VIRGIN ORBIT HOLDINGS, INC. The following discussion and analysis provides information thatVirgin Orbit's management believes is relevant to an assessment and understanding ofVirgin Orbit's condensed consolidated results of operations and financial condition. You should read this discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with filed with theSEC onMarch 31, 2022 , as amended (the "2021 Annual Report on Form 10-K"). This discussion may contain forward-looking statements based uponVirgin Orbit's current expectations, estimates and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed in the sections entitled " Part II, Item 1A. Risk Factors " and " Cautionary Statement Regarding Forward-Looking Statements ."Vieco USA, Inc. entered into a merger agreement (the "Merger Agreement") withNextGen Acquisition Corp. II ("NextGen") onAugust 22, 2021 . The transactions contemplated by the terms of the Merger Agreement (the "Business Combination") were completed onDecember 29, 2021 , in conjunction with which NextGen changed its name toVirgin Orbit Holdings, Inc. (hereafter referred to as "Virgin Orbit , the "Company," "we," "us" or "our", unless the context otherwise requires).
Overview
We are a vertically integrated space company that provides customers dedicated and rideshare small satellite launch capabilities. Our philosophy is to operate a mobile launch system that can "launch at any time, from any place, to any orbit." Our vision is to use space to drive positive and lasting change on Earth, from connecting communities to advancing scientific initiatives; supporting America's and other nations' space presence, and helping create the next generation of world-changing space technology. Since our founding in 2017, we have invested in research and development efforts to develop a unique air-launch system, comprised of Cosmic Girl, a modified Boeing 747 aircraft, and the LauncherOne rocket. Cosmic Girl serves as a reusable mobile launch pad, carrying aloft LauncherOne, a two-stage rocket that is the world's first and only liquid-fueled, air-launched rocket to reach orbit successfully. This mobile system allows us to serve a broad array of applications and end markets, providing customers with a highly differentiated solution to launch satellites relative to other existing small satellite ground launch providers. We believe there is near- and medium-term acceleration in the growth of the space market, driven by rapid advances in launch and satellite technology. As a result, there has been a proliferation of private sector space companies pursuing the growing demand for space solutions across multiple applications. There are numerous private small-satellite launch companies (focused on carrying less than 1,000 kg to 500 km low Earth orbit), but to our knowledge, only five companies have completed successful launch to orbit - Astra Space,Northrop Grumman ,Rocket Lab's dedicated rideshare program, andVirgin Orbit . As one of the few proven small satellite launch providers, we believe we are well-positioned to benefit from these attractive industry tailwinds. We successfully completed a total of four orbital launches in 2021 and 2022 to date, which we believe demonstrates the efficacy of our launch system. To date, we have delivered 33 satellites to their desired orbits with high precision. By utilizing an air-launch system via Cosmic Girl and the LauncherOne rocket, we believe that we offer the agility, flexibility and responsiveness that small satellite customers need to achieve their mission objectives. Our launches have delivered satellites to orbit for customers across commercial, civil and national security and defense markets, both domestically and internationally. Leveraging the successes from these launches, we have been able to secure active contracts representing approximately$581.9 million of potential revenue, of which$163.2 million is under binding agreements, and$418.7 million is under non-binding memorandums ("MOUs") and letters of intent ("LOIs") as ofJune 30, 2022 . We develop and manufacture our launch technology from a vertically-integrated manufacturing facility inLong Beach, California . Leveraging advanced, state-of-the art manufacturing capabilities, including automation and additive manufacturing technologies, we believe we have the necessary infrastructure in-place to meet the medium-term demand for our launch business. Prior to the Business Combination,Virgin Group Holdings Limited ("Virgin Group ") andMubadala Investment Company PJSC ("Mubadala") and its subsidiaries invested approximately$1 billion of capital to found, scale and grow the business. 32
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We have been primarily focused and engaged in designing and developing launch solutions for small satellites since our inception in 2017. We have incurred net losses of$95.9 million and$77.0 million for the six months endedJune 30, 2022 and 2021, respectively, and expect to incur significant losses in the near term. Since achieving commercialization inJanuary 2021 , we have continued and expect to continue to make significant investments in capital expenditures to build and expand our production for commercial small satellite launches, hire top-tier leaders and innovators, and continue to invest in research and development. However, as discussed below under " Liquidity and Capital Resources - Going Concern and Sources of Liquidity," our history of losses and the possibility that we may not be able to raise sufficient capital to finance our operations raise substantial doubt regarding our ability to continue as a going concern.
Business Combination
OnAugust 22, 2021 ,NextGen Acquisition Corp. II ("NextGen") viaPulsar Merger Sub, Inc. ("Pulsar Merger Sub") andVieco USA entered into a merger agreement (the "Merger Agreement") which contemplated Pulsar Merger Sub merging with and intoVieco USA , withVieco USA surviving the merger as a wholly owned subsidiary of NextGen (the "Business Combination"). OnDecember 29, 2021 , as contemplated by the Merger Agreement, we consummated the Business Combination and changed our name toVirgin Orbit Holdings, Inc. The Business Combination was accounted for as a reverse recapitalization.Virgin Orbit common stock and warrants commenced trading on theNasdaq Stock Market LLC ("Nasdaq") under the symbols "VORB" and "VORBW," respectively, onDecember 29, 2021 . See Note 1, "Organization and Business Operations -Business Combination" in the notes to the condensed consolidated financial statements included in this Quarterly Report for further details.
Key Factors Affecting Our Performance
We believe that our future success and financial performance depend on several factors that present significant opportunities for our business, but also pose risks and challenges, including those discussed below and in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q.
Customer Demand
Since our first test flight in 2020, a broad range of potential customers, including national security organizations, commercial satellite providers, and civil service providers have shown significant interest in our service. Our commercial customers include satellite and constellation providers such as Arqit and SatRevolution. Civil customers mostly fall within our spaceport and launch offerings for civil space agencies with customers including, NASA, SpaceportCornwall in theUnited Kingdom , Spaceport Japan atOita Airport inJapan , and Alcantara Launch Center inBrazil . Outside of spaceports, we also provide dedicated launch services for civil space agencies such as NASA, and we expect to provide such service to other governments which have space agencies but lack the infrastructure for domestic space launches. Some national security and defense customers include the United States Space Force, theU.S. Air Force , NRO and theMissile Defense Agency . Leveraging our three successful orbital launches in 2021 and early 2022, we have been able to secure active contracts as ofJune 30, 2022 representing approximately$581.9 million of potential revenue as ofJune 30, 2022 , including$181.6 million of signed, binding agreements, of which$163.2 million in backlog, and$418.7 million of signed, non-binding memorandums of understanding and letters of intent as ofJune 30, 2022 . We also believe there is near- and medium-term growth potential in the space market, driven by rapid advances in launch and satellite technology. As a result, there has been a proliferation of private sector space companies pursuing the growing demand for space solutions across multiple applications. As one of the few proven small satellite launch providers to have successfully reached orbit, we believe we are well-positioned to benefit from these attractive industry tailwinds. Therefore, we plan to leverage our existing launch capabilities and our track record as a systems integrator to provide end-to-end value-added services for Internet of Things ("IoT") and Earth Observation ("EO") applications through the combination of agreements with satellite operators and a satellite constellation we will own and operate. Using a satellite-as-a-service model, we expect to deploy our own satellites in the next few years to serve government and commercial, both domestically and internationally.
Technology Innovation
We design, build, test, and launch LauncherOne in-house and operate at the forefront of composite structures, liquid rocket engines, ultra-responsive launch systems, ruggedized avionics, optimized flight software, automated flight safety systems,
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and advanced manufacturing techniques. We believe the synergy of these technologies enables greater responsiveness to the commercial and government small satellite markets. Our unique air-launch system launches satellites into space from a rocket carried beneath the wing of a modified Boeing 747-400, meaning it has greater flexibility, mobility and responsiveness than other satellite launch systems. To continue establishing market share and attracting customers, we plan to continue our substantial investments in research and development for the continued enhancements of LauncherOne and commercialization of future generations of our rockets.
Manufacturing Capacity
As we plan to continue to scale our production of rockets for our small satellite services, we are making significant investments in capital expenditures for building and enhancing our manufacturing capacity and facilities. We expect our capital expenditures to continue to increase for the next several years. The amount and timing of our future manufacturing capacity requirements, and resulting capital expenditures, will depend on many factors, including the pace and results of our research and development efforts to meet technological development milestones, our ability to develop and manufacture rockets, our ability to achieve sales, and customer demand for our rockets at the levels we anticipate. Our headquarters inLong Beach, California has combined facility of 195,000 square feet and is used for design, engineering, manufacturing, integration, assembly, test activities, payload processing and encapsulation. As ofJune 30, 2022 , we had approximately five rockets in production and the processes, technology and machinery/tooling to support a production capacity of approximately 20 rockets annually.
Global Pandemic
OnMarch 11, 2020 , theWorld Health Organization characterized the outbreak of the coronavirus disease ("COVID-19") as a global pandemic and recommended containment and mitigation measures. We have taken steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, we initially reduced and later temporarily suspended on-site operations for one week at our facilities inLong Beach, California in lateMarch 2020 . Starting lateMarch 2020 , approximately two-thirds of our workforce and contractors were able to complete their duties from home. As of the date of this Quarterly Report on Form 10-Q, all of our employees whose work requires them to be in our facilities are now back on-site, but we have experienced, and expect to continue to experience, reductions in operational efficiency due to illness from COVID-19 and precautionary actions taken related to COVID-19. While many restrictions associated with COVID-19 have more recently been relaxed, the longevity and extent of the COVID-19 pandemic remains uncertain, including due to the emergence and impact of the COVID-19 variants. These measures and challenges may continue for the duration of the pandemic and may affect our revenue growth while the pandemic continues. See Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for further discussion of the impacts of the COVID-19 pandemic on our business.
Components of Results of Operations
Revenue
Launch services
Small satellite launch operations revenue is recognized for providing customer launch services by placing payloads into orbit. Revenue for each customer payload is recognized at a point in time when the performance obligation is complete, which is typically at the point of launch. We began recognizing revenue for launch services inJanuary 2021 from our initial launch with NASA. Our second launch was completed inJune 2021 , with successful deployments of payloads in each of our core offerings: commercial, civil and defense. We successfully completed four orbital launches in 2021 and 2022 to date, out ofMojave, California . To date, we have delivered 33 satellites to their desired orbits with high precision. We generated$1.8 million and$6.2 million of launch services revenue during the six months endedJune 30, 2022 and 2021, respectively, from launch services. We expect a significant portion of our future revenue growth to be derived from further commercialization of our small satellite launch operations and expansion of our portfolio of space offerings.
Engineering services
We also generate revenue by providing engineering services, which primarily relates to research and studies, to our customers. Revenue is recognized as control of the performance obligation is transferred over time to the customer. As ofJune 30, 2022 , we have one engineering service revenue contract for which we expect to transfer all remaining performance obligations to the customer by the year endedDecember 31, 2024 . We expect that we will continue to earn revenue from engineering services, but that such revenue will represent a smaller portion of our future revenue growth 34
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compared to launch services. We generated
Cost of Revenue
Cost of revenue relates to launch services and engineering services, which primarily includes costs for materials and human capital, such as payroll and benefits for our launch and flight operations. We expect that we will continue to incur cost of revenue from launch services and engineering services. Since LauncherOne achieved technological feasibility inJanuary 2021 , we began capitalizing and subsequently charging to cost of revenue the costs incurred to launch small satellites. Costs associated with launch services include the costs for rocket manufacturing, overhead, and launch. Costs for rocket manufacturing include materials, labor, fuel, payroll and benefits for our launch and flight operations as well as the depreciation of Cosmic Girl, maintenance and depreciation of facilities and equipment and other allocated overhead expenses. As we continue to grow our revenue from further commercialization of our small satellite launch operations and expansion of our portfolio of space offerings, we expect that our cost of revenue will increase.
Gross Profit and Gross Margin
Gross profit is calculated as revenue less cost of revenue. Gross margin is the percentage obtained by dividing gross profit by its revenue. Our gross profit and gross margin have varied historically based on the mix of revenue from small satellite launch services and engineering services. Although our gross profit and gross margin may continue to vary by offering as we scale our business, we expect our overall gross profit and gross margin to improve over time.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist of personnel-related expenses related to general corporate functions, primarily including executive management and administration, finance and accounting, legal, business development, and government affairs, as well as certain allocated costs. Personnel-related expenses primarily include salaries and benefits. Allocated costs include costs related to information technology, facilities, human resources and safety. Personnel-related expenses also include allocated sustaining activities relating to launch operations and production processes support, including required launch system maintenance, updates and documentation. As we continue to grow, we expect that our selling, general and administrative costs will increase. 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 theSEC , as well as higher expenses for general and director and officer insurance, investor relations and professional services.
Research and Development Expense
We conduct research and development activities to develop existing and future technologies that advance our satellite launch and space solution offerings. Research and development activities include basic research, applied research, concept formulation studies, design, development and related test program activities. Costs incurred to develop our LauncherOne rockets primarily include equipment, material, labor and overhead. Costs incurred for performing test flights primarily include labor and fuel expenses for launch and flight operations. Research and development costs also include rent, maintenance, and depreciation of facilities and equipment and other allocated overhead expenses. We plan to continue to make substantial investments in research and development for the continued enhancements of LauncherOne and the development of a third stage modified LauncherOne for additional services. As LauncherOne achieved technical feasibility inJanuary 2021 , we began capitalizing the production costs of our LauncherOne rockets.
Interest Expense, net
Interest expense, net relates to our finance lease obligations, cost of financing our director and officer insurance and income from interest bearing demand deposit accounts
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Change in fair value of equity investments
Change in fair value of equity investments consists of the changes in fair value of our equity investments.
Change in fair value of liability classified warrants
Change in fair value of liability classified warrants relates to remeasurement of our public and private placement warrants to fair value as of any respective exercise date and as of each subsequent balance sheet date.
Other Income
Other income consists of sources of income that are not related to our primary operations, including miscellaneous non-operating items, such as income recognized from non-ordinary course of business activities.
Income Tax Provision
Our provision for income taxes consists of an estimate forU.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in the tax law. We maintain a valuation allowance against the full value of ourU.S. and state net deferred tax assets because we believe it is more likely than not that the recoverability of these deferred tax assets will not be realized. Results of Operations
The following table sets 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 June 30, Six Months Ended June 30,
(In thousands) 2022 2021 2022 2021
Revenue $ 5 $ 1,693 $ 2,116 $ 7,228
Cost of revenue 3,427 14,292 20,868 16,673
Gross loss (3,422) (12,599) (18,752) (9,445)
Selling, general and administrative expenses 27,845 20,480 60,271 39,963
Research and development expenses 9,135 11,616 19,938 29,447
Operating loss (40,402) (44,695) (98,961) (78,855)
Other income (expense):
Change in fair value of equity investments (4,635) - (8,820) -
Change in fair value of liability classified
warrants 11,680 - 11,680 -
Interest expense, net (52) (6) (80) (13)
Other income 121 53 323 1,895
Total other income (expense), net: 7,114 47 3,103 1,882
Loss before income taxes (33,288) (44,648) (95,858) (76,973)
Provision for income taxes 4 - 4 -
Net loss $ (33,292) $ (44,648) $ (95,862) $ (76,973) For the Three and Six Months Ended
Revenue
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands, except %) 2022 2021 change change 2022 2021 change change
(In thousands, except %) (In thousands, except %)
Revenue $ 5 $ 1,693 $ (1,688) (100) % $ 2,116 $ 7,228 $ (5,112) (71) %
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Revenue decreased by
Revenue decreased by$5.1 million for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , which was primarily attributable to one launch completed inJanuary 2022 during the six months endedJune 30, 2022 compared to two launches completed during the six months endedJune 30, 2021 , each with the difference in revenue driven by the manifests for satellites being launched. In addition, a decrease of$0.8 million in revenue from theRoyal Air Force pilot training program for six months endedJune 30, 2021 .
Cost of Revenue and Gross Profit
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands) 2022 2021 change change 2022 2021 change change
Revenue $ 5 $ 1,693 $ (1,688) (100) % $ 2,116 $7,228 $ (5,112) (71) % Cost of revenue 3,427 14,292 (10,865) (76) % 20,868 16,673 4,195 25 % Gross loss$ (3,422) $ (12,599) $ 9,177 (73) %$ (18,752) $(9,445) $ (9,307) 99 % Gross margin N/M (744) % (886) % (131) % Cost of revenue decreased by$10.9 million for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 as we did not have any launches during the three months endedJune 30, 2022 and one launch completed inJune 2021 . This is primarily due to a$8.7 million decrease in cost of sales and lower contract losses recorded of$3.5 million . For the six months endedJune 30, 2022 , the increase of$4.2 million in cost of revenue is primarily attributable to additional contract losses recorded of approximately$8.1 million , inventory write-down of$1.6 million related to certain rocket builds that were not recoverable to its net realizable value, and manufacturing variances for future launches of$1.3 million , offset by the$6.9 million decrease in cost of sales due to one launch completed for the six months endedJune 30, 2022 compared to two launches completed for the six months endedJune 30, 2021 . Gross loss increased by$9.2 million , for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 primarily due to the decrease in cost of revenue of$10.9 million related to$8.7 million decrease in cost of sales as no launch was completed during the three months endedJune 30, 2022 compared to one launch inJune 2021 . In addition, lower contract losses of$3.6 million were recorded during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Gross loss increased by$9.3 million for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily attributable the decrease in launch services revenue and the related cost of sales for one launch completed during the six months endedJune 30, 2022 compared to two launches completed for the six months endedJune 30, 2021 .
Selling, General and Administrative Expenses
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands) 2022 2021 change change 2022 2021 change change
Selling, general and
administrative expenses $ 27,845 $ 20,480 $ 7,365 36 % $ 60,271 $ 39,963 $ 20,308 51 %
Selling, general and administrative expenses increased by $7.4 million , or 36%,
for the three months ended June 30, 2022 compared to the three months ended June
30, 2021 , which was primarily attributable to the increase general corporate
expenses of $6.4 million . General corporate expenses includes $3.9 million
related to new public company costs for directors and officers insurance,
training, brand license fees, equipment maintenance and travel expenses.
Selling, general and administrative expenses increased by $20.3 million , or 51%,
for the six months ended June 30, 2022 compared to the six months ended June 30,
2021 , which was primarily attributable to the increase in facilities and
overhead of approximately $8.8 million and the increase general corporate
expenses of $14.1 million , offset by higher department allocations of
approximately $2.7 million as well as other costs of $0.5 million . The increase
in facilities and overhead is due to our change in expense classification of
certain development expenses to sustaining expenses after achieving
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technological feasibility for both the launch operations and production processes which primarily represents personnel-related expenses of$5.2 million during the six months endedJune 30, 2022 . General corporate expenses includes$8.8 million related to new public company costs for directors and officers insurance, advertising, brand license, marketing, equipment maintenance, development labor, and travel expenses.
Research and Development Expenses
Three Months Ended
June 30, $ % Six Months Ended June 30, %
(In thousands) 2022 2021 change change 2022 2021 $ change change
Research and development
expenses $ 9,135 $ 11,616 $ (2,481) (21) % $ 19,938 $ 29,447 $ (9,509) (32) %
Research and development expenses decreased by $2.5 million , or 21%, for the
three months ended June 30, 2022 compared to the three months ended June 30,
2021 , which was primarily attributable to the decrease in facilities, overhead
and general corporate expenses due to the transition from development into
sustaining activities for both launch operations and production processes of
approximately $.3.6 million , offset by the growth in research and development
personnel-related expenses of approximately $1.1 million during the three months
ended June 30, 2021 .
Research and development expenses decreased by $9.5 million , or 32%, for the six
months ended June 30, 2022 compared to the six months ended June 30, 2021 , which
was primarily attributable to the decrease in facilities, overhead and general
corporate expenses due to the transition from development into sustaining
activities for both launch operations and production processes of approximately
$4.0 million , and the decrease in research and development personnel-related
expenses of approximately $5.4 million during the six months ended June 30,
2022 .
Change in fair value of equity investments
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands) 2022 2021 change change 2022 2021 change change
Change in fair value of
equity investments $ (4,635) $ - $ (4,635) N/A $ (8,820) $ - $ (8,820) N/A
The loss on the fair value of equity investments of $4.6 million for the three
months ended June 30, 2022 compared to the three months ended June 30, 2021 ,
which was attributable to the unrealized loss of $4.6 million from the equity
investment in Arqit that was acquired during the third quarter of 2021.
The loss on the fair value of equity investments of $8.8 million for the six
months ended June 30, 2022 compared to the six months ended June 30, 2021 , which
was attributable to the unrealized loss of $8.8 million from the equity
investment in Arqit.
Change in fair value of liability classified warrants
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands) 2022 2021 change change 2022 2021 change change
Change in fair value of
liability classified
warrants $ 11,680 $ - $ 11,680 N/A $ 11,680 $ - $ 11,680 N/A
There was an $11.7 million change in fair value of liability classified warrants
for the three and six months ended June 30, 2022 mainly as a result of a
decrease in the price of our common stock. The public and private placement
warrants were assumed by the Company from NextGen as part of the Business
Combination on December 29, 2021 . The public and private placement warrants are
recorded on the balance sheet at fair value with the carrying amount subject to
remeasurement to fair value as of any respective exercise date and as of each
subsequent balance sheet date.
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Interest Expense, Net
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands) 2022 2021 change change 2022 2021 change change
Interest expense, net $ (52) $ (6) $ (46) 767 % $ (80) $ (13) $ (67) 515 %
Interest expense, net increased $46.0 thousand , or 767% for the three months
ended June 30, 2022 compared to the three months ended June 30, 2021 primarily
attributable to the interest expense for financing of our director and officer
insurance of $29.1 thousand and $16.4 thousand of accrued interest related to
the convertible debt issued on June 28, 2022 .
Interest expense, net increased $67.0 thousand , or 515% for the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 primarily
attributable to the interest expense for financing of our director and officer
insurance of $58.3 thousand and $16.4 thousand of accrued interest related to
the convertible debt issued on June 28, 2022 .
Other Income
Three Months Ended
June 30, $ % Six Months Ended June 30, $ %
(In thousands) 2022 2021 change change 2022 2021 change change
Other income, net $ 121 $ 53 $ 68 128 % 323 1,895 $ (1,572) (83) %
Other income increased by $0.1 million , or 128% for the three months ended June
30, 2022 compared to the three months ended June 30, 2021 primarily related to
interest income earned on money market fund investments.
Other income decreased by $1.6 million , or 83% for the six months ended June 30,
2022 compared to the six months ended June 30, 2021 primarily attributable to
the initial recognition of the initial ordinary shares of Sky and Space Global
Limited ("SAS") issued to us in consideration for the termination of the launch
service agreement ("LSA") of $1.7 million as an equity investment and six months
ended June 30, 2021 .
Provision for Income Taxes
Provision for income taxes was immaterial for the three and six months endedJune 30, 2022 and 2021. We have accumulated net operating losses at the federal and state level for the time period during we had not yet began commercial operations. We maintain a substantially full valuation allowance against net deferred tax assets. The income tax expenses are primarily related to minimum state filing fees in the states where we have operations.
Liquidity and Capital Resources
Liquidity Requirements
We expect our expenses to increase in connection with ongoing activities, particularly as we continue to advance the development of our technologies, commercialize our satellite launch operations and start to develop our space solution offerings, and continue to build and expand our production of rockets and aircraft.
Specifically, we expect our operating expenses to increase as we:
•scale up our facilities, manufacturing processes and capabilities to support expanding our volume of rockets;
•pursue further research and development on our satellite launches and space solution offerings, including those related to our research and education efforts;
•hire additional personnel in research and development, manufacturing operations, testing programs and maintenance as we increase the volume of our satellite launches and expand our space solution offerings;
•seek regulatory approval for any changes, upgrades, or improvements to our technologies and operations in the future; and
•hire additional personnel in management to support the expansion of our operational, financial and information technology functions as a public company.
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We have several non-cancelable leases primarily related to the lease of our manufacturing and testing facilities. These leases generally contain renewal options for periods ranging from three to ten years and require us to pay all executory costs, such as maintenance and insurance. Our total remaining lease obligation as ofJune 30, 2022 is$21.5 million , with$1.4 million due in less than one year. We also have non-cancelable purchase commitments as ofJune 30, 2022 primarily related to supply and engineering services providers. Total non-cancelable purchase commitments due in the next five years is approximately$44.7 million , with$21.0 million due in less than one year. Additionally, we are expanding our satellite launch operations and space solution offerings since commercialization. As ofJune 30, 2022 , we had five rockets in various stages of production and one carrier aircraft in operation. We expect to accelerate our production of rockets to reach an annual production capacity of approximately 20 rockets and we expect to begin acquisition and modification of an additional carrier aircraft in the next 12 to 18 months. We have significantly reduced the per unit cost of producing rockets since production began. As such, we anticipate the costs to manufacture additional rockets to continue to decrease on a per unit basis as we advance and scale up our manufacturing processes and capabilities. We expect our capital investments to increase our production of rockets, modify additional carrier aircrafts, and advance and scale up our manufacturing facilities. However, the recent commercialization of our satellite launch and space solution offerings and the anticipated expansion of our rocket production 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. Many of these risks and uncertainties are described in more detail in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including rate of revenue growth, ability to reduce costs per unit, the expansion of research and development activities, hiring additional personnel, and investment in manufacturing operations. We may sell equity securities or debt securities or secure other debt financing in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such equity securities in subsequent transactions, our current investors may be materially diluted. Any debt financing, if available, may involve restrictive covenants and could reduce our operational flexibility or profitability.
Going Concern and Sources of Liquidity
The unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these unaudited condensed consolidated interim financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Prior to the Business Combination, our operations participated in cash management and funding arrangements managed by the Parent Company. Only cash and cash equivalents held in bank accounts legally owned by our entities are reflected in the consolidated balance sheets. Cash and cash equivalents held in bank accounts legally owned by the Parent Company were not directly attributable to us for any of the periods presented. Transfers of cash, both to and from us, have been reflected as a contribution from or a distribution to the Parent Company in the consolidated balance sheets and as a financing activity on the accompanying consolidated statements of cash flows. Our principal sources of liquidity following the Business Combination have been our cash and cash equivalents, including proceeds from our issuance and sale of a convertible debenture toYorkville , and any additional capital that may be obtained through borrowings or additional sales of securities. As ofJune 30, 2022 , we had an accumulated deficit of$916.3 million and cash and cash equivalents of$122.1 million . Our net loss and net cash used in operating activities for the six months endedJune 30, 2022 was$95.9 million and$112.3 million , respectively. We have not generated positive cash flows from operations or sufficient revenues to provide sufficient cash flows to enable us to finance our operations internally, and may not be able to raise sufficient capital to do so. As a result of the Company's assessment of going concern considerations, management has determined that the liquidity condition raises substantial doubt about the Company's ability to continue as a going concern. Management's plans to mitigate an expected shortfall of capital to support future operations include expanding commercial operations, raising additional funds through borrowings or additional sales of securities or other sources, and managing our working capital. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company or whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise substantial additional capital, operations and production plans may be scaled back or curtailed. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 40
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Table of Contents Cash Flows Historical Cash Flows The following table summarizes our cash flows for the three and six months endedJune 30, 2022 and 2021: Six Months Ended June 30, (In thousands) 2022 2021 Cash used in operating activities$ (112,315) $ (77,243) Cash used in investing activities (10,257)
(11,749)
Cash provided by financing activities 50,490
86,622
Net decrease in cash and cash equivalents
For the six months endedJune 30, 2022 , net cash used in operating activities was$112.3 million primarily consisting of$95.9 million of net loss, adjusted for$11.8 million of non-cash and cash charges, and a decrease in net operating assets and liabilities of$26.0 million . The non-cash charges primarily included the charges in stock-based compensation of$6.4 million , depreciation and amortization of$6.6 million , inventory write-down of$1.6 million and the change in fair value of the equity investment in Arqit of$8.8 million . For the six months endedJune 30, 2021 , net cash used in operating activities was$77.2 million primarily consisting of$77.0 million of net loss, adjusted for$8.3 million of non-cash and cash charges, and a decrease in net operating assets and liabilities of$8.5 million . Deferred revenue decreased due to recognizing revenue for our demo launch inJanuary 2021 . The non-cash charges primarily included the charges in stock-based compensation of$2.7 million , depreciation and amortization of$7.2 million offset by the non-cash initial investment in SAS of$1.7 million .
For the six months ended
Cash Provided by Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was$86.6 million for the six months endedJune 30, 2021 , consisting primarily of equity contributions received from the Parent Company of$85.9 million .
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes
thereto included elsewhere in this Quarterly Report are prepared in accordance
with GAAP. We evaluated the development and selection of our critical accounting
policies and estimates and believe that the following involve a higher degree of
judgment or complexity and are most significant to reporting our results of
operations and financial position and are therefore discussed as critical. The
following critical accounting policies reflect the significant estimates and
judgements used in the preparation of our condensed consolidated financial
statements. Actual results may differ from these estimates under different
assumptions or conditions due to the inherent uncertainty involved in making
those estimates and any such differences may be material. We re-evaluate our
estimates on an ongoing basis.
We believe that the following accounting policies involve a high degree of
judgment and complexity. Accordingly, these are the policies we believe are the
most critical to aid in fully understanding and evaluating our condensed
consolidated financial condition and results of our operations. Refer to
Note 2 - Summary of Significant Accounting Policies to our condensed
consolidated financial statements appearing elsewhere in this Quarterly Report
for a description of other significant accounting policies.
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Table of Contents There have been no material changes in the critical accounting policies previously identified in our 2021 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Please refer to Note 3 - Recently Issued Accounting Pronouncements to our condensed consolidated financial statements included elsewhere in this Quarterly Report for a description of recently issued accounting pronouncements.
Emerging Growth Company Accounting Election
Section 102(b)(1) of the JOBS Act exempts "emerging growth companies" as defined in Section 2(A) of the Securities Act, from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.Virgin Orbit is an "emerging growth company" and has elected to take advantage of the benefits of this extended transition period.Virgin Orbit will use this extended transition period for complying with new or revised accounting standards that have different effective dates for public business entities and non-public business entities until the earlier of the dateVirgin Orbit (a) is no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. The extended transition period exemptions afforded byVirgin Orbit's emerging growth company status may make it difficult or impossible to compareVirgin Orbit's financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of this exemption because of the potential differences in accounting standards used. Refer to Note 2 of our condensed consolidated financial statements included elsewhere in this Quarterly Report for the recent accounting pronouncements adopted and the recent accounting pronouncements not yet adopted as ofJune 30, 2022 .Virgin Orbit will remain an "emerging growth company" under the JOBS Act until the earliest of (a)December 31, 2026 , (b) the last date ofVirgin Orbit's fiscal year in whichVirgin Orbit has total annual gross revenue of at least$1.07 billion , (c) the last date of Virgin Orbit's fiscal year in whichVirgin Orbit is deemed to be a "large accelerated filer" under the rules of theSEC with at least$700.0 million of outstanding securities held by non-affiliates or (d) the date on whichVirgin Orbit has issued more than$1.0 billion in non-convertible debt securities during the previous three years.
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