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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  
Commission File No. 001-38202
Virgin Galactic Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware
85-3608069
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

166 North Roadrunner Parkway, Suite 1C
Las Cruces, New Mexico
88011
(Address of Principal Executive Offices)(Zip Code)

(575) 424-2100
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which
registered
Common stock, $0.0001 par value per share
SPCE
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No
As of November 5, 2020, there were 234,342,464 shares of the Company’s common stock, par value $0.0001, issued and outstanding.


Table of Contents
VIRGIN GALACTIC HOLDINGS, INC.
TABLE OF CONTENTS

Page
PART I - FINANCIAL INFORMATION


1

Table of Contents

PART I. FINANCIAL INFORMATION

Each of the terms the “Company,” “Virgin Galactic,” “we,” “our,” “us” and similar terms used herein refer collectively to Virgin Galactic Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated.

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements (including within the meaning of the Private Securities Litigation Reform Act of 1995) concerning us and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of management, as well as assumptions made by, and information currently available to management. Forward-looking statements may be accompanied by words such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or similar words, phrases or expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:
our ability to achieve or maintain profitability;
our ability to effectively market and sell human spaceflights;
the development of the markets for commercial human spaceflight and commercial research and development payloads;
any delay in completing the flight test program and final development of our spaceflight system, which is comprised of our SpaceShipTwo spaceship, VSS Unity, and our WhiteKnightTwo carrier aircraft, VMS Eve;
our ability to operate our spaceflight system after commercial launch;
the impact of the COVID-19 pandemic on us, our operations, our future financial or operational results, and our access to additional financing;
the safety of our spaceflight systems;
our ability to convert our backlog or inbound inquiries into revenue;
our ability to conduct test flights;
our anticipated full passenger capacity;
delay in development or the manufacture of spaceflight systems;
our ability to supply our technology to additional market opportunities;
our expected capital requirements and the availability of additional financing;
our ability to attract or retain highly qualified personnel, including in accounting and finance roles;
extensive and evolving government regulation that impact the way we operate;
risks associated with international expansion; and
our ability to continue to use, maintain, enforce, protect and defend our owned and licensed intellectual property, including the Virgin brand.

2

Table of Contents
Additional factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part II, Item 1A. “Risk Factors” and Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" below and for the reasons described elsewhere in this Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited, and we cannot guarantee future results. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
3

Table of Contents

VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30, 2020December 31, 2019
(Unaudited)
Assets
Current assets
Cash and cash equivalents$741,575 $480,443 
Restricted cash13,268 12,278 
Inventories25,147 26,817 
Prepaid expenses and other current assets9,871 17,133 
Total current assets789,861 536,671 
Property, plant, and equipment, net57,255 49,333 
Other non-current assets18,930 19,542 
Total assets$866,046 $605,546 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable$8,490 $7,038 
Accrued expenses22,056 22,277 
Customer deposits83,190 83,362 
Other current liabilities2,300 3,168 
Total current liabilities116,036 115,845 
Other long-term liabilities23,763 22,141 
Total liabilities$139,799 $137,986 
Commitments and contingencies (Note 16)
Stockholders' Equity
Preferred stock, $0.0001 par value; 10,000,000 authorized; none issued and outstanding
$  
Common stock, $0.0001 par value; 700,000,000 shares authorized; 234,021,503 and 196,001,038 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
23 20 
Additional paid-in capital1,047,246 589,158 
Accumulated deficit(321,075)(121,677)
Accumulated other comprehensive income53 59 
Total stockholders' equity726,247 467,560 
Total liabilities and stockholders' equity$866,046 $605,546 

See accompanying notes to condensed consolidated financial statements.
4

Table of Contents
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands except for per share data)
(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenue$ $832 $238 $3,252 
Cost of revenue 406 173 1,690 
Gross profit 426 65 1,562 
Selling, general, and administrative expenses30,936 17,814 83,738 44,719 
Research and development expenses46,243 34,528 117,675 96,119 
Operating loss(77,179)(51,916)(201,348)(139,276)
Interest income322 387 2,005 1,137 
Interest expense(9) (26)(2)
Other income, net(44)91 5 128 
Loss before income taxes(76,910)(51,438)(199,364)(138,013)
Income tax (benefit) expense40 37 34 123 
Net loss(76,950)(51,475)(199,398)(138,136)
Other comprehensive loss:
Foreign currency translation adjustment48 (58)(6)(79)
Total comprehensive loss$(76,902)$(51,533)$(199,404)$(138,215)
Net loss per share:
Basic and diluted$(0.34)$(0.27)$(0.94)$(0.71)
Weighted-average shares outstanding:
Basic and diluted225,253,536 193,663,150 213,193,386193,663,150

See accompanying notes to condensed consolidated financial statements.
5

Table of Contents
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(In thousands except for per unit and share data)
(Unaudited)

Member's EquityPreferred StockCommon Stock
Net Parent
Investment
UnitsMember's Capital# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2018$41,477  $  $  $ $ $ $82 $41,559 
Net loss(42,593)— — — — — — — — — (42,593)
Other comprehensive loss— — — — — — — — — 10 10 
Net transfer from Parent Company47,445 — — — — — — — — — 47,445 
Balance as of March 31, 201946,329         92 46,421 
Net loss(44,068)— — — — — — — — — (44,068)
Other comprehensive loss— — — — — — — — — (31)(31)
Net transfer from Parent Company53,730 — — — — — — — — — 53,730 
Balance as of June 30, 201955,991         61 56,052 
Net loss(2,597)— — — — — — — (48,878)— (51,475)
Other comprehensive loss— — — — — — — — — (58)(58)
Net transfer from Parent Company4,944 — — — — — — — — — 4,944 
Conversion from net parent investment to membership equity(58,338)100 58,338 — — — — — — —  
Contribution from Parent Company— — 40,000 — — — — — — — 40,000 
Balance as of September 30, 2019$ 100 $98,338  $  $ $ $(48,878)$3 $49,463 












6

Table of Contents

Member's EquityPreferred StockCommon Stock
Net Parent
Investment
UnitsMember's Capital# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2019$  $  $ 196,001,038 $20 $589,158 $(121,677)$59 $467,560 
Net loss— — — — — — — — (59,930)— (59,930)
Other comprehensive income (loss)— — — — — — — — — (54)(54)
Common stock issued related to warrants exercised— — — — — 13,239,934 1 (1)— —  
Stock-based compensation— — — — — — — 4,425 — — 4,425 
Balance as of March 31, 2020     209,240,972 21 593,582 (181,607)5 412,001 
Net loss— — — — — — — — (62,518)— (62,518)
Other comprehensive loss— — — — — — — — — —  
Common stock issued related to warrants exercised— — — — — 1,162,884 — — — —  
Stock-based compensation— — — — — — — 5,525 — — 5,525 
Transaction costs— — — — — — — (770)— — (770)
Balance as of June 30, 2020     210,403,856 21 598,337 (244,125)5 354,238 
Net loss— — — — — — — — (76,950)— (76,950)
Other comprehensive income (loss)— — — — — — — — — 48 48 
Common stock issued related to stock-based awards, net of taxes— — — — — 17,647 — (399)— — (399)
Stock-based compensation— — — — — — — 8,625 — — 8,625 
Issuance of common stock— — — — — 23,600,000 2 460,198 — — 460,200 
Transaction costs— — — — — — — (19,515)— — (19,515)
Balance as of September 30, 2020$  $  $ 234,021,503 $23 $1,047,246 $(321,075)$53 $726,247 

See accompanying notes to condensed consolidated financial statements.
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VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities
Net loss$(199,398)$(138,136)
Stock-based compensation18,575  
Depreciation and amortization7,397 4,920 
Other operating activities, net75 (375)
Change in assets and liabilities
Inventories1,669 (2,310)
Other current and non-current assets6,152 (5,928)
Accounts payable and accrued expenses719 2,560 
Customer deposits(172)1,319 
Other current and non-current liabilities2,394 9,664 
Net cash used in operating activities(162,589)(128,286)
Cash flows from investing activity
Capital expenditures(14,135)(13,680)
Cash used in investing activity(14,135)(13,680)
Cash flows from financing activities
Payments of finance lease obligations(89)(55)
Net transfer from Parent Company 106,119 
Proceeds from Parent Company 40,000 
Issuance of common stock460,200  
Transaction costs(20,866) 
Withheld taxes paid on behalf of employees on net settled stock-based awards(399) 
Net cash provided by financing activities438,846 146,064 
Net increase in cash and cash equivalents262,122 4,098 
Cash, cash equivalents and restricted cash at beginning of period492,721 81,368 
Cash, cash equivalents and restricted cash at end of period$754,843 $85,466 
Cash and cash equivalents$741,575 $74,438 
Restricted cash13,268 11,028 
Cash, cash equivalents and restricted cash$754,843 $85,466 

See accompanying notes to condensed consolidated financial statements.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)





(1) Organization and its wholly owned subsidiaries ("VGH, Inc.")
Virgin Galactic Holdings, Inc. and its wholly owned subsidiaries ("VGH, Inc.") are focused on the development, manufacture and operations of spaceships and related technologies for the purpose of conducting commercial human spaceflight and flying commercial research and development payloads into space. The development and manufacturing activities are located in Mojave, California with plans to operate the commercial spaceflights out of Spaceport America located in New Mexico.

VGH, Inc. was originally formed as a Cayman Islands exempted company on May 5, 2017 under the name Social Capital Hedosophia Holdings Corp. (“SCH”). SCH was a public investment vehicle incorporated as a blank check company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On October 25, 2019, VGH, Inc. domesticated as a Delaware corporation and consummated the merger transactions contemplated by the Agreement and Plan of Merger, dated as of July 29, 2019, as amended on October 2, 2019, by and among VGH, Inc., Vieco USA, Inc. (“Vieco US”), Vieco 10 Limited (“Vieco 10”), TSC Vehicle Holdings, Inc., (“TSCV”), Virgin Galactic Vehicle Holdings, Inc., (“VGVH”), Virgin Galactic Holdings, LLC (“VGH LLC” and, collectively with TSCV and VGVH, the “VG Companies”), and the other parties thereto (the “Virgin Galactic Business Combination”). The closing of the Virgin Galactic Business Combination occurred on October 25, 2019 and, in connection with the closing, SCH re-domiciled as a Delaware corporation under the name Virgin Galactic Holdings, Inc. Upon closing, the entities comprising the VG Companies became wholly owned subsidiaries of VGH, Inc. and in exchange the VGH, Inc. common stock due to Vieco 10 as consideration was received and directly held by Vieco US. On March 16, 2020, Vieco US distributed its shares of VGH, Inc. to Vieco 10 and, in connection with such distribution, Vieco 10 executed a joinder to the Stockholders' Agreement and the Registration Rights Agreement entered into in connection with the consummation of the Virgin Galactic Business Combination. On July 30, 2020, Vieco 10 subsequently distributed its shares of our common stock to Virgin Investments Limited (“VIL”) and Aabar Space, Inc. (“Aabar”) and, in connection with such distribution, VIL and Aabar executed a joinder to the Stockholders’ Agreement and the Registration Rights Agreement.

Throughout the notes to the condensed consolidated financial statements, unless otherwise noted, “we,” “us,” “our,” the "Company" and similar terms refer to the VG Companies prior to the consummation of the Virgin Galactic Business Combination, and VGH, Inc. and its subsidiaries after the Virgin Galactic Business Combination. Prior to the Virgin Galactic Business Combination and prior to the series of Vieco 10 reorganizational steps, Galactic Ventures, LLC ("GV"), a wholly-owned subsidiary of Vieco 10, was the direct parent of VG Companies.

Global Pandemic
On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. Since then, extraordinary actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

Consistent with the actions taken by governmental authorities, including California, New Mexico and the United Kingdom, where most of our workforce is located, we have taken appropriately cautious 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 then temporarily suspended on-site operations at our facilities in Mojave, California and Spaceport America, New Mexico in late March 2020. Starting late March 2020, approximately two-thirds of our employees and contractors were able to complete their duties from home, which enabled much critical work to continue, including engineering analysis and drawing releases for VSS Unity, VMS Eve and the second SpaceShipTwo vehicle, process documentation updates, as well as workforce training and education. The remaining one-third of our workforce was unable to perform their normal duties from home. In April 2020, in accordance with our classification within the critical infrastructure designation, we resumed limited operations under revised
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




operational and manufacturing plans that conform to the latest COVID-19 health precautions. This includes universal facial covering requirements, rearranging facilities to follow social distancing protocols, conducting active daily temperature checks and undertaking regular and thorough disinfecting of surfaces and tools. We are also testing employees and contractors for COVID-19 on a regular basis. However, the COVID-19 pandemic and the continued precautionary actions taken related to COVID-19 have adversely impacted, and are expected to continue to adversely impact, our operations, including the completion of the development of our spaceflight systems and our scheduled spaceflight test programs.

As of the date of this quarterly report on Form 10-Q, all 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. For the time being, we are encouraging those employees who are able to work from home to continue doing so.

The COVID-19 pandemic and the protocols and procedures we have implemented in response to the pandemic have caused some delays in operational and maintenance activities, including delays in our test flight program. The full impact of the COVID-19 pandemic on our business and results of operations subsequent to September 30, 2020 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 reimpose closed borders, impose prolonged quarantines, or further restrict travel. We believe our cash and cash equivalents on hand at September 30, 2020 and management's operating plan, will provide sufficient liquidity to fund our operations for at least the next twelve months from the issuance of these financial statements. 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.
(2)     Summary of Significant Accounting Policies

(a)    Virgin Galactic Business Combination and Basis of Presentation
The Virgin Galactic Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, SCH has been treated as the acquired company for financial reporting purposes. This determination was primarily based on shareholders of the VG Companies having a relative majority of the voting power of the combined entity, the operations of the VG Companies prior to the acquisition comprising the only ongoing operations of the combined entity, and senior management of the VG Companies comprising the majority of the senior management of the combined entity. Accordingly, for accounting purposes, the financial statements of the combined entity represent a continuation of the financial statements of the VG Companies with the acquisition being treated as the equivalent of the VG Companies issuing stock for the net assets of SCH, accompanied by a recapitalization. The net assets of SCH were recognized as of the date of the Virgin Galactic Business Combination at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Virgin Galactic Business Combination in these financial statements are those of the VG Companies and the accumulated deficit of VG Companies has been carried forward after the Virgin Galactic Business Combination. Earnings per share calculations for all periods prior to the Virgin Galactic Business Combination have been retrospectively adjusted for the equivalent number of shares outstanding immediately after the Virgin Galactic Business Combination to effect the reverse acquisition.

These condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

Prior to the Virgin Galactic Business Combination, these condensed consolidated financial statements have been derived from the historical condensed consolidated financial statements of Vieco 10 and include assets, liabilities, revenues and expenses directly attributable to our operations and allocations of corporate expenses from the Vieco 10 and GV for providing certain corporate functions, which included, but are not limited to, general corporate expenses related to finance, legal, compliance, facilities, and employee benefits. Following the Virgin Galactic Business Combination, these condensed consolidated financial statements represent the stand-alone activity of the Company.

Prior to the Virgin Galactic Business Combination, corporate expenses were allocated to us from Vieco 10 and GV on the basis of direct usage when identifiable or on the basis of headcount. The Company, Vieco 10 and GV each consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company. Following the Virgin Galactic Business Combination, the Company expects to incur additional expenses as a stand-alone company. It is not practicable to estimate actual costs that would have been incurred had the Company been a stand-alone company during the periods presented prior to the Virgin Galactic Business Combination. Actual costs that may have been incurred if the Company had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

The historical condensed consolidated financial statements prior to the Virgin Galactic Business Combination do not reflect any attribution of debt or allocation of interest expense.

Following the Virgin Galactic Business Combination, we perform these corporate functions using our own resources or purchased services from a related party (Note 4). We have entered into a transition service agreement with Vieco 10 in connection with the separation, many of which are expected to have terms longer than one year.

Prior to the Virgin Galactic Business Combination, the Company was historically funded as part of our Vieco 10 and GV’s treasury program. Cash and cash equivalents were managed through bank accounts legally owned by us, Vieco 10 and GV. Accordingly, cash and cash equivalents held by Vieco 10 and GV at the corporate level were not attributable to us for any of the periods presented. Only cash amounts legally owned by entities dedicated to the Company are reflected in the condensed consolidated balance sheets. Transfers of cash, both to and from Vieco 10 and GV’s treasury program by us or related parties, are reflected as a component of net parent investment or membership equity in the condensed consolidated balance sheets and as a financing activity on the accompanying condensed consolidated statements of cash flows.

Prior to the Virgin Galactic Business Combination, as the various entities that make up the Company were not historically held by a single legal entity prior to the contribution of the VG Companies into VGH, LLC on July 8, 2019, total net parent investment is shown in lieu of equity in the condensed consolidated financial statements as of the applicable historical periods. Balances between us, Vieco 10 and GV that were not historically cash settled are included in net parent investment. Net parent investment represents Vieco 10’s interest in the recorded assets of us and represents the cumulative investment by Vieco 10 in us through July 8, 2019, inclusive of operating results.

Prior to the Virgin Galactic Business Combination, certain of our employees historically participated in Vieco 10’s stock-based compensation plans in the form of options issued pursuant to Vieco 10's plan. The performance conditions set forth in Vieco 10 stock-based compensation plans resulted in no stock-
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




based compensation expense recognized during all periods presented prior to consummation of the Virgin Galactic Business Combination.

Prior to the Virgin Galactic Business Combination, the operations of the Company were included in the consolidated U.S. federal, and certain state and local and foreign income tax returns filed by GV, where applicable. Income tax expense and other income tax related information contained in the condensed consolidated financial statements for periods prior to the Virgin Galactic Business Combination are presented on a separate return basis as if the Company had filed its own tax returns. The income taxes of the Company as presented in the condensed consolidated financial statements may not be indicative of the income taxes that the Company will generate in the future. Additionally, certain tax attributes such as net operating losses or credit carryforwards are presented on a separate return basis and have been removed subsequent to the Virgin Galactic Business Combination. In jurisdictions where the Company has been included in the tax returns filed by GV, any income tax receivables resulting from the related income tax provisions have been reflected in the condensed consolidated balance sheets within net parent investment or membership equity, as applicable. Following the Virgin Galactic Business Combination, the Company will file separate standalone tax returns as we effectively became a new and separate tax filer from GV with no historical net operating losses and credit carryforwards.
(b)     Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP required us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. Significant estimates inherent in the preparation of the consolidated financial statements include, but are not limited to, accounting for cost of revenue, useful lives of property, plant and equipment, net, accrued liabilities, income taxes including deferred tax assets and liabilities and impairment valuation, stock-based awards and contingencies.
(c)     Property, Plant, and Equipment, net
Property, plant, and equipment, net and leasehold improvements are stated at cost, less accumulated depreciation.

Depreciation on property, plant, and equipment, net is calculated on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter period of the estimated life or the lease term.

The estimated useful lives of property and equipment are principally as follows:
AssetUseful Life
Buildings39 years
Leasehold ImprovementsShorter of the estimated useful life or lease term
Aircraft20 years
Machinery & equipment
5 to 7 years
IT software and equipment
3 to 5 years

We incur repair and maintenance costs on major equipment, which is expensed as incurred.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(d)     Other Summary of Significant Accounting Policies
Other than policies noted within Recent Accounting Pronouncements below, there have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the Annual Report on Form 10-K.

The interim financial information is unaudited, but reflects all normal recurring adjustments that are,
in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of the results for a full year.
(3)    Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”).

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

(a)Issued Accounting Standard Updates
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which affects general principles within Topic 740, and are meant to simplify and reduce the cost of accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and simplifies areas including franchise taxes that are partially based on income, transactions with government that result in a step up in the tax basis of goodwill, the incremental approach for intraperiod tax allocation, interim period income tax accounting for year-to-date losses that exceed anticipated losses and enacted changes in tax laws in interim periods. The changes are effective for annual periods beginning after December 15, 2020. The Company is currently assessing the impact of ASU 2019-12 in its consolidated financial statements.

(b)Adopted Accounting Standard Updates
Effective January 1, 2020, we adopted ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modified the disclosure requirements on fair value measurements. The adoption of ASU 2018-03 did not have a material impact on the Company’s consolidated financial statements.
(4)    Related Party Transactions
The Company licenses its brand name from certain entities affiliated with Virgin Enterprises Limited (“VEL”), a company incorporated in England. VEL is an affiliate of the Company. Under the trademark license, the Company has the exclusive right to operate under the brand name “Virgin Galactic” worldwide. Royalty payables, excluding sponsorship royalties, for the use of license are the greater of 1% of revenue or $0.04 million per quarter, prior to the commercial launch date. Sponsorship royalties payable are 25% of revenue. We paid license and royalty fees of $0.04 million and $0.02 million for the three months ended September 30, 2020 and 2019, respectively. We paid license and royalty fees of $0.13 million and $0.06 million for the nine months ended September 30, 2020 and 2019, respectively.

As a result of the Virgin Galactic Business Combination, the Company entered into a Transition Services Agreement ("TSA") with Virgin Orbit, LLC ("VO") and GV on October 25, 2019. Prior to the Virgin Galactic Business Combination, the VG Companies historically performed certain services for VO, Vieco 10 and GV. The Company is allocated corporate expenses from Vieco 10 and GV for corporate-related functions based on an allocation methodology that considers our headcount, unless directly attributable to the business. General corporate overhead
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




expense allocations include tax, accounting and auditing professional fees, and certain employee benefits. For the three and nine months ended September 30, 2020, there was no corporate expense allocated to us from Vieco 10 and Vieco US. For the three and nine months period ended September 30, 2019, we were allocated $1.0 million and $1.2 million corporate expenses, net, from Vieco 10 and GV, respectively. Corporate expense are included within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.

The Company is allocated operating expense from VO Holdings, Inc. and its subsidiaries (“VOH”), a majority owned company of Vieco 10 and GV for operations-related functions based on an allocation methodology that considers our headcount, unless directly attributable to the business. Operating expense allocations include use of machinery and equipment and other general administrative expenses. We were allocated $0.13 million and $0.07 million of operating expenses, net, from VOH for the three months ended September 30, 2020 and 2019, respectively. We were allocated $0.37 million and $0.2 million of operating expenses, net, from VOH for the nine months ended September 30, 2020 and 2019, respectively. The Company has a receivable (payable) to VOH of $0.1 million and $(0.8) million as of September 30, 2020 and December 31, 2019, respectively.
(5)    Inventory
As of September 30, 2020 and December 31, 2019, inventory is comprised of the following:
As of
September 30, 2020December 31, 2019
(Unaudited)
(In thousands)
Raw Materials$23,503 $22,578 
Spare parts1,644 4,239 
Total inventory
$25,147 $26,817 

For the three months ended September 30, 2020, we wrote off $0.1 million of inventory due to excess and obsolescence. For the nine months ended September 30, 2020, we wrote off $1.3 million of inventory due to excess and obsolescence. There were no write-downs of inventories to net realizable value for the three and nine months ended September 30, 2019.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(6)    Property, Plant, and Equipment, net
As of September 30, 2020 and December 31, 2019, property, plant, and equipment, net consists of the following :
As of
September 30, 2020December 31, 2019
(Unaudited)
(In thousands)
Buildings$9,142 $9,142 
Leasehold improvements27,910 20,048 
Aircraft195 320 
Machinery and equipment36,752 33,608 
IT software and equipment21,720 17,151 
Construction in progress3,257 3,674 
98,976 83,943 
Less accumulated depreciation and amortization
(41,721)(34,610)
Property, plant, and equipment, net
$57,255 $49,333 

Total depreciation and amortization for the three months ended September 30, 2020 and 2019 was $2.7 million and $1.7 million, respectively, of which $1.3 million and $0.9 million was recorded in research and development expense, respectively. Total depreciation and amortization for the nine months ended September 30, 2020 and 2019 was $7.4 million and $4.9 million, respectively, of which $3.5 million and $2.7 million was recorded in research and development expense, respectively.


























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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7)     Leases
The Company's leases are more fully described in Note 8 of the "Notes to Consolidated Financial Statements" in the 2019 Annual Report on Form 10-K.

The components of lease expense related to leases for the periods presented below are as follows:

Three Months Ended September 30,
20202019
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $1,181 $1,202 
Short-term lease expense126 27 
Finance Lease Cost:
Amortization of right-of-use assets
40 59 
Interest on lease liabilities8 8 
Total finance lease cost48 67 
Variable lease cost 798 113 
Total lease cost$2,153 $1,409 
Nine Months Ended September 30,
20202019
(Unaudited and in thousands)
Lease Cost:
Operating lease expense$3,343 $3,017 
Short-term lease expense249 120 
Finance Lease Cost:
Amortization of right-of-use assets
95 115 
Interest on lease liabilities25 18 
Total finance lease cost120 133 
Variable lease cost1,573 377 
Total lease cost$5,285 $3,647 

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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of supplemental cash flow information related to leases for the period are as follows:
Nine Months Ended September 30,
20202019
(In thousands, except term and rate data)
Cash flow information:
Operating cash flows for operating leases$3,763 $3,425 
Operating cash flows for finance leases$25 $17 
Financing cash flows for finance leases
$89 $55 
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
Operating leases$96 $16,989 
Finance Leases$91 $498 
Other Information:
Weighted average remaining lease term:
Operating leases (in years)13.2313.95
Finance leases (in years)3.074.10
Weighted average discount rates:
Operating leases11.69 %11.71 %
Finance leases8.48 %8.51 %

The supplemental balance sheet information related to leases for the period is as follows:
As of
September 30, 2020December 31, 2019
(Unaudited)
(In thousands)
Operating leases
Long-term right-of-use assets$15,712 $16,632 
    Short-term operating lease liabilities$1,990 $2,354 
    Long-term operating lease liabilities20,838 21,867 
Total operating lease liabilities$22,828 $24,221 

Lease expense for the three months ended September 30, 2020 and September 30, 2019 was $2.2 million and $1.4 million, respectively. Lease expense for the nine months ended September 30, 2020 and September 30, 2019 was $5.3 million and $3.6 million, respectively.


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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Commitments
The Company has certain noncancelable operating leases primarily for its premises. These leases generally contain renewal options for periods ranging from 3 to 20 years and require the Company to pay all executory costs, such as maintenance and insurance. Certain lease arrangements have rent free periods or escalating payment provisions, and we recognize rent expense of such arrangements on a straight line basis.

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum finance lease payments as of September 30, 2020 are as follows:
Operating LeasesFinance
Leases
(In thousands)
2020 (for the remaining period)$4,591 $145 
20213,525 131 
20223,246 97 
20233,233 46 
20243,233  
Thereafter27,664  
Total lease payments$45,492 $419 
Less:
Imputed interest/present value discount(23,034)$(49)
Present value of lease liabilities$22,458 $370 

(8) Other Current and Non-current Assets
A summary of the components of other assets are as follows:
As of
September 30, 2020December 31, 2019
(Unaudited)
(In thousands)
Prepaid expense $9,274 $16,672 
Accounts receivable363 461 
Other current assets234  
    Total other current assets$9,871 $17,133 
Right-of-use assets$15,712 $16,927 
Other non-current assets3,218 2,615 
    Total other non-current assets $18,930 $19,542 

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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(9)    Accrued Expenses
A summary of the components of accrued liabilities are as follows:
As of
September 30, 2020December 31, 2019
(Unaudited)
(In thousands)
Accrued payroll$2,777 $2,027 
Accrued vacation4,308 2,797 
Accrued bonus5,195 6,502 
Accrued inventory2,063 2,235 
Other accrued expenses7,713 8,716 
Total accrued expenses$22,056 $22,277 

(10)    Long-term Debt
As of
September 30, 2020December 31, 2019
(Unaudited)
(In thousands)
Commercial loan$930 $ 
930  
     Less: Current portion(310) 
Non-current portion$620 $ 

Aggregate maturities of long-term debt as of September 30, 2020 are as follows:
(In thousands)
2020 (for the remaining period)$310 
2021310 
2022310 
$930 

On June 18, 2020, we financed the purchase of software licenses through a loan totaling approximately $0.9 million. The loan amortized in three equal annual installment of approximately $0.3 million with the final payment due on October 1, 2022 with 0% interest rate. The loan is secured by a standby letter of credit issued from our financial institution and restricted cash has been recorded for the corresponding outstanding balance.

The imputed interest of this loan was immaterial.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(11)    Income Taxes
As of October 25, 2019 and for the period from January 1, 2019 through October 25, 2019, we adopted the separate     return approach for the purpose of presenting the condensed consolidated financial statements, including the income tax provisions and the related deferred tax assets and liabilities. The historic operating results for the periods prior to the Virgin Galactic Business Combination reflect a separate return approach for each jurisdiction in which we had a presence and GV will file tax returns for the period from January 1, 2019 through October 25, 2019. As of December 31, 2019 and for the period from October 26, 2019 through December 31, 2019, we will file separate standalone tax returns.

Income tax expense was $0.04 million and $0.04 million for the three months ended September 30, 2020 and 2019, respectively. Income tax expense was $0.03 million and $0.12 million for the nine months ended September 30, 2020 and 2019, respectively. The effective income tax rate was nil for three months ended September 30, 2020 and 2019. The effective income tax rate was nil for nine months ended September 30, 2020 and 2019. Our effective tax rate differs from the U.S. statutory rate primarily due to a substantially full valuation allowance against our net deferred tax assets where it is more likely than not that some or all of the deferred tax assets will not be realized.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)




(12)    Stockholders' Equity

There have been no significant changes from the Stockholders' Equity disclosed in Note 11 of the “Stockholders Equity” included in the Annual Report on Form 10-K other than the issuance of common stock and redemption of warrants as noted below.

Issuance of Common Stock

In August 2020, the Company sold 23,600,000 shares of common stock at a public offering price of $19.50 per share for gross proceeds, before deducting underwriting discounts and commissions and other expenses payable by the Company, of $460.2 million. The Company incurred $20.9 million of transaction costs.

Warrants and Warrant Redemption
As of April 30, 2020, there were no public warrants (as defined below) outstanding. As of December 31, 2019, there were 22,999,977 warrants outstanding that had initially been issued as part of our initial public offering in 2017 (the “public warrants”), which included warrants that were part of the Company’s then-outstanding units. As of both September 30, 2020 and December 31, 2019, there were also 8,000,000 warrants outstanding that were issued in a private placement simultaneously with the Company’s initial public offering (the “private placement warrants”).

Under the terms of the warrant agreement (the “Warrant Agreement”) between us and Continental Stock     Transfer & Trust Company, as warrant agent, the public warrants became exercisable on a cashless basis on January 27, 2020, based on the exchange ratio as calculated under the Warrant Agreement at the time of the exercise. On March 13, 2020 and pursuant to the terms of the Warrant Agreement, we announced that all public warrants that remained unexercised immediately after 5:00 p.m. New York City time on April 13, 2020 (the “Redemption Date”) would be redeemed for $0.01 per warrant. Warrant holders could exercise their public warrants at any time from March 13, 2020 and prior to the Redemption Date on a cashless basis, and receive 0.5073 shares of common stock per public warrant surrendered for exercise. Immediately after the Redemption Date, 295,305 public warrants remained unexercised and were redeemed at a redemption price of $0.01 per public warrant in accordance with the terms of the Warrant Agreement. The private placement warrants were not subject to the redemption and remain outstanding.

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Notes to Condensed Consolidated Financial Statements
(Unaudited)




(13 )     Earnings per Share
The following table presents net loss per share and related information:
Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
(In thousands, except for share and per share data)
Basic and diluted:
     Net loss$(76,950)$(51,475)$(199,398)$(138,136)
     Weighted average shares of common stock outstanding225,253,536 193,663,150 213,193,386 193,663,150 
     Basic and diluted net loss per share$(0.34)$(0.27)$(0.94)$(0.71)


Earnings per share calculations for the three and nine months ended September 30, 2019 have been retrospectively adjusted for the equivalent number of shares outstanding immediately after the Virgin Galactic Business Combination to effect the reverse recapitalization less issuance of 1,924,402 shares to Boeing, the issuance of 413,486 shares to settle transaction costs and the common stock equivalent of the vested 1,500,000 restricted stock units ("RSUs") granted to certain directors in connection to the Virgin Galactic Business Combination that remain unsettled as of September 30, 2020.

As of September 30, 2020, December 31, 2019 and September 30, 2019, the Company has excluded the potential effect of warrants to purchase shares of common stock totaling 8,000,000, 30,999,977 and 30,999,977, respectively, shares and the dilutive effect of outstanding stock options and unvested restricted stock units, as described in Note 12 of the “Notes to Consolidated Financial Statements” included in the 2019 Annual Report on Form 10-K, in the calculation of diluted loss per share, as the effect would be anti-dilutive due to losses incurred.
(14)    Stock-Based Compensation
The Company's 2019 Incentive Award Plan ("2019 Plan") is more fully described in Note 13 of the "Notes to Consolidated Financial Statements" in the 2019 Annual Report on Form 10-K. Under the 2019 Plan, the Company has the ability to grant incentive stock options, non-qualified stock options and RSUs to employees, directors and other service providers. Twenty five percent of such stock options cliff vest at the grant dates first anniversary and will ratably vest monthly over the next three years, subject to continued employment on each vesting date. Vested options will be exercisable at any time until ten years from the grant date, subject to earlier expiration under certain terminations of service and other conditions. The stock options granted have an exercise price equal to the closing stock price of our common stock on the grant date.

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Notes to Condensed Consolidated Financial Statements
(Unaudited)




The following table sets forth the summary of options activity under the 2019 Plan (dollars in thousands except per share data):
Number of SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
Options outstanding at December 31, 2018 $