Sandy Huffaker
With its inventory already down 40% YTD, Virgin Galactic Holdings, Inc. (NYSE:SPCE) was just lately dealt an enormous blow after The Boeing Firm (BA) filed a commerce secret and breach of contract lawsuit in opposition to it in mild of a earlier settlement between each events. A Virgin Galactic spokesperson has since advised SpaceNews that the lawsuit is baseless in each details and regulation and shared that the corporate intends to defend itself vigorously. In my view, this alerts that each firms might be headed to a fierce battle within the courtroom that might take a number of months to resolve.
I anticipate this growth to delay the corporate’s plans to begin industrial Delta class spaceflights in 2026 because it now would not have the required mothership to assist the anticipated Delta flight cadence of two flights per week. Furthermore, because the firm intends to defend itself, it could not be capable to develop a brand new mothership till a verdict is reached which might take almost 28 months. Provided that Virgin Galactic’s money steadiness is just sufficient to final lower than 2 years on the present annual burn charge of $500 million, I anticipate it to boost extra capital in 2025, additional diluting shareholders, and even probably file for chapter if it could’t begin sending Delta class spaceflights on the focused cadence as a consequence of Boeing’s lawsuit. As such, I am ranking Virgin Galactic as a Robust Promote.
Boeing Lawsuit
In July 2022, Virgin Galactic entered into an settlement with Aurora, a Boeing subsidiary, to design and manufacture its next-generation mothership. A brand new mothership clearly appears important to Virgin Galactic in its objective of ceaselessly sending area vacationers to suborbital heights on its upcoming Delta spaceship since its present mothership, Eve, is allegedly unable to perform that mission, per the lawsuit submitting.
The filed lawsuit alleges that Virgin Galactic’s expectations for the design of the brand new mothership had expanded considerably which implies that Aurora needed to do extra reverse engineering than anticipated to advance the design of the brand new mothership. Because of this, Aurora estimated that the brand new mothership could not be accomplished earlier than 2027 and would value almost twice the quantity Virgin Galactic had hoped for.
This led each events to comply with not execute any additional activity orders, with Virgin Galactic allegedly refusing to pay Aurora $26 million for work it already carried out. Furthermore, the lawsuit alleges that Virgin Galactic has refused to destroy math mannequin paperwork which include commerce secrets and techniques developed by Boeing and Aurora through the years. In the meantime, Virgin Galactic maintains that it is entitled to make use of the mathematics mannequin paperwork in additional growth efforts together with a brand new associate.
The lawsuit additionally alleges that Virgin Galactic shared that it expects the brand new mothership to be prepared by 2027 within the Q3 2023 earnings name, the identical timeline Aurora projected, indicating that the corporate is creating a substitute for the mothership Aurora was engaged on. From Boeing’s viewpoint, this is able to destroy its unique means to ship a singular product. Boeing used Capital One Fin. Corp. v. Sykes as a precedent, stating that “As soon as confidential info is disclosed to a competitor, the knowledge can’t regain its secret standing.”
Given the precedent utilized by Boeing within the lawsuit, the doable outcomes, in my opinion, can be Virgin Galactic shedding in courtroom or each events reaching a settlement that may impression the corporate financially. That stated, the lawsuit might be dismissed or Virgin Galactic might win in courtroom.
Limitations of VMS Eve
Nevertheless, what’s worse for Virgin Galactic is that the litigation course of implies that it might be troublesome to provide a brand new mothership by 2027, which is essential to scale up Delta class spaceflights because of the limitations of its Eve mothership.
In keeping with the Q3 earnings name, Virgin Galactic plans to begin take a look at flights for the Delta class spaceship in mid-2025 and begin industrial flights in 2026. The corporate additionally expects its present mothership, Eve, to hold the primary 2 Delta class spaceships throughout their testing and income service in 2026 as administration expects the two new motherships to enter service in 2027. The corporate believes commencing Delta class spaceflights in 2026 by Eve will “assist significant income and money move positivity”, with a goal of every Delta class spaceship flying twice every week.
In my view, that is extraordinarily unlikely because of the limitations of Eve stemming from its previous age. Eve is now 15 years previous because it was first launched in 2008. Since then, the mothership has accomplished greater than 330 flights, per the corporate’s newest 10-Okay submitting, which might be an indication that Eve could also be on its final hurrah. I imagine that is the case since administration lowered its flight cadence from a flight per thirty days to a flight per quarter, as shared within the Q3 earnings name.
Furthermore, I imagine trying to extend Eve’s flight cadence poses security dangers to passengers since in Virgin Galactic’s most up-to-date spaceflight, Galactic 06, an alignment pin indifferent from the launch pylon of Eve after the spaceship was launched from the mothership. Whereas the indifferent pin did not significantly pose a security impression to the crew on board, the FAA has determined that Virgin Galactic can be grounded till an investigation into the pin’s detachment is accomplished, stating that “A return to flight relies on the FAA figuring out that any system, course of, or process associated to the mishap doesn’t have an effect on public security”.
Eve’s situation was additionally the middle of a lawsuit filed by buyers in 2021 alleging that “Unity and Eve have been so rickety that each flight might be their final. Cracks appeared on Eve’s wings after each flight, and a few weren’t fastened – a lot so {that a} Virgin Galactic worker stated the wings regarded like spiderwebs or cracked eggshells”. The identical lawsuit additionally claims that Scaled Composites, the corporate that constructed Eve, by no means supplied the corporate with “correct or dependable engineering drawings” for Eve and the Unity spaceship.
Provided that Virgin Galactic plans to launch 2 flights per week per Delta class spaceship, I imagine Eve is solely incapable of attaining this goal since a quarterly cadence for Eve implies that the corporate can solely launch 4 spaceflights of Delta class spaceships in 2026 if the take a look at flights are profitable. In the meantime, the corporate’s plan of working 2 Delta class spaceships and flying them twice every week implies that it ought to ship 208 spaceflights in 2026, 104 occasions per spaceship.
Virgin Galactic’s CEO Michael Colglazier even acknowledged a brand new mothership’s significance to the corporate’s long-term plans when he beforehand stated “Our subsequent era motherships are integral to scaling our operations. They are going to be sooner to provide, simpler to keep up and can enable us to fly considerably extra missions every year” within the Aurora settlement announcement. Thus, I do not imagine Virgin Galactic can attain its long-term objective of sending 300 to 400 annual Delta spaceflights with out an Eve substitute. This in flip makes it almost unimaginable for the corporate to achieve $1 billion in annual gross sales, a important pillar of its future profitability prospects.
Potential Chapter Situation
Contemplating Eve’s limitations and the potential delay in launching Delta spaceships in mass as a consequence of Boeing’s lawsuit, chapter is a severe threat dealing with Virgin Galactic, in my view, in mild of its money burn charge. In 2023, the corporate began producing income from industrial flights. Nevertheless, this has prompted its working prices to extend YoY from $502.2 million to $538.3 million.
Whereas that enhance might be attributed to its value of income, it is price noting that the corporate acknowledged within the 10-Okay submitting that it started presenting the working prices related to its industrial spaceline actions as spaceline operations bills as a substitute of R&D because of the achievement of technological feasibility. Which means prices associated to the manufacturing of rocket motors as an illustration are actually included in spaceline operations, not R&D as in prior years.
With Deltaclass spaceship take a look at flights anticipated to start in mid-2025, Virgin Galactic intends to pause Unity flights in Q2 2024, per the Q3 earnings name, in order that its staff can assist the ultimate meeting efforts of Delta class spaceships. As such, the corporate ought to file just about no revenues for 18 months till January 2026 not less than, the date set for the primary Delta class spaceship industrial flight. On the similar time, the corporate will nonetheless incur working prices each quarter because it continues to develop and take a look at Delta class spaceships. Because of this, Virgin Galactic will probably be hemorrhaging money at an especially excessive charge, in my opinion.
Because the firm’s working prices amounted to about $500 million in 2022 and 2023, I anticipate Virgin Galactic to incur round $750 million not less than in the course of the pause interval, $250 million within the second half of 2024, and $500 million in 2025. This determine might be increased than my estimates because of the excessive R&D prices related to creating spaceships and motherships.
10-Okay submitting
Having stated that, Virgin Galactic’s money burn might proceed for extra time in mild of Boeing’s lawsuit. From 2018 to 2022, the typical time from the graduation of a commerce secret investigation to closing dedication by the ITC was 17.6 months. Nevertheless, over the identical interval, the typical time to verdict within the US district courtroom, the place Boeing filed the lawsuit, was about 27.8 months. Which means a ruling on this lawsuit might be made by mid-2026, which means that the corporate might burn by $1 billion in working prices whereas producing minimal to no income as a consequence of Eve’s incapability to ship 2 Delta class spaceflights per week as administration envisions.
With a complete liquidity of $982.1 million, I anticipate Virgin Galactic to proceed issuing shares beneath its ongoing ATM program and probably announce a brand new ATM program simply to remain afloat because of the uncertainty surrounding its plans for Delta class spaceships. In its newest 10-Okay submitting, Virgin Galactic shared that it raised $287.5 million in gross proceeds beneath its $400 million ATM providing. At its present share worth of $1.48, the corporate can difficulty simply greater than 76 million shares to boost the remaining $112.5 million accessible beneath this system which might enhance the corporate’s excellent shares by 19%.
In my view, these actions might delay submitting for chapter, nonetheless, the aforementioned uncertainty round sending Delta class spaceflights on the focused cadence might dampen buyers’ curiosity in proudly owning shares of the corporate which might make it laborious for the corporate to promote shares beneath its ATM program. This leaves submitting for chapter as probably the most viable end result for Virgin Galactic, in my view, particularly when it has $418.7 million in convertible notes maturing in 2027.
Upside Dangers
Upside dangers to my bearish thesis on Virgin Galactic embody the corporate reaching a monetary settlement with Boeing that permits it to proceed creating its mothership based mostly on Aurora’s work. As such, the corporate might begin Delta class spaceflights in 2026 and begin producing revenues. As well as, the lawsuit might be dismissed by the courtroom since Boeing’s claims are based mostly on Aurora by chance sending Virgin Galactic the mathematics mannequin paperwork. In that case, Virgin Galactic is probably not impacted by the lawsuit in any respect. This might enable the corporate to boost capital from buyers, wherein case, it would not file for chapter.
Furthermore, Virgin Galactic might emerge as a buyout goal to profit from its IP, particularly its 2 licensed utility patents associated to the design of its spaceships and motherships. I imagine a possible purchaser might be SpaceX since buying Virgin Galactic will enable it to compete with Blue Origin in suborbital spaceflights. Though this state of affairs may get rid of the danger of chapter, I do not imagine it is probably as a consequence of Virgin Galactic’s $418.7 million debt maturing in 2027 and the uncertainty surrounding its next-gen motherships that can assist a Delta class spaceship flight cadence of two spaceflights per week.
Conclusion
Following Boeing’s current lawsuit, I imagine Virgin Galactic’s future is in jeopardy with out the mandatory mothership to begin Delta class spaceflights given the constraints of Eve. Furthermore, the corporate plans to pause Unity flights in Q2 this 12 months to assist the event of Delta class spaceships. Based mostly on this, I anticipate the corporate to proceed burning money because of the nature of its enterprise, and with $892 million in money available, its liquidity is probably not sufficient to fund its operations if Delta class spaceflights are delayed as a consequence of litigation or take a look at failures. This might see Virgin Galactic declaring chapter, particularly with a $418.7 million debt wall maturing in 2027, which is why I am ranking it as a powerful promote.
