VORB - Virgin Orbit: A Space SPAC Dream Explodes Stock Tumbles

2023-03-31 18:28:26 ET

Summary

• Virgin Orbit's failure is not unexpected. The company needed a perfect commercialization path for its product and did not have one.
• Virgin Orbit left shareholders extremely vulnerable, securing only up to one year of funding.
• Virgin's investment arm is likely to take control of the assets. Shareholders are left with a 97% loss over the past 12 months.

In a recent report, I marked Virgin Orbit (VORB) stock a sell following its operational pause . I previously had a Hold rating but given the operational complexities and the significant cash burn, I did not see any reason to maintain that rating as Virgin Orbit's projections were based on rosy future projections without really being capitalized well enough to get to that rosy future. CNBC reported on Thursday that all but 100 employees will be laid off as the company ceases operations since it was unable to secure additional funding.

How Did Virgin Orbit End Up In This Mess?

First of all, it's important to understand that disruptive technology can be rewarding for companies but it comes at a price. Significant money needs to be spent in R&D before revenues can be generated. Virgin Orbit has never made a secret of requiring a revenue stream or capital raises to survive.

The company wants to commercialize space by offering air-launched missions where a rocket mounted under a Boeing 747 is being flown to a certain altitude using the efficiencies of air-breathing propulsion from the airplane. From there, the rocket is released and boosted to its desired altitude using the quality of the rocket to bring a payload into orbit. Things actually fell apart for Virgin Orbit in January this year when a launch in the UK failed and it drove any revenue generation expected to the right. Apparently, the problems were such that commercial deployment was far off. So far off, that the company required additional funding.

A Capital Raise Story For Virgin Orbit

To fund the R&D, Virgin Orbit was spun off from Virgin Galactic ( SPCE ), and in a SPAC IPO $228 million was raised, giving $194.2 million in cash and cash equivalents by the end of 2021. Subsequently, the company burned through $157.9 million in 2022. Which at a run rate of $52.7 million means that the IPO funded only one year of operations. I believe that if investors would have known this beforehand, they would've been more cautious investing in Virgin Orbit. At the end of the third quarter, the company had $71.2 million in cash and cash equivalents.

On Nov. 4 ,2022, Virgin Investments Limited, which is part of the Virgin Group, injected $25 million into the company followed by another $20 million in December 2022, $10 million in January 2023 and $5 million by the end of February and another $10.9 million by the end of March 2023 as Virgin Orbit announced to cease operations.

What we see when we look at the cash injections and burn is that the injections in November and December basically were funding the Q4 2023 cash burn. Overall, we see that the injections got smaller and the last two injections basically cover the $15 million in severance and outplacement costs. Virgin Investment Limited already had anticipated the shutdown of the company. The financial situation at Virgin Orbit was such that after the first quarter it would not have the funds to continue operations and this is something I already noted before:

The trend suggests that Virgin Orbit would burn around $45 million during the fourth quarter, and the free cash flow outlook suggests a cash burn that would be around $50 million per quarter plus or minus $5 million. What does this mean? Very simply, it means that at this point Virgin Orbit doesn't have the funds to fund a quarter ahead. That also explains the timing of the week-long shutdown.

So, the shut down was something that we could see coming. What didn't help is that the convertible notes are going to hurt investors either way. The notes were secured with Virgin Orbit assets, meaning that if Virgin Orbit would cease operations, VIL would receive the first rights to the assets, and if the company would succeed, VIL could swap the debt for equity owning another 7% of the company and dilute shareholders. So, this was never likely to be beneficial to shareholders. Having only a year of funding in the bank after the IPO left Virgin Orbit and its shareholders extremely vulnerable and VIL took advantage of that. What happened here was that shareholders have basically paid for the R&D, and now that Virgin Orbit is ceasing operations VIL gets first right to the assets and shareholders will suffer even more.

Conclusion: A Mismatch Wipes Out VORB Shareholders

There's a lot that can be said, but the reality is that an investment in Virgin Orbit could have been extremely rewarding or a miserable failure. It became the latter. The company simply did not raise enough money in its IPO, giving it only a year of funding, while the commercialization of its product was heavily dented due to a launch failure earlier this year. All this time, Virgin Orbit has continued issuing convertible notes putting shareholders at risk and empowering VIL which had an extremely strong position and could decide to no longer fund Virgin Orbit because the investment arm of the Virgin Group possessed secured convertible notes, and if they want they can now take control of those assets with a significant chunk of R&D already done and attempt to commercialize the product. This is hardly a courteous business practice, but Virgin Orbit pushed itself and every shareholder in this position resulting in shareholder losses of 97% over the last year and 72% since my last report. Maybe it shows why SPACs can be a nice vehicle to raise capital, but why they're also an extremely risky vehicle if the underlying business is heavily infused with risks.

For further details see: