424B3 1 spce424b3prospectussupplem.htm 424B3 Document

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-237961

PROSPECTUS SUPPLEMENT

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Virgin Galactic Holdings, Inc.
150,464,840 Shares of Common Stock
This prospectus supplement further supplements and updates the prospectus dated May 13, 2020, as supplemented by the prospectus supplement dated May 14, 2020, the prospectus supplement dated June 2, 2020 and the prospectus supplement dated August 12, 2020, relating to the resale of up to 150,464,840 shares of our common stock by the selling stockholders named in the prospectus or their permitted transferees, which includes up to 142,464,840 outstanding shares of our common stock and up to 8,000,000 shares of our common stock that are issuable upon the exercise of warrants to purchase our common stock that were initially issued in connection with a private placement.
This prospectus supplement incorporates into our prospectus the information contained in our attached:
Current Report on Form 8-K, which was filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2020; and
Quarterly Report on Form 10-Q, which was filed with the SEC on November 6, 2020.
Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “SPCE”. On November 13, 2020, the last reported sale price of our common stock was $22.27 per share.
Our business and an investment in our common stock involve significant risks. These risks are described under the caption “Risk Factors” in our Quarterly Report for the period ended June 30, 2020, which was filed with the SEC on August 3, 2020.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is November 16, 2020.




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
____________________________

FORM 8-K
____________________________

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 6, 2020
____________________________

Virgin Galactic Holdings, Inc.
(Exact name of registrant as specified in its charter)
 ____________________________





Delaware 001-38202 85-3608069
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(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)
Not Applicable
(Former name or former address, if changed since last report)
 ____________________________

 Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
Written communications pursuant to Rule 425 under the Securities Act
Soliciting material pursuant to Rule 14a-12 under the Exchange Act
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading 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 is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.   ☐




Item 5.02Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensation Arrangements of Certain Officers

On November 6, 2020, Enrico Palermo tendered his resignation as the Chief Operating Officer of Virgin Galactic Holdings, Inc. (the “Company”) and as President of TSC, LLC, one of the Company’s wholly owned subsidiaries, each effective as of the close of business on December 4, 2020.

In connection with Mr. Palermo’s departure, the Company expects to pay Mr. Palermo an annual bonus, the amount of which will be based on the achievement applicable performance goals and will be pro-rated based on his time employed in 2020. His right to receive this pro-rated bonus opportunity will be subject to his timely execution and non-revocation of a general release of claims.


2


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 






 Virgin Galactic Holdings, Inc.



Date: November 12, 2020 By: /s/ Michelle Kley

 Name: Michelle Kley

 Title: 
Executive Vice President, General Counsel and Secretary

3

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.


VIRGIN GALACTIC HOLDINGS, INC.
TABLE OF CONTENTS



1


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

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


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

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 $3,252 
Cost of revenue— 406 173 1,690 
Gross profit— 426 65 1,562 
Selling, general, and administrative expenses30,936 17,814 83,738 44,719 
Research and development expenses46,243 34,528 117,675 96,119 
Operating loss(77,179)(51,916)(201,348)(139,276)
Interest income322 387 2,005 1,137 
Interest expense(9)— (26)(2)
Other income, net(44)91 128 
Loss before income taxes(76,910)(51,438)(199,364)(138,013)
Income tax (benefit) expense40 37 34 123 
Net loss(76,950)(51,475)(199,398)(138,136)
Other comprehensive loss:
Foreign currency translation adjustment48 (58)(6)(79)
Total comprehensive loss$(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

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


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 $467,560 
Net loss— — — — — — — — (59,930)— (59,930)
Other comprehensive income (loss)— — — — — — — — — (54)(54)
Common stock issued related to warrants exercised— — — — — 13,239,934 (1)— — — 
Stock-based compensation— — — — — — — 4,425 — — 4,425 
Balance as of March 31, 2020     209,240,972 21 593,582 (181,607)5 412,001 
Net loss— — — — — — — — (62,518)— (62,518)
Other comprehensive loss— — — — — — — — — — — 
Common stock issued related to warrants exercised— — — — — 1,162,884 — — — — — 
Stock-based compensation— — — — — — — 5,525 — — 5,525 
Transaction costs— — — — — — — (770)— — (770)
Balance as of June 30, 2020     210,403,856 21 598,337 (244,125)5 354,238 
Net loss— — — — — — — — (76,950)— (76,950)
Other comprehensive income (loss)— — — — — — — — — 48 48 
Common stock issued related to stock-based awards, net of taxes— — — — — 17,647 — (399)— — (399)
Stock-based compensation— — — — — — — 8,625 — — 8,625 
Issuance of common stock— — — — — 23,600,000 460,198 — — 460,200 
Transaction costs— — — — — — — (19,515)— — (19,515)
Balance as of September 30, 2020$  $  $ 234,021,503 $23 $1,047,246 $(321,075)$53 $726,247 

See accompanying notes to condensed consolidated financial statements.
7

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.
8

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
10

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-
11

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.
12

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
13

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.
14

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.


























15


(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 liabilities
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 

16


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.


17


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 

18

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.
19

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.
20

VIRGIN GALACTIC HOLDINGS, INC.
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.

21

VIRGIN GALACTIC HOLDINGS, INC.
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.

22

VIRGIN GALACTIC HOLDINGS, INC.
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— $— 0— 
Granted6,212,609 11.58 
Exercised— — 
Forfeited options(90,565)11.79 
Options outstanding at December 31, 20196,122,044 $11.58 9.83— 
Granted1,155,734 20.34 
Exercised— — 
Forfeited options(225,242)11.79 
Options outstanding at September 30, 20207,052,536 $13.01 9.15$43,866,774 
Options exercisable at September 30, 202065,105 $22.98 9.75— 
__________________

(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 on the period end date.

The following table sets forth the summary of RSUs activity under the 2019 Plan (dollars in thousands except per share data):
SharesWeighted Average Fair Value
Outstanding at January 1, 2019— $— 
Granted1,795,209 7.11 
Vested— — 
Forfeited(27,495)7.11 
Outstanding at December 31, 20191,767,714 $7.11 
Granted1,579,460 20.29 
Vested(35,000)22.98 
Forfeited(86,976)8.34 
Outstanding at September 30, 20203,225,198 $19.30 


23

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




Stock options and RSUs expenses are included in selling, general and administrative and research and development expense in the condensed consolidated statements of operations and comprehensive loss, related to stock options and RSUs is as follows:
Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
Stock option expense
   Selling, General & Administrative2,582 — 6,527 — 
   Research & Development1,254 — 3,310 — 
      Total stock option expense3,836 — 9,837 — 
RSU expense
   Selling, General & Administrative2,474 — 4,945 — 
   Research & Development2,315 — 3,793 — 
      Total RSU expense4,789 — 8,738 — 
      Total stock-based compensation expense$8,625 $— $18,575 $— 

As of September 30, 2020, the unrecognized stock-based compensation related to these options was $48.5 million and is expected to be recognized over a weighted-average period of 3.2 years. At September 30, 2020, the unrecognized stock-based compensation related to RSUs was $63.7 million and is expected to be recognized over a weighted-average period of 2.1 years.

The weighted average assumptions used to value the option grants are as follows:
As of
September 30, 2020December 31, 2019
Expected life (in years)6.06.0
Volatility75.2 %75.0 %
Risk free interest rate1.1 %1.7 %
Dividend yield— %— %

The weighted average fair value per option at the grant date for options issued during the nine months ended September 30, 2020 and for the year ended December 31, 2019 was $8.55 and $7.63, respectively.

Award Modification
On March 10, 2020, we modified the RSU grants made in connection with the closing of the Virgin Galactic Business Combination by removing one of the vesting criteria requiring our share price value to be greater than $10 per share at the time RSUs vest. No other terms of the awards were modified. Stock-based compensation expense related to the modification was calculated by taking the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award. Given the RSUs were unvested at the time of modification, the incremental stock-based compensation expense will prospectively be expensed over the remaining vesting period. Total incremental stock-based compensation expense recorded as a result of the modification was $1.7 million for the three months ended September 30, 2020. Total incremental stock-based compensation expense recorded as a result of the modification was $3.1 million for the nine months ended September 30, 2020.
24

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




(15)     Fair Value Measurements
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We estimate fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which is categorized in one of the following levels:
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the
reporting entity at the measurement date;
Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The carrying amounts included in the condensed consolidated balance sheets under current assets and current liabilities approximate fair value because of the short maturity of these instruments. The following tables summarize the fair value of assets that are recorded in the Company’s condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019 at fair value on a recurring basis:
Fair Value Measurements as of September 30, 2020
Level 1Level 2Level 3
(In thousands)
Assets
Money Market436,227   
Certificate of Deposit93,772   
Cash Equivalents200,404   
Total assets at fair value$730,403 $— $— 
Fair Value Measurements as of December 31, 2019
Level 1Level 2Level 3
(In thousands)
Assets
Money Market$423,149 $— $— 
Certificate of Deposit42,630 — — 
Total asset at fair value$465,779 $— $— 

(16)    Commitments and Contingencies
Legal Proceedings
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company applies accounting for contingencies to determine when and how much to accrue for and disclose related to legal and other contingencies. Accordingly, the Company discloses contingencies deemed to be reasonably possible and accrues loss contingencies when, in consultation with legal advisors, it is concluded that a loss is probable and reasonably estimable. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is
25

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




therefore not predictable with assurance, management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, beyond that provided at September 30, 2020, would not be material to the Company’s financial position, results of operations or cash flows. However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from legal proceedings, lawsuits and other claims could differ materially from those projected.

In September 2018, a former contractor employed through a third party staffing agency, alleged on behalf of himself and other aggrieved employees that the Company and the staffing agency, purportedly violated California state wage and hour laws. In March 2020, the Company agreed to settle this matter for $1.9 million. For the three and nine months ended September 30, 2020, the Company recorded an additional legal settlement expense of $0 million and $0.2 million, respectively, and was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss. As of September 30, 2020, the Company has an outstanding $1.9 million payable pending final court motions that has been delayed due to COVID-19.
(17)    Employee Benefit Plan
The Company has defined contribution plans, under which the Company pays fixed contributions into a separate entity, and additional contributions to the plans are based upon a percentage of the employees’ elected contributions. The Company will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized within selling, general, and administrative expenses and research and development in the condensed consolidated statements of operations and comprehensive loss, as incurred. Defined contributions were $1.4 million and $1.2 million for the three months ended September 30, 2020 and 2019, respectively. Defined contributions were $3.4 million and $2.9 million for the nine months ended September 30, 2020 and 2019, respectively.
(18)    Supplemental Cash Flow Information
Nine Months Ended
September 30,
20202019
(in thousands)
Supplemental disclosure
Cash payments for:
Income tax paid$26 $125 
$26 $125 
Schedule for noncash investing activities
Unpaid property, plant, and equipment received$1,173 $1,767 
$1,173 $1,767 
Schedule for noncash financing activities
Issuance of common stocks through "cashless" warrants exercised$360,742 $— 
Issuance of common stocks through restricted stock units vested804 — 
Long-term debt930 — 
Unpaid deferred transaction costs117 6,123 
$362,593 $6,123 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” or “our” refer to the business of the VG Companies and their subsidiaries prior to the consummation of the Virgin Galactic Business Combination and Virgin Galactic Holdings, Inc. and its subsidiaries after consummation of the Virgin Galactic Business Combination. Prior to the Virgin Galactic Business Combination and prior to the series of Vieco 10 reorganization steps, Galactic Ventures, LLC ("GV"), a wholly-owned subsidiary of Vieco 10, was the direct parent of the VG Companies.

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and "Cautionary Note Regarding Forward-Looking Statements" sections and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview
We are at the vanguard of a new industry, pioneering the commercial exploration of space with reusable spaceflight systems. We believe the commercial exploration of space represents one of the most exciting and important technology initiatives of our time. This industry has begun growing dramatically due to new products, new sources of private and government funding, and new technologies. Demand is emerging from new sectors and demographics. As government space agencies have retired or reduced their own capacity to send humans into space, private companies are beginning to make crucial inroads into the fields of human space exploration. We have embarked into this commercial exploration journey with a mission to put humans into space and return them safely to Earth on a routine and consistent basis. We believe the success of this mission will provide the foundation for a myriad of exciting new industries.
We are a vertically integrated aerospace company pioneering human spaceflight for private individuals and researchers. Our spaceship operations consist of commercial human spaceflight and flying commercial research and development payloads into space. Our operations also include the design and development, manufacturing, ground and flight testing, and post-flight maintenance of our spaceflight vehicles. We focus our efforts in spaceflights using our reusable technology for human tourism and for research and education. We intend to offer our customers, who we also refer to as "future astronauts", a unique, multi-day experience culminating in a spaceflight that includes several minutes of weightlessness and views of Earth from space. As part of our commercial operations, we have exclusive access to the Gateway to Space facility at Spaceport America located in New Mexico. Spaceport America is the world’s first purpose built commercial spaceport and will be the site of our initial commercial spaceflight operations. We believe the site provides us with a competitive advantage when creating our spaceflight plans as it not only has a desert climate with relatively predictable weather conditions preferable to support our spaceflights, it also has airspace that is restricted for surrounding commercial air traffic that will facilitate frequent and consistent flight scheduling.

Our primary mission is to launch the first commercial program for human spaceflight. In December 2018, we made history by flying our groundbreaking spaceship, SpaceShipTwo, to space. This represented the first flight of a spaceflight system built for commercial service to take humans into space. Shortly thereafter, we flew our second spaceflight in SpaceShipTwo in February 2019, and, in addition to the two pilots, carried a crew member in the cabin. We have received reservations for approximately 600 spaceflight tickets and collected more than $80.0 million in future astronaut deposits as of October 31, 2020. Additionally, in February 2020, we launched our One Small Step campaign which allows interested individuals to place a $1,000 refundable registration deposit towards the cost of a future ticket once we reopen ticket sales and, as of October 31, 2020, there were close to 900 participants in our One Small Step program. With each ticket purchased, future astronauts will experience a multi-day journey that includes a tour of the spaceport, flight suit fitting, spaceflight training and culminating with a trip to space on the final day.

We have also developed an extensive set of vertically integrated aerospace development capabilities encompassing preliminary vehicle design and analysis, detail design, manufacturing, ground testing, flight testing, and maintenance of our spaceflight system. Our spaceflight system consists of three primary components: our carrier aircraft, WhiteKnightTwo; our spaceship, SpaceShipTwo; and our hybrid rocket motor.

SpaceShipTwo is a spaceship with the capacity to carry pilots and future astronauts, or commercial research and development payloads, into space and return them safely to Earth. Fundamentally, SpaceShipTwo is a rocket-powered aerospace vehicle that operates more like a plane than a traditional rocket. SpaceShipTwo is powered by a hybrid rocket
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propulsion system, which we refer to as "RocketMotorTwo", which propels the spaceship on a trajectory into space. SpaceShipTwo’s cabin has been designed to maximize the future astronaut’s safety, experience and comfort. A dozen windows line the sides and ceiling of the spaceship, offering the future astronauts the ability to view the blackness of space as well as stunning views of the Earth below. Our mothership, WhiteKnightTwo, is a twin-fuselage, custom-built aircraft designed to carry SpaceShipTwo up to an altitude of approximately 45,000 feet where the spaceship is released for its flight into space. Using WhiteKnightTwo’s air launch capability, rather than a standard ground-launch, reduces the energy requirements of our spaceflight system as SpaceShipTwo does not have to rocket its way through the higher density atmosphere closest to the Earth’s surface.

Our team is currently in various stages of designing, testing and manufacturing additional spaceships and rocket motors in order to meet the expected demand for human spaceflight experiences. Concurrently, we are researching and developing new products and technologies to grow our company. We are in the early planning stage to develop and build a second carrier aircraft for SpaceShipTwo.

Our operations also include efforts in spaceflight opportunities for research and education. For example, researchers have utilized parabolic aircraft and drop towers to create moments of microgravity and conduct significant research activities. In most cases, these solutions offer only seconds of microgravity per flight and do not offer access to the upper atmosphere or space. Other researchers have conducted experiments on sounding rockets or orbital facilities. These opportunities are expensive, infrequent and may impose highly limiting operational constraints. We believe that research experiments will benefit from exposure to space conditions aboard SpaceShipTwo due to the large cabin, gentler loading during flight, relatively low cost, advantageous operational parameters, and frequent flights. As such, researchers are able to conduct critical experiments and obtain important data through suborbital spaceflight as opposed to costly alternative methods. Our commitment to advancing research and science was present in our December 2018 and February 2019 spaceflights as we transported payloads into space for research purposes under a NASA flight contract.

We have also leveraged our knowledge and expertise in manufacturing spaceships to occasionally perform engineering services for customers, such as research, design, development, manufacturing and integration of advanced technology systems.

Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Quarterly Report on 10-Q titled “Risk Factors.”

Commercial Launch of Our Human Spaceflight Program
We are in the final phases of developing our commercial spaceflight program. Prior to commercialization, we must complete our test flight program, which includes a rigorous series of ground and flight tests, including our baseline spaceflight metrics, flight paths and safety protocol that will be used throughout our spaceflight program. The final portion of the test flight program includes submission of verification reports to the FAA for their review, which will then allow us to carry paying customers on spaceflights under our existing commercial spaceflight license. However, the timing of the submission may be delayed by multiple factors, some of which are outside of our control, including the current, and uncertain future impact of the COVID-19 outbreak on our business. Any delays in successful completion of our test flight program, whether on account of the impact of COVID-19 or otherwise, will impact our ability to generate human spaceflight revenue.

Customer Demand
While not yet in commercial service for human spaceflight, we have already received significant interest from potential future astronauts. Going forward, we expect the size of our backlog and the number of future astronauts that have flown to space on our spaceflight system to be an important indicator of our future performance. As of October 31, 2020, we had reservations for SpaceShipTwo flights for approximately 600 future astronauts. In February 2020, we launched our One Small Step campaign which allows interested individuals to place a $1,000 refundable registration deposit towards the cost of a future ticket once we reopen ticket sales and, as of October 31, 2020, we had received close to 900 One Small Step deposits from 61 countries. We will be retiring the "One Small Step" program on December 31, 2020, but plan on reopening ticket sales following Sir Richard Branson's flight expected in 2021.

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Available Capacity and Annual Flight Rate
We face constraints of resources and competing demand for our human spaceflights. We expect to commence commercial operations with a single SpaceShipTwo, VSS Unity, and a single WhiteKnightTwo carrier aircraft, VMS Eve, which together comprise our only spaceflight system. As a result, our annual flight rate will be constrained by the availability and capacity of this spaceflight system. To reduce this constraint, we are in various stages of designing, testing and manufacturing two additional SpaceShipTwo vehicles. We believe that expanding the fleet will allow us to increase our annual flight rate once commercialization is achieved.

Safety Performance of Our Spaceflight Systems
Our spaceflight systems are highly specialized with sophisticated and complex technology. We have built operational processes to ensure that the design, manufacture, performance and servicing of our spaceflight systems meet rigorous quality standards. However, our spaceflight systems are still subject to operational and process problems, such as manufacturing and design issues, pilot errors, or cyber attacks. Any actual or perceived safety issues may result in significant reputational harm to our business and our ability to generate human spaceflight revenue.

Impact of COVID-19
On 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 have included 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 and under revised 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 of our employees whose work requires them to be in our facilities are now back on-site and we have implemented strict protocols to ensure employee safety, including enforcing staggered shifts to lower on-site density and re-working communications processes with engineers who are primarily working from home. We have, however, 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 and continue to cause delays to our business and operations, which has led to accumulated impacts to both schedule and cost efficiency and some delays in operational and maintenance activities, including delays in our test flight program. We expect this to continue through the fourth quarter and into 2021. Though we remain on track with our upcoming planned flights, 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
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next twelve months from the issuance of the financial statements included in this Quarterly Report on Form 10-Q. If we experience a significant delay due to our workforce getting ill or if the pandemic worsens, we may take additional actions, such as further reducing costs.
Component of Results of Operations
Revenue
To date, we have primarily generated revenue by transporting scientific commercial research and development payloads using our spaceflight systems and by providing engineering services as a subcontractor to the primary contractor of a long-term contract with the U.S. government. We also have generated revenue from a sponsorship arrangement.

Following the commercial launch of our human spaceflight services, we expect the significant majority of our revenue to be derived from sales of tickets to fly to space. We also expect that we will continue to receive a small portion of our revenue by providing services relating to the research, design, development, manufacture and integration of advanced technology systems.

Cost of Revenue
Costs of revenue related to spaceflights include costs related to the consumption of a rocket motor, fuel, payroll and benefits for our pilots and ground crew, and maintenance. Cost of revenue related to the engineering services consist of expenses related to materials and human capital, such as payroll and benefits. Once we have completed our test flight program and commenced commercial operations, we will capitalize the cost to construct any additional SpaceShipTwo vehicles. Cost of revenue will include vehicle depreciation once those spaceships are placed into service. We have not capitalized any spaceship development costs to date.

Gross Profit and Gross Margin
Gross profit is calculated based on the difference between our revenue and cost of revenue. Gross margin is the percentage obtained by dividing gross profit by our revenue. Our gross profit and gross margin has varied historically based on the mix of revenue-generating spaceflights and engineering services. As we approach the commercialization of our spaceflights, we expect our gross profit and gross margin may continue to vary as we scale our fleet of spaceflight systems.

Selling, General and Administrative
Selling, general and administrative expenses consist of human capital related expenses for employees involved in general corporate functions, including executive management and administration, accounting, finance, tax, legal, information technology, marketing, and human resources; depreciation expense and rent relating to facilities, including the lease with Spaceport America, and equipment; professional fees; and other general corporate costs. Human capital expenses primarily include salaries and benefits. As we continue to grow as a company, we expect that our selling, general and administrative costs will increase on an absolute dollar basis.

We also expect to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general, director, officer insurance, investor relations, and professional services.

Research and Development
Research and development expense represents costs incurred to support activities that advance our human spaceflight towards commercialization, including basic research, applied research, concept formulation studies, design, development, and related testing activities. Research and development costs consist primarily of the following costs for developing our spaceflight systems:
flight testing programs, including rocket motors, fuel, and payroll and benefits for pilots and ground crew performing test flights;
equipment, material, and labor hours (including from third party contractors) for developing the spaceflight system’s structure, spaceflight propulsion system, and flight profiles; and
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rent, maintenance, and depreciation of facilities and equipment and other overhead expenses allocated to the research and development departments.

As of September 30, 2020, our current primary research and development objectives focus on the development of our SpaceShipTwo vehicles for commercial spaceflights and developing our RocketMotorTwo, a hybrid rocket propulsion system that will be used to propel our SpaceShipTwo vehicles into space. The successful development of SpaceShipTwo and RocketMotorTwo involves many uncertainties, including:
timing in finalizing spaceflight systems design and specifications;
successful completion of flight test programs, including flight safety tests;
our ability to obtain additional applicable approvals, licenses or certifications from regulatory agencies, if required, and maintaining current approvals, licenses or certifications;
performance of our manufacturing facilities despite risks that disrupt production, such as natural disasters and hazardous materials;
performance of a limited number of suppliers for certain raw materials and components;
performance of our third-party contractors that support our research and development activities;
our ability to maintain rights from third parties for intellectual properties critical to research and development activities;
our ability to continue funding and maintaining our current research and development activities; and
the impact of the ongoing global COVID-19 pandemic.

A change in the outcome of any of these variables could delay the development of SpaceShipTwo and RocketMotorTwo, which in turn could impact when we are able to commence our human spaceflights.

As we are currently still in our final development and testing stage of our spaceflight system, we have expensed all research and development costs associated with developing and building our spaceflight system. We expect that our research and development expenses will decrease once technological feasibility is reached for our spaceflight systems as the costs incurred to manufacture additional SpaceShipTwo vehicles, built by leveraging the invested research and development, will no longer qualify as research and development activities.

Interest Income
Interest income consists primarily of interest earned on cash and cash equivalents held by us in interest bearing demand deposit accounts and cash equivalents.

Interest Expense
Interest expense relates to our finance lease obligations.

Other Income
Other income consists of miscellaneous non-operating items, such as gains on marketable securities.

Income Tax Provision
We are subject to income taxes in the United States and the United Kingdom. Our income tax provision consists of an estimate of federal, state, and foreign income taxes based on enacted federal, state, and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.
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Results of Consolidated Operations
The following tables set forth our results of operations for the periods presented and expresses the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparisons of financial results is not necessarily indicative of future results.
Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
(In thousands)
Revenue$— $832 $238 $3,252 
Cost of revenue— 406 173 1,690 
Gross profit— 426 65 1,562 
Operating expenses:
Selling, general and administrative expenses30,936 17,814 83,738 44,719 
Research and development expenses46,243 34,528 117,675 96,119 
Operating loss(77,179)(51,916)(201,348)(139,276)
Interest income322 387 2,005 1,137 
Interest expense(9)— (26)(2)
Other income(44)91 128 
Loss before income taxes(76,910)(51,438)(199,364)(138,013)
Income tax (benefit) expense40 37 34 123 
Net loss$(76,950)$(51,475)$(199,398)$(138,136)


For the Three and Nine Months Ended September 30, 2020 Compared to the Three and Nine Months Ended September 30, 2019
Revenue
Three Months Ended September 30,$
Change
%
Change
Nine Months Ended September 30,$
Change
%
Change
2020201920202019
(In thousands, except %)
Revenue$— $832 $(832)(100)%$238 $3,252 $(3,014)(93)%

We did not record any revenue for the three months ended September 30, 2020, compared to $0.8 million of revenue for the three months ended September 30, 2019. This revenue recorded for the three months ended September 30, 2019 was attributable to engineering services provided under long-term U.S. government contracts in 2019.

Revenue decreased by $3.0 million, or 93%, to $0.2 million for the nine months ended September 30, 2020 from $3.3 million for the nine months ended September 30, 2019. This is primarily due to decreased engineering services of $1.9 million under long-term U.S. government contracts, a decrease in payload revenue of $0.8 million attributable to the February 2019 payload flown in connection with our testing program, and reduced sponsorship revenue of $0.3 million from an expired agreement.
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Cost of Revenue and Gross Profit
Three Months Ended September 30,$
Change
%
Change
Nine Months Ended September 30,$
Change
%
Change
2020201920202019
(In thousands, except %)
Cost of revenue$— $406 $(406)(100)%173 1,690 $(1,517)(90)%
Gross profit— 426 $(426)(100)%65 1,562 $(1,497)(96)%
Gross margin— %51 %27 %48 %

We did not record any cost of revenue in the three months ended September 30, 2020, as we did not record any revenue in the period. Cost of revenue was $0.4 million for the three months ended September 30, 2019.

Cost of revenue decreased by $1.5 million, or 90%, to $0.2 million for the nine months ended September 30, 2020 from 1.7 million for the nine months ended September 30, 2019. The change in cost of revenue was primarily due to the costs for flying payload in February 2019 compared to the nine months ended September 30, 2020, during which time we recorded no payload revenue. The labor costs associated with providing engineering services under long-term U.S. government contracts decreased proportionally with the billings. Gross profit decreased by $1.5 million, or 96%, to $0.1 million for the nine months ended September 30, 2020 from $1.6 million for the nine months ended September 30, 2019. Gross margin for the nine months ended September 30, 2020 decreased 21% compared to the nine months ended September 30, 2019. The decrease in gross profit and gross margin was primarily driven by smaller gross margins associated with the long-term engineering service contracts.

Selling, General and Administrative Expenses
Three Months Ended September 30,$
Change
%
Change
Nine Months Ended September 30,$
Change
%
Change
2020201920202019
(In thousands, except %)
Selling, general and administrative expenses$30,936 $17,814 $13,122 74 %$83,738 $44,719 $39,019 87 %

Selling, general and administrative expenses increased by $13.1 million, or 74%, to $30.9 million for the three months ended September 30, 2020 from $17.8 million for the three months ended September 30, 2019. This increase was primarily due to additional costs associated with being a public company, including $2.3 million of professional and legal fees, $2.3 million of salary and other benefits, and $2.4 million of insurance costs, as well as $6.6 million of stock-based compensation. These increases were partially offset with decreases of $0.7 million in facilities costs and $0.4 million in travel costs.

Selling, general and administrative expenses increased by $39.0 million, or 87%, to $83.7 million for the nine months ended September 30, 2020 from $44.7 million for the nine months ended September 30, 2019. This $39.0 million increase was primarily due to additional cost associated with being a public company, including increases of $9.9 million of professional and legal fees, $7.4 million of insurance costs, $6.2 million of salary and other benefits, $2.1 million of IT software and consulting expenses, as well as $12.9 million stock-based compensation and $1.5 million of depreciation expense. These increases were partially offset with decreases of $1.1 million in facilities costs and $1.0 million of travel costs.

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Research and Development Expenses
Three Months Ended September 30,$
Change
%
Change
Nine Months Ended September 30,$
Change
%
Change
2020201920202019
(In thousands, except %)
Research and development expenses$46,243 $34,528 $11,715 34 %$117,675 $96,119 $21,556 22 %

Research and development expenses increased by $11.7 million, or 34%, to $46.2 million for the three months ended September 30, 2020 from $34.5 million for the three months ended September 30, 2019. The increase was primarily due to costs associated with developing our spaceflight system, including increases of $3.6 million of salary and other benefits, $1.0 million of facilities costs, net increase of $3.5 million of materials and equipment lease costs, $0.9 million of travel costs, $0.6 million of insurance costs and $1.9 million of stock-based compensation.

Research and development expenses increased by $21.6 million, or 22%, to $117.7 million for the nine months ended September 30, 2020 from $96.1 million for the nine months ended September 30, 2019. The increase was primarily due to costs associated with developing our spaceflight system, including increases of $5.7 million of salary and other benefits, $5.2 million of materials and equipment lease costs, $2.2 million of facilities costs, $1.3 million of travel costs, $1.2 million of insurance costs, and $5.5 million of stock-based compensation and $0.8 million of depreciation expense.

Interest Income
Three Months Ended September 30,$
Change
%
Change
Nine Months Ended September 30,$
Change
%
Change
2020201920202019
(In thousands, except %)
Interest income$322 $387 $(65)(17)%$2,005 $1,137 $868 76 %

Interest income decreased by $0.1 million, or 17%, to $0.3 million for the three months ended September 30, 2020 from $0.4 million for the three months ended September 30, 2019. The decrease was primarily due to significant reductions in interest rates offered for cash, cash equivalents and restricted cash being held in an interest-bearing accounts.

Interest income increased by $0.9 million, or 76%, to $2.0 million for the nine months ended September 30, 2020 from $1.1 million for the nine months ended September 30, 2019. The increase was primarily due to increase in cash, cash equivalents and restricted cash related to the proceeds of the Virgin Galactic Business Combination and subsequent common stock offering, which are being held in an interest-bearing accounts, whose interest rates offered have reduced significantly in 2020.

Interest Expense
The increase in interest expense for the three and nine months ended September 30, 2020 was not material and attributable to our finance lease obligations.

Other Income
The decrease in other income for the three and nine months ended September 30, 2020 from the three and nine months ended September 30, 2019 was not material and is primarily attributable to the net unrealized losses on marketable securities.

Income Tax (Benefit) Expense
Income tax expense was immaterial for the three and nine months ended September 30, 2020 and 2019. We have accumulated net operating losses at the federal and state level as we have not yet started commercial operations. We maintain a substantially full valuation allowance against our net deferred tax assets. The income tax expenses shown above are primarily related to minimum state filing fees in the states where we have operations as well as corporate income taxes for our operations in the United Kingdom, which operates on a cost-plus arrangement.
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Liquidity and Capital Resources
Prior to the consummation of the Virgin Galactic Business Combination, our operations historically participated in cash management and funding arrangements managed by Vieco 10 and GV. Only cash and cash equivalents held in bank accounts legally owned by entities dedicated to us are reflected in the condensed consolidated balance sheets. Cash and cash equivalents held in bank accounts legally owned by Vieco 10 and GV were not directly attributable to us for any of the periods presented. Transfers of cash, both to and from Vieco 10 and GV by us have been reflected as a component of net parent investment and membership equity in the condensed consolidated balance sheets and as a financing activity on the accompanying condensed consolidated statements of cash flows.

As of September 30, 2020, we had cash, cash equivalents and restricted cash of $755 million. From the time of our inception to the consummation of the Virgin Galactic Business Combination, we financed our operations and capital expenditures through cash flows financed by Vieco 10 and GV. Our principal sources of liquidity following the Virgin Galactic Business Combination have been from the October 2019 investment by an entity affiliated with the Boeing Company and our August 2020 sale of common stock.

Historical Cash Flows
Nine Months Ended
September 30,
20202019
(In thousands)
Net cash (used in) provided by
Operating activities$(162,589)$(128,286)
Investing activities(14,135)(13,680)
Financing activities438,846 146,064 
Net change in cash and cash equivalents and restricted cash$262,122 $4,098 

Operating Activities
Net cash used in operating activities was $163 million for the nine months ended September 30, 2020, primarily consisting of $199.4 million of net losses, adjusted for non-cash items, which primarily included depreciation and amortization expense of $7.4 million and stock based compensation expense of $18.6 million, as well as a $10.8 million of cash consumed by working capital.

Net cash used in operating activities was $128.3 million for the nine months ended September 30, 2019, primarily consisting of $138.1 million of net losses, adjusted for certain non-cash items, which primarily included depreciation and amortization expense of $4.9 million, as well as $5.3 million of cash consumed by working capital.

Investing Activities
Net cash used in investing activities was $14.1 million for the nine months ended September 30, 2020, primarily consisting of construction activities at the Gateway to Space facility, IT infrastructure purchases, and the purchase of tooling and manufacturing equipment.

Net cash used in investing activities was $13.7 million for the nine months ended September 30, 2019, primarily consisting of purchases of tooling and manufacturing equipment, construction activities at the Gateway to Space facility, including main hangar construction, and purchasing of furniture and fixtures, as well as construction relating to spaceflight systems fueling facilities.

Financing Activities
Net cash used in financing activities was $439 million for the nine months ended September 30, 2020, consisting primarily of cash received from sale and issuance of common stock offset by professional and other fees related to financing transaction costs.

Net cash provided by financing activities was $146.1 million for the nine months ended September 30, 2019, consisting primarily of equity contributions received from Vieco 10.
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Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue to advance the development of our spaceflight system and the commercialization of our human spaceflight operations. In addition, we expect cost of revenue to increase significantly as we commence commercial operations and add additional spaceships to our operating fleet.

Specifically, our operating expenses will increase as we:
scale up our manufacturing processes and capabilities to support expanding our fleet with additional spaceships, carrier aircraft and rocket motors upon commercialization;
pursue further research and development on our future human spaceflights, including those related to our research and education efforts, high speed point-to-point travel and orbital spaceflight;
hire additional personnel in research and development, manufacturing operations, testing programs, and maintenance as we increase the volume of our spaceflights upon commercialization;
seek regulatory approval for any changes, upgrades or improvements to our spaceflight technologies and operations in the future, especially upon commercialization;
maintain, expand and protect our intellectual property portfolio; and
hire additional personnel in management to support the expansion of our operational, financial, information technology, and other areas to support our operations as a public company.

Changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control.

Additionally, we are in the final phases of developing our commercial spaceflight program. While we anticipate initial commercial launch with a single SpaceShipTwo, we currently have two additional SpaceShipTwo vehicles under construction and expect the direct costs to complete these two vehicles to be in the range of $35 million to $55 million. We anticipate the costs to manufacture additional vehicles will begin to decrease as we continue to scale up our manufacturing processes and capabilities. Until we have achieved technological feasibility with our spaceflight systems, we will not capitalize expenditures incurred to construct any additional components of our spaceflight systems and continue to expense these costs as incurred to research and development.

The commercial launch of our human spaceflight program and the anticipated expansion of our fleet 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.
Contractual Obligations and Commitments
Except as set forth in Note 16, Commitments and Contingencies, of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We believe that the estimates,
36

assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Please refer to Note 2 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information about these critical accounting policies, as well as a description of our other significant accounting policies.

Revenue Recognition
We have yet to undertake our first commercial spaceflight for paying private individuals and consequently have not generated any human spaceflight revenue. In December 2018 and February 2019, we successfully carried payloads into space and accordingly recognized revenue related to these spaceflights. Additionally, we have one fixed-price contract with NASA to carry payloads into space.
For the three months and nine months period ended September 30, 2020 and 2019, we recognized revenue when delivery of our obligations to our customer has occurred, the collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Revenue is measured at the fair value of the consideration received excluding discounts, rebates, value added tax, and other sales taxes or duty. Cash payments for spaceflights are classified as customer deposits until persuasive evidence of an arrangement exists. Revenues from spaceflight is recognized when spaceflight service has been delivered. Revenue from engineering services is recognized on a time-and-materials basis for direct labor hours incurred at fixed hourly rates.

Inventories
Inventories consist of raw materials expected to be used for the development of the human spaceflight program and customer specific contracts. Inventories are stated at the lower of cost or net realizable value. If events or changes in circumstances indicate that the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price or other causes, a loss is recognized in the period in which it occurs. We capitalize labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. In addition, we capitalize costs incurred to fulfill a contract in inventories in advance of contract award as work-in-process if we determine that contract award is probable. We determine the costs of other product and supply inventories by using the first-in first-out or average cost methods.

Research and Development
We conduct research and development activities to develop existing and future technologies that advance our spaceflight system towards commercialization. Research and development activities include basic research, applied research, concept formulation studies, design, development, and related test program activities. Costs incurred for developing our spaceflight system and flight profiles primarily include equipment, material, and labor hours. Costs incurred for performing test flights primarily include rocket motors, fuel, and payroll and benefits for pilots and ground crew. Research and development costs also include rent, maintenance, and depreciation of facilities and equipment and other allocated overhead expenses. We expense all research and development costs as incurred. Once we have achieved technological feasibility, we will capitalize the costs to construct any additional components of our spaceflight systems.

Income Taxes
Prior to the Virgin Galactic Business Combination, we adopted the separate return approach for the purpose of presenting the combined financial statements, including the income tax provisions and the related deferred tax assets and liabilities. Our historic operations reflect a separate return approach for each jurisdiction in which we had a presence and GV filed a tax return. Following the Virgin Galactic Business Combination, we will file our own tax returns.

We record income tax expense for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record valuation allowances to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing its future
37

taxable income on a jurisdictional basis, we consider the effect of our transfer pricing policies on that income. We have placed a valuation allowance against U.S. federal and state deferred tax assets since the recovery of the assets is uncertain.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we grow, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit or refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the income tax expense in the period in which such determination is made and could have a material impact on our financial condition and operating results. The income tax expense includes the effects of any accruals that we believe are appropriate, as well as the related net interest and penalties.

We have not yet started commercial operations and as such we are accumulating net operating losses at the federal and state levels, which are reflected in the income tax provision section of the balance sheet. The presented income tax expenses in these statements are primarily related to minimum state filing fees in the states where we have operations as well as corporate income taxes for our operations in the United Kingdom, which operates on a cost-plus arrangement and therefore incurs income tax expenses.

Stock-Based Compensation
Vieco 10 granted options with performance conditions and service requirements. Compensation cost is recognized if it is probable that the performance condition will be achieved. The performance conditions restrict exercisability or settlement until certain liquidity events occur, such as a qualifying initial public offering or change in control. No accrual has been recorded as none of the performance conditions have been achieved nor deemed probable of being achieved.

In connection with the Virgin Galactic Business Combination, our board of directors and stockholders adopted the 2019 Incentive Award Plan (the "2019 Plan"). Pursuant to the 2019 Plan, up to 21,208,755 shares of common stock have been reserved for issuance to employees, consultants and directors. Please refer to Note 14 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information regarding stock-based compensation.

Cash Incentive Plan
Some of our employees participate in a multiyear cash incentive plan (the “Cash Incentive Plan”) to provide cash bonuses based on the attainment of three qualifying milestones with defined target dates. The maximum aggregate amount of cash awards under the Cash Incentive Plan is $30.0 million. Compensation cost is recognized if it is probable that a milestone will be achieved.

On October 25, 2019, the second qualifying milestone under the VG Companies' multiyear cash incentive plan was amended such that the participants who remained continuously employed by us are entitled to receive 100% of the bonus that such participant would have otherwise received upon the achievement of the original second qualifying milestone. We recognized the $9.9 million in compensation costs owed to participants for the second qualifying milestone and such amount was paid on November 8, 2019.
Recent Accounting Pronouncements
Please refer to Note 3 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have operations within the United States and the United Kingdom and as such we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and fluctuations in foreign currency exchange rates. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

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Interest Rate Risk
Cash, cash equivalents and restricted cash consist solely of cash held in depository accounts and as such are not affected by either an increase or decrease in interest rates. We consider all highly liquid investments with a maturity of three months or less as cash equivalents. As of September 30, 2020, we had $755 million deposits held primarily in cash, cash equivalents and restricted cash, which includes $730.4 million in cash equivalents. Cash equivalents are short term investments and would not be significantly impacted by changes in the interest rates. We believe that a 10% increase or decrease in interest rates would not have a material effect on our interest income or expense.

Foreign Currency Risk
The functional currency of our operations in the United Kingdom is the local currency. We translate the financial statements of the operations in the United Kingdom to United States Dollars and as such we are exposed to foreign currency risk. Currently, we do not use foreign currency forward contracts to manage exchange rate risk, as the amount subject to foreign currency risk is not material to our overall operations and results.
Item 4. Controls and Procedures
Background and Remediation of Material Weakness
In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2019 and 2018, we identified two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The first material weakness is related to the lack of a sufficient number of personnel to execute, review and approve all aspects of the financial statement close and reporting process. This material weakness may not allow for us to have proper segregation of duties and the ability to close our books and records and report our results, including required disclosures, on a timely basis. The second material weakness arises from the need to augment our information technology and application controls in our financial reporting.

We continue to focus on the design and implementation of processes and procedures to improve our internal control over financial reporting and remediate our material weaknesses. We have already expanded our governance and risk management leadership by hiring an executive in charge of our efforts to comply with the Sarbanes-Oxley Act. Our additional planned activities include:
designing and implementing additional review procedures to include more comprehensive documentation and formalization of internal control operations;
recruiting additional personnel, in addition to utilizing third party consultants, to more effectively segregate key functions within our business and financial reporting process;
designing and implementing information technology general controls and business process application controls in our financial systems to support our information processing objectives;
enhancing our financial system's security role definition, and implementing workflow controls, to improve the reliability of our systems process and related reporting; and

implementing additional integration in our financially significant systems to reduce the amount of manual intervention in our internal controls and financial reporting process.

While these actions, and others, are subject to ongoing management evaluation, including the validation and testing of internal controls over a sustained period of financial reporting cycles, we are committed to remediating internal controls deficiencies as they are identified and committed to the continuous improvement of our overall controls environment.

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Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

However, after giving full consideration to the material weaknesses referenced above, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with U.S. GAAP, our management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.

Changes in Internal Control Over Financial Reporting
Other than described above in this Item 4, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II - OTHER INFORMATION
Item 1.    Legal Proceedings
We are from time to time subject to various claims, lawsuits and other legal and administrative proceedings arising in the ordinary course of business. Some of these claims, lawsuits and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, non-monetary sanctions or relief. However, we do not consider any such claims, lawsuits or proceedings that are currently pending, individually or in the aggregate, to be material to our business or likely to result in a material adverse effect on our future operating results, financial condition or cash flows.
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Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in Part II, Item 1A. "Risk Factors" of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, which risk factor section is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed as part of this report:
(1) Exhibits. The following exhibits are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.
Incorporated by Reference
Exhibit No.Exhibit DescriptionFormFile No.ExhibitFiling DateFiled/Furnished Herewith
2.1(1)
8-K/A001-382022.107/11/2019
2.1(a)(1)
S-4333-2330982.1(a)10/03/2019
3.1
8-K001-382023.110/29/2019
3.2
8-K001-382023.210/29/2019
4.18-K001-382024.210/29/2019
10.18-K001-3820299.107/31/2020
10.28-K001-3820299.207/31/2020
31.1
*
42

Incorporated by Reference
Exhibit No.Exhibit DescriptionFormFile No.ExhibitFiling DateFiled/Furnished Herewith
31.2
*
32.1
**
32.2
**
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCH
Inline XBRL Taxonomy Extension Schema Document*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document*
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

* Filed herewith.
** Furnished herewith.
(1) Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.

43

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Virgin Galactic Holdings, Inc.
Date: November 5, 2020/s/ Michael Colglazier
Name:
Michael Colglazier
Title:
Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 2020
/s/ Jonathan Campagna
Name:
Jonathan Campagna
Title:
Chief Financial Officer
(Principal Financial and Accounting Officer)

44

Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Michael Colglazier, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Virgin Galactic Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who ha
c.ve a significant role in the registrant’s internal control over financial reporting.

November 5, 2020/s/ Michael Colglazier
Michael Colglazier
Chief Executive Officer
(Principal Executive Officer)



Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002


I, Jonathan Campagna, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Virgin Galactic Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.