Virgin Galactic 10Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-38202


Virgin Galactic Holdings, Inc.
(Exact name of registrant as specified in its charter)


Delaware						85-3608069
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


1700 Flight Way Tustin California						92782
(Address of Principal Executive Offices)						(Zip Code)


(949) 774-7640
(Registrant’s telephone number, including area code)


N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.0001 par value per share

SPCE

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of October 31, 2023, there were 399,715,289 shares of the Company’s common stock outstanding.

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VIRGIN GALACTIC HOLDINGS, INC.

TABLE OF CONTENTS


		Page
	PART I - FINANCIAL INFORMATION

	Cautionary Note Regarding Forward-Looking Statements	2

Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders' Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		31

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements (including within the meaning of the Private Securities Litigation Reform Act of 1995) concerning us and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of management, as well as assumptions made by, and information currently available to management.

Forward-looking statements may be accompanied by words such as “achieve,” “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “future,” “grow,” “increase,” “intend,” “may,” “opportunity,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “strategy,” “target,” “will,” “would,” or similar words, phrases, or expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:

•any delay in future commercial flights of our spaceflight fleet;

•our ability to successfully develop and test our next generation vehicles, and the time and costs associated with doing so;

•the safety of our spaceflight systems;

•the development of the markets for commercial spaceflight and commercial research and development payloads;

•our ability to effectively market and sell spaceflights;

•our ability to convert our backlog or inbound inquiries into revenue;

•our anticipated full passenger capacity;

•our ability to achieve or maintain profitability;

•delay in development or the manufacture of spaceflight systems;

•our ability to supply our technology to additional market opportunities;

•our expected capital requirements and the availability of additional financing;

•our ability to attract or retain highly qualified personnel;

•the effect of terrorist activity, armed conflict (including any escalation of hostility arising out of the conflict between Russia and Ukraine or other geopolitical conflicts), natural disasters or pandemic diseases on the economy generally, on our future financial or operational results, or our access to additional financing;

•consumer preferences and discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions;

•extensive and evolving government regulation that impact the way we operate;

•risks associated with international expansion;

•our ability to maintain effective internal control over financial reporting and disclosure and procedures; and

•our ability to continue to use, maintain, enforce, protect and defend our owned and licensed intellectual property, including the Virgin brand.

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Additional factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part I, Item 1.“Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report on Form 10-K") and in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited, and we cannot guarantee future results. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Each of the terms the “Company,” “Virgin Galactic,” “we,” “our,” “us” and similar terms used herein refer collectively to Virgin Galactic Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated.

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PART I. FINANCIAL INFORMATION

VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Unaudited; in thousands, except share and per share amounts)


	September 30, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	231,030	$	302,291
Restricted cash	38,031		40,336
Marketable securities, short-term	766,047		606,716
Inventories	17,062		24,043
Prepaid expenses and other current assets	24,051		28,228
Total current assets	1,076,221		1,001,614
Marketable securities, long-term	53,130		30,392
Property, plant and equipment, net	74,066		53,658

Other non-current assets	64,567		54,274
Total assets	$	1,267,984	$	1,139,938
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	27,986	$	16,326
Accrued liabilities	49,888		61,848
Customer deposits	97,923		102,647
Other current liabilities	4,342		3,232
Total current liabilities	180,139		184,053
Non-current liabilities:
Convertible senior notes, net	417,338		415,720
Other long-term liabilities	71,148		59,942
Total liabilities	668,625		659,715
Commitments and contingencies (Note 13)
Stockholders' Equity
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding	—		—
Common stock, $0.0001 par value; 700,000,000 shares authorized; 399,581,904 and 275,397,229 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	40		28
Additional paid-in capital	2,622,776		2,111,316
Accumulated deficit	(2,022,148)		(1,623,795)
Accumulated other comprehensive loss	(1,309)		(7,326)
Total stockholders' equity	599,359		480,223
Total liabilities and stockholders' equity	$	1,267,984	$	1,139,938

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited; in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue	$	1,728	$	767	$	3,991	$	1,443

Operating expenses:
Spaceline operations	25,648		590		26,200		737
Research and development	44,848		97,411		241,292		211,578
Selling, general and administrative	42,218		46,113		144,020		127,820
Depreciation and amortization	3,286		2,214		9,723		7,981
Total operating expenses	116,000		146,328		421,235		348,116

Operating loss	(114,272)		(145,561)		(417,244)		(346,673)

Interest income	12,856		3,524		28,590		6,327
Interest expense	(3,221)		(3,293)		(9,648)		(8,924)
Other income (expense), net	86		(203)		164		7
Loss before income taxes	(104,551)		(145,533)		(398,138)		(349,263)
Income tax expense	53		21		215		69
Net loss	(104,604)		(145,554)		(398,353)		(349,332)
Other comprehensive income (loss):
Foreign currency translation adjustment	(60)		(181)		9		(314)
Unrealized income (loss) on marketable securities	1,022		(585)		6,008		(8,227)
Total comprehensive loss	$	(103,642)	$	(146,320)	$	(392,336)	$	(357,873)


Net loss per share:
Basic and diluted	$	(0.28)	$	(0.55)	$	(1.26)	$	(1.34)

Weighted-average shares outstanding:
Basic and diluted	375,853		263,907		316,198		260,255

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited; in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total
	Shares	Amount
Balance at December 31, 2021	258,166,417	$	26	$	2,019,750	$	(1,123,643)	$	(1,869)	$	894,264
Net loss	—	—		—		(93,057)		—		(93,057)
Other comprehensive loss	—	—		—		—		(5,805)		(5,805)
Stock-based compensation	—	—		10,895		—		—		10,895
Issuance of common stock pursuant to stock-based awards, net of withholding taxes	307,471	—		(1,882)		—		—		(1,882)
Purchase of capped call	—	—		(52,318)		—		—		(52,318)
Balance at March 31, 2022	258,473,888	26		1,976,445		(1,216,700)		(7,674)		752,097
Net loss	—	—		—		(110,721)		—		(110,721)
Other comprehensive loss	—	—		—		—		(1,970)		(1,970)
Stock-based compensation	—	—		12,083		—		—		12,083
Issuance of common stock pursuant to stock-based awards, net of withholding taxes	216,758	—		(914)		—		—		(914)
Balance at June 30, 2022	258,690,646	26		1,987,614		(1,327,421)		(9,644)		650,575
Net loss	—	—		—		(145,554)		—		(145,554)
Other comprehensive loss	—	—		—		—		(766)		(766)
Stock-based compensation	—	—		11,510		—		—		11,510
Issuance of common stock pursuant to stock-based awards, net of withholding taxes	202,949	—		(633)		—		—		(633)
Issuance of common stock pursuant to at-the-market offering	15,587,600	1		99,573		—		—		99,574
Transaction costs	—	—		(1,163)		—		—		(1,163)
Balance at September 30, 2022	274,481,195	$	27	$	2,096,901	$	(1,472,975)	$	(10,410)	$	613,543

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited; in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Gain (Loss)		Total
	Shares	Amount
Balance at December 31, 2022	275,397,229	$	28	$	2,111,316	$	(1,623,795)	$	(7,326)	$	480,223
Net loss	—	—		—		(159,385)		—		(159,385)
Other comprehensive income	—	—		—		—		3,136		3,136
Stock-based compensation	—	—		12,976		—		—		12,976
Issuance of common stock pursuant to stock-based awards, net of withholding taxes	508,159	—		(1,870)		—		—		(1,870)
Issuance of common stock pursuant to at-the-market offering	5,759,499	—		32,044		—		—		32,044
Transaction costs	—	—		(343)		—		—		(343)
Balance at March 31, 2023	281,664,887	28		2,154,123		(1,783,180)		(4,190)		366,781
Net loss	—	—		—		(134,364)		—		(134,364)
Other comprehensive income	—	—		—		—		1,919		1,919
Stock-based compensation	—	—		11,859		—		—		11,859
Issuance of common stock pursuant to stock-based awards, net of withholding taxes	485,076	1		(447)		—		—		(446)
Issuance of common stock pursuant to at-the-market offering	54,610,571	5		241,388		—		—		241,393
Transaction costs	—	—		(2,601)		—		—		(2,601)
Balance at June 30, 2023	336,760,534	34		2,404,322		(1,917,544)		(2,271)		484,541
Net loss	—	—		—		(104,604)		—		(104,604)
Other comprehensive income	—	—		—		—		962		962
Stock-based compensation	—	—		10,763		—		—		10,763
Issuance of common stock pursuant to stock-based awards, net of withholding taxes	385,122	—		(684)		—		—		(684)
Issuance of common stock pursuant to at-the-market offering	62,436,248	6		210,702		—		—		210,708
Transaction costs	—	—		(2,327)		—		—		(2,327)
Balance at September 30, 2023	399,581,904	$	40	$	2,622,776	$	(2,022,148)	$	(1,309)	$	599,359

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)


	Nine Months Ended September 30,
		2023		2022
Cash flows from operating activities:
Net loss		$	(398,353)	$	(349,332)
Stock-based compensation		35,598		34,488
Depreciation and amortization		9,723		7,981
Amortization of debt issuance costs		1,618		1,466
Other non-cash items		(6,500)		10,256
Change in operating assets and liabilities:
Inventories		3,996		6,817
Other current and non-current assets		10,297		2,253
Accounts payable and accrued liabilities		(2,941)		23,828
Customer deposits		(4,724)		13,108
Other current and long-term liabilities		(1,598)		136
Net cash used in operating activities		(352,884)		(248,999)
Cash flows from investing activities:
Capital expenditures		(25,941)		(12,306)
Purchases of marketable securities		(872,950)		(604,945)
Proceeds from maturities and calls of marketable securities		702,346		294,612
Net cash used in investing activities		(196,545)		(322,639)
Cash flows from financing activities:
Payments of finance lease obligations		(175)		(132)
Proceeds from convertible senior notes		—		425,000
Debt issuance costs		—		(11,278)
Purchase of capped call		—		(52,318)
Repayment of commercial loan		—		(310)
Proceeds from issuance of common stock		484,145		99,573
Proceeds from issuance of common stock pursuant to stock options exercised		—		49
Withholding taxes paid on behalf of employees on net settled stock-based awards		(3,001)		(3,479)
Transaction costs related to issuance of common stock		(5,106)		(1,137)
Net cash provided by financing activities		475,863		455,968
Net decrease in cash, cash equivalents and restricted cash		(73,566)		(115,670)
Cash, cash equivalents and restricted cash at beginning of period		342,627		550,030
Cash, cash equivalents and restricted cash at end of period		$	269,061	$	434,360

Cash and cash equivalents		$	231,030	$	394,032
Restricted cash		38,031		40,328
Cash, cash equivalents and restricted cash		$	269,061	$	434,360

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(1) Description of Business and Basis of Presentation

Virgin Galactic Holdings, Inc., together with its consolidated subsidiaries ("Virgin Galactic" or the "Company"), is focused on the development, manufacture and operation of spaceships and related technologies for the purpose of conducting commercial spaceflight and flying commercial research and development payloads into space.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Certain information and footnote disclosures, normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), have been condensed or omitted pursuant to such rules and regulations. However, in management's opinion, the condensed consolidated financial statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods presented.

The operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Statement of Operations Presentation

In July 2023, the Company concluded that technological feasibility had been achieved for its initial spaceship, VSS Unity, and mothership carrier aircraft, VMS Eve, which together comprise the Company’s current spaceflight system. As a result, future costs associated with this spaceflight system, including the manufacture of related rocket motors, will no longer qualify as research and development activities.

Following the launch of commercial service and achievement of technological feasibility, the Company began presenting the operating expenses supporting the Company’s commercial spaceline activities as spaceline operations expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Expenses incurred prior to the achievement of technological feasibility were classified as research and development and selling, general and administrative expenses. Spaceline operations expense includes costs associated with commercial spaceflight services and production costs that are not eligible for capitalization. Spaceline operations expense also includes costs to support the Company’s Future Astronaut Community and costs related to payload cargo and engineering services, which were previously presented as customer experience expense.

(2) Cash, Cash Equivalents and Marketable Securities

The Company maintains certain cash balances restricted as to withdrawal or use. Restricted cash consists of cash deposits received from future astronauts that are contractually restricted for operational use until the condition of carriage is signed or the deposits are refunded.

The amortized cost, unrealized loss and estimated fair value of the Company's cash, cash equivalents and marketable securities are as follows:

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements


	September 30, 2023
	Amortized Cost		Gross Unrealized Loss		Fair Value
	(In thousands)
Cash and cash equivalents:
Cash and restricted cash	$	33,697	$	—	$	33,697
Money market	235,364		—		235,364
Marketable securities:
U.S. treasuries	302,742		(21)		302,721
Corporate bonds	517,741		(1,285)		516,456
	$	1,089,544	$	(1,306)	$	1,088,238


	December 31, 2022
	Amortized Cost		Gross Unrealized Loss		Fair Value
	(In thousands)
Cash and cash equivalents:
Cash and restricted cash	$	51,651	$	—	$	51,651
Money market	249,249		—		249,249
Certificate of deposits	41,727		—		41,727
Marketable securities:
U.S. treasuries	79,570		(53)		79,517
Corporate bonds	564,853		(7,262)		557,591
	$	987,050	$	(7,315)	$	979,735

Interest receivable of $4.5 million is included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022.

The Company recognizes amortization and accretion of purchase premiums and discounts on its marketable securities within interest income in the accompanying condensed consolidated statements of operations and comprehensive loss. The Company recognized $6.0 million in accretion income, net and $1.5 million in amortization expense, net for its marketable securities for the three months ended September 30, 2023 and 2022, respectively. The Company recognized $8.5 million in accretion income, net and $5.5 million in amortization expense, net for its marketable securities for the nine months ended September 30, 2023 and 2022, respectively.

The following table presents the contractual maturities of the Company's marketable securities as of September 30, 2023:


	September 30, 2023
	Amortized Cost		Estimated Fair Value
	(In thousands)
Matures within one year	$	767,170	$	766,047
Matures in one to two years	53,313		53,130
	$	820,483	$	819,177

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(3) Inventories

Inventories are comprised of the following:


	September 30, 2023		December 31, 2022
	(In thousands)
Raw materials	$	10,822	$	15,033
Work-in-process	1,424		—
Spare parts	4,816		9,010
	$	17,062	$	24,043

(4) Property, Plant and Equipment

Property, plant and equipment consists of the following:


		September 30, 2023		December 31, 2022
	(In thousands)
Land		$	1,302	$	1,302
Buildings		9,092		9,117
Machinery and equipment		38,738		37,223
Information technology software and equipment		38,400		33,387
Flight equipment and rotables		3,825		195
Leasehold improvements		36,369		31,086
Construction in progress		18,367		4,339
		146,093		116,649
Less: accumulated depreciation and amortization		72,027		62,991
		$	74,066	$	53,658

The following table sets forth a summary of depreciation and amortization expense related to property, plant and equipment:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Spaceline operations	$	1,516	$	—	$	1,516	$	—
Research and development	436		395		2,897		2,896
Selling, general and administrative	1,334		1,819		5,310		5,085
	$	3,286	$	2,214	$	9,723	$	7,981

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(5) Leases

The components of expense related to leases are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Operating lease cost	$	3,382	$	2,553	$	8,992	$	6,622
Variable lease cost	1,559		1,760		2,844		4,654
Short-term lease cost	127		—		139		—

Finance lease cost:
Amortization of assets under finance leases	68		42		199		100
Interest on finance lease liabilities	21		11		60		20
Total finance lease cost	89		53		259		120
Total lease cost	$	5,157	$	4,366	$	12,234	$	11,396

The components of supplemental cash flow information related to leases are as follows:


	Nine Months Ended September 30,
	2023			2022
	(In thousands, except term and rate data)
Cash Flow Information:
Operating cash flows for operating leases	$	7,050		$	7,980
Operating cash flows for finance leases	$	60		$	20
Financing cash flows for finance leases	$	175		$	132
Non-cash Activity:
Assets acquired in exchange for lease obligations:
Operating leases	$	13,814		$	16,338
Finance leases	$	219		$	230
Other Information:
Weighted average remaining lease term:
Operating leases (in years)	10.0			10.8
Finance leases (in years)	3.2			2.8
Weighted average discount rates:
Operating leases	12.1		%	12.1		%
Finance leases	12.9		%	11.3		%

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

The supplemental balance sheet information related to leases is as follows:


	September 30, 2023		December 31, 2022
	(In thousands)
Operating Leases:
Long-term right-of-use assets	$	59,570	$	48,463

Short-term operating lease liabilities	$	4,139	$	3,020
Long-term operating lease liabilities	69,592		56,645
Total operating lease liabilities	$	73,731	$	59,665

Right-of-use assets are presented in other non-current assets and lease liabilities are presented in other current liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets.

(6) Accrued Liabilities

The components of accrued liabilities are as follows:


	September 30, 2023		December 31, 2022
	(In thousands)
Accrued compensation	$	29,418	$	26,554
Accrued manufacturing sub-contractor and contract labor costs	6,059		19,398
Other accrued expenses	14,411		15,896
	$	49,888	$	61,848

(7) Convertible Senior Notes

On January 19, 2022, the Company completed an offering of $425 million aggregate principal amount of convertible senior notes (the "2027 Notes"). The 2027 Notes are senior unsecured obligations of the Company and bear interest at a fixed rate of 2.50% per year. Interest is payable in cash semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2022. The 2027 Notes mature on February 1, 2027 unless earlier repurchased, redeemed or converted.

The net carrying value of the 2027 Notes is as follows:


	September 30, 2023		December 31, 2022
	(In thousands)
Principal	$	425,000	$	425,000
Less: unamortized debt issuance costs	7,662		9,280
Net carrying amount	$	417,338	$	415,720

During each of the three months ended September 30, 2023 and 2022, the Company recognized $3.2 million of interest expense on the 2027 Notes, including $0.5 million of amortized debt issuance costs.

During the nine months ended September 30, 2023 and 2022, the Company recognized $9.6 million and $8.9 million of interest expense on the 2027 Notes, respectively, including $1.6 million and $1.5 million of amortized debt issuance costs, respectively.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(8) Income Taxes

Income tax expense was $53,000 and $21,000 for the three months ended September 30, 2023 and 2022, respectively. Income tax expense was $215,000 and $69,000 for the nine months ended September 30, 2023 and 2022, respectively. The effective income tax rate was nil for three and nine months ended September 30, 2023 and 2022. The effective tax rate differs from the U.S. statutory rate primarily due to a full valuation allowance against net deferred tax assets where it is more likely than not that some or all of the deferred tax assets will not be realized.

(9) Stockholders' Equity

In August 2022, the Company entered into a distribution agency agreement with Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC (each, an "Agent" and collectively, the "Agents") providing for the offer and sale of up to $300 million of shares of the Company's common stock from time to time through the Agents, acting as sales agents, or directly to one or more of the Agents, acting as principal(s), through an "at the market offering" program (the "2022 ATM Program").

The Company completed the 2022 ATM Program in June 2023, selling a total of 59.4 million shares of common stock and generating $300.0 million in gross proceeds since its inception, before deducting $3.0 million in underwriting discounts, commissions and other expenses.

In June 2023, the Company entered into a distribution agency agreement with the Agents providing for the offer and sale of up to $400 million of shares of the Company's common stock from time to time through the Agents, acting as sales agents, or directly to one or more of the Agents, acting as principal(s), through an "at the market offering" program (the "2023 ATM Program").

During the three months ended September 30, 2023, the Company sold 62.4 million shares of common stock under the 2023 ATM Program and generated $210.7 million in gross proceeds, before deducting $2.1 million in underwriting discounts, commissions and other expenses.

During the nine months ended September 30, 2023, the Company sold 79.7 million shares of common stock under the 2023 ATM Program and generated $287.5 million in gross proceeds, before deducting $2.9 million in underwriting discounts, commissions and other expenses.

(10) Earnings Per Share

The following table presents net loss per share and related information:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share amounts)
Basic and diluted:
Net loss	$	(104,604)	$	(145,554)	$	(398,353)	$	(349,332)
Weighted average common shares outstanding	375,853		263,907		316,198		260,255
Basic and diluted net loss per share	$	(0.28)	$	(0.55)	$	(1.26)	$	(1.34)

Basic and diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period. The computation of diluted net loss per share excludes the effect of all potential common shares outstanding as their impact would have been anti-dilutive.

The Company has excluded stock-based awards and shares issuable upon conversion of the 2027 Notes from the diluted loss per share calculation because their effect was anti-dilutive. The total number of shares excluded for the three and nine months ended September 30, 2023 were 45.0 million. The total number of shares excluded for the three and nine months ended September 30, 2022 were 42.2 million.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(11) Stock-Based Plans and Compensation

Equity Incentive Plans

The Company maintains two equity incentive plans -- the Amended and Restated Virgin Galactic Holdings, Inc. 2019 Incentive Award Plan (the "2019 Plan") and the Virgin Galactic Holdings, Inc. 2023 Employment Inducement Incentive Award Plan (the "Inducement Plan").

Pursuant to the 2019 Plan, the Company has the ability to grant incentive stock options and non-qualified stock options, restricted stock awards, stock appreciation rights, restricted stock units ("RSUs") and other stock or cash-based awards to employees and other service providers of the Company and its subsidiaries and members of the Company’s board of directors. The 2019 Plan, as amended and restated, was adopted by the Company's board of directors and became effective in April 2023, subject to the approval of the Company’s stockholders, and was approved by the Company’s stockholders in June 2023. Prior to the amendment and restatement of the Virgin Galactic Holdings, Inc. 2019 Incentive Award Plan (the “Original Plan”), the Company initially reserved 21,208,755 shares of common stock for issuance. The amendment and restatement of the Original Plan increased the number of shares available for issuance by 8,200,000 shares.

Pursuant to the Inducement Plan, the Company has the ability to grant non-qualified stock options, restricted stock awards, stock appreciation rights, restricted stock units and other stock or cash-based awards to any prospective employee in connection with their commencement of employment with the Company, who (i) is being hired by the Company or (ii) is being rehired following a bona fide period of interruption of employment by the Company, as an inducement material to their commencing employment. The Company's board of directors adopted the Inducement Plan in June 2023 and reserved 2,800,000 shares of common stock for the issuance of awards thereunder.

Stock-Based Compensation

Pursuant to both the 2019 Plan and the Inducement Plan, the Company has the ability to grant performance stock units ("PSUs") and performance stock options ("PSOs"). PSUs are RSUs that vest based on achievement of specified performance criteria. PSOs are stock options that vest based on achievement of specified performance criteria.

A summary of the components of stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Stock option and PSO expense:
Spaceline operations	$	282	$	—	$	282	$	—
Research and development	318		596		1,343		2,020
Selling, general and administrative	1,181		2,113		4,200		6,022
Total stock option and PSO expense	1,781		2,709		5,825		8,042

RSU and PSU expense:
Spaceline operations	1,545		—		1,545		—
Research and development	1,579		2,756		6,587		8,400
Selling, general and administrative	5,858		6,045		21,641		18,046
Total RSU and PSU expense	8,982		8,801		29,773		26,446
Total stock-based compensation expense	$	10,763	$	11,510	$	35,598	$	34,488

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

As of September 30, 2023, the Company had unrecognized stock-based compensation expense of $4.4 million for stock options, which is expected to be recognized over a weighted-average period of 0.9 years. Unrecognized stock-based compensation expense as of September 30, 2023 for RSUs and PSUs totaled $49.8 million and $6.7 million, respectively, which are both expected to be recognized over a weighted-average period of 1.1 years.

(12) Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company estimates fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which is categorized in one of the following levels:

•Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date;

•Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability; and

•Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The following tables present the Company's financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy:


	September 30, 2023
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money market	$	235,364	$	—	$	—	$	235,364

U.S. treasuries	302,721		—		—		302,721
Corporate bonds	—		516,456		—		516,456
Total assets at fair value	$	538,085	$	516,456	$	—	$	1,054,541


	December 31, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money market	$	249,249	$	—	$	—	$	249,249
Certificates of deposit	41,727		—		—		41,727
U.S. treasuries	79,517		—		—		79,517
Corporate bonds	—		557,591		—		557,591
Total assets at fair value	$	370,493	$	557,591	$	—	$	928,084

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

The following tables present the Company's financial liabilities that are recorded at amortized cost, segregated among the appropriate levels within the fair value hierarchy:


	September 30, 2023
	Level 1		Level 2		Level 3		Total
	(In thousands)
Liabilities:
2027 Notes	$	—	$	156,532	$	—	$	156,532
Total liabilities at fair value	$	—	$	156,532	$	—	$	156,532


	December 31, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Liabilities:
2027 Notes	$	—	$	193,439	$	—	$	193,439
Total liabilities at fair value	$	—	$	193,439	$	—	$	193,439

(13) Commitments and Contingencies

Leases

The Company has certain non-cancelable operating leases primarily for its premises. These leases generally contain renewal options for periods ranging from 3 to 20 years and require the Company to pay all executory costs, such as maintenance and insurance. Certain lease arrangements have rent free periods or escalating payment provisions, and the Company recognizes rent expense for such arrangements on a straight line basis.

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum finance lease payments as of September 30, 2023 are as follows:


	Operating Leases		Finance Leases
	(In thousands)
2023 (for the remaining period)	$	2,854	$	78
2024	12,423		247
2025	12,771		218
2026	12,882		167
2027	12,601		52
Thereafter	77,395		20
Total payments	130,926		782
Less: present value discount/imputed interest	57,195		142
Present value of lease liabilities	$	73,731	$	640

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

Legal Proceedings

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company applies accounting for contingencies to determine when and how much to accrue for and disclose related to legal and other contingencies. Accordingly, the Company discloses contingencies deemed to be reasonably possible and accrues loss contingencies when, in consultation with legal advisors, it is concluded that a loss is probable and reasonably estimable. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, beyond that provided at September 30, 2023, would not be material to the Company’s consolidated financial position, results of operations or cash flows. However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from legal proceedings, lawsuits and other claims could differ materially from those projected.

Lavin v. the Company

On May 28, 2021, a class action complaint was filed against the Company in the Eastern District of New York captioned Lavin v. Virgin Galactic Holdings, Inc., Case No. 1:21-cv-03070. In September 2021, the Court appointed Robert Scheele and Mark Kusnier as co-lead plaintiffs for the purported class. Co-lead plaintiffs amended the complaint in December 2021, asserting violations of Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 against the Company and certain of its current and former officers and directors on behalf of a putative class of investors who purchased the Company's common stock between July 10, 2019 and October 14, 2021.

The amended complaint alleges, among other things, that the Company and certain of its current and former officers and directors made false and misleading statements and failed to disclose certain information regarding the safety of the Company's ships and success of its commercial flight program. Co-lead plaintiffs seek damages, interest, costs, expenses, attorneys' fees and other unspecified equitable relief. The defendants moved to dismiss the amended complaint and, on November 7, 2022, the court granted in part and denied in part the defendants’ motion and gave the plaintiffs leave to file a further amended complaint. Plaintiffs’ filed a second amended complaint on December 12, 2022. The second amended complaint contains many of the same allegations as in the first amended complaint. The defendants moved to dismiss the second amended complaint on February 24, 2023 and on August 8, 2023, the court granted in part and denied in part the defendants’ motion. On August 22, 2023, the plaintiffs filed a motion asking the court to reconsider its August 8, 2023 order and to certify an interlocutory appeal, or in the alternative to enter a final judgment. The motion was fully briefed as of October 10, 2023. The Company intends to continue to vigorously defend against this matter.

Spiteri, Grenier, Laidlaw, St. Jean, and D. Abughazaleh derivatively on behalf of the Company vs. Certain Current and Former Officers and Directors

On February 21, 2022, March 1, 2022, September 21, 2022, and December 13, 2022, four alleged shareholders filed separate derivative complaints purportedly on behalf of the Company against certain of its current and former officers and directors in the Eastern District of New York captioned Spiteri v. Branson et al., Case No. 1:22-cv-00933, Grenier v. Branson et al., Case No. 1:22-cv-01100, Laidlaw v. Branson et al., Case No. 1:22-cv-05634, and St. Jean v. Branson et al., Case No. 1:22-cv-7551, respectively. On February 13, 2023, an alleged shareholder filed a derivative complaint purportedly on behalf of the Company against certain of its current and former officers and directors in the District of Delaware captioned Abughazaleh v. Branson et al., Case No. 23-cv-00156. Collectively, the complaints assert violations of Sections 10(b), 14(a), and 21D of the Securities Exchange Act of 1934 and claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, contribution and indemnification, and unjust enrichment arising from substantially similar allegations as those contained in the securities class action described above. The complaints seek an unspecified sum of damages, interest, restitution, expenses, attorneys’ fees and other equitable relief. The cases are at a preliminary stage.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(14) Supplemental Cash Flow Information


	Nine Months Ended September 30,
	2023		2022
	(In thousands)
Supplemental disclosure of cash flow information:
Cash payments for:
Income taxes	$	533	$	34
Interest	10,625		5,667

Supplemental disclosure of non-cash investing and financing activities:
Unpaid property, plant and equipment	$	2,512	$	1,356
Transfer of inventory to rotables in property, plant and equipment	2,681		—
Issuance of common stock through RSUs vested	8,740		9,557

(15) Subsequent Events

On November 7, 2023, the Company announced a workforce reduction of approximately 185 employees, constituting approximately 18% of the Company’s workforce. The Company is taking this action to decrease its costs and strategically realign its resources. The Company currently estimates that it will incur charges associated with the workforce reduction of approximately $5 million, primarily related to employee severance payments, benefits and related termination costs. The Company expects to recognize the majority of these charges in the fourth quarter of 2023 and that the reduction in force will be substantially complete during the first quarter of 2024.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references in this section to the “Company,” "Virgin Galactic," “we,” “us,” or “our” refer to Virgin Galactic Holdings, Inc. and its subsidiaries.

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "Annual Report on Form 10-K"). This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” section of our Annual Report on Form 10-K and under the "Cautionary Note Regarding Forward-Looking Statements" section and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

Virgin Galactic Holdings, Inc. is an aerospace and space travel company offering access to space for private individuals, researchers and government agencies. Our missions include flying passengers to space, as well as flying scientific payloads and researchers to space in order to conduct experiments for scientific and educational purposes. Our operations include the design and development, manufacturing, ground and flight testing, and post-flight maintenance of our spaceflight system vehicles. Our spaceflight system is developed using our proprietary technology and processes and is focused on providing space experiences for private astronauts, researcher flights and professional astronaut training. We have also leveraged our knowledge and expertise in manufacturing spaceships to occasionally perform engineering services for third parties.

Recent Developments

In late June 2023, we completed our first commercial spaceflight, 'Galactic 01,' which marked the start of our commercial service.

In July 2023, we concluded that technological feasibility had been achieved for our initial spaceship, VSS Unity, and mothership carrier aircraft, VMS Eve, which together comprise our current spaceflight system. As a result, future costs associated with this spaceflight system, including the manufacture of related rocket motors, will no longer qualify as research and development activities.

Following the launch of commercial service and achievement of technological feasibility, we began presenting the operating expenses supporting our commercial spaceline activities as spaceline operations expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Expenses incurred prior to the achievement of technological feasibility were classified as research and development and selling, general and administrative expenses. Spaceline operations expense includes costs associated with commercial spaceflight services and production costs that are not eligible for capitalization. Spaceline operations expense also includes costs to support our Future Astronaut Community and costs related to payload cargo and engineering services, which were previously presented as customer experience expense.

Through the date of the report, we have completed five commercial spaceflights, including two flights with researchers who conducted scientific experiments.

Factors Affecting Our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part 1, Item 1A. of our Annual Report on Form 10-K titled “Risk Factors.”

Customer Demand

We have already received significant interest from potential future astronauts. Going forward, we expect the size of our backlog and the number of future astronauts that have flown to space on our spaceflight system to be an important indicator of our future performance. As of September 30, 2023, we had reservations for spaceflights for approximately 800 future astronauts. In August 2021, we reopened ticket sales to a select group and increased the pricing of our consumer offerings to a base price of $450,000 per seat. In February 2022, we opened ticket sales to the general public. As of September 30, 2023, the tickets sold represent approximately $207 million in expected future spaceflight revenue upon completion of spaceflights.

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Available Capacity and Annual Flight Rate

We commenced our commercial operations with VSS Unity and VMS Eve, which together comprise our current spaceflight system. As a result, our annual flight rate will be constrained by the availability and capacity of this spaceflight system. To reduce the capacity constraint associated with having only one spaceflight system, we are currently developing our next generation spaceflight vehicles, which include our Delta class spaceships and our next generation motherships, which will allow us to increase our annual flight rate. We are dedicating significant engineering resources to the work that precedes production of the future fleet. Simultaneously, we are focused on the flight consistency of Unity and Eve to bring our customers to space and to demonstrate the value of our product.

Safety Performance of Our Spaceflight System

Our spaceflight system is highly specialized with sophisticated and complex technology. We have built operational processes to ensure that the design, manufacture, performance and servicing of our spaceflight system meets rigorous quality standards. However, our spaceflight system is still subject to operational and process risks, such as manufacturing and design issues, human errors, or cyber-attacks. Any actual or perceived safety issues may result in significant reputational harm to our business and our ability to generate spaceflight revenue.

Components of Results of Operations

Revenue

Following the commercial launch of our spaceflight services, we expect the significant majority of our revenue to be derived from ticket sales to fly to space and related services. We also expect that we will continue to receive a small amount of revenue from Future Astronaut community membership fees and events, as well as engineering services for third parties.

Spaceline Operations

Spaceline operations expense includes costs to maintain and operate our spaceflight systems; non-capitalizable costs to build our new vehicles and manufacture items required to support the making of our vehicles, such as rocket motors and spare parts; the consumption of rocket motors, fuel and other consumables; costs to maintain and support our Future Astronaut community; and costs to provide payload cargo and engineering services.

Research and Development

Prior to achieving technological feasibility, we expensed all research and development costs associated with developing and building our current spaceflight system. Until we complete the design phase of our next generation spaceflight system, we will not capitalize expenditures incurred to construct this spaceflight system and we will continue to expense these costs as incurred to research and development.

Research and development expenses represent costs incurred to support activities that advance our future fleet towards commercialization, including basic research, applied research, concept formulation studies, design, development, and related testing activities. Research and development costs will consist primarily of equipment, material, and labor costs (including from third-party contractors) for designing the spaceflight system’s structure, spaceflight propulsion system, and flight profiles for our next generation spaceships and motherships, as well as allocated facilities and other supporting overhead costs.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of compensation and other employee benefit costs for employees involved in general corporate functions, including executive management and administration, accounting, finance, legal, information technology, sales and marketing, and human resources. Non-compensation components of selling, general and administrative expenses include accounting, legal and other professional fees, facilities expenses, and other corporate expenses.

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Results of Operations

The following tables set forth our results of operations for the periods presented. The period-to-period comparisons of financial results are not necessarily indicative of future results.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Revenue	$	1,728	$	767	$	3,991	$	1,443

Operating expenses:
Spaceline operations	25,648		590		26,200		737
Research and development	44,848		97,411		241,292		211,578
Selling, general and administrative	42,218		46,113		144,020		127,820
Depreciation and amortization	3,286		2,214		9,723		7,981
Total operating expenses	116,000		146,328		421,235		348,116

Operating loss	(114,272)		(145,561)		(417,244)		(346,673)

Interest income	12,856		3,524		28,590		6,327
Interest expense	(3,221)		(3,293)		(9,648)		(8,924)
Other income (expense), net	86		(203)		164		7
Loss before income taxes	(104,551)		(145,533)		(398,138)		(349,263)
Income tax expense	53		21		215		69
Net loss	$	(104,604)	$	(145,554)	$	(398,353)	$	(349,332)

For the Three and Nine Months Ended September 30, 2023 Compared to the Three and Nine Months Ended September 30, 2022

Revenue


	Three Months Ended September 30,				$ Change		% Change		Nine Months Ended September 30,				$ Change		% Change
	2023		2022						2023		2022
	(In thousands, except %)
Revenue	$	1,728	$	767	$	961	125	%	$	3,991	$	1,443	$	2,548	177	%

Revenue for the three months ended September 30, 2023 was primarily attributable to revenue generated from our commercial spaceflights and membership fees related to our Future Astronaut community. Revenue for the three months ended September 30, 2022 was primarily attributable to membership fees related to our Future Astronaut community.

Revenue for the nine months ended September 30, 2023 was primarily attributable to revenue generated from our commercial spaceflights and membership fees related to our Future Astronaut community. Revenue for the nine months ended September 30, 2022 was primarily attributable to membership fees related to our Future Astronaut community, as well as the performance of engineering services.

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Spaceline Operations


	Three Months Ended September 30,				$ Change		% Change	Nine Months Ended September 30,				$ Change		% Change
	2023		2022					2023		2022
	(In thousands, except %)
Spaceline operations	$	25,648	$	590	$	25,058	nm	$	26,200	$	737	$	25,463	nm

Spaceline operations expense for the three and nine months ended September 30, 2023 were primarily attributable to costs to maintain and operate our spaceflight system; non-capitalizable costs to build our new vehicles and manufacture items required to support the making of our vehicles, such as rocket motors and spare parts; and costs to maintain and support our Future Astronaut community.

Spaceline operations expense for the three months ended September 30, 2022 were primarily attributable to costs to maintain and support our Future Astronaut community. Spaceline operations expense for the nine months ended September 30, 2022 were primarily attributable to costs to maintain and support our Future Astronaut community and labor costs incurred in connection with engineering services.

Research and Development


	Three Months Ended September 30,				$ Change		% Change		Nine Months Ended September 30,				$ Change		% Change
	2023		2022						2023		2022
	(In thousands, except %)
Research and development	$	44,848	$	97,411	$	(52,563)	(54)	%	$	241,292	$	211,578	$	29,714	14	%

Research and development expenses decreased from $97.4 million for the three months ended September 30, 2022 to $44.8 million for the three months ended September 30, 2023. The decrease was primarily driven by a $37.2 million decrease in direct labor, materials and other direct costs associated with the development of our spaceflight systems, an $11.3 million decrease in compensation and other employee benefit costs, a $1.6 million decrease in facilities costs, and a $1.5 million decrease in stock-based compensation.

Research and development expenses increased from $211.6 million for the nine months ended September 30, 2022 to $241.3 million for the nine months ended September 30, 2023. The increase was primarily driven by a $53.7 million increase in manufacturing sub-contractor and contract labor costs, consulting, and other direct costs associated with the development of our spaceflight systems and a $9.5 million increase in compensation and other employee benefit costs. These increases were partially offset by a $31.5 million decrease in direct labor and materials costs associated with the development of our spaceflight system and a $2.5 million decrease in stock-based compensation.

Selling, General and Administrative


	Three Months Ended September 30,				$ Change		% Change		Nine Months Ended September 30,				$ Change		% Change
	2023		2022						2023		2022
	(In thousands, except %)
Selling, general and administrative	$	42,218	$	46,113	$	(3,895)	(8)	%	$	144,020	$	127,820	$	16,200	13	%

Selling, general and administrative expenses decreased from $46.1 million for the three months ended September 30, 2022 to $42.2 million for the three months ended September 30, 2023. The decrease was primarily driven by a $3.8 million decrease in compensation and other employee benefit costs, a $2.5 million decrease in consulting costs, and a $1.1 million decrease in stock-based compensation. These decreases were partially offset by a $4.5 million increase in marketing and promotion costs.

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Selling, general and administrative expenses increased from $127.8 million for the nine months ended September 30, 2022 to $144.0 million for the nine months ended September 30, 2023. The increase was primarily driven by a $7.9 million increase in compensation and other employee benefit costs, a $5.3 million increase in marketing and promotion costs, a $2.0 million increase in software and other information and technology costs, and a $1.8 million increase in stock-based compensation.

Depreciation and Amortization


	Three Months Ended September 30,				$ Change		% Change		Nine Months Ended September 30,				$ Change		% Change
	2023		2022						2023		2022
	(In thousands, except %)
Depreciation and amortization	$	3,286	$	2,214	$	1,072	48	%	$	9,723	$	7,981	$	1,742	22	%

Depreciation and amortization expense increased from $2.2 million for the three months ended September 30, 2022 to $3.3 million for the three months ended September 30, 2023, an increase of $1.1 million due to the acquisition of property, plant and equipment.

Depreciation and amortization expense increased from $8.0 million for the nine months ended September 30, 2022 to $9.7 million for the nine months ended September 30, 2023, an increase of $1.7 million due to the acquisition of property, plant and equipment.

Interest Income


	Three Months Ended September 30,				$ Change		% Change		Nine Months Ended September 30,				$ Change		% Change
	2023		2022						2023		2022
	(In thousands, except %)
Interest income	$	12,856	$	3,524	$	9,332	265	%	$	28,590	$	6,327	$	22,263	352	%

Interest income increased from $3.5 million for the three months ended September 30, 2022 to $12.9 million for the three months ended September 30, 2023. This increase was primarily driven by increased average balances of marketable securities and deposits in interest bearing accounts, as well as higher interest rates.

Interest income increased from $6.3 million for the nine months ended September 30, 2022 to $28.6 million for the nine months ended September 30, 2023. This increase was primarily driven by higher investment returns on marketable securities and higher interest rates on deposits in interest bearing accounts.

Interest Expense


	Three Months Ended September 30,				$ Change		% Change		Nine Months Ended September 30,				$ Change		% Change
	2023		2022						2023		2022
	(In thousands, except %)
Interest expense	$	3,221	$	3,293	$	(72)	(2)	%	$	9,648	$	8,924	$	724	8	%

Interest expense was $3.2 million for three months ended September 30, 2023 and $3.3 million for the three months ended September 30, 2022. Interest expense consists of interest expense and amortization of debt issuance costs related to our convertible senior notes.

Interest expense increased from $8.9 million for nine months ended September 30, 2022 to $9.6 million for the nine months ended September 30, 2023. This increase was primarily driven by a full nine months of interest expense and amortization of debt issuance costs related to our convertible senior notes in 2023.

Income Tax Expense

Income tax expense was immaterial for the three and nine months ended September 30, 2023 and 2022. We have accumulated net operating losses at the U.S. federal and state levels. We maintain a full valuation allowance against our net U.S. federal and state deferred tax assets. The income tax expense is primarily related to corporate income taxes for our operations in the United Kingdom, which operates on a cost-plus arrangement.

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Liquidity and Capital Resources

As of September 30, 2023, we had cash, cash equivalents and restricted cash of $269.1 million and marketable securities of $819.2 million. Our principal sources of liquidity have come from sales of our common stock and offering of convertible senior notes ("2027 Notes").

Historical Cash Flows


	Nine Months Ended September 30,
	2023		2022
	(In thousands)
Net cash provided by (used in):
Operating activities	$	(352,884)	$	(248,999)
Investing activities	(196,545)		(322,639)
Financing activities	475,863		455,968
Net decrease in cash, cash equivalents and restricted cash	$	(73,566)	$	(115,670)

Operating Activities

Net cash used in operating activities was $352.9 million for the nine months ended September 30, 2023, and consisted primarily of $398.4 million of net losses, adjusted for non-cash items, which primarily included stock-based compensation expense of $35.6 million and depreciation and amortization expense of $9.7 million.

Net cash used in operating activities was $249.0 million for the nine months ended September 30, 2022, and consisted primarily of $349.3 million of net losses, adjusted for non-cash items, which primarily included stock-based compensation expense of $34.5 million and depreciation and amortization expense of $8.0 million, as well as $46.1 million of cash provided from changes in operating assets and liabilities.

Investing Activities

Net cash used in investing activities was $196.5 million for the nine months ended September 30, 2023, and consisted of $873.0 million in purchases of marketable securities and $25.9 million in capital expenditures, partially offset by $702.3 million in proceeds from maturities and calls of marketable securities.

Net cash used in investing activities was $322.6 million for the nine months ended September 30, 2022, and consisted of $604.9 million in purchases of marketable securities and $12.3 million in capital expenditures, partially offset by $294.6 million in proceeds from maturities and calls of marketable securities.

Financing Activities

Net cash provided by financing activities was $475.9 million for the nine months ended September 30, 2023, and consisted primarily of net cash proceeds from the sale and issuance of common stock of $479.0 million, partially offset by tax withholdings paid for net settled stock-based awards of $3.0 million.

Net cash provided by financing activities was $456.0 million for the nine months ended September 30, 2022, and consisted primarily of the issuance of the 2027 Notes for net proceeds of $413.7 million and net cash proceeds from sale and issuance of common stock of $98.4 million, partially offset by the purchase of the capped call related to the 2027 Notes of $52.3 million and tax withholdings paid for net settled stock-based awards of $3.5 million.

Funding Requirements

We expect our expenditures to fluctuate in connection with our ongoing activities, particularly as we continue to advance the development of our next generation spaceflight system and leverage investments in capital expenditures.

As our fleet of spaceships expands, we expect our expenditures to increase as we scale our commercial operations. Specifically, our long-term expenditures will increase as we:

•scale up our manufacturing processes and capabilities to support expanding our fleet with additional spaceships, carrier aircraft and rocket motors in connection with commercialization;

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•hire additional personnel in manufacturing operations, testing programs, maintenance operations and guest services as we increase the volume of our spaceflights;

•scale up required operational facilities, such as hangars and warehouses; and

•establish our astronaut campus in New Mexico

We expect our arrangements with third-party providers to manufacture key subassemblies for our next generation spaceships and for the design and manufacture of our next generation of carrier aircraft will require significant capital expenditures. Certain estimated amounts in connection with third-party arrangements are subject to future negotiations and cannot be estimated with reasonable certainty.

We believe that our current capital is adequate to sustain our operations for at least the next twelve months. Changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. While we have completed our initial commercial launch with a single spaceship, we are currently developing our next generation spaceflight vehicles. We anticipate the costs to manufacture additional vehicles will begin to decrease as we continue to scale up our manufacturing processes and capabilities.

Issuances of Common Stock

In August 2022, we entered into a distribution agency agreement with Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC (each, an "Agent" and collectively, the "Agents") providing for the offer and sale of up to $300 million of shares of our common stock from time to time through the Agents, acting as sales agents, or directly to one or more of the Agents, acting as principal(s), through an "at the market offering" program (the "2022 ATM Program").

We completed the 2022 ATM Program in June 2023, selling a total of 59.4 million shares of common stock and generating $300.0 million in gross proceeds since its inception, before deducting $3.0 million in underwriting discounts, commissions and other expenses.

In June 2023, we entered into a distribution agency agreement with the Agents providing for the offer and sale of up to $400 million of shares of the Company's common stock from time to time through the Agents, acting as sales agents, or directly to one or more of the Agents, acting as principal(s), through an "at the market offering" program (the "2023 ATM Program").

During the three months ended September 30, 2023, we sold 62.4 million shares of common stock under the 2023 ATM Program and generated $210.7 million in gross proceeds, before deducting $2.1 million in underwriting discounts, commissions and other expenses.

During the nine months ended September 30, 2023, we sold 79.7 million shares of common stock under the 2023 ATM Program and generated $287.5 million in gross proceeds, before deducting $2.9 million in underwriting discounts, commissions and other expenses.

Liquidity Outlook

For at least the next twelve months, we expect our principal demand for funds will be for our ongoing activities described above. We expect to meet our short-term liquidity requirements primarily through our cash, cash equivalents and marketable securities on hand. We believe we will have sufficient liquidity available to fund our business needs, commitments and contractual obligations for the next twelve months.

Beyond the next twelve months, our principal demand for funds will be to sustain our operations, including the construction of additional spaceships and motherships, expansion of our footprint at Spaceport America in New Mexico, construction of our astronaut campus and payment of the principal amount of our convertible senior notes as they become due. We expect to generate revenue from our spaceflight program, which commenced with our first commercial spaceflight, 'Galactic 01,' in late June 2023. To the extent this source of capital as well as the sources of capital described above are insufficient to meet our needs, we may need to seek additional debt or equity financing.

The commercial launch of our spaceflight program and the anticipated expansion of our fleet have unpredictable costs and are subject to significant risks, uncertainties and contingencies, many of which are beyond our control, that may affect the timing and magnitude of these anticipated expenditures. Some of these risk and uncertainties are described in more detail in our Annual Report on Form 10-K under the heading Item 1A. “Risk Factors—Risks Related to Our Business.”

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Contractual Obligations and Commitments

Except as set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K. Additionally, in some cases, we have entered arrangements with third-party providers for services, such as the design and manufacture of our next generation of carrier aircraft. The amounts we would pay under those arrangements will be significant but are not contractually committed until we execute specific task orders with the applicable counterparty, are subject to future negotiations and cannot be estimated with reasonable certainty.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to below have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

During the fiscal quarter ended September 30, 2023, there were no significant changes to our critical accounting policies and estimates compared to those previously disclosed in "Critical Accounting Policies and Estimates" included in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2022 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the fiscal quarter ended September 30, 2023, there were no significant changes to our market risks compared to those previously disclosed in Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" included in our 2022 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

As described under the heading “Recent Developments” in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, the launch of commercial service and achievement of technological feasibility for our current spaceflight system represents a change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting for the three months ended September 30, 2023. Therefore, significant changes were made to our internal control over financial reporting to support the related changes in accounting processes and financial presentation, and appropriately address the underlying risks. These changes include implementation of preventative and detective controls that support the capitalization of costs related to our assets that have achieved technological feasibility.

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Except as otherwise disclosed, there were no changes in our internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time subject to various claims, lawsuits and other legal and administrative proceedings arising in the ordinary course of business. Some of these claims, lawsuits and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, non-monetary sanctions or relief. However, we do not consider any such claims, lawsuits or proceedings that are currently pending, individually or in the aggregate, to be material to our business or likely to result in a material adverse effect on our future operating results, financial condition or cash flows. See Note 13 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Item 1A. Risk Factors

Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K and in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

During the three months ended September 30, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non Rule 10b5-1 trading arrangement."

In November 2023, we announced that ‘Galactic 06’ is expected to take place in January 2024, and that we are shifting our Unity flight cadence from monthly to quarterly. We also announced that we plan to pause Unity spaceflights in mid-2024, and that we expect to re-commence flying with test flights for our Delta Class spaceships in mid-2025, in advance of revenue service expected to begin in 2026.

Item 6. Exhibits

The following documents are filed as part of this report:

(1) Exhibits. The following exhibits are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.

Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/Furnished Herewith

3.1

Certificate of Incorporation of the Registrant

8-K

001-38202

3.1

10/29/2019

3.2

By-Laws of the Registrant

8-K

001-38202

3.2

10/29/2019

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Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/Furnished Herewith

31.1

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Virgin Galactic Holdings, Inc.

Date: November 8, 2023		/s/ Michael Colglazier
	Name:	Michael Colglazier
	Title:	Chief Executive Officer (Principal Executive Officer)

Date: November 8, 2023		/s/ Douglas Ahrens
	Name:	Douglas Ahrens
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

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Virgin Galactic (SPCE) 10-Q2023 Q3 Quarterly report

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