Good afternoon. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's First Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Hosting today's conference call will be Michelle Kley, Executive Vice President, General Counsel and Secretary at Virgin Galactic. As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Kley. Please go ahead..

Thank you, and good afternoon, everyone. Welcome to Virgin Galactic's first quarter 2020 earnings conference call. On the call with me today are George Whitesides, Chief Executive Officer; and Jon Campagna, Chief Financial Officer, who will provide prepared remarks.

Also on the call is Enrico Palermo, Chief Operating Officer who will be available along with George and Jon to answer questions during the Q&A portion of the call.

Earlier today, we issued a press release and made a slide presentation available on our Investor Relations website, which provides an overview of our business and financial highlights for the first quarter of 2020. During today’s call, we will make certain forward-looking statements within the meaning of federal securities laws.

Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from forward-looking statements in this communication.

For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the earnings press release we issued today and other documents filed by Virgin Galactic from time to time with the Securities and Exchange Commission, including our Form 10-Q for the first quarter of 2020.

Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements. With that, I'd like to turn the call over to George Whitesides..

Thank you, Michelle. Good afternoon, everyone. First and foremost, I would like to start by offering my sincere hope that you and your families are staying safe during this unprecedented time. Today, I will provide an update on our first quarter activity on and the milestones we achieved during the quarter.

I will also update you on the impact of COVID-19 on our operations. I will then discuss business highlights for the quarter, and Jon will provide detail regarding our financial performance. Before we dive into our first quarter results, let me give a very brief refresher on our investment thesis that I walked through in detail last quarter.

Virgin Galactic is the world's first and only public company focused on commercial human spaceflight. And we believe the commercial exploration of space represents one of the most exciting and significant technology initiatives of our time. Our business model is highly efficient, underpinned by the reusable scalable nature of our spaceships.

The design features meaningfully reduce the operational cost of each spaceflight over time delivering strong unit economics. .

Thanks George. Looking at Slide 21, we are pleased with our first quarter results, which reflects our ongoing progress as we settle into life as a public company. We're in a strong cash position and ended the quarter with cash and cash equivalent of 419 million on our balance sheet as of March 31 2020.

Revenue for the quarter was 238,000, which we generated by providing engineering services. Net loss for the quarter was 60 million and represents our first full quarter as a public company. Our net loss narrowed from 73 million in the fourth quarter of 2019.

Non-GAAP SG&A expenses have been adjusted to exclude stock based compensation and transaction related costs associated with the preparation and filing of an S-1 registration statement in the first quarter. And non-GAAP R&D expenses have been adjusted to exclude stock based compensation. GAAP SG&A expenses for the quarter were 27 million.

Non-GAAP SG&A expenses for the quarter were 23 million. GAAP R&D expenses for the quarter were 34 million. While non-GAAP R&D expenses for the quarter were 33 million.

Adjusted EBITDA, which includes stock based compensation and transaction related costs associated with the preparation and filing of an S-1 registration statement in the first quarter totaled negative 53 million. This is compared to adjusted EBITDA of negative 55 million in the fourth quarter of 2019.

Cash paid for capital expenditures was 4 million in the first quarter of 2020, compared to 6 million in the fourth quarter of 2019. Capital expenditures in the first quarter consisted primarily vehicle tooling costs and investments in Spaceport America as we continue to prepare that facility for commercial operation.

Lastly, we completed the redemption of all outstanding public warrants on a cashless basis on April 13, 2020 in accordance with the warrant agreement. All public warrants and units ceased trading on that day, so we now only have common shares trading publicly.

Turning to Slide 22, I'd like to take some time to run through some of the line items on our income statement to provide more context on the drivers behind some of these numbers. First, on revenue, as we expected, revenue in the quarter was minimal and was driven by providing engineering services under one of our government related contracts.

Looking forward to the rest of 2020, our primary focus is executing on our test flight program and ensuring the safety of our workforce given the challenges associated with the COVID-19 pandemic. Because of this, we anticipate minimal revenue for the remainder of the year.

Turning to R&D, as a reminder, our vehicle cost currently sit within R&D and will continue to be expensed there until we achieve technological feasibility. While subject to change, we anticipate achieving technological feasibility once we have completed a powered test flight to space for passengers in the cabin.

At the point of achieving technological feasibility, we'll begin to capitalize our vehicle costs.

Our R&D expenses for the quarter totaled 34 million, a decrease of 3 million compared to the fourth quarter of 2019, primarily due to a cash incentive plan disbursement that was paid in 2019 in connection with the close of the transaction with Social Capital Hedosophia as well as certain cost reductions taken during the quarter.

Our SG&A expenses for the quarter totaled 27 million, a decrease of 10 million compared to the fourth quarter of 2019, primarily due to a cash incentive plan disbursement and transaction related expenses that were paid in 2019 in connection with the close of the transaction with Social Capital Hedosophia as well as certain cost reductions taken during the quarter.

As I mentioned on our last call, we use adjusted EBITDA as a key measure of our performance. Adjusted EBITDA excludes stock based compensation and non-recurring transaction costs.

Our stock based compensation for the period increased by 1 million to 4 million compared to the fourth quarter last year, and represents our first full quarter of incurring those expenses.

Adjusted EBITDA in the quarter improved as a result of management's actions to reduce expenses in light of recent economic developments associated with the coronavirus pandemic, including reductions in bonuses. Turning to slide 23, and looking at the cash flow statement.

The decrease in cash and cash equivalents over the quarter totaled 61 million, an improvement compared to the previous quarter primarily as a result of a reduction in transaction related costs and management's actions to reduce cash spend.

Although we are not providing specific guidance on cash burn, the first quarter of 2020 represents our first full quarter as a public company and we believe is an approximate indication of our ongoing cash burn with the incremental public company related costs.

Cash paid for capital expenditures decreased from the prior quarter by 2 million to $4 million. Capital expenditures for the quarter were primarily attributed to continuing investments in Spaceport America operational readiness and vehicle tooling costs.

While we continue to maintain a healthy balance sheet, given the current economic climate, we are taking additional steps to preserve our liquidity including reducing executive bonuses and temporarily reducing executive and director compensation in deferring or eliminating non-essential hiring and contractor engagement.

Finally, I would like to quickly touch on the S-1 registration statement we filed with the SEC on Friday.

Under the terms of the registration rights agreement entered into by Virgin Galactic Holding and Social Capital Hedosophia in connection with our merger, we had a contractual obligation to register the resale of the shares of a handful of our shareholders within six months of closing the transaction, which we have now done.

I would now like to turn the call back over to George for some final remarks..

Thanks Jon. Before we turn to Q&A, I would like to talk about our priorities for Q2 and beyond. Clearly, this is an unprecedented and challenging time for companies and individuals across the world. Our number one priority is the health and safety of our employees, their families, and the communities in which we operate.

We remain focused on completing our test flight program and preparing for commercial launch as soon as we are able. The successful completion of our first free flight of VSS Unity on Friday was a key milestone in that respect.

As I outlined earlier, while we have made tremendous progress over the past few weeks, we continue to work on our manufacturing processes and facility safety protocols to ensure we can continue operating successfully during the COVID-19 pandemic.

It is too early to fully quantify the duration and severity of the impact that COVID-19 will have on our business. I would like to thank our entire team for their continued dedication and passion in the face of such challenging times.

I'm tremendously encouraged that during an unprecedented crisis, virtually our entire customer community has remained with us. And we have rapidly expanded the number of spacefarers who have put down money to express their desire to fly to space with us.

This underscores how as it has in past downturns, our customer base is remarkably resilient, which will serve the company well going forward. I'm also tremendously excited about our new partnership with NASA around high speed flight technologies.

I truly believe NASA and ourselves are the leaders in civil high Mach flight technologies, and what we will create together will be amazing. Finally, the team is excited about one of our long awaited milestones, which we expect to announce in the coming months, the unveil of our commercial customer cabin.

Our entire team remains fully focused on preparing for commercial launch and opening up access to space. And we look forward to sharing more with you on future earnings calls. I'll now hand over to the operator for Q&A. Thanks very much. .

Thank you. Your first question comes from the line of Robert Spingarn with Credit Suisse. Your line is open..

Good afternoon, guys. .

Hi, Robert..

George, I'd like to start with timeline and obviously recognizing that we are in an unprecedented situation cautioned around that, but what can you tell us about the shift in the timeline, whether it's COVID driven or just the normal ramp to getting into commercial service?.

Well, Rob, I think what I would start with is that it was a really big deal to get off this last flight on Friday. The ability of the team to essentially operate under COVID health constraints was something that I was keeping a close eye on as we progressed through April.

And the fact that we were able to get this flight off in that time was heartening to me because it suggested that we are able to create updated operational protocols that will allow our team to operate safely and carry out test flight missions.

I think the big question now is how does that sort of play out? I think that's the question nationally as well, how – there's an infinite amount of questions on that front. But that is what we are really focused on. I think what we need to do next is fly at least one more glide flight, then get into powered flight testing and see how that goes.

We're feeling pretty good overall the fact that we were able to do this flight was a big step of confidence I think, that we can operate safely and effectively during this COVID timeline.

But I think basically, we need to see how that goes for a bit, before we give sort of projections for the remainder of the powered flight test program because I really want to get a sense of how if at all these constraints affect operations. .

Is there anything about current restrictions that cause you to have to stop at some point? Other words, under the current regime, could you do a powered flight or do you have to wait for further adjustment and lock down and that – and state ordered type changes?.

Yeah, good question. The short answer is, no. We work in close partnership with the New Mexico Spaceport Authority, as well as the other relevant authorities, Albuquerque, FAA, the range control at White Sands and the operational interfaces for Friday's flight, really were flawless. It worked really well.

We have been doing a lot of practice and communication with those different entities to make sure that when we did it for real, it worked well and the team, not just our team, but the other teams, at the relevant government centers did a great job. And it all worked very smoothly.

As you know, Rob as part of our AST license, we're able to conduct powered flights under that license. So we have no regulatory constraint in that respect.

I think what you can expect is continued high communication between us and the local government authorities, state government authorities, FAA, the Federal folks, but I think right now what we have demonstrated is that we have – we did a tremendous amount of work in late March and into April to figure out how to conduct proper health COVID protocols in an operational flight environment and we did that successfully.

Now, I don't know how long we're going to have to go through that, hopefully, this pandemic does recede over the course of the year, but what we've proven is that we can continue operations in that environment. Now, that said it's not all perfect. We did restrict the number of people on site which can have an impact.

And obviously, we're trying to follow various health protocols in terms of distancing and various other things. So, those are the kinds of things that I want to monitor as we go forward over the coming period of time to see how – really how quickly we're able to progress.

I think we've done well, the fact also that we've been I think right out in front from an industrial manufacturer and operator perspective on COVID testing. I think it's really helped a lot.

We were able to identify a provider who had excess capacity early and then begin testing our folks quickly so that when they come back to work, they can have increased confidence that they're going to work in a safe environment.

When you combine that with all the other things that we're doing in the facilities in terms of sanitary actions and masks and everything else, I think people are feeling pretty good when they're coming to work, which is obviously really important.

So anyway, I don't think we have any major constraints, but there will be things that we'll need to monitor, and we'll need to see how those things affect our operations as we go forward. .

Your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open. .

Thanks, operator and thanks, George and everybody on the call. Hope everyone's healthy and doing well both with the community of the company and your families. Question on the Space Act Agreement with NASA. In the press release George, you said, we see this as an area of tremendous growth.

And we'll continue to invest in it alongside our commercial spaceflight operations.

Does today's agreement, change either the ramp or run rates of CapEx or R&D spending over the next couple of years, anyway that you'd like to highlight?.

Not in the immediate months. So great question, I mean, I think what this does is establishes a framework for us to have technology interface and shared sort of research areas that will allow us to make quicker progress on key areas that are the long lead technology areas for high Mach vehicle.

And as you've probably seen in the releases we're going to be focusing on thermal issues and propulsion, which anybody who knows about high Mach vehicles, these are two of the key areas, right.

And so NASA has tremendous amount of background in these areas that we can take advantage of, but they're also really interested in getting real data from operating high Mach vehicles like our spaceship. And I think that what's been really heartening is to see the way that our teams are interacting well.

So we've now built up quite a great team internal working on high Mach technologies. And they've got some great relationships with the folks at Langley and some of the other centers. And so I think that this will serve as a way to make sure we're moving quickly on the longest lead technology areas.

So that as we ramp up our efforts in this area over the coming months and years, that we're able to do that in a smart way. Because one of the things that I've learned about development is you really have to focus on the long lead issues first and make sure you got great teams working on them. So we're grateful to Dr.

Kenyon at the Aero branch and others for partnering with us on this and I think we're going to create some great stuff together as we go forward. .

Thanks, George. And just one follow up.

And my discussions at least with investors prospective investors, sort of current investors, very common question we get is about Blue Origin, which you've highlighted as one of your very few competitors, you're obviously much farther down the road and putting people to space and commercialization than they are, but two different paths.

And in some cases, you have some very significant differences. But when your perspective space tourism customers ask you, what's the difference between the experience that you offer and what Jeff and the folks at Blue are talking about? Kind of how do you explain that? And again, I recognize that time to market is totally different.

You're the only game in town now unless you want to go on a Soyuz. So beyond the time to market anything you want to highlight? Thanks..

Yeah. Sure. What I like to share – as you know, I have always been a big believer that this market is big enough for a couple of entities, I think it's going to be supply constrained for a while to come and the growth that we've seen in some of the other customer funnel areas underscore that.

But what we've done is pursue two fundamentally different architectures, right. And the basis of that choice is dependent really on the longer term areas of investment and market sizing that – or market focus that both teams are working on.

And so, we have chosen a winged vehicle architecture that is very conducive to evolution into a high Mach point-to-point system.

The great folks at Blue have chosen a system that is very well suited to future planetary and interplanetary exploration, as evidenced by the great win that they got from NASA last week in the lunar lander area and the vehicles that they've got is really good for landing on the moon.

What we think is that our vehicle is really good, both from the perspective of a customer experience to suborbital spaceflight, which is, of course, our primary near term market.

The fact that we have this great air launch architecture which we tested on Friday, where we take the spaceship up to 50,000 feet, gives us an enormous comfort level around safety.

Because we're using airplane technologies for the first 50,000 feet and the last 50,000 feet and it'd be a really nice smooth, ride up to that altitude and then also landing. It was awesome to see. You know, Dave Mackay, our Chief Pilot land the spaceship for the first time on the runway in New Mexico.

Just like hundreds and eventually thousands of future astronauts will fly. The winged architecture that we have has a very simple hybrid rocket motor and we think that that's a great – underscoring our confidence in our safety posture.

And, of course, the fact that we've got a ton of windows and people will be able to float around the cabin will be great things. So as always, I like to say, I think there's going to be great experiences, obviously, ours is around 90 minutes and there's about 11. But I do think that there's going to be great experiences with both.

And we wish the Blue team well as they embark on a very exciting thing, which is a focus on lunar exploration and that will be terrific as we pursue sort of point-to-point stuff back on planet Earth, so that's it how I'd answer your question Adam. .

Our next question comes from the line of Darryl Genovesi with Vertical Research Partners. Your line is open. .

Hi, everybody. Thanks for the time. I guess this is where George, you have 9000 or so indications of interest, I think. You've compelled 400 of those people to give you a small deposit.

How should we think about the balance? Are these people that you've actually spoken to? Or are they sort of up next to get a phone call sometime during Q2? How many of them have said no? How many of them have said I'm thinking about it? Can you just give us a sense of what sort of steps remain for the balance?.

Yeah, that's a great question. So I think the good news is that no one said no. The headline is we're working through it as quick as we can. Having 400 actually rapidly growing past 400 folks already sign up getting close to the 600 folks that we've already signed with sort of full contracts, or full deposits is encouraging to me.

The fact that we now have this – another 1,000 plus people that just added their names to the queue on the registration of interest side is great. I mean, so that that side of things is growing quickly.

And I do think that the folks who are signing up for the Small Step program are the folks who will buy tickets and that's encouraging because we're rapidly building out the first few years of our of our customer operations.

As you say, well, we have a lot of work to do ahead of us, which is great and the commercial team is doing great work, reaching out to these folks talking to them, and converting many of them. Many of them are just inbound conversion. So that's great too. But we have a big sort of pool of potential targets that we're working through now.

And that's what we'll keep doing over the course of the year and years to come. .

Cool and then maybe one for Jon. Jon, just I mean, in general, I know we still have a lot of wood chopped to get commercial service launched.

But broadly speaking, any difference in the way you're thinking about the margin profile, once you do begin commercial services start to ramp relative to some of the financial targets that you laid out this fall?.

Yeah, Darryl, it's a great question. I mean, essentially, no. We as – as has always been the case we have a lot of sort of fixed costs part of our operations and as we continue to add spaceships – built that capacity that that margin gets to those higher numbers that we've talked about in the past.

So it's definitely our focus to execute on the test plan, continue to build spaceships to achieve higher margins that we anticipate. .

Your next question comes from the line of Robert Spingarn with Credit Suisse. Your line is open. .

I wanted to just follow up on a few of the things you've already talked about and ask some clarifying questions and I have three of them. The One Small Step deposits how did those – the 400 where you took in the $1000 apiece, how, how did those trend across Q1 and into April? I think you said this is through April, this figure.

Just curious as how the crisis may have changed customer interest temporarily. .

Yeah, I have to maybe look at our data to see exactly Rob. So maybe we'll try to get to that data if we can. I'm not sure I know off the top of my head, but I wouldn't be surprised if we see some kind of impact going into Q2. I'm not sure we saw that much in Q1.

But certainly people's attentions are on their families and focused on taking care of their homes and that's fine. And so we may see some effect like that, but I don't have that number off the top of my head right now. .

Okay, and then on the on the NASA agreement you talked about a little bit before, but is there an actual revenue opportunity that's been agreed upon or some kind of a contract or you – I'm just curious what kind of terms, who's spending what and how that all works together. .

I think the terms of the Space Act Agreement become public at some point in the future. It is a little bit of a waiting period before it gets sort of publicly accessible. This initial phase of the Space Act agreement Rob is essentially where we bring together our resources.

They're bringing together their resources, we're bringing together our resources, and we work on these initial technology areas to start. And then I think that there's some exciting opportunities both potentially with NASA and other government agencies. And we'll see how those play out over the coming months and years. .

Okay, and then my last question was on your progress on the second spaceship, and wanted to see whether or not you're on plan, understanding, I would imagine that the virus has slowed things down a bit, but on plan for time and cost on the second spacecraft. .

Yeah, good question. We've got Enrico here, who's our COO. Maybe he can take a crack at that one. .

Maybe happy to, as George summarized before we've obviously implemented new protocols throughout our operation and that extends into our manufacturing operation here in Mojave, California. And I'm really proud of how the team has managed.

So like the test flight in New Mexico, we've been able to continue without safety protocols fabricating the next spaceship. The team was bolstered by the achievement of Weight on Wheels early this year. And then George briefed the activities since then that we've made significant progress on the assembly.

But as Georgia said earlier, it's too early to quantify the length and the severity of the pandemics impact of business and that includes manufacturing. But we're bolstered by Weight on Wheels, we're bolstered by the fact that more than 90% of our technicians are back at work and making good progress.

And we're all looking forward to the moment we can roll that spaceship out. .

Now, I'd now like to turn the call back to George Whitesides, CEO for some closing remarks..

All right, well, thanks, everybody. Appreciate you dialing in or webcasting into our earnings call. We appreciate your interest and support. And we look forward to updating everyone on our progress during the next quarters call. Thanks and stay safe. All right. Bye, bye. .

This concludes today's conference call. You may now disconnect..