Virgin Galactic(SPCE) - 2023 Q4 - Annual Report

Cautionary Note Regarding Forward-Looking Statements The report contains forward-looking statements subject to various risks and uncertainties outside the company's control - The report contains forward-looking statements about future plans, trends, events, results of operations, or financial condition, which are subject to various risks and uncertainties outside the company's control[12][13] - Key factors that could cause actual results to differ materially include delays in commercial flights, challenges in developing next-generation vehicles, safety concerns, market development, marketing effectiveness, profitability, capital requirements, personnel retention, geopolitical conflicts, economic conditions, and regulatory changes[13][14] Risk Factor Summary The company faces substantial risks including historical losses, market development, operational delays, and regulatory challenges - Virgin Galactic has incurred significant losses and may not achieve profitability, with future success highly dependent on effective marketing and sales of spaceflights in an emerging market[19] - Anticipated pause in Unity flights in mid-2024 for Delta Class development poses risks of delays, impacting business and financial results[19] - The company may require substantial additional funding, faces risks related to the 'Virgin' brand not being under its control, and must protect its proprietary intellectual property[19] - Extensive and evolving government regulations, potential control by Virgin Investments Limited, and anti-takeover provisions in organizational documents also present risks[22] Part I Item 1. Business Virgin Galactic pioneers commercial space travel and is developing its next-generation Delta Class fleet for scaled operations - Virgin Galactic is pioneering consumer space experiences using reusable spaceflight systems, aiming to put humans and research experiments into space routinely and safely[24] - The company offers multi-day experiences culminating in spaceflight with weightlessness and Earth views, operating from Spaceport America, the world's first purpose-built commercial spaceport[26][34] - Commercial service began in June 2023 with 'Galactic 01', and the company plans to pause Unity spaceflights in mid-2024 to focus on developing Delta Class spaceships, with commercial service expected in 2026[29][31] | Metric | Value (as of Dec 31, 2023) | | :--- | :--- | | Spaceflight ticket reservations | ~750 | | Deposits & membership fees collected | $99.7 million | | Expected future spaceflight revenue | ~$205 million | | Commercial spaceflights completed | 6 (as of Jan 2024) | | Paying astronauts flown | 15 | | Payloads flown for research | 30 | Overview The company pioneers reusable spaceflight systems for consumer and research space travel from Spaceport America - Virgin Galactic is pioneering a consumer space experience using reusable spaceflight systems, aiming for routine and consistent human and research spaceflights at unprecedented frequency with next-generation vehicles[24] - The company offers multi-day experiences culminating in a spaceflight with weightlessness and Earth views, utilizing its proprietary spaceflight system and exclusive access to Spaceport America in New Mexico[26] - Commercial service ('Galactic 01') began in June 2023, following successful test flights including those carrying research experiments and Sir Richard Branson[29][30] - The company is developing Delta Class spaceships and next-generation motherships to increase annual flight rates, expecting to pause Unity flights in mid-2024 and re-commence with Delta test flights in 2025, with commercial service in 2026[31] | Metric | Value (as of Dec 31, 2023) | | :--- | :--- | | Spaceflight ticket reservations | ~750 | | Deposits & membership fees collected | $99.7 million | Commercial Space Industry The commercial space industry is rapidly growing, driven by new technology, funding, and demand - The commercial space industry is experiencing dramatic growth due to advancing technologies, decreasing costs, new funding sources, and expanding demand from new sectors and demographics[37][38] - Historically, human spaceflight was limited by high costs and government control, with only about 675 humans having traveled to space as of December 31, 2023[37][42] - Current commercial orbital spaceflight tickets are estimated to exceed $50 million per seat, highlighting the high cost barrier that Virgin Galactic aims to address[41][43] Our Strategy The company's strategy focuses on building a scaled, profitable business through its proprietary flight system and brand experience - Virgin Galactic's strategy is to build a scaled and profitable business providing safe, reliable, and regular space transportation using its proprietary, reusable flight system and a distinctive, Virgin-branded customer experience[44] - Key strategic initiatives include expanding spaceflight operations with more vehicles (Delta Class spaceships with six passenger seats, flying twice per week), increasing flight frequency to hundreds per year, and identifying opportunities for additional spaceports[46] - The company also aims to lower operating costs through efficiencies in manufacturing and operations, and to leverage its proprietary technology to expand into adjacent and international markets[46] Our Competitive Strengths Competitive strengths include pioneering technology, a significant reservation backlog, the iconic Virgin brand, and high barriers to entry - Virgin Galactic's competitive strengths include its pioneering role in commercial human spaceflight, differentiated technology, and significant backlog of approximately 750 future astronaut reservations[46][48] - The company benefits from the iconic Virgin brand, offering a unique multi-day customer journey with personalized training and access to a global Future Astronaut community[48] - Additional strengths include highly specialized integrated design and manufacturing capabilities, advanced rocket systems, and operating from Spaceport America, the world's first purpose-built commercial spaceport[48] Our Assets The company's core assets include its custom-built mothership, reusable spaceships, hybrid rocket motor, and safety systems Our Carrier Aircraft—The Mothership The mothership is a custom-built, twin-fuselage aircraft designed to carry spaceships to an altitude of 45,000 feet - The mothership is a twin-fuselage, custom-built aircraft designed to carry spaceships to approximately 45,000 feet before release, reducing energy requirements for suborbital launch[51] - Its design features include a twin-boom configuration, all-composite material construction for weight reduction, and four Pratt and Whitney Canada commercial turbo-fan engines[52][53] - The mothership has completed over 330 flights as of December 31, 2023, and is designed for hundreds of spaceship launches, offering economic advantages and rapid turnaround times[55][56][57] Our Spaceships The reusable, rocket-powered winged spaceships are designed to carry pilots, astronauts, and research experiments to space - Virgin Galactic spaceships are reusable, rocket-powered winged vehicles designed to carry pilots, private astronauts, and research experiments into space, reaching speeds over Mach 3[58] - Key features include a hybrid rocket motor ignition after mothership release, a unique 'wing-feathering' system for safe re-entry, and a cabin with a dozen windows for optimal Earth views[59][60] - VSS Unity commenced commercial service in June 2023 and is expected to pause flights in mid-2024 as the company transitions to test flights for Delta Class spaceships in 2025, with commercial service in 2026[62] Hybrid Rocket Motor The spaceship is powered by a hybrid rocket propulsion system designed for safety, reliability, and economy - The spaceship is powered by a hybrid rocket propulsion system using a solid fuel grain and liquid oxidizer, requiring a new motor installation after each flight[63] - The rocket motor is designed for safety, reliability, and economy, featuring critical safety features like the ability to be safely shut down at any time[64] - The in-house propulsion team is upgrading the production plant to increase production rates and reduce unit costs to support the growing spaceship fleet[65] Safety Systems The spaceflight system prioritizes safety through horizontal take-off, pilot redundancy, and a unique wing-feathering re-entry system - Virgin Galactic's spaceflight system prioritizes safety through horizontal take-off and landing, which reduces fuel requirements and allows for safe returns if problems arise[66] - Key safety elements include highly reliable mothership engines, two pilots per vehicle for redundancy, a simple and robust hybrid rocket motor with shut-off control, and a unique wing-feathering system for controlled re-entry[67] - Additional safety measures involve customized medical screening and pre-flight training for astronauts, full mission abort capability, and an aviation Safety Management System (SMS)[67] Spaceport America Spaceport America in New Mexico is the world's first purpose-built commercial spaceport and the company's operational headquarters - Spaceport America, located in New Mexico, is the world's first purpose-built commercial spaceport, serving as the operational headquarters and astronaut flight preparation site[68] - The facility spans over 25 square miles of desert landscape with 6,000 square miles of restricted airspace, providing favorable year-round launch conditions[68] - The 'Virgin Galactic Gateway to Space' terminal hangar building is LEED-Gold certified, designed for functionality and aesthetics consistent with the Virgin brand[69] Signature Campus in Sierra County The company is developing an exclusive astronaut campus and training facility near Spaceport America - In August 2022, Virgin Galactic purchased land in Sierra County, New Mexico, to develop a new, exclusive astronaut campus and training facility near Spaceport America[70] - The campus master plan includes training facilities, accommodations, an observatory, wellness center, recreation, and dining options, with its opening phased to align with the ramp-up of the Delta fleet[70] The Astronaut Journey The astronaut journey includes customized pre-flight training and a unique spaceflight experience Pre-Flight Training Astronauts undergo several days of customized pre-flight training at Spaceport America to ensure safety and maximize enjoyment - Astronauts undergo several days of pre-flight training at Spaceport America, including briefings, mock-up training, and time with fellow astronauts and crew[74] - The customized training program, developed with experts, covers emergency egress, flight communication, flight protocols, seat ingress/egress, and G-force training[75] - Training emphasizes hands-on activities with real flight hardware or high-fidelity mock-ups to build astronaut comfort and familiarity[76][77] The Spaceflight Experience The spaceflight experience involves a Mach 3 ascent, weightlessness at apogee, and a runway landing - On flight day, astronauts receive final briefings, board the spaceship mated to the mothership, and experience a cabin designed for optimal flight experience[78][79] - After mothership release at 45,000 feet, the rocket motor ignites, propelling the spaceship to Mach 3 with up to 4Gs of acceleration, followed by a coast to apogee where astronauts experience weightlessness and Earth views[80][81] - Astronauts return to their personalized seats for re-entry, cushioned by rapid deceleration, and the spaceship glides back for a runway landing[82] Sales and Marketing Ticket sales reopened in 2021 at a base price of $450,000, building a significant backlog of reservations - Following Sir Richard Branson's test flight in August 2021, Virgin Galactic reopened ticket sales at a base price of $450,000 per seat[83] | Metric | Value (as of Dec 31, 2023) | | :--- | :--- | | Spaceflight ticket reservations | ~750 | | Deposits & membership fees collected | $99.7 million | | Potential spaceflight revenue | ~$205 million | - The company maintains high retention rates for refundable deposits, largely attributed to the strength of the Virgin Galactic brand and inbound requests[83][84] Research and Education Applications The company's suborbital platform offers researchers low-cost, repeatable access to space and microgravity - Virgin Galactic's technology has potential applications in scientific research and professional astronaut training, addressing limitations of traditional microgravity research methods[85] - The company's suborbital platform provides researchers with low-cost, repeatable access to space and microgravity, allowing them to accompany and tend to experiments[85] - To date, 30 experiments have been flown for research missions, including dedicated government-funded ('Galactic 01') and privately-funded ('Galactic 05') research flights[87] Design, Development and Manufacturing The company possesses extensive vertically integrated aerospace development capabilities for its spaceflight systems - Virgin Galactic possesses extensive vertically integrated aerospace development capabilities, covering design, manufacturing, ground testing, flight testing, and post-delivery support[89] - The company is currently designing and producing a new fleet of Delta Class spaceships based on the VSS Unity design, aiming for substantially lower costs[90] - Manufacturing and operating facilities include a 200,000+ sq ft campus in Mojave, CA, a 61,000 sq ft design/engineering center in Tustin, CA, and a new 151,000 sq ft final assembly facility in Mesa, AZ[92] Additional Potential Applications of our Technology and Expertise The company's technology and expertise may be leveraged for additional aerospace applications beyond human spaceflight - Virgin Galactic believes its robust platform of advanced technologies, design, engineering, manufacturing experience, and flight training can be leveraged for additional aerospace applications[93] - While the primary focus is commercial human spaceflight, the company intends to explore and evaluate applying its technologies and expertise to ancillary applications[94] Competition The emerging commercial spaceflight industry is highly competitive, with Blue Origin as the primary suborbital competitor - The commercial spaceflight industry is emerging and expected to be highly competitive, with Virgin Galactic's primary suborbital competitor being Blue Origin[95] - Larger, well-funded entities like SpaceX and Boeing, currently focused on orbital spaceflight, could shift focus to suborbital spaceflight and directly compete[95][96] - Virgin Galactic's ability to compete depends on pricing, consumer confidence in safety, customer satisfaction, and flight frequency/availability[97] Intellectual Property The company relies on a combination of patents, trademarks, and license agreements to protect its intellectual property Virgin Trademark License Agreement The company holds rights to use the 'Virgin Galactic' name and logo under a long-term license agreement with Virgin - Virgin Galactic holds exclusive and non-exclusive rights to use the 'Virgin Galactic' name and Virgin signature logo under an Amended and Restated Trademark License Agreement (Amended TMLA)[99] - The Amended TMLA has an initial term of 25 years (expiring October 2044) with two 10-year renewal options and can be terminated by Virgin under specific conditions[100] - Virgin Galactic is obligated to pay quarterly royalties to Virgin, calculated as the greater of a low single-digit percentage of gross sales or a fixed dollar amount[103] Spacecraft Technology License Agreement The company holds a non-exclusive license for key patents and patent applications from Mojave Aerospace Ventures - Virgin Galactic holds a non-exclusive, worldwide license under certain patents and patent applications from Mojave Aerospace Ventures, LLC (MAV) via a Spacecraft Technology License Agreement[106] - The license agreement's term extends until the later of a fixed date and the expiration of the last patent right granted[106] - Under the agreement, Virgin Galactic pays MAV license fees and royalties, including a low-single-digit percentage of commercial spaceflight operating revenue[107] Regulatory The company's operations are subject to extensive government regulations, including from the FAA and under export control laws Federal Aviation Administration FAA regulations govern spaceflight system operations, requiring licenses, permits, and financial responsibility for third-party liability - Virgin Galactic's spaceflight system operations are subject to FAA regulations, policies, and guidance, requiring proper licenses, permits, and compliance with financial responsibility for third-party liability[108] - A 'learning period' restricting FAA occupant safety regulations for spaceflight participants has been extended to March 9, 2024, with proposed legislation to extend it to October 1, 2031[108] - The company's operations are covered under the existing regulatory framework until 2026 and are transitioning to revised FAA regulations for Delta Class vehicles[108][110] Informed Consent and Waiver Federal and state laws require informed consent and waivers of claims from spaceflight participants and crew - Commercial human spaceflight operations are subject to federal and state laws (CSLA, CSLAA, SFICA) requiring informed consent and waivers of claims from participants and crew[111] - The CSLAA mandates informed consent before receiving compensation or making flight agreements, and establishes a three-tiered indemnification system for third-party claims, with federal government indemnity up to $3.0 billion for catastrophic losses[112] - New Mexico's SFICA provides protection from passenger lawsuits with informed consent and requires operators to maintain at least $1.0 million in insurance[113][114] International Traffic in Arms Regulations and Export Controls The spaceflight business is subject to stringent U.S. import and export control laws like ITAR and EAR - Virgin Galactic's spaceflight business is subject to stringent U.S. import and export control laws, including ITAR and EAR, which regulate hardware, software, technical data, and services[115] - Compliance requires maintaining ITAR registration, proper classification of products, and obtaining licenses for controlled activities[117] - Failure to comply can result in significant civil or criminal penalties, fines, loss of export privileges, debarment from government contracts, and reputational harm[118] Human Capital The company's human capital strategy focuses on acquiring, developing, and retaining skilled employees critical to its mission - Virgin Galactic's employees are critical to its mission, bringing diverse perspectives and experiences from highly reputed commercial aviation, aerospace, military, and high-technology organizations[119][120] - The company's human capital management strategy focuses on acquisition, development, and retention, with market-based compensation and benefits[121][127] - In November 2023, Virgin Galactic implemented a workforce reduction of approximately 185 employees (18% of its workforce) to decrease costs and strategically realign resources[122][123] | Metric | Value (Year Ended Dec 31, 2023) | | :--- | :--- | | Total employees (as of Feb 13, 2024) | 805 | | Workforce reduction (Nov 2023) | ~185 employees (~18%) | | Compensation & benefits expense (excl. stock-based) | $188.0 million | Available Information The company's SEC filings are publicly available on the SEC's website and the company's investor relations page - Virgin Galactic files annual, quarterly, and current reports, proxy statements, and other information with the SEC, which are publicly available on the SEC's website (www.sec.gov) and the company's investor information page (virgingalactic.com)[126] Item 1A. Risk Factors The company faces substantial risks including historical losses, operational delays, competition, and regulatory hurdles - Virgin Galactic has incurred significant net losses ($502.3 million in 2023) and expects future losses, with profitability uncertain due to scaling operations and developing next-gen vehicles[129][130] - The company's success is highly dependent on marketing and selling spaceflights in an emerging market, with estimates for the total addressable market subject to uncertainty[131][132] - Anticipated pause in Unity flights in mid-2024 for Delta Class development (commercial service expected 2026) poses risks of delays due to design, testing, regulatory approvals, manufacturing, and supply chain issues[133][134] - Unsatisfactory safety performance, security incidents, or adverse publicity could cause significant reputational harm, tort liability, and increased costs[137][139] - The company's backlog of ~750 reservations ($205 million potential revenue) may not convert to actual revenue due to refundable deposits and potential flight delays or cancellations[140][141] - Substantial additional funding may be required, and reliance on a limited number of suppliers for critical raw materials and components creates supply chain and cost volatility risks[152][154] - Intense competition from Blue Origin, SpaceX, and Boeing, along with risks to intellectual property (including the licensed 'Virgin' brand), could adversely affect business[159][165] - Extensive and evolving government regulations (FAA, export controls, privacy laws) and potential control by Virgin Investments Limited (VIL) pose significant compliance and operational risks[189][227] Risks Related to Our Business Business risks include a history of losses, potential development delays, operational challenges, and reliance on limited suppliers | Metric | 2023 Net Loss | 2022 Net Loss | 2021 Net Loss | | :--- | :--- | :--- | :--- | | Net Loss (in millions) | $(502.3) | $(500.2) | $(352.9) | - The company expects operating expenses to increase significantly in the coming years due to scaling spaceflight operations, manufacturing streamlining, and next-generation vehicle development[130] - Delays in developing Delta Class spaceships and next-generation motherships would adversely impact business, financial condition, and results of operations[133] - Inability to operate spaceflight systems at anticipated flight rates due to unexpected weather, maintenance, pilot error, natural disasters, or regulatory changes could negatively impact business[136] - Unsatisfactory safety performance or security incidents could lead to significant reputational harm, tort liability, increased costs, and potential delays or cancellations of flights[137][139] - The backlog of approximately 750 future astronaut reservations ($205 million in expected revenue) may not convert to actual revenue as deposits are largely refundable[140][141] - The company may require substantial additional funding, which may not be available on acceptable terms, and relies on a limited number of suppliers for critical raw materials[152][154] - The 'Virgin' brand is not under the company's control, and negative publicity related to the brand could materially adversely affect its business[165] - Failure to adequately protect proprietary intellectual property rights or reliance on third-party licenses could impair competitive position[166][170] - The business is subject to extensive and evolving government laws and regulations, with non-compliance potentially leading to penalties and operational restrictions[189][194][196] - High dependence on senior management and skilled personnel, along with hazards and operational risks at facilities, could disrupt business and flight schedules[205][207][213] - Operating results may fluctuate significantly due to flight schedules, seat sales, costs, R&D investments, competition, and external factors[216][217] Risks Related to Our Ownership Structure Ownership structure risks include significant control by Virgin Investments Limited and anti-takeover provisions - Virgin Investments Limited (VIL) has significant ability to control the direction of Virgin Galactic's business, requiring its consent for major corporate actions[227][228] - Delaware law and the company's organizational documents contain anti-takeover provisions that could delay or discourage acquisition attempts and limit stockholder actions[229][230] - The certificate of incorporation's exclusive forum provision for certain lawsuits in Delaware courts may discourage legal actions against directors and officers[231][233] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - None[254] Item 1C. Cybersecurity The company employs a risk-based cybersecurity program aligned with industry standards, with no material incidents identified to date - Virgin Galactic utilizes a risk-based cybersecurity and data privacy approach to identify, assess, and manage information and cybersecurity risks[255] - The company has an Information Security Governance Program, including an incident response plan and policies, structured for business alignment and senior leadership visibility[256] - The defensive strategy integrates tools, policies, and services aligned with industry standards like NIST CSF and ISO 27001/27002, with no material cybersecurity risks or incidents identified to date[256][257] - The Chief Information Officer (CIO) leads the cybersecurity program, supported by the Information Security Department and external consultants, with quarterly status presentations to the Audit Committee[258][260] Item 2. Properties The company operates from key leased facilities in California, New Mexico, and Arizona, and owns land for a future campus - Virgin Galactic's primary operations are conducted at three leased locations: Mojave, California (manufacturing), Spaceport America, New Mexico (commercial operations), and Tustin, California (corporate headquarters)[261][262][264] - The company also leases two hangars (151,000 sq ft) in Mesa, Arizona, for the final assembly of its next-generation Delta Class spaceships and motherships[265] - Land owned in Sierra County, New Mexico, is planned for a new astronaut campus and training facility[261] Item 3. Legal Proceedings The company is subject to various legal proceedings, which management currently believes are not material to its financial position - Virgin Galactic is involved in various legal proceedings, including intellectual property, commercial, product liability, employment, class action, and derivative litigation[211][266] - Management believes that any monetary liability or financial impact from these matters, individually or in the aggregate, would not be material to the company's consolidated financial position, results of operations, or cash flows[266] Item 4. Mine Safety Disclosures This item is not applicable to Virgin Galactic Holdings, Inc - Not applicable[267] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'SPCE', with 774 record holders as of February 13, 2024 - Virgin Galactic's common stock is traded on the NYSE under the symbol 'SPCE'[269] | Metric | Value (as of Feb 13, 2024) | | :--- | :--- | | Shares of common stock outstanding | 400,040,013 | | Holders of record of common stock | 774 | - The company has not reported any recent sales of unregistered equity securities or issuer purchases of equity securities[270][271] - The stock performance graph compares the company's total stockholder return against the S&P 500 Index and the S&P Aerospace and Defense Select Industry Index[272][273] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[274] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company commenced commercial service in 2023, reporting increased revenue and a net loss of $502.3 million - Virgin Galactic commenced commercial spaceflight services in June 2023 with 'Galactic 01'[279] - Technological feasibility for VSS Unity and VMS Eve was achieved in July 2023, reclassifying future related costs from R&D to spaceline operations expense[280][281] - The company plans to pause Unity spaceflights in mid-2024 to focus on developing Delta Class spaceships, with test flights in 2025 and commercial service expected in 2026[282] Key Financial Performance (Year Ended December 31) | Metric (in thousands) | 2023 | 2022 | 2021 | Change (2023 vs 2022) | % Change (2023 vs 2022) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $6,800 | $2,312 | $3,292 | $4,488 | 194% | | Spaceline operations | $50,538 | $1,906 | $272 | $48,632 | n.m. | | Research and development | $295,140 | $314,174 | $144,223 | $(19,034) | (6)% | | Selling, general & admin | $174,864 | $175,118 | $166,814 | $(254) | n.m. | | Depreciation and amortization | $13,369 | $11,098 | $11,518 | $2,271 | 20% | | Special charges | $4,398 | $0 | $0 | $4,398 | n.m. | | Operating loss | $(531,509) | $(499,984) | $(319,535) | $(31,525) | (6)% | | Interest income | $42,234 | $12,502 | $1,208 | $29,732 | 238% | | Interest expense | $(12,872) | $(12,130) | $(25) | $(742) | (6)% | | Net loss | $(502,337) | $(500,152) | $(352,899) | $(2,185) | (0.4)% | Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash, cash equivalents & restricted cash | $253,592 | $342,627 | | Marketable securities | $728,800 | $637,108 | - The company completed a $300 million 'at-the-market' (ATM) offering in June 2023 and initiated a new $400 million ATM program in June 2023, selling $287.5 million by December 31, 2023[317][318][319] Overview The company is an aerospace and space travel firm providing space access for private, research, and government clients - Virgin Galactic is an aerospace and space travel company providing access to space for private individuals, researchers, and government agencies[278] - Its operations encompass design, development, manufacturing, testing, spaceflight operation, and post-flight maintenance of its proprietary spaceflight system[278] Recent Developments The company commenced commercial service in June 2023 and plans to pause Unity flights in mid-2024 for Delta Class development - Virgin Galactic commenced commercial service with its first spaceflight, 'Galactic 01,' in June 2023[279] - In July 2023, the company achieved technological feasibility for its VSS Unity spaceship and VMS Eve mothership, leading to the reclassification of future related costs as spaceline operations expense[280][281] - In November 2023, Virgin Galactic announced plans to pause Unity spaceflights in mid-2024 to accelerate the development of Delta Class spaceships, with test flights expected in 2025 and commercial service in 2026[282] - The company completed its sixth commercial spaceflight in January 2024[282] Factors Affecting Our Performance Performance is influenced by customer demand, available capacity, annual flight rate, and safety Customer Demand Customer demand is a key performance indicator, with approximately 750 reservations as of December 31, 2023 - Customer demand, measured by backlog size and number of astronauts flown, is a key performance indicator, with reservations for approximately 750 future astronauts as of December 31, 2023[283] - Ticket sales reopened in August 2021 at $450,000 per seat, representing approximately $205 million in expected future spaceflight revenue[283] Available Capacity and Annual Flight Rate The current flight rate is constrained by the single spaceflight system, with Delta Class development aimed at increasing capacity - The current annual flight rate is constrained by the single VSS Unity and VMS Eve spaceflight system[284] - In 2024, Unity flight cadence will shift to quarterly and then pause mid-year to reallocate resources to Delta Class development[284] Safety Performance of Our Spaceflight System Safety performance is critical, as any actual or perceived issues could significantly harm reputation and revenue - The highly specialized and complex spaceflight system is subject to operational and process risks, including manufacturing/design issues, human errors, or cyber-attacks[285] - Any actual or perceived safety issues could result in significant reputational harm and negatively impact the ability to generate spaceflight revenue[285] Results of Operations The company's 2023 results show increased revenue from commercial flights and a significant rise in spaceline operations costs Revenue Revenue increased by 194% in 2023, driven primarily by commercial spaceflights and membership fees | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $6,800 | $2,312 | $4,488 | 194% | - Revenue for 2023 was primarily from commercial spaceflights and Future Astronaut community membership fees[288][289] Spaceline Operations Spaceline operations expense increased significantly due to the commencement of commercial service and cost reclassification | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Spaceline operations | $50,538 | $1,906 | $48,632 | n.m. | - Spaceline operations expense significantly increased in 2023 due to costs to maintain and operate the spaceflight system, following the reclassification of expenses after achieving technological feasibility[291][292] - Prior to technological feasibility, these expenses were classified as research and development and selling, general and administrative expenses[281] Research and Development R&D expenses decreased by 6% in 2023 due to lower materials costs, partially offset by higher sub-contractor costs | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Research and development | $295,140 | $314,174 | $(19,034) | (6)% | - R&D expenses decreased by $19.0 million (6%) in 2023, primarily due to a $51.7 million decrease in materials costs, partially offset by a $47.6 million increase in manufacturing sub-contractor and contract labor costs[296] - R&D costs support the advancement of the future fleet towards commercialization, including design, development, and testing of next-generation spaceships and motherships[294][295] Selling, General and Administrative SG&A expenses remained relatively flat in 2023, with a slight decrease of $0.3 million | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Selling, general and administrative | $174,864 | $175,118 | $(254) | n.m. | - SG&A expenses slightly decreased by $0.3 million in 2023, driven by lower consulting and employee benefit costs, partially offset by increased information technology and marketing expenses[298] - SG&A primarily covers compensation for general corporate functions, professional fees, facilities, and other corporate expenses[297] Depreciation and Amortization Depreciation and amortization expense increased by 20% in 2023 due to property, plant, and equipment acquisitions | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Depreciation and amortization | $13,369 | $11,098 | $2,271 | 20% | - Depreciation and amortization expense increased by $2.3 million (20%) in 2023, primarily due to the acquisition of property, plant, and equipment[299] Special Charges The company recorded $4.4 million in special charges in 2023 related to a workforce reduction - In November 2023, Virgin Galactic initiated a restructuring plan, including a workforce reduction of approximately 185 employees (18% of its workforce), resulting in $4.4 million in severance and related benefit costs[300][507][508] - The unpaid severance and related benefit costs of $1.4 million as of December 31, 2023, are expected to be fully paid in Q1 2024[301][508] Interest Income Interest income increased by 238% in 2023 due to higher marketable securities balances and interest rates | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest income | $42,234 | $12,502 | $29,732 | 238% | - Interest income significantly increased by $29.7 million (238%) in 2023, driven by higher average balances of marketable securities, improved investment returns, and higher interest rates on deposits[302] Interest Expense Interest expense increased by 6% in 2023 due to a full year of expense related to convertible senior notes | Metric | 2023 (in thousands) | 2022 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $12,872 | $12,130 | $742 | 6% | - Interest expense increased by $0.7 million (6%) in 2023, primarily due to a full year of interest expense and amortization of debt issuance costs related to the convertible senior notes issued in 2022[303] Income Tax Expense Income tax expense was immaterial for 2023 and 2022, with a full valuation allowance against U.S. deferred tax assets - Income tax expense was immaterial for 2023 and 2022, as the company maintains a full valuation allowance against its net U.S. federal and state deferred tax assets[304] - The reported income tax expense primarily relates to corporate income taxes for operations in the United Kingdom[304] Liquidity and Capital Resources The company maintains liquidity through cash, marketable securities, and capital raised from 'at-the-market' offerings Historical Cash Flows Cash flows reflect increased operating use, decreased investing use, and significant financing inflows from stock issuance Operating Activities Net cash used in operating activities increased to $448.2 million in 2023, driven primarily by net losses | Metric | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(448,193) | $(380,241) | | Net loss | $(502,337) | $(500,152) | | Stock-based compensation | $44,258 | $45,709 | | Depreciation and amortization | $13,369 | $11,098 | - Net cash used in operating activities increased to $448.2 million in 2023, primarily driven by net losses, partially offset by non-cash items like stock-based compensation and depreciation[307] Investing Activities Net cash used in investing activities decreased to $116.3 million in 2023, reflecting marketable securities transactions | Metric | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in investing activities | $(116,273) | $(286,165) | | Purchases of marketable securities | $(1,009,836) | $(704,565) | | Capital expenditures | $(44,309) | $(16,489) | | Proceeds from marketable securities | $937,872 | $434,889 | - Net cash used in investing activities decreased to $116.3 million in 2023, reflecting $1.0 billion in marketable securities purchases and $44.3 million in capital expenditures, partially offset by $937.9 million from maturities and calls of marketable securities[309] Financing Activities Net cash provided by financing activities was $475.4 million in 2023, primarily from common stock sales | Metric | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by financing activities | $475,431 | $459,003 | | Proceeds from common stock issuance | $478,900 | $102,100 | | Proceeds from convertible senior notes | $0 | $413,700 | | Purchase of capped call | $0 | $(52,300) | - Net cash provided by financing activities was $475.4 million in 2023, primarily from $478.9 million in common stock sales[311] - In 2022, financing activities included $413.7 million from convertible senior notes and $102.1 million from common stock sales, offset by a $52.3 million capped call purchase[312] Contractual Obligations Future minimum payments under non-cancellable operating leases totaled $128.2 million as of December 31, 2023 - As of December 31, 2023, future minimum payments under non-cancellable operating leases totaled $128.2 million, with arrangements expiring through 2065[313] Funding Requirements Future expenditures will increase to scale manufacturing, expand facilities, and develop the next-generation spaceflight system - Expenditures are expected to fluctuate with ongoing activities, particularly the development of the next-generation spaceflight system and capital investments[314] - Long-term expenditures will increase to scale manufacturing for additional spaceships, carrier aircraft, and rocket motors, and establish the astronaut campus in New Mexico[314] - Significant capital expenditures are anticipated for third-party arrangements to manufacture key subassemblies for Delta Class spaceships and design next-generation carrier aircraft[314] Issuances of Common Stock The company utilized 'at-the-market' offerings to raise capital, completing a $300 million program and initiating a new $400 million program in 2023 - Virgin Galactic completed its 2022 'at-the-market' (ATM) offering in June 2023, selling 59.4 million shares and generating $300.0 million in gross proceeds[317] - In June 2023, a new $400 million ATM program was initiated, under which 79.7 million shares were sold by December 31, 2023, generating $287.5 million in gross proceeds[318][319] Liquidity Outlook Current cash and marketable securities are expected to meet short-term liquidity needs, but long-term funding will be required - Virgin Galactic expects to meet short-term liquidity requirements for the next twelve months through its current cash, cash equivalents, and marketable securities[320] - Beyond twelve months, funding will be needed for additional spaceships and motherships, Spaceport America expansion, astronaut campus construction, and convertible senior notes repayment[321] - The company anticipates generating revenue from its spaceflight program, but may need additional debt or equity financing if current capital sources are insufficient[321] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgments for inventories, R&D, income taxes, and stock-based compensation Inventories Inventories are valued at the lower of cost or net realizable value using the average cost method - Inventories, consisting of materials for spaceflight operations, are valued at the lower of cost or net realizable value using the average cost method[324] Research and Development R&D activities focus on advancing the future fleet towards commercialization through design, development, and testing - R&D activities advance the future fleet towards commercialization, including basic and applied research, concept formulation, design, development, and testing[325] - Costs primarily include equipment, material, and labor for designing next-generation spaceships and motherships, plus allocated overhead[326] Income Taxes Income tax expense is recorded using the asset and liability method, with a valuation allowance against deferred tax assets - Income tax expense is recorded using the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences and carryforwards[327] - Valuation allowances are established against deferred tax assets when realization is not more likely than not[327][328] - The company has accumulated net operating losses at federal and state levels, with income tax expense primarily related to UK operations[329] Stock-Based Compensation Stock-based compensation expense is recognized based on the grant-date fair values of awards over their service periods - Stock-based awards (RSUs, PSUs, PSOs, service-based stock options) are recognized as compensation expense based on their grant-date fair values over the requisite service periods[330][331] - Fair value for service-based stock options is estimated using the Black-Scholes model, while market-based PSUs and PSOs use the Monte-Carlo simulation method[332] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from interest rate changes and foreign currency exchange rate fluctuations - Virgin Galactic is exposed to market risks from interest rate changes and foreign currency exchange rate fluctuations due to operations in the U.S. and UK[333] Interest Rate Risk The investment portfolio is subject to interest rate risk, though a 100 basis point change would not be material | Metric | Value (as of Dec 31, 2023) | | :--- | :--- | | Cash, cash equivalents & marketable securities | $982.4 million | | Invested in money market, U.S. treasury, corporate debt | $964.7 million | - The investment portfolio is subject to market risk from interest rate changes, but a hypothetical 100 basis point change would not have a material impact on its value as of December 31, 2023[336][338] - The $425 million 2.50% convertible senior notes due 2027 have a fixed annual interest rate, limiting direct interest rate exposure, but their fair value fluctuates with market interest rates and common stock price[337] Foreign Currency Risk Foreign currency risk from UK operations is currently not material, and the company does not use hedging instruments - The functional currency of UK operations is the local currency, exposing the company to foreign currency risk when translating financial statements to USD[339] - Currently, foreign currency forward contracts are not used to manage exchange rate risk, as the amount subject to this risk is not material to overall operations[339] Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this item are incorporated by reference from page F-1 of this report - The financial statements required by this Item are included in Item 15 of this report and are presented beginning on page F-1 and are incorporated herein by reference[340] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[341] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2023[343] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[345] - Ernst & Young LLP audited the consolidated financial statements and issued an unqualified opinion on the effectiveness of internal control over financial reporting[346] - There were no changes in internal control over financial reporting during the three months ended December 31, 2023, that materially affected or are reasonably likely to materially affect it[347] Item 9B. Other Information No officers or directors adopted or terminated any Rule 10b5-1 trading arrangements during Q4 2023 - During Q4 2023, no officers or directors adopted or terminated any Rule 10b5-1(c) trading arrangements or 'non Rule 10b5-1 trading arrangement'[348] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Virgin Galactic Holdings, Inc - Not applicable[348] Part III Item 10. Directors, Executive Officers and Corporate Governance Information for this item will be provided in an amendment to this report or incorporated by reference from the 2024 Proxy Statement - Information for this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from the 2024 Annual Meeting Proxy Statement[351] Item 11. Executive Compensation Information for this item will be provided in an amendment to this report or incorporated by reference from the 2024 Proxy Statement - Information for this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from the 2024 Annual Meeting Proxy Statement[352] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item will be provided in an amendment to this report or incorporated by reference from the 2024 Proxy Statement - Information for this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from the 2024 Annual Meeting Proxy Statement[353] Item 13. Certain Relationships and Related Transactions, and Director Independence Information for this item will be provided in an amendment to this report or incorporated by reference from the 2024 Proxy Statement - Information for this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from the 2024 Annual Meeting Proxy Statement[354] Item 14. Principal Accountant Fees and Services Information for this item will be provided in an amendment to this report or incorporated by reference from the 2024 Proxy Statement - Ernst & Young LLP, Wichita, Kansas, Auditor Firm ID: 42, is the independent registered public accounting firm[355] - Information for this item will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference from the 2024 Annual Meeting Proxy Statement[355] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K - This section details the financial statements (referenced from F-1), financial statement schedules (none), and a comprehensive list of exhibits filed, furnished, or incorporated by reference[357][358] - Exhibits include the Certificate of Incorporation, By-Laws, specimen common stock certificate, Indenture for convertible senior notes, indemnification agreements, incentive award plans, employment agreements, stockholders' agreement, registration rights agreement, trademark license agreement, spacecraft technology license agreement, facilities leases, and distribution agency agreements[359][360][361] Item 16. Form 10-K Summary This item indicates that there is no Form 10-K Summary provided - None[363] Signatures The report is duly signed by the company's CEO, CFO, and Board of Directors as of February 27, 2024 - The report is signed by Michael Colglazier, Chief Executive Officer and President (Principal Executive Officer), and Douglas Ahrens, Chief Financial Officer (Principal Financial and Accounting Officer), on February 27, 2024[368] - A Power of Attorney grants Michael Colglazier and Douglas Ahrens the authority to file and sign amendments to this Annual Report on Form 10-K[369] - The report is also signed by the company's directors, including Raymond Mabus, Jr, Henio Arcangeli, Jr, Luigi Brambilla, Tina Jonas, Craig Kreeger, Wanda Sigur, Diana Strandberg, and W Gilbert West[371][372] Index to Consolidated Financial Statements and Supplementary Data Reports of Independent Registered Public Accounting Firms Ernst & Young LLP and KPMG LLP provided unqualified opinions on the company's financial statements and internal controls - Ernst & Young LLP issued an unqualified opinion on Virgin Galactic's consolidated financial statements as of December 31, 2023, and on the effectiveness of its internal control over financial reporting[379][380][392][393] - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the two-year period ended December 31, 2022[402] - A critical audit matter for Ernst & Young LLP was the capitalization of spaceflight system costs, due to the high degree of auditor judgment required[384][385] Consolidated Balance Sheets Total assets were $1,179.5 million and total liabilities were $674.0 million as of December 31, 2023 Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $216,799 | $302,291 | $(85,492) | | Restricted cash | $36,793 | $40,336 | $(3,543) | | Marketable securities, short-term | $657,238 | $606,716 | $50,522 | | Inventories | $16,301 | $24,043 | $(7,742) | | Total current assets | $950,829 | $1,001,614 | $(50,785) | | Marketable securities, long-term | $71,596 | $30,392 | $41,204 | | Property, plant and equipment, net | $93,806 | $53,658 | $40,148 | | Total ass