearly 64% adjusted EBITDA improvement from the second quarter to the third quarter demonstrates our returns from improved contracts, margins, and careful cost management. We're focused on continuing to lower SG&A expenses while enhancing margins. The SG&A margin for the third quarter stands at 41.1%, down from 105.1% a year ago. Moving on to slide 19, let's review free cash flow and liquidity for the third quarter, followed by an update on our balance sheet improvement before I hand it to Pete. On the left chart, we show free cash flow, which now reflects operating cash flow minus CapEx. For the third quarter of 2022, cash usage improved by 16.6%, totaling $12.6 million compared to $15.1 million in the same quarter a year ago. The increased cash use this quarter was due to multiple factors: improved revenue, gross margins, and ongoing operational and capital investments in the Redwire platform. Additionally, working capital build-up for upcoming contract awards has affected cash flow, as we expect to receive that cash in the fourth quarter and beyond. We are also actively reinforcing our supply chain. Management is focused on driving improvement moving into 2023. On the right chart, our liquidity as of June 30, 2022, totaled $17 million with $7 million in cash and $10 million available under credit facilities, but that has changed significantly this quarter. On slide 20, on October 3, we announced the acquisition of QinetiQ Space NV, now renamed Redwire Space NV, and on October 28, we entered an investment agreement with AEI and Bain Capital totaling $80 million. The acquisition was completed on October 31. The three key points here are: first, the investment is expected to be immediately beneficial to Redwire's adjusted EBITDA and free cash flow. Second, Space NV has shown significant top-line growth and a strong financial profile, reporting €49 million in revenue and €3 million in profit after taxes for the year ending March 31, 2022. Lastly, as of the third quarter of 2022, Redwire's total backlog rose to $304 million, a historic high, and post-transaction, we expect to benefit from Space NV's backlog of €113 million. This investment from Bain Capital and AE Industrial Partners significantly enhances Redwire’s financial condition. Our liquidity status has improved, and this update reflects that after the Space NV purchase, we now have more than tripled our liquidity at the start of the current fourth quarter. This financing strengthens our balance sheet, enhancing our creditworthiness. On November 1, 2022, we entered a fifth agreement with Adam Street Capital Partners to extend the suspension of certain leverage requirements, indicating continued support for liquidity. This investment, backed by proven leaders in the aerospace sector, bolsters our confidence in Redwire's strategy and access to capital, which remains strong during a period when many options are limited for others. Please turn to slide 21, and I will now turn it over to Pete for final remarks.

All right. Thank you, Jonathan. So to wrap up, a very busy and exciting third quarter with some very notable subsequent events recently occurring in early Q4. Here are the high points we want you to take away. Most importantly, Redwire continues to deliver for our customers, not in the future, but in the present, we're generating revenue and backlog today. Andrew talked about a number of these different programs, the recent successful launch of NG-18, which was carrying our next-generation bio printer, our cameras that weather permitting are going to be launching on Artemis here in the next quarter. The set of iROSA Solar Arrays that are on SpaceX CRS-26 that are headed to the international space station. These and others created this third quarter 2022 revenue growth year-over-year and improved our financial performance sequentially even with the delays in the contract ramp-up that have impacted financial performance in 2022 guidance. Next, Redwire continues to grow total backlog. You’ve heard it a couple of times from myself, Jonathan, and Andrew that we hit a historic high in our total backlog. Demand for our infrastructure is leading to this historic growth. Thirdly, Redwire continues our successful track record of financially accretive acquisitions to scale our platform. We are notable in the industry for our ability to grow inorganically. And this quarter with Space NV, this will add to our total backlog. This will increase our revenue growth and will improve our sequential financial performance as we streamline and achieve more operating leverage in the business for the rest of fiscal year 2022 and 2023. We're very excited about this unique acquisition. And finally, as Jonathan just covered in great detail, Redwire is strengthening its balance sheet and liquidity position, with the addition of approximately $80 million in capital from highly respected industry investors, Bain Capital and AEI. This has resulted in an accretive financing for Space NV with additional capital for future growth and stability. And with that, I now turn it over to the operator for Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first question is from the line of Greg Konrad with Jefferies. Please state your question.

Good morning. Maybe just to begin, just on guidance, you mentioned improved Q4 performance, but at the low end of guidance, it seems like revenues could be down sequentially. Can you maybe talk about with less than two months to go, what are the biggest variables? You mentioned labor, supply chain awards and driving that wide range for the year? And then tied to that, you mentioned nothing has been updated for Space NV. Is there a reason that, that wouldn't contribute to the final two months of the year?

Yes, thank you for the question. The main issue we’re facing is our capacity to ramp up on contracts as we have reached historic highs in our backlog. As you noted, the demand for skilled talent in the industry is significant, and we are focusing on hiring and onboarding these individuals on our latest contracts. Additionally, we need our subcontractors to meet their obligations as we approach the end of the fourth quarter. This is where the variability is coming from; it’s not due to a lack of demand for our products and services but rather how quickly we can scale up in the remaining time of the year. Regarding the Space NV deal, we intentionally did not factor their numbers into our projections for the rest of the year since the closing occurred early in Q4. However, we will definitely quantify the additional revenue and backlog during our next earnings call, as we will have had two solid months working with Space NV. Therefore, our current projections and forecasts for the rest of the year do not account for that additional revenue, representing potential upside for us.

That's helpful. And then on labor, can you maybe quantify some of the stress? I mean, the labor issues, obviously, aren't unique to you, and we've been hearing it across suppliers. But is there any way to think about what the requirements are and how that's been trending? And then how does maybe inflation and wages impact those numbers?

We appreciate the question. Currently, we don't have specific quantitative data to share. However, the space industry is experiencing rapid growth, and there is a limited talent pool at the moment. This is causing delays in our hiring process, which is taking longer than we initially expected. While we are growing, the ability to hire is pushing some of our revenue into the next quarters, leading to a slower ramp-up than planned. At this stage, we can only provide qualitative insights. We've posted our job openings, but fulfilling those positions is taking additional time. In our next call, we will likely focus more on inflation. We are closely monitoring the macroeconomic environment, but we don’t have any numbers to report at this time. Like others in the industry, we need to consider both sides of the issue—increasing input costs and our capacity to raise prices for our customers. We will make a note to discuss this further in the first quarter of next year. Jonathan, do you have anything you'd like to add?

I mean internally, let's just say, we know the numbers and we know what we want to do. There are some competitive aspects to what you're asking, Greg, from the standpoint of contract bids and other things that we just are not prepared to talk about. But rest assured, internally, we have a very good sense of what we can do. Many of our newer contracts you're starting to see higher gross margins are taking it into account. So it's happening. It's happening internally, we're just not prepared on this call to disclose it for a number of reasons.

And then, is there any way to maybe characterize the other stress you talked about, which was delays in contract awards? It seems like you have both the government and commercial side. Just wondering if this is a government issue or on the commercial side, it seems like maybe there's some funding issues. I mean, when you think about those awards, how do you kind of break that out between government and commercial?

We're observing similar trends in both sectors. Sometimes, we encounter combined commercial contracts that rely on a certain level of government funding. I see numerous new opportunities and innovative capabilities in space that various companies are beginning to explore. As they establish their programs and plans, this introduces variability in the timelines. They're facing the same challenges we are, such as ramping up staffing and managing their own subcontractor supply chain issues. This situation is evident across both government and commercial contracts. Andrew, do you have anything to add?

Yeah. I think that's well said. As we've talked about on previous calls, we have seen in the commercial side of things, we have seen folks have their projections come back down to earth as it were. But most of that is flushed through our pipeline and our anticipated awards. So really what Pete was hitting on in terms of our commercial customers being thoughtful about getting their teams ramped up, getting their programs ramped up to execute is more what's driving slip to the right and contract awards rather than funding availability.

And then maybe just one last one for me. I mean, I know it's a little bit early, but just looking at total backlog today, some of the headwinds this year, I mean, how are you thinking about growth next year and just kind of puts and takes given that backlog, but also some contribution from M&A?

We're really excited about the momentum we're experiencing as we head into 2023, which we believe is quite strong. There are four key numbers we’re focusing on that indicate our future direction. Firstly, our backlog has reached $304 million, marking a historically high level, and we expect this trend to continue. Additionally, we currently have $343 million in bids under evaluation by our customers, with decisions expected in the next six months. This gives us solid momentum as we have the $304 million backlog to work with along with the anticipated decisions on the $343 million in bids. Furthermore, our year-to-date book-to-bill ratio stands at 1.18, indicating we are receiving orders faster than we can execute revenue, which is another positive sign. As for Space NV, as of March 2022, they reported €113 million in backlog, and we believe that figure remains strong this year. Their growth seems promising, especially with the synergies we aim to create following their acquisition by Redwire, which we think will enhance our growth significantly in 2023. Overall, the numbers point toward a strong momentum as we move further into 2023, and with improved liquidity in our balance sheet, we feel well-positioned.

Thank you.

Thank you. Our next question is from Austin Moeller with Canaccord. Please go ahead.

Hi. Good morning, Pete and Jonathan.

Hey, Austin. And Andrew is here, too. So thank you, Austin.

Hi, Andrew.

Hi.

So my first question here, has the government enabled you to include inflation impacts in your existing contracts, or will that mostly be included in future contracts in the backlog? And what's the average length of a contract for Redwire programs?

Thank you for your question, Austin. We engage in various types of contracts with the government, including cost-plus fixed fee contracts, firm fixed price contracts, and time and materials. The cost-plus fixed fee contracts allow us to easily account for any inflation impacts. With our firm fixed price contracts, we bear more responsibility for cost changes compared to our initial bids. To mitigate this, we secure contracts with our subcontractors early, and many of our firm fixed price contracts have already locked in subcontractor pricing from previous agreements, which helps shield us from inflation. Furthermore, when preparing our bids, we consider the effects of inflation and are cautious about future trends. We are also committed to maintaining a strict approach regarding milestone payments in our firm fixed price contracts, following industry best practices to ensure timely cash flow.

Okay. Great. My next question is whether you plan to consider more upfront cash collections on future contracts with customers, given our current situation.

Yes. Absolutely.

Contracts type.

Okay. Great. Yes. Thank you for the color.

We didn't address your question about our contract length. It typically ranges from 1.5 years to three years. This allows for the possibility of repricing on certain contracts, even with rising inflation. You can see how this influences our expectations for revenue growth in 2023 and 2024.

Okay. Great. That's very helpful, Jonathan. Thanks.

Thank you. Our next question is from an analyst with B. Riley. Please proceed with your question.

Hi there. I have a quick question. How much are you currently depending on subcontractors to fulfill orders compared to your own employees? Also, could you provide the difference in wages?

Yes. Hi, Kat. How are you? This is Pete. So we don't disclose that information for competitive reasons. But obviously, we have I believe, over 600 employees now. So we're doing a fair amount of fulfillment rest assured as Redwire.

I want to add to that, Kat. We have discussed unit economics with you and other analysts previously, and we plan to provide that information in 2023. We want to give you enough detail to model the unique economics better. However, we can't share that information right now because we need to balance our disclosure obligations with competitive concerns. This is a critical and exciting time for us as we see our backlog increasing. Many contracts we're handling require us to focus on improving margins while maintaining better control. Please be patient with us; we are working on it internally and aim to disclose those unit economics to you in 2023.

Thank you for your patience. I just want to clarify whether you were not awarded contracts for limited proposals or if those contracts have been delayed and are yet to be awarded. Any additional information on that would be appreciated.

We have experienced delays in contracts and also a ramp-up in contract execution. The change in our guidance is mainly due to our inability to increase the backlog to $304 million within the remaining timeframe. We entered the third quarter facing delays we previously discussed, as orders and contracts that we anticipated in the second quarter were pushed back to the third quarter. You can now see the increase in our backlog. We now have a limited amount of time to ramp up and execute, and we are adjusting our projections based on our analytics to assess how quickly we can achieve that.

Okay. Great. And then...

We're being fairly prudent, Kat. We're being fairly prudent it. Okay Kat.

Great. And then just a final one from me. So from a total pipeline perspective, so that like $3.5 billion number, are you seeing any new areas of growth, I guess, kind of what's going on directionally there, if there's anything new that you can share?

Yes. I mean, we're seeing growth across the board, both near-term and actually a lot of really great opportunities entering in our pipeline for the long term. We've often talked about what we call our blue-chip foundation with venture optionality. That blue-chip foundation we're referring to is our – what we also refer to as our picks and shovels offering. These are the things that every space program is going to need like power, avionics, antennas, capabilities like that digital engineering, so we have great demand currently in the present for the near-term for these picks and shovels. And then we're also seeing really good step-up demand as we move towards a future where there's going to be an incredible economy in LEO, not only on currently in the near term on the International Space Station, but the planned commercial space stations that organizations like Blue Origin and their orbital reef are planning. We're seeing a lot of demand now that's coming because these things are going to be built over the next decade, and that building has already started. So the demand signals are really strong, really across the entire board, the blue-chip foundation of our picks and shovels is seeing strong demand as the demand for space in general grows. And then, of course, there's venture optionality associated with one-of-the-kind technologies we have, like our in-space manufacturing, our bio capabilities. These are the payloads that are going to populate future commercial space stations. We know that because they are the capabilities that are populating the ISS today. You're going to see a significant uptick in that area as well.

Great. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Peter Cannito for closing comments.

Yes, I'd just like to thank everybody for joining the call today. We're very excited about our third quarter results, but we have work to do, and we're looking forward to sharing more information about our acquisition of Space NV's, the future – in the future. But thank you, everybody, for joining today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.