Virgin Galactic Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparative period is Q1 2019. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Virgin Galactic is developing reusable spaceflight systems for commercial passenger flights and research payloads. It had not begun commercial passenger operations and reported no human-spaceflight revenue during the quarter. Revenue came from limited payload and engineering activity. The company said it had reservations for approximately 600 future astronauts and more than $80 million in deposits as of April 29, 2020; many reservations and deposits are refundable.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Revenue | $0.238 million | $1.782 million; down 87% |
| Gross profit / margin | $0.065 million / 27% | $0.776 million / 44% |
| Operating expenses | SG&A $26.755 million; R&D $34.282 million | SG&A $12.295 million; R&D $31.424 million |
| Operating loss | $60.972 million | $42.943 million |
| Net loss / loss per share | $59.930 million / $0.30 | $42.593 million / $0.22 |
| Cash used in operating activities | $56.313 million | $42.871 million |
| Capital expenditures | $4.036 million | $3.068 million |
| Cash, cash equivalents and restricted cash | $431.652 million at March 31 | $492.721 million at December 31, 2019 |
| Total assets / liabilities | $548.059 million / $136.058 million | $605.546 million / $137.986 million at December 31, 2019 |
The filing presents no conventional borrowings on the balance sheet; it reports operating lease liabilities of $24.803 million and finance lease liabilities with a present value of $0.389 million. Customer deposits were $83.264 million. Management said available cash and its operating plan were expected to fund operations for at least 12 months from issuance of the financial statements.
Material changes and notable items
- Revenue fell mainly because Q1 2019 included a payload flight and Q1 2020 did not. Gross margin also declined, which management attributed primarily to the lower margins on engineering services.
- SG&A more than doubled, driven by public-company costs, including professional and legal fees, insurance, stock-based compensation, and higher salaries and operating costs. R&D increased 9%, including higher development costs and stock-based compensation.
- Cash and cash equivalents declined by $61.069 million during the quarter. Operating cash use and capital spending were partly offset by working-capital movements; financing cash flow was a $0.720 million use.
- Q1 included $4.425 million of stock-based compensation. The company modified certain RSU vesting terms and recorded $0.4 million of incremental compensation expense. It also recorded a $1.1 million inventory write-off for excess and obsolete items.
- The company issued 13.24 million common shares related to warrant exercises during the quarter. Public warrants were later subject to redemption; the filing reports 295,305 unexercised public warrants redeemed after the April 13 redemption date. Private placement warrants remained outstanding.
- A California wage-and-hour matter was settled for $1.9 million; an additional $0.2 million settlement expense was recorded in Q1.
Outlook, risks and management commentary
- Management described the commercial program as in its final development and testing phases. It expected to submit an FAA license modification in 2020 to permit flights with customers, but warned that timing could be delayed, including by COVID-19.
- Two additional SpaceShipTwo vehicles were under construction; estimated direct costs to complete them were $40 million to $60 million. The company continued to expense development costs until technological feasibility is achieved.
- COVID-19 led to reduced and temporarily suspended on-site operations in late March. Limited operations resumed in April; as of May 5, more than 90% of employees whose work required facility access were back on-site. Management said the pandemic’s full operational and financial effects were uncertain.
- Key risks include flight-test delays, safety and regulatory approvals, operating initially with one flight system, customer cancellations and refundable deposits, limited suppliers, financing needs, and the still-emerging market for commercial human spaceflight. The company warned that expenses are expected to increase as it develops and commercializes its program.
- Two material weaknesses in internal control over financial reporting remained under remediation: insufficient personnel for the close and reporting process, and the need to strengthen IT and application controls. Management judged disclosure controls effective at March 31 after considering additional procedures.
- There was no formal revenue or earnings guidance in the provided filing text. Executives and eligible directors voluntarily agreed to temporary compensation reductions for May 11 through June 30, 2020.
Most important facts for investors to verify
- Progress on flight testing, FAA requirements, and the timing and cost of starting passenger service.
- Actual cash burn, liquidity runway, and whether COVID-19 or development delays change the funding outlook.
- Conversion of reservations and refundable deposits into completed flights and recognized revenue.
- Completion costs and schedule for the two vehicles under construction, and the capacity and flight rate achievable with the initial fleet.
- Remediation of the two material weaknesses and any dilution or share overhang from warrants and equity awards.