Virgin Orbit Holdings, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Stock-Based Compensation

Stock-Based Compensation

9 Months Ended

Sep. 30, 2022

Share-based Payment Arrangement [Abstract]

The Company maintains a stock-based compensation plan pursuant to which it has granted stock options to certain eligible service providers.

Prior to Closing, Virgin Orbit maintained the 2017 Stock Incentive Plan (the “2017 Plan”) to purchase “VO Holdings, Inc. (“VO Holdings”) common stock, which became Virgin Orbit common stock as part of the Business Combination. As part of the consummation of the Business Combination, the adoption of the 2021 Stock Incentive Plan (the “2021 Plan”) replaces the 2017 Plan for issuance of new awards. Upon the consummation of the Business Combination, all outstanding stock options under the 2017 Plan, whether vested or unvested, were converted into options to purchase a number of shares of common stock of Virgin Orbit based on the Exchange Ratio, with a

corresponding adjustment to the exercise price such that there was no change to the aggregate exercise price for such outstanding options. The 2017 Plan will continue to govern the outstanding awards granted under this plan.

In connection with the Business Combination, we adopted the 2021 Plan in order to facilitate the grant of cash and equity incentives to directors, employees and consultants of the Company, employees of the Company’s subsidiaries and other eligible consultants and to enable us and certain of our subsidiaries and affiliates to obtain and retain services of these individuals, which is essential to our long-term success. The 2021 Plan became effective on December 28, 2021, the date immediately preceding the consummation of the Business Combination. Stock options related to this 2021 Plan were first granted in January 2022.

Compensation expense is recognized only for those options expected to vest with forfeitures estimated based on historical experience and future expectations and is adjusted for forfeitures in the period they occur. Stock-based compensation awards are amortized on a straight-line basis over the graded vesting period based on continued service.

Stock Options

The following table includes the activity during the nine months ended September 30, 2022 for all stock options granted under the 2021 Plan:


	Number of shares(2)	Weighted average exercise price		Weighted average remaining contractual life	Aggregate intrinsic value(1)
	(In thousands)	(In dollars)		(In years)	(In thousands)
Balances as of December 31, 2021	9,101	$	3.78	6.35	$	35,014
Granted	5,680	6.61
Exercised	(394)	3.70
Forfeited options	(1,210)	5.34
Expired or cancelled options	(271)	3.84
Balances as of September 30, 2022	12,906	$	4.91	7.49	$	—

Exercisable as of September 30, 2022	7,541	$	3.98	6.40	$	—

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(1) Aggregate intrinsic value is calculated based on the difference between our closing stock price at period end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised all their options at the period end date.

(2) Shares include time-based options and exclude the CEO milestone awards, totaling $1.6 million stock options described below.

Stock-based compensation expense recorded in the condensed consolidated statements of operations and comprehensive loss during the three and nine months ended September 30, 2022 and 2021 consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(In thousands)
Cost of revenue	$	959	$	118	$	1,635	$	299
Research and development	760		85		1,215		478
Selling, general and administrative	3,789		5,357		9,104		7,531
	$	5,508	$	5,560	$	11,954	$	8,308

As of September 30, 2022, and 2021, there was $16.1 million and $6.0 million, respectively, of total unrecognized stock-based compensation related to the unvested stock options granted. As of September 30, 2022, the total cost is expected to be recognized over a weighted average term of 3.0 years and 2.2 years, respectively. The total fair value of shares vested during the nine months ended September 30, 2022 and 2021 was $17.8 million and $3.7 million, respectively.

CEO Awards

Except with respect to the milestone and supplemental milestone awards granted to our CEO, Mr. Hart, described below, Mr. Hart’s stock options vest and become exercisable as to 25% of the underlying shares on the first anniversary of the applicable vesting commencement date, and thereafter as to the remaining 75% of the underlying shares in either (a) six substantially equal installments on each successive six-month anniversary of the vesting commencement date, or (b) twelve substantially equal installments on each successive quarterly anniversary of the applicable vesting commencement date, subject to continued employment through the applicable vesting date. In addition, Mr. Hart’s stock options will vest and become exercisable in full upon a termination of employment without “cause” within 24 months following a “change in control”, each as defined in the 2017 Plan.

On November 20, 2017, the Company granted Mr. Hart a milestone award of 757,978 stock options with an estimated grant date fair value approximating $2.1 million. Fifty percent of the stock options vested when we achieved our first commercial launch on June 30, 2021. Additionally, on March 17, 2021, the Company granted our CEO a supplemental milestone award of 845,317 stock options with an estimated grant date fair value approximating $2.5 million. On June 30, 2021, the day Virgin Orbit achieved the first commercial launch, Tubular Bells Part One, 50.0% of the milestone award vested. On December 31, 2021, the last day of the first calendar year in which the first commercial launch occurred, 33.3% of the supplemental milestone award vested. The remaining 50.0% of the milestone award and the remaining 66.7% of the supplemental milestone award will vest upon Mr. Hart’s continued service through the last day of the first calendar year in which the Company has five successful revenue-generating deployment launches of satellites into their respective intended orbits in such calendar year.

Stock Option Valuation

The Company uses the Black-Scholes option pricing model to determine the fair value of the awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.

The weighted average assumptions used to value the option grants for the nine months ended September 30, 2022 are as follows:


	2022
Expected life (in years)	5.99
Volatility	85	%
Risk-free interest rate	1.64	%
Dividend yield	—

Restricted Stock Units

During the three months ended September 30, 2022, new RSUs were awarded to employees that vest over two years, with 25% vesting at each six month anniversary from the grant date. In addition, the RSUs awarded to our Board of Directors are comprised of two components: the initial award that vests ratably over three years and the annual award that has a one year cliff vest from the date of the annual meeting.

The following table sets forth the summary of RSUs activity granted under the 2021 Plan (dollars in thousands except per share data):


	Number of shares	Weighted average fair value
	(In thousands)	(In dollars)
Balances as of December 31, 2021	—	$	—
Granted	4,109	4.00
Vested	—	—
Forfeited	(34)	4.00
Balances as of September 30, 2022	4,075	$	4.00

At September 30, 2022, the unrecognized stock-based compensation related to RSUs was $13.9 million, and is expected to be recognized over a weighted-average period of 1.8 years.