Virgin Galactic Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Virgin Galactic was developing and testing reusable spacecraft for future commercial human spaceflight and research payload services. It had not begun commercial human spaceflight operations.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0.6m | $0.2m | $2.4m |
| Gross profit | $0 | $0.4m | $0.1m | $1.1m |
| SG&A | $26.0m | $14.6m | $52.8m | $26.9m |
| Research and development | $37.2m | $30.2m | $71.4m | $61.6m |
| Operating loss | $63.2m | $44.4m | $124.2m | $87.4m |
| Net loss | $62.5m | $44.1m | $122.4m | $86.7m |
| Basic and diluted loss per share | $0.30 | $0.23 | $0.59 | $0.45 |
| Operating cash used | — | $107.9m | $88.9m |
Figures are in U.S. dollars; financial statement amounts have been converted from thousands to millions. Q2 gross margin was not meaningful because revenue was zero; six-month gross margin was 27%, down from 47%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $359.9m and restricted cash was $13.3m, totaling $373.2m. Total cash and restricted cash fell $119.5m during the first half.
- Six-month investing cash use was $10.1m, mainly for the Gateway to Space facility, IT infrastructure, tooling and manufacturing equipment. Financing cash use was $1.5m.
- Total assets were $491.0m; current assets were $415.6m and current liabilities $113.7m. Customer deposits, a current liability, were $81.7m.
- Total liabilities were $136.7m. The company reported $0.9m of commercial loan debt, with $0.3m current and $0.6m long-term. Separately, operating lease liabilities totaled $23.0m.
- Management said cash on hand and its operating plan were expected to fund operations for at least 12 months from issuance of the statements.
Material changes and notable items
- Revenue declined sharply: none was recorded in Q2 2020, and first-half revenue was down 90% year over year. The prior-year period included engineering services, payload-flight revenue and sponsorship revenue; the sponsorship agreement had expired.
- First-half net loss rose to $122.4m from $86.7m. SG&A increased 96% and R&D increased 16% year over year. The filing attributes much of the SG&A increase to public-company costs and stock-based compensation, and the R&D increase to spacecraft development and related compensation and operating costs.
- COVID-19 restrictions temporarily suspended on-site operations in late March; limited operations resumed in April. The company reported continuing efficiency impacts and delays to development, maintenance and the test-flight program.
- The company wrote off $1.1m of inventory as excess or obsolete in the first half. It also recorded $0.2m of additional legal settlement expense in the first half related to a $1.9m wage-and-hour settlement.
- Public warrants were redeemed or exercised; none remained outstanding after April 2020. Private-placement warrants remained outstanding.
Outlook, risks and contingencies
- No specific commercial-launch date or financial guidance is provided in the filing. Commercial service depended on completing flight testing and submitting verification reports for FAA review. The company already held an FAA commercial spaceflight license, subject to required verification steps before carrying paying customers.
- Two additional SpaceShipTwo vehicles were under construction; management estimated their remaining direct completion costs at $35m–$55m. The company said it expected expenses to increase as it developed the system, expanded the fleet and prepared for commercialization.
- As of July 30, 2020, the company reported approximately 600 spaceflight reservations, more than $80m in future-astronaut deposits and over 700 refundable One Small Step deposits. Reservations and deposits may be refundable or canceled and are not assured future revenue.
- Key risks include development and test-flight delays, safety and regulatory approvals, COVID-19 effects, reliance on a single initial flight system, supplier and manufacturing constraints, uncertain customer demand, and the possibility of needing additional financing. Management said further cost reductions could be considered if pandemic-related disruption worsened.
- The company disclosed two material weaknesses in internal control over financial reporting: insufficient personnel for financial close and reporting, and a need to strengthen IT and application controls. Management reported remediation work in progress. It nevertheless concluded disclosure controls were effective at June 30 and that the financial statements were fairly presented.
- Ordinary-course legal proceedings were disclosed; management did not consider pending matters material in aggregate, subject to the uncertainties described in the filing.
Important facts for investors to verify
- Progress and timing of the remaining test flights, FAA verification submissions and readiness to carry paying passengers.
- Cash burn relative to the stated 12-month liquidity expectation, including the cost to complete the two additional spacecraft and any financing needs.
- Whether reservations and refundable deposits convert into completed flights and recognized revenue, and the eventual ticket price, passenger capacity and flight cadence.
- COVID-19’s continuing effect on operations, testing schedules, supply chains and workforce efficiency.
- Remediation and independent assessment of the two material weaknesses in financial reporting controls.
- Terms and potential refunds associated with customer deposits, and the status of the disclosed settlement and other legal contingencies.