Unless the context otherwise requires, all references in this section to the
"Company," "we," "us," or "our" refer to the business of the
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 Amended Annual Report on Form 10-K/A. 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 Amended Annual Report on Form 10-K/A 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
We are at the vanguard of a new industry, pioneering the commercial exploration
of space with reusable spaceflight systems. We believe the commercial
exploration of space represents one of the most exciting and important
technology initiatives of our time. This industry has begun growing dramatically
due to new products, new sources of private and government funding, and new
technologies. Demand is emerging from new sectors and demographics. As
government space agencies have retired or reduced their own capacity to send
humans into space, private companies are beginning to make crucial inroads into
the fields of human space exploration. We have embarked into this commercial
exploration journey with a mission to put humans into space and return them
safely to Earth on a routine and consistent basis. We believe the success of
this mission will provide the foundation for a myriad of exciting new
industries.
We are a vertically integrated aerospace company pioneering human spaceflight
for private individuals and researchers. Our spaceship operations consist of
commercial human spaceflight and flying commercial research and development
payloads into space. Our operations also include the design and development,
manufacturing, ground and flight testing, and post-flight maintenance of our
spaceflight vehicles. We focus our efforts in spaceflights using our reusable
technology for human tourism and for research and education. We intend to offer
our customers, a unique, multi-day experience culminating in a spaceflight that
includes several minutes of weightlessness and views of Earth from space. As
part of our commercial operations, we have exclusive access to the
Our primary mission is to launch the first commercial program for human
spaceflight. In
We have also developed an extensive set of vertically integrated aerospace development capabilities encompassing preliminary vehicle design and analysis, detail design, manufacturing, ground testing, flight testing, and maintenance of our spaceflight system. Our spaceflight system consists of three primary components: our carrier aircraft, the mothership; our spaceship, SpaceShipTwo; and our hybrid rocket motor.
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SpaceShip is a spaceship with the capacity to carry pilots and future astronauts, or commercial research and development payloads, into space and return them safely to Earth. Fundamentally, SpaceShip is a rocket-powered aerospace vehicle that operates more like a plane than a traditional rocket. SpaceShip is powered by a hybrid rocket propulsion system, which we refer to as "RocketMotor", which propels the spaceship on a trajectory into space. SpaceShip's cabin has been designed to maximize the future astronaut's safety, experience and comfort. A dozen windows line the sides and ceiling of the spaceship, offering the future astronauts the ability to view the blackness of space as well as stunning views of the Earth below. Our mothership is a twin-fuselage, custom-built aircraft designed to carry SpaceShip up to an altitude of approximately 45,000 feet where the spaceship is released for its flight into space. Using the mothership's air launch capability, rather than a standard ground-launch, reduces the energy requirements of our spaceflight system as SpaceShip does not have to rocket its way through the higher density atmosphere closest to the Earth's surface.
Our team is currently in various stages of designing, testing and manufacturing additional spaceships and rocket motors in order to meet the expected demand for human spaceflight experiences. Concurrently, we are researching and developing new products and technologies to grow our company.
Our operations also include efforts in spaceflight opportunities for research
and education. For example, researchers have utilized parabolic aircraft and
drop towers to create moments of microgravity and conduct significant research
activities. In most cases, these solutions offer only seconds of microgravity
per flight and do not offer access to the upper atmosphere or space. Other
researchers have conducted experiments on sounding rockets or satellites. These
opportunities are expensive, infrequent and may impose highly limiting
operational constraints. We believe that research experiments will benefit from
prolonged exposure to space conditions and yield better results aboard SpaceShip
due to the large cabin, gentler loading during flight, relatively low cost,
advantageous operational parameters, and frequent flights. As such, researchers
and educators are able to conduct critical experiments and obtain important data
without having to sacrifice time and resources. Our commitment to advancing
research and science was present in our
We have also leveraged our knowledge and expertise in manufacturing spaceships to occasionally perform engineering services for future astronauts, such as research, design, development, manufacturing and integration of advanced technology systems.
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 the section of our Amended Annual Report on 10-K/A titled "Risk Factors."
Commercial Launch of Our Human Spaceflight Program
We are in the final phases of developing our commercial spaceflight program.
Prior to commercialization, we must complete our test flight program, which
includes a rigorous series of ground and flight tests, including our baseline
spaceflight metrics, flight paths and safety protocol that will be used
throughout our spaceflight program. The final portion of the test flight program
includes submission of verification reports to the
Customer Demand
While not yet in commercial service for human spaceflight, 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
24 -------------------------------------------------------------------------------- Table of Contents Available Capacity and AnnualFlight Rate We face constraints of resources and competing demand for our human spaceflights. We expect to commence commercial operations with a single SpaceShip, VSS Unity, and a single mothership carrier aircraft, VMS Eve, which together comprise our only spaceflight system. As a result, our annual flight rate will be constrained by the availability and capacity of this spaceflight system. To reduce this constraint, we are in various stages of designing, testing and manufacturing two additional SpaceShip vehicles. We believe that expanding the fleet will allow us to increase our annual flight rate once commercialization is achieved.
Safety Performance of Our Spaceflight Systems Our spaceflight systems are highly specialized with sophisticated and complex technology. We have built operational processes to ensure that the design, manufacture, performance and servicing of our spaceflight systems meet rigorous quality standards. However, our spaceflight systems are still subject to operational and process problems, such as manufacturing and design issues, pilot errors, or cyber-attacks. Any actual or perceived safety issues may result in significant reputational harm to our business and our ability to generate human spaceflight revenue.
Impact of COVID-19
On
Consistent with the actions taken by governmental authorities, including
Beginning in the summer of 2020, all of our employees whose work requires them
to be in our facilities returned back on-site, and we continue with our
implemented and established strict protocols to ensure employee safety,
including enforcing staggered shifts to lower on-site density and re-working
communications processes with engineers
The COVID-19 pandemic and the protocols and procedures we have implemented in response to the pandemic have caused and continue to cause delays to our business and operations, which has led to accumulated impacts to both schedule and cost efficiency and some delays in operational and maintenance activities, including delays in our test flight program. We expect this to continue through well into 2021. The full impact of the COVID-19 pandemic on our business and results of our future operations will depend on future developments, such as the ultimate duration and scope of the outbreak and its impact on our operations necessary to complete the development of our spaceflight systems, our scheduled spaceflight test programs and commencement of our commercial flights. In addition to existing travel restrictions, countries may continue to maintain or
25 -------------------------------------------------------------------------------- Table of Contents reimpose closed borders, impose prolonged quarantines, and/or further restrict travel. We believe our cash and cash equivalents on hand atMarch 31, 2021 and management's operating plan, will provide sufficient liquidity to fund our operations for at least the next twelve months from the issuance of the financial statements included in this Quarterly Report on Form 10-Q. If we experience a significant delay due to our workforce getting ill or if the pandemic worsens, we may take additional actions, such as further reducing costs. Component of Results of Operations Revenue To date, we have primarily generated revenue by transporting scientific commercial research and development payloads using our spaceflight systems and by providing engineering services as a subcontractor to the primary contractor of a long-term contract with theU.S. government. We also have generated revenues from a sponsorship arrangement.
Following the commercial launch of our human spaceflight services, we expect the significant majority of our revenue to be derived from sales of tickets to fly to space. We also expect that we will continue to receive a small portion of our revenue by providing services relating to the research, design, development, manufacture and integration of advanced technology systems.
Cost of Revenue Costs of revenue related to spaceflights include costs related to the consumption of a rocket motor, fuel, payroll and benefits for our pilots and ground crew, and maintenance. Cost of revenue related to the engineering services consist of expenses related to materials and human capital, such as payroll and benefits. Once we have completed our test flight program and commenced commercial operations, we will capitalize the cost to construct any additional SpaceShip vehicles. Cost of revenue will include vehicle depreciation once those spaceships are placed into service. We have not capitalized any spaceship development costs to date.
Gross Profit and Gross Margin Gross profit is calculated based on the difference between our revenue and cost of revenue. Gross margin is the percentage obtained by dividing gross profit by our revenue. Our gross profit and gross margin has varied historically based on the mix of revenue-generating spaceflights and engineering services. As we approach the commercialization of our spaceflights, we expect our gross profit and gross margin may continue to vary as we scale our fleet of spaceflight systems.
Selling, General and Administrative Selling, general and administrative expenses consist of human capital related expenses for employees involved in general corporate functions, including executive management and administration, accounting, finance, tax, legal, information technology, marketing and commercial, and human resources; depreciation expense and rent relating to facilities, including a portion of the lease with Spaceport America, and equipment; professional fees; and other general corporate costs. Human capital expenses primarily include salaries, cash bonuses and benefits. As we continue to grow as a company, we expect that our selling, general and administrative costs will increase on an absolute dollar basis.
We also expect to incur additional expenses as a result of operating as a public
company, including expenses necessary to comply with the rules and regulations
applicable to companies listed on a national securities exchange and related to
compliance and reporting obligations pursuant to the rules and regulations of
the
26 -------------------------------------------------------------------------------- Table of Contents •equipment, material, and labor hours (including from third party contractors) for developing the spaceflight system's structure, spaceflight propulsion system, and flight profiles; and •rent, maintenance, and depreciation of facilities and equipment and other overhead expenses allocated to the research and development departments. As ofMarch 31, 2021 , our current primary research and development objectives focus on the development of our SpaceShip vehicles for commercial spaceflights and developing our RocketMotor, a hybrid rocket propulsion system that will be used to propel our SpaceShip vehicles into space. The successful development of SpaceShip and RocketMotor involves many uncertainties, including: •timing in finalizing spaceflight systems design and specifications; •successful completion of flight test programs, including flight safety tests; •our ability to obtain additional applicable approvals, licenses or certifications from regulatory agencies, if required, and maintaining current approvals, licenses or certifications; •performance of our manufacturing facilities despite risks that disrupt productions, such as natural disasters and hazardous materials; •performance of a limited number of suppliers for certain raw materials and components; •performance of our third-party contractors that support our research and development activities; •our ability to maintain rights from third parties for intellectual properties critical to research and development activities; •our ability to continue funding and maintain our current research and development activities; and •the impact of the ongoing global COVID-19 pandemic.
A change in the outcome of any of these variables could delay the development of SpaceShip and RocketMotor, which in turn could impact when we are able to commence our human spaceflights.
As we are currently still in our final development and testing stage of our spaceflight system, we have expensed all research and development costs associated with developing and building our spaceflight system. We expect that our research and development expenses will decrease once technological feasibility is reached for our spaceflight systems as the costs incurred to manufacture additional SpaceShip vehicles, built by leveraging the invested research and development, will no longer qualify as research and development activities.
Change in Fair Value of Warrants Change in fair value of warrants reflects the non-cash change in the fair value of warrants. Certain warrants issued as part of the Company's initial public offering in 2017 and assumed upon the consummation of the Business Combination were recorded at their fair value on the date of the Business Combination and are remeasured as of any warrant exercise date and at the end of each reporting period.
Interest Income, net Interest income, net consists primarily of interest earned on cash and cash equivalents held by us in interest bearing demand deposit accounts and cash equivalents, as well as interest expense related to our finance lease obligations.
Other Income Other income consists of miscellaneous non-operating items, such as gains on marketable securities and handling fees related to customer refunds.
Income Tax Provision
We are subject to income taxes in
27 -------------------------------------------------------------------------------- Table of Contents allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Results of Consolidated Operations The following tables set forth our results of operations for the periods presented and expresses the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparisons of financial results is not necessarily indicative of future results.
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