Virgin Galactic Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; dollar amounts below are in U.S. dollars.
Business context
Virgin Galactic is developing reusable spacecraft and related services for commercial human spaceflight and research payloads. Human spaceflight operations had not yet launched during the period; revenue remained minimal and came primarily from Future Astronaut membership fees and engineering or payload-related services.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $0.36 million | $0.57 million | $0.68 million | $0.57 million |
| Operating expenses | $110.1 million | $74.5 million | $201.8 million | $155.7 million |
| Operating loss | $109.7 million | $73.9 million | $201.1 million | $155.2 million |
| Net loss | $110.7 million | $94.0 million | $203.8 million | $223.7 million |
| Basic and diluted loss per share | $0.43 | $0.39 | $0.79 | $0.94 |
Gross margin is not presented in the filing’s revised expense format. Revenue was immaterial relative to costs, so operating and net losses remained substantial.
- Costs: Q2 research and development rose 80% to $62.3 million, primarily from contract labor and materials, facilities, and employee costs. Selling, general and administrative expense rose 21% to $44.7 million. For H1, R&D increased 64% to $114.2 million.
- Cash flow: H1 operating cash use was $153.0 million, versus $113.5 million in 2021. Investing cash use was $385.5 million, mainly purchases of marketable securities; capital expenditures were $6.3 million. Financing provided $358.5 million, principally from the convertible notes, net of capped-call costs.
- Liquidity: At June 30, cash and cash equivalents were $329.9 million, restricted cash $40.2 million, and marketable securities $752.5 million, for combined cash, restricted cash and securities of about $1.123 billion. Management said available resources should fund operations for at least 12 months from issuance of the statements.
- Debt: The company issued $425 million of 2.50% senior unsecured convertible notes due 2027; carrying value net of issuance costs was $414.6 million. It paid $52.3 million for capped calls intended to limit dilution or offset certain conversion-related cash payments. The notes’ reported fair value was $271.2 million.
- Balance sheet: Total liabilities were $617.9 million and stockholders’ equity was $650.6 million. Customer deposits were $104.6 million at quarter-end.
Changes versus prior comparable periods
Q2 revenue declined 37%, while operating expenses rose 48% and net loss widened by $16.7 million. Higher R&D and corporate costs drove the operating-loss increase; interest expense also rose following the 2027 Notes issuance. H1 revenue increased 18%, but operating loss widened by $45.9 million. H1 net loss narrowed year over year, partly because 2021 included a $69.1 million non-cash warrant remeasurement expense; no warrants were outstanding in 2022. Marketable securities also generated $7.6 million of unrealized losses in other comprehensive income during H1 2022.
Outlook, risks and other notable items
- Commercial human spaceflight service was expected to begin in Q2 2023, after planned vehicle maintenance, enhancements and further flight testing. The company cited supplier-delivery risks that could affect timing.
- VSS Imagine test flights were expected in mid-2023, with private astronaut service as soon as Q4 2023; management noted testing variability could push service into early 2024. Initial operations were expected to rely on one spaceship and one mothership, constraining flight capacity.
- As of June 30, the company reported about 800 reservations and approximately $104.8 million in customer deposits. Tickets sold represented approximately $212 million of expected future revenue upon completed flights. The base price for consumer tickets reopened in 2021 was $450,000 per seat.
- Management expects expenses and funding needs to increase as it develops vehicles, expands manufacturing and prepares commercial operations. It said longer-term spending and certain next-generation carrier-aircraft costs remain uncertain; additional securities offerings or debt refinancing may be needed if available resources prove insufficient.
- Key risks include flight-test delays, spacecraft safety and reliability, supplier and manufacturing constraints, regulatory approvals, customer demand, and the ability to scale the fleet and achieve profitability. The filing reported a securities class action and related derivative claims alleging misleading statements about safety and the commercial flight program; the company said it intended to defend the class action. Management stated pending proceedings were not expected to have a material effect, but outcomes remain uncertain.
- After quarter-end, the company entered a lease for two manufacturing and operations hangars in Mesa, Arizona, with an approximately ten-year initial term and average annual base rent of about $3.0 million.
Important facts for investors to verify
- Whether maintenance, enhancements and flight tests are completed on schedule, and whether commercial service begins in Q2 2023.
- Whether VSS Imagine’s testing and planned service timing meet the company’s stated expectations.
- Actual cash burn, future development and fleet-expansion costs, and the duration of available liquidity.
- Conversion, dilution and settlement implications of the $425 million notes and the capped-call arrangements.
- Progress converting reservations and deposits into completed flights and recognized revenue, and developments in the pending litigation.