Virgin Galactic Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. The October 25, 2019 business combination was accounted for as a reverse recapitalization, so historical operating results primarily represent the Virgin Galactic businesses before the transaction.
Business context
Virgin Galactic is developing reusable spacecraft and related systems for commercial human spaceflight and research payloads. It had not begun paid passenger flights by year-end. Its 2019 revenue came from payload flights, engineering services and sponsorships. The company expected initial commercial operations to use one SpaceShipTwo and one carrier aircraft, following completion of testing and remaining FAA requirements.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $3.8 million | $2.8 million |
| Gross profit / margin | $1.8 million / 47% | $1.6 million / 58% |
| Operating loss | $(213.3) million | $(167.2) million |
| Net loss | $(210.9) million | $(138.1) million |
| Operating cash flow | $(203.6) million | $(145.7) million |
| Investing cash flow | $(19.4) million | $(10.6) million |
- Revenue increased 33%, mainly from a February 2019 payload flight and increased engineering work under U.S. government contracts. 2019 revenue included approximately $0.8 million from spaceflight operations, $2.8 million from engineering services and $0.2 million from sponsorships.
- SG&A rose 61% to $82.2 million, in part due to corporate growth and preparation to operate as a public company. R&D rose 13% to $132.9 million; spaceflight-system development costs were $114.5 million.
- Gross margin declined 11 percentage points as revenue mix shifted toward lower-margin engineering services and payload flights. The 2018 net loss included $28.0 million of nonrecurring supplier-settlement income; 2019 other income was $0.1 million.
- At year-end, cash and cash equivalents were $480.4 million and restricted cash was $12.3 million. Total current assets were $536.7 million and current liabilities $115.8 million. Total liabilities were $138.0 million; the filing does not identify material conventional borrowings, with reported liabilities largely including customer deposits and lease obligations.
- Financing cash flow was $634.3 million, including $500.0 million from the business-combination transaction and $20.0 million from Boeing, offset in part by transaction costs. Management estimated available cash would fund operating expenses and capital requirements for at least 24 months, subject to assumptions and risks.
- Customer deposits were $83.4 million at year-end. More than 600 reservations were backed by over $80 million in deposits and represented approximately $120 million of potential future ticket revenue; deposits were largely refundable. Operating lease commitments totaled $48.8 million undiscounted.
Changes, outlook and key risks
- Net loss widened by $72.8 million year over year, while operating cash use increased by $57.9 million. The loss increase reflects higher SG&A and R&D, as well as the absence of the prior-year supplier settlement gain.
- Management expected to submit final integrated vehicle performance results to the FAA in the first half of 2020 and anticipated commercial launch after remaining flight testing and regulatory steps. The company planned to expand to five SpaceShipTwo vehicles by the end of 2023; these are expectations, not assured outcomes. The two additional vehicles then under construction were expected to require $40–$60 million to complete.
- At February 23, 2020, the company reported 7,957 reservation inquiries since the December 2018 spaceflight. Inquiries were not deposits or booked revenue. Management expected ticket prices to increase temporarily when sales resumed and anticipated premium options.
- Principal risks include delays or failure to complete testing or obtain FAA clearance, safety incidents, operating initially with a single flight system, inability to achieve planned flight cadence or passenger capacity, and failure to convert refundable reservations and inquiries into revenue. The commercial human-spaceflight market remains unproven; demand is discretionary and competition includes Blue Origin.
- The 2014 SpaceShipTwo test-flight accident, involving an earlier vehicle operated by a third-party contractor, killed one pilot and injured another. The company described design and procedural changes but emphasized that safety risks cannot be eliminated. Regulatory requirements may evolve, and New Mexico’s spaceflight informed-consent law was scheduled to expire in July 2021 unless extended.
- The company disclosed two material weaknesses in internal financial reporting controls: insufficient personnel for the close and reporting process, and a need to strengthen IT and application controls. Management was implementing remediation; the financial statements received an unqualified audit opinion.
- Other notable exposures include dependence on limited suppliers, leased facilities, third-party technology licenses and Virgin brand rights. The Virgin trademark agreement includes termination conditions; loss of the license could require significant rebranding. Pending legal matters were not considered material by management, though a wage-and-hour claim sought unspecified damages.
Important facts for investors to verify
- Whether FAA testing and approval milestones were achieved and when paid passenger operations actually began.
- Whether reservations and inquiries converted into nonrefundable bookings, and the cancellation, refund and deposit terms.
- Actual flight frequency, passenger capacity, ticket pricing, unit economics and cash burn compared with management’s plans.
- Progress and cost of completing additional vehicles, and whether the stated cash runway remains adequate.
- Remediation of the two internal-control material weaknesses and any subsequent reporting or audit issues.