Even before Monday’s launch failure, Virgin Orbit’s finances were dismal

Some financial analysts believe the company will run out of money in March.

On Monday night Virgin Orbit's attempt to launch a rocket from the United Kingdom failed after a problem with the rocket's second-stage engine.

The US-based launch company did not provide any additional details about the cause of the accident, which led to the loss of nine small satellites on board. In the wake of the failure, officials sought to put a brave face on the mission's outcome and Virgin Orbit's future.

"We will work tirelessly to understand the nature of the failure, make corrective actions, and return to orbit as soon as we have completed a full investigation and mission assurance process," Dan Hart, Virgin Orbit's chief executive officer, said in a prepared statement.

However, the confident words belie a reality that the financial road ahead for Virgin Orbit is a very, very difficult one.

A brief history of Virgin Orbit

Virgin Orbit started as an idea in 2011 by Sir Richard Branson as an offshoot of his Virgin Galactic space business, with the goal of fully utilizing the White Knight aircraft. Eventually, it was decided the company, formally created in 2017, would use its own aircraft, a modified Boeing 747-400 named Cosmic Girl, as a platform from which to drop and launch small rockets.

Lacking revenue of its own, Virgin Orbit was funded for most of a decade by the Virgin Group, the multinational company that owns and operates Branson's various businesses, as well as an Emirati state-owned holding company, Mubadala Investment Company.

Independent estimates suggest that, over that time, Virgin Orbit spent as much as $1 billion to develop and test its LauncherOne rocket and air-launch system. The company made its first successful launch in January 2021 and has averaged one mission every six months since then.

An obvious question is this: With such high development costs and a low cadence for a rocket that sells for $12 million per launch, how can Virgin Orbit be financially sustainable?

In 2021 the company answered its short-term cash needs by going public, merging with a special purpose acquisition company (SPAC). However, funds raised from this merger were far less than anticipated. Upon announcing its intent to go public, Virgin Orbit said it anticipated raising $383 million from the proceeds of the SPAC transaction; however, it raised just $68 million from this process and instead had to turn to private investments for an additional $160 million to keep operating.

Fundraising woes

So far, in 2022, the company has reported a net loss of $139.5 million through September 30, with "cash and cash equivalents" on hand of $71.2 million. Financial results for the fourth quarter of 2022 should be published about one month from today.

There are ominous signs about the company's financial state, however. Here's what we know about the company's efforts to raise funding since September 30, 2022:

Nov. 4: Branson invests an additional $25 million in Virgin Orbit via an unsecured convertible note.

Nov. 7: During its quarterly earnings call, the company says it will be "opportunistic in the capital markets to fund our growth." Previously officials had said they were seeking to raise additional funds via capital raises, and this confirmed that.

Nov. 23: On the Wednesday afternoon before the Thanksgiving holiday in the United States, Virgin Orbit announces a "cessation" of these fundraising efforts. "Due to current market conditions, the Company has elected not to proceed with an offering.

Any future capital raising transactions will depend upon future market conditions," the company stated.

Dec. 19: Branson invests an additional $20 million in Virgin Orbit. Significantly, this note is secured by the entirety of the company's assets. As part of the terms of the convertible note, "The Company and the Guarantors have granted a first-priority security interest on substantially all of their respective assets, including all aircrafts, aircraft engines (including spare aircraft parts) and related assets."

Financial industry sources said the issuance of a secured note is a red flag, because it will make additional fundraising much more difficult. Why invest in Virgin Orbit if all of the company's hard assets are secured by another creditor?

The timing here is concerning. Effectively, it appears that after Virgin Orbit failed to raise equity capital in November, the company pledged all of its assets to Branson after exhausting its other options. Branson, certainly, could add more funding in 2023. However as an economic recession looms and threatens Branson's other Virgin properties, it is not clear that he has the ability or willingness to continue to stem the flow at Virgin Orbit.

Yorkville to the rescue?

There is one other financial matter to consider. Earlier in 2022, Virgin Orbit signed an "equity agreement" with an investor group named Yorkville Advisors worth up to $250 million. However, the terms of this agreement are fairly complex. It is not actually an investment in Virgin Orbit by Yorkville, but rather a mechanism by which Yorkville sells shares to public investors.

Essentially, the agreement provided Virgin Orbit with $50 million upfront, but Virgin Orbit cannot tap into the additional $200 million until it pays back this advance. This cannot happen before the summer of 2023, and repaying or "converting" this note too quickly would likely have an adverse effect on Virgin Orbit's stock price.

Therefore, while it may look like there is $200 million sitting there for Virgin Orbit to tap into, that is unlikely to happen soon. And if the company faces a cash crunch in the next six months—which is likely—the Yorkville agreement will be of no help.

Assuming a monthly burn rate of about $20 million, financial analysts estimate Virgin Orbit has enough cash to survive until about March. So it will need to raise significant additional capital before then to avoid bankruptcy.