Virgin Galactic Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Virgin Galactic is developing reusable spacecraft for commercial human spaceflight and research payloads; it had not yet begun commercial passenger flights.
Financial performance and position
- Revenue: Q3 revenue was $0, versus $0.8 million in Q3 2019. Nine-month revenue was $0.2 million, down 93% from $3.3 million, reflecting lower engineering-services, payload-flight and sponsorship revenue.
- Profitability: Q3 net loss was $77.0 million, versus $51.5 million; nine-month net loss was $199.4 million, versus $138.1 million. Q3 operating loss was $77.2 million; nine-month operating loss was $201.3 million.
- Costs and margins: Q3 SG&A rose 74% to $30.9 million and R&D rose 34% to $46.2 million. Nine-month SG&A increased 87% to $83.7 million and R&D increased 22% to $117.7 million. Nine-month gross margin was 27%, versus 48% in 2019; there was no Q3 2020 revenue.
- Cash flow: Nine-month operating cash use was $162.6 million and capital expenditures were $14.1 million. Financing provided $438.8 million, principally from the August stock offering. Cash, cash equivalents and restricted cash totaled $754.8 million at quarter end, including $741.6 million of unrestricted cash and equivalents.
- Liquidity and obligations: Current assets were $789.9 million and current liabilities $116.0 million. Customer deposits were $83.2 million. Long-term debt was $0.9 million, of which $0.3 million was current; operating lease liabilities totaled $22.8 million. The company said its cash and operating plan should fund operations for at least 12 months from the financial statements’ issuance.
- Capital and share count: The August offering sold 23.6 million shares at $19.50 per share for $460.2 million gross proceeds; transaction costs were $20.9 million. Shares outstanding were 234.0 million at September 30.
Changes, outlook and key risks
- Losses increased year over year as development spending and public-company costs grew while revenue remained minimal. Nine-month stock-based compensation was $18.6 million, compared with none in 2019.
- Management said COVID-19 restrictions and illness reduced operating efficiency and delayed development, maintenance and test-flight activities; impacts were expected to continue through Q4 and into 2021. The company said it remained on track with upcoming planned flights, but gave no clear quantified schedule in this filing. It expected to reopen ticket sales following Sir Richard Branson’s flight, then expected in 2021.
- Two additional SpaceShipTwo vehicles were under construction; estimated direct completion costs were $35 million to $55 million. The company expected expenses to rise as it develops the system, expands manufacturing and prepares for commercialization.
- As of October 31, 2020, the company reported approximately 600 flight reservations and more than $80 million in future-astronaut deposits. Its One Small Step program had nearly 900 refundable $1,000 deposits; the program was to end December 31, 2020.
- Key risks include test-flight completion and safety, FAA review and approvals, commercial launch timing, customer demand and conversion of deposits to revenue, fleet capacity, COVID-19 disruption, financing needs, supplier and manufacturing execution, and evolving regulation.
- A $1.9 million wage-and-hour settlement remained payable pending court motions delayed by COVID-19. Management disclosed two previously identified material weaknesses in financial-reporting controls—staffing/segregation of duties and IT/application controls—and ongoing remediation efforts. Management nevertheless concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Progress and timing of test flights, FAA review, commercial launch, and Branson’s expected flight.
- Cash burn and liquidity runway relative to development costs, including the estimated $35–$55 million to complete two spacecraft.
- Whether reservations and customer deposits convert into paid flights, and the terms and refund exposure of deposits.
- Remediation and sustained effectiveness of the disclosed internal-control weaknesses.
- Potential continuing effects of COVID-19 on schedules, costs, workforce efficiency and access to financing.