đNew Chapter 11 Bankruptcy - Vector Launch Inc.đ
Vector Launch Inc.
December 13, 2019
đAnother Example of the Tech Hype Machine Getting a Fast and Furious Reality Check (Short âFounder Friendly?â; Long #BustedTech)đ
Weâve been rather bored with energy and retail distress these days and so we looked on with great interest when Arizona-based Vector Launch Inc. and its subsidiary, Garvey Spacecraft Corporation, filed for bankruptcy in the District of Delaware. Sure, sure, itâs not a big name like McDermott International ($MDR) â the excitement there awaits us in â20 â but itâs meaningful nonetheless. Why? Because Sand Hill Road is known for its moonshots. And they often come crashing down to earth. Just not usually in bankruptcy court.
Yet this one did. Vector, a space technology company that was producing rockets and satellite computing technology, has an interesting history. Founded in 2016 by two of the original team members behind Elon Muskâs SpaceX, the company shared Mr. Muskâs vision and penchant for exaggeration. The company launched in 2016 and, in retrospect, the laudatory coverage of the ambition is laughable. Hereâs Techcrunch:
With small rockets carrying single 20-40 kg payloads launching weekly or even every few days, the company can be flexible with both prices and timetables. Such small satellites are a growing business: 175 were launched in 2015 alone, and thereâs plenty of room to grow. Itâll still be expensive, of course, and you wonât be able to just buy a Thursday afternoon express ticket to low earth orbit â yet.
Customers will, however, reap other benefits. There are less restrictions on space: no more having to package your satellite or craft into a launch container so it fits into a slot inside a crowded space bus. Less of a wait between build and launch means hardware can be finalized weeks, not years, in advance â and expensive satellites arenât sitting in warehouses waiting for their turn to go live and get that sweet return on investment.
Sounds dope AF, we admit. Even more exciting, Techcrunch reported that Vector hoped to make its first real flights in 2017. At the time, it had raised government grant money (DOD and NASA) and a small amount of angel money. Straight out of the Musk playbook: fund your company and get rich off of the government teat. Brilliant.
But you donât get government money without pedigreed founders and highfalutin promises to change the world (literally via rockets). Just imagine how that package looks to the outside investment community.
Investors are knocking down the front door looking to get in, he said, though he declined to name any. Perhaps they smell profitability: Vectorâs business plan has it cash positive after just a few launches.
Oof. That bit looks REALLLLLLY REALLLLLY bad now, huh? It gets worse.
Here are some of the things that subsequently transpired:
The company finalized an agreement to conduct 21 launches for Finland-based Iceyeâs commercial Synthetic Aperture Radar satellite constellation. đ
Quartz published a flattering piece about the shift to smaller rockets, giving heavy prominence to Vector. đ
The company won $2.5mm worth of contracts from the Defense Advanced Research Projects Agency (DARPA) and NASA. đ
The company announced a Tucson headquarters and manufacturing plant, celebrating the potential creation of 200 jobs with the hope of reaching as many as 500; the âdirect economic impact of the facility could be $290 million over five yearsâ (citing $2.5mm in contracts and revenue in â16 and $160mm-worth of signed contracts for launches âonce the plant starts producing rocketsâŚâ). đ
Vector announced âan agreement with York Space Systems, an aerospace company specializing in small and medium class spacecraft, to conduct six satellite launches from 2019 through 2022 with the option for 14 additional launchesâ; the contract was reportedly worth a staggering $60mm. đ
These guys were rockinâ and rollin'.
But, wait, thereâs more!
After several more government grants and a number of angel infusions, the company finally raised a $21mm Series A round in June 2017 â which included money from vaunted Silicon Valley venture capital firm, Sequoia Capital (as well as Shasta Ventures and Lightspeed).
By August of 2017, the hype machine was in full effect. Here is a CNBC piece championing the companyâs first completed âmission.â Around the same time, Techcrunch, The Los Angeles Times and Ars Technica all wrote about the promise of small rockets. Size doesnât matter, they said!!
By October 2018, the company was back fundraising; it secured a $70mm Series B raise from Kodem Growth Partners, Morgan Stanley Alternative Investment Partners and participation from its existing trio of VC firms. Now nothing and nobody could get in these guysâ way!!!!!
Well, except Sequoia Capital.
Per the companyâs CHAPTER 11 BANKRUPTCY PAPERS(!!!!):
âIn early August 2019, a member of Vectorâs board of directorsâŚappointed by SequoiaâŚabruptly resigned and informed Vector that Sequoia had decided to no longer support Vector via funding for future operations. Almost immediately after theâŚresignation, the Debtorsâ CEO resigned. The fallout from Sequoiaâs decision and the CEOâs resignation spooked the investor community and doomed the Debtorsâ efforts to raise additional capital.â
Thereâs more:
These events could not have been timed more poorly for the Debtors. In addition to preventing the Debtors from attracting new capital, they occurred when the debtors had almost expended all of the capital from their prior capital raises. Indeed, the Debtorsâ cash balances barely exceeded their secured debt, which principal amount totaled $11.5 million.
HOLD ON. So, the company lit $70mm of new funding on fire in less than a year and didnât have enough money to clear its secured debt. And SECURED DEBT? Where was the press release for that?!?!
After evaluating its options, the Board determined that if it did not immediately cease operations, the Debtors would be unable to pay their employees if their secured lenders declared a default and froze the Debtorsâ cash (which is precisely what occurred). With no access to capital to fund ongoing business needs and to satisfy the Debtorsâ outstanding secured debt, the Board voted to cease operations and to terminate most of the Debtorsâ employees and pay all owed wagesâŚ
This ainât exactly WeWork but still. Life comes at you fast: one moment youâre a media darling garnering all kinds of favorable coverage, raising millions upon million of dollars with investors âknocking down the doorâ and, the next, your pesky venture capitalists are pulling the plug and high-tailing for the exits!
Less than two weeks later, the Debtorsâ secured lenders froze the approximately $12 million in cash deposited in the Debtorsâ bank accounts as expected. The Debtorsâ secured lenders subsequently swept the cash from Debtorsâ bank accounts, leaving the Debtors with no cash, a single employee (the acting CEO), and, after assessing fees and other charges, approximately $500k in secured debt. The Debtorsâ remaining assets essentially consisted of three leased facilities, transporter-erector launcher, launch vehicle parts (including rocket engines and ground support equipment), satellite computer technology, patents, and other intellectual property.
So much to unpack here.
First, what the hell is a âtransporter-erector launcherâ and where does Johnny get one?
Second, at what point did this thing sh*t the bed so badly that it needed to tap a credit facility? That it had to (maybe?) jettison its founder-CEO?? Tap bridge financing???
It turns out that TriplePoint Capital LLC committed to lend the company $15mm back in October 2018 alongside the companyâs Series B raise (PETITION Note: this is not in and of itself crazyâŚmany startups take on venture debt in conjunction with a fundraise generally as a safety net; usually they hope NOT to use it because theyâll just go on to their next equity raise). The loan was secured by basically all of the companyâs collateral and was structured as two draws in equal $7.5mm installments. With the sweep, TriplePoint ensured that its claim would be minimized: at the time of filing, they are owed $500k.
To bridge to a filing, the company secured a $500k bridge loan from Lockheed Martin Corporation â now the proposed stalking horse purchaser. The company also issued $1.6mm in convertible notes in connection with what it thought would be a Series C raise prior to Sequoia backing out. Whoops.
The big question, then, is why did Sequoia so abruptly quit the board and split?* Why, then, did the CEO, James Cantrell, quit the next day? It sounds like thereâs a lot more here to uncover:
Mr. Cantrell subsequently filed a lawsuit against Vector claiming that he was terminated. The Debtors dispute Mr. Cantrellâs claims regarding his departure. Moreover, the Debtors believe they hold claims against Mr. Cantrell that they intend to pursue for the benefit of the Debtorsâ creditors.
Some shady-a$$ sh*t mustâve been discovered around August 5. Just as fervently as investors were, at one point, trying to invest in this company, parties in interest were now eager to save themselves. Silicon Valley Bank (over $4mm owed) and TriplePoint issued notices of default and swept the Debtorsâ cash (PETITION Note: thatâs why they say that possession is half the battle!).
Lockheed is the White Knight here salvaging whatâs left of this hot mess. It provided the bridge loan; it will provide a $2.5mm DIP (yay bankruptcy pros getting paid!); and it will purchase the debtorsâ GalacticSky assets for $4.25mm. The offer is cash and equity.
Interestingly, despite all of this, optimism abounds here. The debtors note that they hope to pursue the Lockheed sale followed by other sales of assets:
If consummated, the Debtors believe that the proceeds from Sales will provide for payment in full of the Debtorsâ secured obligations, administrative expense claims, and priority claims. In addition, the debtors believe there will be sufficient funds for (i) a liquidation trust to pursue the Debtorsâ claims against certain parties, including its former CEO and (ii) distributions to general unsecured creditors.
That claim against the former CEO ought to be interesting. Stay tuned.đŹ
*Axiosâ Dan Primack wrote:
Per a source: Sequoia decided to stop investing due to a high burn rate and the company not meeting projections. That decision was followed by two lenders opting against giving Vector new debt lines â something Sequoia didn't instruct, but which Vector nonetheless blames on the VC firm.
Case Data:
Jurisdiction: (Judge Dorsey)
Capital Structure: $500k (TriplePoint Capital LLC), $500k (Lockheed Martin)
Professionals:
Legal: Pillsbury Winthrop Shaw Pittman LLP (Hugh Ray III, Jason Sharp, William Hotze) & Sullivan Hazeltine Allinson LLC (Elihu Allinson Ill)
Financial Advisor: Winter Harbor LLC (Shaun Martin)
Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)
Other Parties in Interest:
Prepetition Lender ($500k): TriplePoint Capital LLC
Legal: McDermott Will & Emery LLP (Darren Azman, Daniel Thomson) & Bayard PA (Justin Alberto)
Prepetition Lender ($500k) & Stalking Horse Purchaser ($2.5mm): Lockheed Martin Corporation
Legal: Hogan Lovells LLP (Christopher Donoho, John Beck, Jennifer Lee & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Andrew Remming, Paige Topper)
Large Equityholders: Kodem Growth Partners, Sequoia Capital, Shasta Ventures V LP, Lightspeed Venture Partners XI LP, DNX Ventures
Official Committee of Unsecured Creditors: Valcor Engineering Corporation; (ii) Rincon Etal Investments, Inc.; (iii) Expanding TFO I, LP; (iv) M4 Engineering Inc., and (v) Gas Innovations
Brown Rudnick LLP (Bennett Silverberg, Kenneth Aulet) & Potter Anderson & Corroon (Christopher Samis, L. Katherine Good, D. Ryan Slaugh)
Financial Advisor: Dundon Advisors LLC (Matthew Dundon, Philip Preis)