Virgin Galactic Holdings, Inc. — Q1 2021 Form 10-Q
Period: Three months ended March 31, 2021. The financial statements are unaudited; prior-year comparisons are as restated. Virgin Galactic is developing reusable spaceflight systems for commercial human spaceflight and research payloads and had not yet begun commercial passenger operations.
Financial results and liquidity
- Revenue: $0, versus $238,000 in Q1 2020. The prior-period revenue came from engineering services under U.S. government contracts that ended in early 2020. With no current-period revenue, gross margin is not meaningful.
- Expenses and loss: SG&A was $44.9 million, up 68%; research and development was $36.4 million, up 6%. Operating loss was $81.3 million, compared with $61.0 million. Net loss was $129.7 million, or $0.55 per diluted share, versus $376.8 million, or $1.86 per share.
- Non-operating item: The $48.7 million warrant fair-value loss was non-cash. The comparable Q1 2020 warrant loss was $316.9 million, substantially affecting the year-over-year net-loss comparison.
- Cash flow: Operating cash use was $48.8 million; capital expenditures were $0.8 million. Cash, cash equivalents and restricted cash declined by $49.3 million during the quarter.
- Liquidity and balance sheet: Cash and cash equivalents were $616.6 million, plus $13.0 million of restricted cash. Current assets totaled $674.3 million and current liabilities $118.1 million. Total liabilities were $328.2 million, including a $184.2 million warrant liability; stockholders’ equity was $419.8 million.
- Debt and customer deposits: Long-term debt was $620,000, with $310,000 current. Customer deposits were $83.0 million; these are liabilities, not recognized revenue.
Material changes versus Q1 2020
- Revenue fell to zero after the government engineering-services contracts ended. SG&A increased by $18.2 million, principally due to higher salaries and benefits and stock-based compensation; research and development increased by $2.1 million.
- Net loss narrowed largely because the prior-year period included a much larger non-cash warrant remeasurement loss. Meanwhile, operating loss increased as expenses rose and revenue ceased.
- Stock-based compensation rose to $22.1 million from $4.4 million. Cash used in operations decreased to $48.8 million from $56.3 million.
- The company’s Q1 2020 financial statements were restated for warrant-accounting errors. The filing reports a related material weakness in internal control over financial reporting.
Outlook, risks and unusual items
- Management said cash and its operating plan were expected to fund operations for at least 12 months from issuance of the financial statements. It expects expenses to increase as development, testing, manufacturing and commercialization efforts continue; it provided no firm revenue or commercial-launch guidance in this filing.
- Two additional SpaceShip vehicles were under construction. The company estimated direct costs to complete them at $35 million to $55 million. Development costs continued to be expensed as research and development because technological feasibility had not been achieved.
- Commercial passenger operations depend on completing the test program and FAA review of verification reports. Management cited COVID-19-related operational inefficiency and delays, including to the test-flight program, and said impacts could continue well into 2021. Safety, technical, regulatory, supplier and financing risks could further delay commercialization.
- As of March 31, the company reported about 600 flight reservations and more than $80 million in future-astronaut deposits. It planned to reopen ticket sales following Sir Richard Branson’s flight, then expected in 2021; timing and conversion of reservations into revenue remained uncertain.
- The $184.2 million private-placement warrant liability is a Level 3 fair-value estimate and can cause non-cash earnings volatility. The company also disclosed an outstanding $1.9 million settlement payable in a wage-and-hour matter, pending final court motions.
- Disclosure controls were not effective as of March 31 because of the warrant-accounting material weakness. Management said remediation was ongoing; it concluded the filed financial statements were fairly presented in all material respects.
Key facts for investors to verify
- Progress and timing of flight tests, FAA review and the start of paid commercial flights.
- Whether COVID-19 or other operational, safety, technical or regulatory issues affect schedules, costs or fleet capacity.
- Cash burn, capital requirements and completion costs for the two vehicles under construction.
- Conversion of reservations and deposits into ticket sales and recognized revenue.
- Remediation and sustained effectiveness of internal controls, and the valuation changes in the private-placement warrants.