VIRGIN ORBIT HOLDINGS, INC. The following discussion and analysis provides information thatVirgin Orbit's management believes is relevant to an assessment and understanding ofVirgin Orbit's consolidated results of operations and financial condition. The discussion should be read together with the historical audited annual consolidated financial statements as of and for the years endedDecember 31, 2021 and 2020, and the related notes that are included elsewhere in this Annual Report . This discussion may contain forward-looking statements based uponVirgin Orbit's current expectations, estimates and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed in the sections entitled " Item 1A. Risk Factors " and " Cautionary Statement Regarding Forward-Looking Statements ." Overview We are a vertically integrated space company that provides customers dedicated and rideshare small satellite launch capabilities. Our philosophy is to operate a mobile launch system that can "launch at any time, from any place, to any orbit." Our vision is to use space to drive positive and lasting change on Earth, from connecting communities to advancing scientific initiatives; supporting America's and other nations' space presence, and helping create the next generation of world-changing space technology. Since our founding in 2017, we have invested in research and development efforts to develop a unique air-launch system, comprised of Cosmic Girl, a modified Boeing 747 aircraft, and the LauncherOne rocket. Cosmic Girl serves as a reusable mobile launch pad, carrying LauncherOne aloft, and LauncherOne is a two-stage rocket that is the world's first and only liquid-fueled, air-launched rocket to reach orbit successfully. This mobile system allows us to serve a broad array of applications and end markets, providing customers with a highly differentiated solution to launch satellites relative to other existing small satellite ground launch providers. We believe there is near- and medium-term acceleration in the growth of the space market, driven by rapid advances in launch and satellite technology. As a result, there has been a proliferation of private sector space companies pursuing the growing demand for space solutions across multiple applications. Indeed, there are numerous private small-satellite launch companies (focused on carrying less than 1,000 kg to 500 km low Earth orbit), but just four that are able to boast a successful launch to orbit -SpaceX's dedicated rideshare program,Northrop Grumman ,Rocket Lab andVirgin Orbit . As one of the few proven small satellite launch providers, we believe we are well-positioned to benefit from these attractive industry tailwinds. So far, we successfully completed three orbital launches in 2021 and early 2022, each at the beginning of our targeted launch window, which demonstrates the efficacy of our launch system. To date, we have delivered 26 satellites to their desired orbits with high precision. By utilizing an air-launch system via Cosmic Girl and the LauncherOne rocket, we offer the agility, flexibility and responsiveness that small satellite customers need to achieve their mission objectives. Our launches have delivered satellites to orbit for customers across commercial, civil and national security and defense markets, both domestically and internationally. Leveraging the successes from these launches, we have been able to secure active contracts representing approximately$575.2 million of potential revenue, of which$151.5 million are binding agreements, and$423.7 million are non-binding MOUs and LOIs. We develop and manufacture our launch technology from a vertically-integrated manufacturing facility inLong Beach, California . Leveraging advanced, state-of-the art manufacturing capabilities, including automation and additive manufacturing technologies, we believe we have the necessary infrastructure in-place to meet the medium-term demand for our launch business. Prior to the Business Combination,Virgin Group andMubadala Investment Company PJSC ("Mubadala") and its subsidiaries invested approximately$1 billion of capital to found, scale and grow the business. We have been primarily focused and engaged in designing and developing launch solutions for small satellites since our inception in 2017. We have incurred net losses of$157.3 million and$121.7 million for the years endedDecember 31, 2021 and 2020, respectively, and expect to incur significant losses in the near term. Since achieving commercialization inJune 2021 , we have continued and will continue to make significant investments in capital expenditures to build and expand our production for commercial small satellite launches, hire top-tier leaders and innovators, and continue to invest in research and development. 45
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Key Factors Affecting Performance
We believe that our future success and financial performance depend on several factors that present significant opportunities for our business, but also pose risks and challenges, including those discussed below and in the section of this Annual Report entitled " Item 1A. Risk Factors ." Customer Demand Since our first test flight in 2020, a broad range of potential customers, including national security organizations, commercial satellite providers, and civil service providers have shown significant interest in our service. Our commercial customers include satellite and constellation providers such asArqit Limited ("Arqit") and SatRevolution. Civil customers mostly fall within our spaceport and launch offerings for civil space agencies with customers including, NASA, Spaceport Cornwall in theUnited Kingdom , Spaceport Japan atOita Airport inJapan , and Alcantara Launch Center inBrazil . Outside of spaceports, we also provide dedicated launch services for civil space agencies such as NASA, and we expect to provide such service to other governments which have space agencies but lack the infrastructure for domestic space launches. Some national security and defense customers include the United States Space Force, theU.S. Air Force , NRO and theMissile Defense Agency . Leveraging our three successful orbital launches in 2021 and early 2022, we have been able to secure active contracts representing approximately$575.2 million of potential revenue, including$167.6 million of signed, binding agreements, of which$151.5 million in backlog, and$423.7 million of signed, non-binding memorandums of understanding and letters of intent. We also believe there is near- and medium-term growth potential in the space market, driven by rapid advances in launch and satellite technology. As a result, there has been a proliferation of private sector space companies pursuing the growing demand for space solutions across multiple applications. As one of the few proven small satellite launch providers to have successfully reached orbit, we believe we are well-positioned to benefit from these attractive industry tailwinds. Therefore, we plan to leverage our existing launch capabilities and our track record as a systems integrator to provide end-to-end value-added services for IoT and EO applications through the combination of agreements with satellite operators and a satellite constellation we will own and operate. Using a satellite-as-a-service model, we expect to deploy our own satellites beginning in late 2023 to serve government and commercial, both domestically and internationally.
Technology Innovation
We design, build, and test LauncherOne in-house and operate at the forefront of composite structures, liquid rocket engines, ultra-responsive launch systems, ruggedized avionics, optimized flight software, automated flight safety systems, and advanced manufacturing techniques. We believe the synergy of these technologies enables greater responsiveness to the commercial and government small satellite markets. Our unique air-launch system launches satellites into space from a rocket carried beneath the wing of a modified Boeing 747-400, meaning it has greater flexibility, mobility and responsiveness than other satellite launch systems. To continue establishing market share and attracting customers, we plan to continue our substantial investments in research and development for the continued enhancements of LauncherOne and commercialization of future generations of our rockets.
Manufacturing Capacity
As we plan to continue to scale our production of rockets for our small satellite services, we are making significant investments in capital expenditures for building and enhancing our manufacturing capacity and facilities. We expect our capital expenditures to continue to increase for the next several years. The amount and timing of our future manufacturing capacity requirements, and resulting capital expenditures, will depend on many factors, including the pace and results of our research and development efforts to meet technological development milestones, our ability to develop and manufacture rockets, our ability to achieve sales, and customer demand for our rockets at the levels we anticipate. Our headquarters inLong Beach, California has combined facility of 195,000 square feet and is used for design, engineering, manufacturing, integration, assembly, test activities, payload processing and encapsulation. We currently have approximately four rockets in production and our facility has the infrastructure, processes and technology / machinery to support a production capacity of approximately 20 rockets annually.
Global Pandemic
OnMarch 11, 2020 , theWorld Health Organization characterized the outbreak of the coronavirus disease ("COVID-19") as a global pandemic and recommended containment and mitigation measures. We have taken steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, we initially reduced and later temporarily suspended on-site operations for one week at our facilities in Long 46
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Beach,California in lateMarch 2020 . Starting lateMarch 2020 , approximately two-thirds of our workforce and contractors were able to complete their duties from home. As government authorities had classified our business as part of the nation's critical infrastructure, the remaining one-third of our workforce was able to resume on-site operations under revised operational and manufacturing plans that conform to the latest COVID-19 health precautions. This includes universal facial covering requirements, rearranging facilities to follow social distancing protocols, conducting active daily temperature checks, undertaking regular and thorough disinfecting of surfaces and tools and regular testing of our employees and contractors for COVID-19 on a regular basis. As of the date of this Annual Report, all of our employees whose work requires them to be in our facilities are now back on-site, but we have experienced, and expect to continue to experience, reductions in operational efficiency due to illness from COVID-19 and precautionary actions taken related to COVID-19. While many restrictions associated with COVID-19 have more recently been relaxed, the longevity and extent of the COVID-19 pandemic remains uncertain, including due to the emergence and impact of the COVID-19 variants. These measures and challenges may continue for the duration of the pandemic and may affect our revenue growth while the pandemic continues. See the section entitled "Risk Factors" for further discussion of the impacts of the COVID-19 pandemic on our business.
Components of Results of Operations
Revenue
Launch services
Small satellite launch operations revenue is recognized for providing customer launch services by placing payloads into orbit. Revenue for each customer payload is recognized at a point in time when the performance obligation is complete, which is typically at the point of launch. We began recognizing revenue for launch services inJanuary 2021 from our initial launch with NASA. Our second launch was completed inJune 2021 , with successful deployments of payloads in each of our core offerings: commercial, civil and defense. So far, we successfully completed three orbital launches in 2021 and early 2022, out ofMojave, California . To date, we have delivered 26 satellites to their desired orbits with high precision. We generated$6.0 million and$0 million during the years endedDecember 31, 2021 and 2020, respectively, from launch services. We expect a significant portion of our future revenue growth to be derived from further commercialization of our small satellite launch operations and expansion of our portfolio of space offerings.
Engineering services
We also generate revenue by providing engineering services, which primarily relates to research and studies, to our customers. Revenue is recognized as control of the performance obligation is transferred over time to the customer. As ofDecember 31, 2021 , we have two engineering services revenue contracts for which we expect to transfer all remaining performance obligations to the customer by the years endingDecember 31, 2024 and 2022, respectively. We expect that we will continue to earn revenue from engineering services, but that such revenue will represent a smaller portion of our future revenue growth compared to launch services. We generated$1.4 million and$2.0 million for the years endedDecember 31, 2021 and 2020, respectively, from engineering services.
Bridge ventilators
OnApril 30, 2020 , we secured an Emergency Use Authorization from theU.S. Food and Drug Administration to develop a mass-producible bridge ventilator to aid in the COVID-19 pandemic. We sold 600 ventilators and recognized$1.9 million in revenue related to these units in the fiscal year endedDecember 31, 2020 . We have stopped our ventilator production and sales in 2021.
Cost of Revenue
Cost of revenue relates to launch services, engineering services, and bridge ventilator production and primarily includes costs for materials and human capital, such as payroll and benefits. We expect that we will continue to incur cost of revenue from launch services and engineering services while we have stopped bridge ventilator production in 2021. Since LauncherOne achieved technological feasibility inJanuary 2021 , we began capitalizing and subsequently charging to cost of revenue the costs incurred to launch small satellites. Costs associated with launch services include the costs for rocket manufacturing, overhead, and launch. Costs for rocket manufacturing include materials, labor, fuel, payroll and benefits for our launch and flight operations as well as the depreciation of Cosmic Girl, maintenance and depreciation of facilities and equipment and other allocated overhead expenses. As we continue to grow our revenue from further commercialization of our small satellite launch operations and expansion of our portfolio of space offerings, we expect that our cost of revenue 47
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will increase. Our increases in cost of revenue will include the quarterly royalty expenses that will ramp-up under the TMLA.
Gross Profit and Gross Margin
Gross profit is calculated as revenue less cost of revenue. Gross margin is the percentage obtained by dividing gross profit by its revenue. Our gross profit and gross margin have varied historically based on the mix of revenue from small satellite launch services, engineering services and bridge ventilator production. Although our gross profit and gross margin may continue to vary by offering as we scale our business, we expect our overall gross profit and gross margin to improve over time.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist of personnel-related expenses related to general corporate functions, primarily including executive management and administration, finance and accounting, legal, business development, and government affairs, as well as certain allocated costs. Personnel-related expenses primarily include salaries and benefits. Allocated costs include costs related to information technology, facilities, human resources and safety. Personnel-related expenses also include allocated sustaining activities relating to launch operations and production processes support, including required launch system maintenance, updates and documentation. As we continue to grow, we expect that our selling, general and administrative costs will increase. We also expect to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , as well as higher expenses for general and director and officer insurance, investor relations and professional services.
Research and Development Expense
We conduct research and development activities to develop existing and future technologies that advance our satellite launch and space solution offerings. Research and development activities include basic research, applied research, concept formulation studies, design, development and related test program activities. Costs incurred to develop our LauncherOne rockets primarily include equipment, material, labor and overhead. Costs incurred for performing test flights primarily include labor and fuel expenses for launch and flight operations. Research and development costs also include rent, maintenance, and depreciation of facilities and equipment and other allocated overhead expenses. We plan to continue to make substantial investments in research and development for the continued enhancements of the LauncherOne and the development of a third stage modified LauncherOne for additional services. As LauncherOne achieved technical feasibility inJanuary 2021 , we began capitalizing the production costs of our LauncherOne rockets.
Interest Expense
Interest expense relates to our finance lease obligations and outstanding long-term debt due to the Parent Company.
Change in fair value of equity investments
Change in fair value of equity investments consists of the changes in fair value of our equity investments.
Change in fair value of liability classified warrants
Change in fair value of liability classified warrants relates to remeasurement of our liability for public and private placement warrants to fair value as of any respective exercise date and as of each subsequent balance sheet date.
Other Income, net
Other income consists of sources of income that are not related to our primary
operations, including interest income and miscellaneous non-operating items,
such as income recognized from non-refundable deposits as a result of customer
contract terminations, our employee store merchandising and legal settlements.
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Income Tax Provision
Our provision for income taxes consists of an estimate forU.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in the tax law. We maintain a valuation allowance against the full value of ourU.S. and state net deferred tax assets because we believe it is more likely than not that the recoverability of these deferred tax assets will not be realized. Results of Operations
The following table sets forth our results of operations for the periods presented. The period-to-period comparisons of financial results are not necessarily indicative of future results.
Years Ended
December 31, $ %
(In thousands) 2021 2020 change change
Revenue $ 7,385 $ 3,840 $ 3,545 92 %
Cost of revenue 37,872 3,168 34,704 1095 %
Gross profit (30,487) 672 (31,159) (4637) %
Selling, general and administrative expenses 92,796 43,003 49,793 116 %
Research and development expenses 48,079 137,135 (89,056) (65) %
Operating loss (171,362) (179,466) 8,104 (5) %
Other income (expense):
Change in fair value of equity investments 6,792 - 6,792 100%
Change in fair value of liability classified
warrants 3,749 - 3,749 100%
Interest expense, net (24) (4,852) 4,828 (100) %
Other income, net 3,560 62,671 (59,111) (94) %
Total other income (expense), net: 14,077 57,819
Loss before income taxes (157,285) (121,647) (35,638) 29 %
Provision for income taxes 6 5 1 20 %
Net loss (157,291) (121,652) (35,639) 29 %
Revenue
Years Ended
December 31, $ %
(In thousands) 2021 2020 change change
Revenue $ 7,385 $ 3,840 $ 3,545 92 %
Revenue increased by $3.5 million for the year ended December 31, 2021 compared
to the year ended December 31, 2020 primarily attributable to the recognition of
launch services revenue of $6.0 million from our two launches for the year ended
December 31, 2021 . We did not generate any revenue from launch services during
the year ended December 31, 2020 . A $0.8 million increase in revenue from the
Royal Air Force pilot training program was offset by a $0.6 million decrease in
revenue from engineering services and $1.9 million decrease in revenue from
bridge ventilators built to help in the fight against the COVID-19 pandemic
during 2020.
Cost of Revenue and Gross Profit
Years Ended
December 31, $ %
(In thousands) 2021 2020 change change
Revenue $ 7,385 $ 3,840 $ 3,545 92 %
Cost of revenue 37,872 3,168 34,704 1095 %
Gross profit (30,487) 672 (31,159) (4637) %
Gross margin (413) % 18 %
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Cost of revenue increased by$34.7 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily attributable to our two launches in January andJune 2021 and the recognition of contract losses of$17.4 million . After the launch inJanuary 2021 , we began to capitalize costs associated with the launch services. For the year endedDecember 31, 2021 , we determined inventory related to certain near-term rocket builds was not recoverable and as a result, we recognized an inventory write-down of$4.1 million to its estimated net realizable value. Gross profit decreased by$31.2 million , and gross margin decreased by 431 percentage points for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily attributable to the shift of revenues from the development of bridge ventilators in 2020 to launch services with the two launches in 2021.
Selling, General and Administrative Expenses
Years Ended
December 31, $ %
(In thousands) 2021 2020 change change
Selling, general and administrative expenses $ 92,796 $ 43,003 $ 49,793 116 %
Selling, general and administrative expenses increased by $49.8 million , or
116%, for the year ended December 31, 2021 compared to the year ended
December 31, 2020 primarily attributable to the increase in personnel-related
expenses of $48.1 million , $0.8 million of facilities, overhead and general
corporate expenses, and $0.8 million in professional and legal fees. The
increase in personnel-related expenses is primarily related to sustaining the
launch and production processes during the year ended December 31, 2021 . The
sustaining activities relating to launch operations and production processes
support, such as required launch system maintenance, updates and documentation,
increased upon LauncherOne reaching technological feasibility as a result of the
launch in January 2021 . The increase in personnel-related expenses also includes
a $4.2 million increase in stock-based compensation expense attributed to stock
options granted to a former employee.
Research and Development Expenses
Years Ended
December 31, %
(In thousands) 2021 2020 $ change change
Research and development expenses Research and development expenses decreased by$89.1 million , or 65%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily attributable to the decreases in personnel-related expenses of$42.1 million facilities, overhead and payroll and related expenses of$45.8 million and professional services fees of$1.2 million due to LauncherOne reaching technical feasibility during the year endedDecember 31, 2021 . LauncherOne reached technological feasibility upon the successful launch inJanuary 2021 . Since then, a portion of the research and development resources to develop the LauncherOne technology have shifted focus from technological development to sustaining the launch and production processes as well as capitalized labor and overhead to inventory.
Change in fair value of equity investments
Years Ended
December 31, $ %
(In thousands) 2021 2020 change change
Change in fair value of equity investments Change in fair value of equity investments increased by$6.8 million , or 100%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 attributable to the unrealized gain of$7.0 million from the equity investment in Arqit, and partially offset by the$0.2 million unrealized loss for the equity investment in SAS.
Change in fair value of liability classified warrants
Years Ended
December 31, $ %
(In thousands) 2021 2020 change change
Change in fair value of liability classified
warrants $ 3,749 $ - $ 3,749 100%
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Change in fair value of liability classified warrants increased by$3.7 million , or 100%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 as a result of the public and private placement warrants that were originally issued by NextGen and subsequently assumed by the Company as part of the Business Combination. The public and private placement warrants are recorded on the balance sheet at fair value with the carrying amount subject to remeasurement to fair value as of any respective exercise date and as of each subsequent balance sheet date. Interest Expense, Net Years Ended December 31, $ % (In thousands) 2021 2020 change change Interest expense, net$ (24) $ (4,852) $ 4,828 (100) % Interest expense, net decreased by$4.8 million , or 100%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was attributable to the loan the Parent Company forgave for the outstanding principal and accrued interest payable of$235.1 million revolving loan facility ("RLF"). The RLF was considered extinguished because of such contribution. Other Income, Net Years Ended December 31, $ % (In thousands) 2021 2020 change change Other income, net 3,560 62,671$ (59,111) (94) % Other income decreased by$59.1 million , or 94% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily attributable to the recognition of$62.2 million of non-refundable deposits received as a result of the bankruptcy filing of our largest customer for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , we received$3.6 million primarily attributable to$1.7 million for the initial ordinary shares ofSky and Space Global Limited ("SAS") issued to us in exchange for the termination of the LSA, as well as a non-refundable deposit of$1.2 million .
Provision for Income Taxes
Provision for income taxes was immaterial for the years endedDecember 31, 2021 and 2020. We have accumulated net operating losses at the federal and state level for the time period during we had not yet began commercial operations. We maintain a substantially full valuation allowance against net deferred tax assets. The income tax expenses are primarily related to minimum state filing fees in the states where we have operations.
Liquidity and Capital Resources
Liquidity Requirements
We expect our expenses to increase in connection with ongoing activities, particularly as we continue to advance the development of our technologies, commercialize our satellite launch operations and start to develop our space solution offerings, and continue to build and expand our production of rockets and aircraft.
Specifically, our operating expenses will increase as we:
•scale up our facilities, manufacturing processes and capabilities to support expanding our volume of rockets;
•pursue further research and development on our satellite launches and space solution offerings, including those related to our research and education efforts;
•hire additional personnel in research and development, manufacturing operations, testing programs and maintenance as we increase the volume of our satellite launches and expand our space solution offerings;
•seek regulatory approval for any changes, upgrades, or improvements to our technologies and operations in the future; and
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•hire additional personnel in management to support the expansion of our operational, financial and information technology functions as a public company.
We have several non-cancelable leases primarily related to the lease of our manufacturing and testing facilities. These leases generally contain renewal options for periods ranging from three to ten years and require us to pay all executory costs, such as maintenance and insurance. Our total remaining lease obligation as ofDecember 31, 2021 is$24.3 million , with$3.3 million due in less than one year. We also have non-cancelable purchase commitments as ofDecember 31, 2021 primarily related to supply and engineering services providers. Total non-cancelable purchase commitments approximately due in the next five years is$48.4 million , with$20.9 million due in less than one year. Additionally, we are expanding our satellite launch operations and space solution offerings since commercialization. As ofDecember 31, 2021 , we had approximately five rockets in various stages of production and one carrier aircraft in operation. We expect to accelerate our production of rockets to reach an annual production capacity of approximately 20 rockets and we expect to begin acquisition and modification of an additional carrier aircraft in the next 12 - 18 months. We have significantly reduced the per unit cost of producing rockets since production began. As such, we anticipate the costs to manufacture additional rockets to continue to decrease on a per unit basis as we advance and scale up our manufacturing processes and capabilities. We expect our capital investments to increase our production of rockets, modify additional carrier aircrafts, and advance and scale up our manufacturing facilities. However, the recent commercialization of our satellite launch and space solution offerings and the anticipated expansion of our rocket production have unpredictable costs and are subject to significant risks, uncertainties and contingencies, many of which are beyond our control, that may affect the timing and magnitude of these anticipated expenditures. Many of these risks and uncertainties are described in more detail in this Annual Report under the heading " Item 1A. Risk Factors ." Our future capital requirements will depend on many factors, including rate of revenue growth, ability to reduce costs per unit, the expansion of research and development activities, hiring additional personnel, and investment in manufacturing operations. We may sell equity securities or debt securities or secure other debt financing in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such equity securities in subsequent transactions, our current investors may be materially diluted. Any debt financing, if available, may involve restrictive covenants and could reduce our operational flexibility or profitability.
Sources of Liquidity
Prior to the Business Combination, our operations participated in cash management and funding arrangements managed by the Parent Company. Only cash and cash equivalents held in bank accounts legally owned by our entities are reflected in the consolidated balance sheets. Cash and cash equivalents held in bank accounts legally owned by the Parent Company were not directly attributable to us for any of the periods presented. Transfers of cash, both to and from us, have been reflected as a contribution from or a distribution to the Parent Company in the consolidated balance sheets and as a financing activity on the accompanying consolidated statements of cash flows. Our principal sources of liquidity following the Business Combination are our cash and cash equivalents and any additional capital that may be obtained through borrowings or additional sales of equity securities. We have not generated sufficient revenues to provide sufficient cash flows to enable us to finance our operations internally. We have incurred significant losses since our inception and had an accumulated deficit of$820.5 million as ofDecember 31, 2021 . Our cash and cash equivalents was$194.2 million and$22.4 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively, and we have not generated positive cash flows from operations. In an effort to alleviate these conditions, management continues to seek and evaluate opportunities to raise additional funds. As part of our funding efforts, onMarch 28, 2021 and as described below, we entered into the Purchase Agreement with the Investor, pursuant to which the Investor has committed to purchase up to$250 million of our common stock, at our direction from time to time, subject to the satisfaction of certain conditions and limitations set forth in the Purchase Agreement. The actual amount that we raise under the Purchase Agreement will depend on market conditions and other limitations in the agreement. We expect that our existing cash and cash equivalents and the amounts we may raise from the Purchase Agreement will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Annual Report.
Standby Equity Purchase Agreement
On
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sell to the Investor up to
Upon the initial satisfaction of the conditions to the Investor's obligation to purchase shares of common stock set forth in the Purchase Agreement (the "Commencement"), including that a registration statement registering the resale by the Investor of the shares of common stock under the Securities Act that may be sold to Investor by us under the Purchase Agreement (the "Initial Resale Registration Statement") is declared effective by theSecurities and Exchange Commission (the "SEC") and a final prospectus relating thereto is filed with theSEC , we will have the right, but not the obligation, from time to time at our sole discretion until the first day of the month next following the 36-month period from and after the Effective Date, to direct the Investor to purchase up to a specified maximum amount of shares of common stock as set forth in the Purchase Agreement by delivering written notice (each, a "Notice") to the Investor . The purchase price of the shares of common stock that we may sell to the Investor pursuant to the Purchase Agreement will be 97.5% of the average of the volume weighted average price of our common stock during each trading day in the three (3) consecutive trading days commencing on the trading day following delivery of a Notice (other than any trading days excluded pursuant to the terms of the Purchase Agreement) (such period, the "Pricing Period"). The maximum amount to be sold pursuant to each Notice may not exceed$50 million , and a Notice cannot be delivered earlier than six trading days following the Pricing Period relating to any prior Notice. Any shares of common stock that may be sold by us under the Purchase Agreement will be sold in transactions exempt from registration under the Securities Act in reliance upon the exemption afforded under Section 4(a)(2). The Purchase Agreement prohibits us from directing the Investor to purchase any shares of common stock pursuant to the Purchase Agreement if those shares, when aggregated with all other shares of our common stock then beneficially owned by the Investor and its affiliates, would result in the Investor and its affiliates having beneficial ownership of more than the 9.99% of our then outstanding shares of common stock. The Purchase Agreement contains customary registration rights, representations, warranties, conditions and indemnification obligations by each party. The representations, warranties and covenants contained in the Purchase Agreement were made only for purposes of the Purchase Agreement and as of specific dates, were solely for the benefit of the parties to such agreement and are subject to certain important limitations.
The Purchase Agreement also provides that we may request a pre-advance loan from
the Investor in a principal amount not to exceed
Subject to the terms of the Purchase Agreement, we have the right to terminate the Purchase Agreement at any time after Commencement, at no cost or penalty, upon five (5) trading days' prior written notice. No termination of the Purchase Agreement will affect the indemnification provisions contained within the Purchase Agreement, which will survive any termination of the Purchase Agreement.
Revolving Loan Facility
As ofDecember 31, 2020 , we had a nine-year term$200.0 million RLF and a ten-year term$30.0 million RLF, subordinated to the$200.0 million RLF, and entered with the Parent Company. No repayments of principal balances or interest accrued have been made for the aggregate$230.0 million RLF. During the year endedDecember 31, 2021 , the Parent Company contributed the outstanding principal and accrued unpaid interest payable of the RLF as a capital contribution to us, which was recorded in equity for no consideration. As a result, the RLF was considered extinguished and there are no principal balances outstanding as ofDecember 31, 2021 . 53
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Table of Contents Cash Flows Historical Cash Flows The following table summarizes our cash flows for the years endedDecember 31, 2021 and 2020: Years Ended December 31, (In thousands) 2021 2020 Cash used in operating activities$ (153,997) $ (143,016) Cash used in investing activities (30,280) (13,298) Cash provided by financing activities 352,473 31,660 Net increase (decrease) in cash and cash equivalents $
168,196
For the year endedDecember 31, 2021 , net cash used in operating activities was$154.0 million primarily consisting of$157.3 million of net loss, adjusted for$16.9 million of non-cash and cash charges, and a decrease in net operating assets and liabilities of$13.6 million . Inventory increased due to capitalizing the raw materials, labor and overhead costs related to the production of the Company's rockets after reaching technological feasibility inJanuary 2021 . Deferred revenue decreased due to recognizing revenue for our demo launch inJanuary 2021 . The non-cash charges primarily included the charges in stock-based compensation of$10.6 million , depreciation and amortization of$14.4 million , inventory write-down of$4.1 million , offset by the change in fair value of the equity investment in Arqit of$7.0 million , the change in fair value of liability classified warrants of$3.7 million . and the non-cash initial investment in SAS of$1.7 million , partially offset by the change in its fair value of$0.2 million . For the year endedDecember 31, 2020 , net cash used in operating activities was$143.0 million primarily consisting of$121.7 million of net loss, adjusted for$22.0 million of non-cash charges, and an increase in net operating assets and liabilities of$43.3 million . Deferred revenue decreased due to the cancellation of a launch services agreement with one of our largest customers, OneWeb, as a result of OneWeb's bankruptcy process. The non-cash charges primarily included the charges in stock-based compensation of$3.2 million , depreciation and amortization of$14.0 million , and non-cash interest on long-term debt, due to the Parent Company of$4.8 million .
For the year endedDecember 31, 2021 , net cash used in investing activities was$30.3 million consisting of purchases of property and equipment and$5.0 million of purchases of equity investment in Arqit.
For the year ended
Cash Provided by Financing Activities
Net cash provided by financing activities was$352.5 million for the year endedDecember 31, 2021 , consisting primarily of proceeds from the reverse recapitalization of$200.1 million , offset by payments of transaction costs related to the reverse recapitalization of$19.3 million , equity contributions received from the Parent Company of$169.1 million , proceeds from the exercise of stock options of$2.8 million and cash received from the sale of non-controlling interest of$1.7 million , offset by payments of finance lease obligations of$0.1 million . Net cash provided by financing activities was$31.7 million for the year endedDecember 31, 2020 , consisting primarily of equity contributions received from the Parent Company of$150.0 million and cash received from the sale of non-controlling interest of$0.4 million , offset by equity distributions to the Parent Company of$118.5 million and payments of finance lease obligations of$0.2 million .
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes thereto included
elsewhere in this Annual Report are prepared in accordance with GAAP. We
evaluated the development and selection of our critical accounting policies and
estimates and believe that the following involve a higher degree of judgment or
complexity and are most significant to reporting our
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results of operations and financial position and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgements used in the preparation of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions due to the inherent uncertainty involved in making those estimates and any such differences may be material. We re-evaluate our estimates on an ongoing basis. We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. Refer to Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this Annual Report for a description of other significant accounting policies. Going Concern The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. In connection with the preparation of the consolidated financial statements for the years endedDecember 31, 2021 and 2020, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to our ability to continue as a going concern within one year after the date of the issuance of such financial statements. However, through our evaluation of our strategic business plan, we identified conditions and events that mitigate and alleviate substantial doubt about the Company's ability to continue as a going concern. This is further discussed in Note 1 - Organization and Business Operations to the Consolidated Financial Statements. Revenue Recognition Launch Services We recognize revenue from launch services when control is transferred to our customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services. A launch services agreement generally consists of multiple launches with each launch being allocated a fixed price. The revenue of a launch services agreement is recognized at a point-in-time when the performance obligation is complete, which is typically at the point of launch. However, as we are in the early stage of commercialization, the costs to provide the launch services for each contract are still subject to estimates, including labor costs, material costs, and allocated overhead and facilities and equipment costs. When we determine it is probable that the costs to provide the services stipulated by the launch services agreement will exceed the allocated fixed price for each launch, we record a provision for the contract loss. Contract losses are recorded at the contract level and are recognized when known. To the extent the contract loss provision is less than the accumulated costs to fulfill the contract, we record the provision net of inventory and net of contract assets on the consolidated balance sheet. During the year endedDecember 31, 2021 , we identified certain contracts where the expected costs to fulfill the contracts were in excess of the estimated transaction price, and as such, recorded a provision for the related contract loss. The provision for contract losses outstanding as ofDecember 31, 2021 was$21.5 million , with$11.6 million recorded net of inventory and$2.6 million net of contract assets on the consolidated balance sheet.
Long-lived Asset
Long lived assets consist of property, plant and equipment, net and right-of-use
assets and are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or asset group,
which represents a combination of assets that produce distinguishable cash
flows, may not be recoverable. If circumstances require a long-lived asset to be
tested for possible impairment, we first compare undiscounted cash flows
expected to be generated by that asset to the carrying amount. If the carrying
amount of the long-lived asset is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the carrying amount
exceeds the fair value. Fair value is determined through various valuation
techniques, including discounted cash flow models, quoted market values, and
third-party independent appraisals, as considered necessary. We have not
recorded any impairment charges during the years presented.
Depreciation on property, plant and equipment is calculated on a straight-line
basis over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter period of the estimated useful life or lease term. We
monitor conditions related to these assets to determine whether events and
circumstances warrant a revision to the remaining depreciation period.
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Stock-Based Compensation
The Company maintains stock-based compensation plans for its employees, officers, directors and consultants.
Stock-based compensation expense related to the stock-based awards granted to our employees is measured and recognized in our consolidated financial statements based on fair value. The fair value of each stock option granted to employees is estimated on the grant date using the Black-Scholes option-pricing model. For performance-based stock options, the value of the award is measured at the grant date as the fair value of the award and is expensed on a straight-line basis over the graded vesting period, using the accelerated attribution method, once the performance condition becomes probable of being achieved. Determining the grant date fair value of options using the Black-Scholes option-pricing model requires management to make certain assumptions and judgments. The determination of the grant date fair value of stock option awards issued is affected by a number of variables, including the risk-free interest rates over the expected option term, the expected common share price volatility over the expected option term, the expected dividend yield of our common shares over the expected option term, and the fair value of the underlying common shares.
•Risk-Free Interest Rate - The risk-free interest rate is based on the
•Expected Term - The expected term represents the period that our stock-based awards are expected to be outstanding and is based on historical experience of similar awards, considering the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. •Expected Volatility - The volatility rate is determined by using an average of historical volatilities of selected industry peers deemed to be comparable to our business corresponding to the expected term of the awards as we do not have sufficient history of trading in our common stock.
•Dividend Yield - The expected dividend yield is zero as we have never declared or paid cash dividends and have no current plans to do so in the near future.
Warrant Liability
The Company accounts for the warrants assumed in connection with the Business Combination in accordance with the guidance contained in ASC 815-40, Derivatives and Hedging-Contracts in Entity's Own Equity, under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the warrants as liabilities at their fair value and remeasures the warrants to fair value at each reporting period. This liability is subject to remeasurement at each balance sheet date until exercised, and any change in fair value is recognized in the consolidated statements of operations and comprehensive loss. The fair value of the warrants may fluctuate primarily based on the implied volatility which varies based on future market and industry conditions. These market and industry factors may materially reduce the market price of our warrants regardless of our operating performance.
Recently Issued and Adopted Accounting Pronouncements
Please refer to Note 3 - Recently Issued and Adopted Accounting Pronouncements to our consolidated financial statements included elsewhere in this Annual Report for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements.
Emerging Growth Company Accounting Election
Section 102(b)(1) of the JOBS Act exempts "emerging growth companies" as defined in Section 2(A) of the Securities Act, from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.Virgin Orbit is an "emerging growth company" and has elected to take advantage of the benefits of this extended transition period.Virgin Orbit will use this extended transition period for complying with new or revised accounting standards that have different effective dates for public business entities and non-public business entities until the earlier of the dateVirgin Orbit (a) is no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period 56
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provided in the JOBS Act. The extended transition period exemptions afforded byVirgin Orbit's emerging growth company status may make it difficult or impossible to compareVirgin Orbit's financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of this exemption because of the potential differences in accounting standards used. Refer to Note 2 of our consolidated financial statements included elsewhere in this Annual Report for the recent accounting pronouncements adopted and the recent accounting pronouncements not yet adopted for the years endedDecember 31, 2021 and 2020.Virgin Orbit will remain an "emerging growth company" under the JOBS Act until the earliest of (a)December 31, 2026 , (b) the last date ofVirgin Orbit's fiscal year in whichVirgin Orbit has total annual gross revenue of at least$1.07 billion , (c) the last date of Virgin Orbit's fiscal year in whichVirgin Orbit is deemed to be a "large accelerated filer" under the rules of theSEC with at least$700.0 million of outstanding securities held by non-affiliates or (d) the date on whichVirgin Orbit has issued more than$1.0 billion in non-convertible debt securities during the previous three years.
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