10-Q 1 spce-20220331.htm 10-Q spce-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
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.)
1700 Flight Way
Tustin, California
92782
(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 May 2, 2022, there were 258,589,981 shares of the Company’s common stock, par value $0.0001, issued and outstanding.


VIRGIN GALACTIC HOLDINGS, INC.
TABLE OF CONTENTS
Page


1


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 “achieve,” “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “future,” “grow,” “increase,” “intend,” “may,” “opportunity,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “strategy,” “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:
any delay in completing the flight test program and final development of our spaceflight fleet, which is comprised of our SpaceShipTwo spaceships, VSS Unity and VSS Imagine, and our mothership carrier aircraft, VMS Eve;
our ability to conduct test flights;
our ability to operate our spaceflight system after commercial launch;
the safety of our spaceflight systems;
the development of the markets for commercial human spaceflight and commercial research and development payloads;
our ability to effectively market and sell human spaceflights;
our ability to convert our backlog or inbound inquiries into revenue;
our anticipated full passenger capacity;
our ability to achieve or maintain profitability;
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;
the impact of the COVID-19 pandemic on us, our operations, our future financial or operational results, and our access to additional financing;
extensive and evolving government regulation that impact the way we operate;
risks associated with international expansion;
our ability to maintain effective internal control over financial reporting and disclosure and procedures; and
our ability to continue to use, maintain, enforce, protect and defend our owned and licensed intellectual property, including the Virgin brand.

Additional factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part I, Item 1.“Business,” Part I, Item 1A. “Risk Factors,” and Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "Annual Report on Form 10-K") and in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly 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
2

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.
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.


3

PART I. FINANCIAL INFORMATION
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
March 31, 2022December 31, 2021
(Unaudited)
Assets
Current assets
Cash and cash equivalents$601,464 $524,481 
Restricted cash35,361 25,549 
Marketable securities, short-term265,859 79,418 
Inventories29,467 29,668 
Prepaid expenses and other current assets17,433 19,476 
Total current assets949,584 678,592 
Marketable securities, long-term314,140 301,463 
Property, plant, and equipment, net47,476 47,498 
Other non-current assets40,944 41,281 
Total assets$1,352,144 $1,068,834 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$9,711 $9,237 
Accrued liabilities30,552 28,787 
Customer deposits100,091 90,863 
Other current liabilities2,529 2,636 
Total current liabilities142,883 131,523 
Non-current liabilities:
Convertible senior notes, net414,155  
Other long-term liabilities43,009 43,047 
Total liabilities600,047 174,570 
Commitments and contingencies (Note 17)
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; 258,473,888 and 258,166,417 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
26 26 
Additional paid-in capital1,976,445 2,019,750 
Accumulated deficit(1,216,700)(1,123,643)
Accumulated other comprehensive income(7,674)(1,869)
Total stockholders' equity752,097 894,264 
Total liabilities and stockholders' equity$1,352,144 $1,068,834 

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 March 31,
20222021
Revenue$319 $ 
Operating expenses:
Customer experience25  
Selling, general, and administrative37,007 43,319 
Research and development51,827 35,089 
Depreciation and amortization2,852 2,869 
Total operating expenses91,711 81,277 
Operating loss(91,392)(81,277)
Interest income818 325 
Interest expense(2,474)(7)
Change in fair value of warrants (48,719)
Other income, net16 27 
Loss before income taxes(93,032)(129,651)
Income tax expense(25)(43)
Net loss(93,057)(129,694)
Other comprehensive income (loss):
Foreign currency translation adjustment(25)27 
Unrealized loss on marketable securities(5,780) 
Total comprehensive loss$(98,862)$(129,667)
Net loss per share:
Basic and diluted$(0.36)$(0.55)
Weighted-average shares outstanding:
Basic and diluted258,287,847 234,191,636 

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)
(For the periods ended March 31, 2022 and 2021)
Preferred StockCommon Stock
# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2020 $ 236,123,659 $23 $1,297,794 $(770,744)$5 $527,078 
Net loss— — — — — (129,694)— (129,694)
Other comprehensive income— — — — — — 26 26 
Stock-based compensation— — — — 22,111 — — 22,111 
Issuance of common stock pursuant to stock-based compensation, net of witholding taxes  1,150,771 — 323 — — 323 
Balance as of March 31, 2021  237,274,430 $23 $1,320,228 $(900,438)$31 $419,844 

Preferred StockCommon Stock
# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2021 $ 258,166,417 $26 $2,019,750 $(1,123,643)$(1,869)$894,264 
Net loss— — — — — (93,057)— (93,057)
Other comprehensive loss— — — — — — (5,805)(5,805)
Stock-based compensation— — — — 10,895 — — 10,895 
Issuance of common stock pursuant to stock-based compensation, net of withholding taxes — — 307,471 — (1,882)— — (1,882)
Purchase of capped calls— — — — (52,318)— — (52,318)
Balance as of March 31, 2022  258,473,888 $26 $1,976,445 $(1,216,700)$(7,674)$752,097 

See accompanying notes to condensed consolidated financial statements.
6

VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31,
20222021
Cash flows from operating activities
Net loss$(93,057)$(129,694)
Stock-based compensation10,895 22,111 
Depreciation and amortization2,852 2,869 
Amortization of debt issuance costs403  
Change in fair value of warrant liability 48,719 
Other operating activities, net86 10 
Change in assets and liabilities
Inventories201 296 
Other current and non-current assets2,282 3,692 
Accounts payable and accrued liabilities1,126 3,322 
Customer deposits9,228 (196)
Other current and non-current liabilities(67)102 
Net cash used in operating activities(66,051)(48,769)
Cash flows from investing activity
Capital expenditures(1,773)(819)
Investment in marketable securities(204,898) 
Cash used in investing activity(206,671)(819)
Cash flows from financing activities
Payments of finance lease obligations(34)(34)
Proceeds from convertible senior notes425,000  
Debt issuance costs(11,248) 
Purchase of capped calls(52,318) 
Proceeds from issuance of common stock pursuant to stock options exercised49 10,837 
Withholding taxes paid on behalf of employees on net settled stock-based awards(1,932)(10,514)
Net cash provided by financing activities359,517 289 
Net increase (decrease) in cash and cash equivalents86,795 (49,299)
Cash, cash equivalents and restricted cash at beginning of period550,030 678,955 
Cash, cash equivalents and restricted cash at end of period$636,825 $629,656 
Cash and cash equivalents$601,464 $616,625 
Restricted cash35,361 13,031 
Cash, cash equivalents and restricted cash$636,825 $629,656 

See accompanying notes to condensed consolidated financial statements.
7

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."), in this report as "we," "us," "our," the "Company" and similar terms, 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 Tustin, California and Mojave, California, with plans to operate the commercial spaceflights out of Spaceport America located in New Mexico.
(2)     Summary of Significant Accounting Policies

(a)    Basis of Presentation
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 reclassifications of the components of operating loss have been made in the condensed consolidated statements of operations and comprehensive loss to conform to the current period presentation. Specifically, cost of revenue has been reclassified to customer experience, and gross margin is no longer presented. Customer experience expenses related to spaceflight operations include the consumption of a rocket motor and fuel and other consumables, as well as payroll and benefits for our pilots and ground crew. Customer experience expenses related to the payload cargo services, as well as engineering services, consist of materials and human capital, such as payroll and benefits, to perform these services. Additionally, customer experience expenses include costs associated with maintaining and growing our Future Astronaut community, as well as hospitality, medical, safety, security, training, and facility costs that are for the benefit of our astronauts. Additionally, depreciation and amortization expense are presented separately instead of included in selling, general, and administrative or research and development expenses. These reclassifications had no impact on total loss as previously reported.
(b)     Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP required us to make estimates and assumptions that affect the amounts reported in the 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 revenue, contract assets, contract liabilities, useful lives of property, plant and equipment, fair value of investments, accrued liabilities, income taxes including deferred tax assets and liabilities and impairment valuation, warrants, stock-based awards and contingencies.
(c)     Convertible Senior Notes

On January 1, 2022, the Company adopted ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which removes from GAAP the liability and equity separation model for convertible instruments with either cash or beneficial conversion features. As a result, convertible debt instruments would only be separated into multiple components if they were issued at a substantial premium or if embedded derivatives required bifurcation was identified. The notes were not issued at a substantial premium, and the Company analyzed the provisions of the notes and did not identify any material embedded features which would require bifurcation from the host debt. As such, the notes are accounted for entirely as a liability net of unamortized issuance costs. The carrying amount of the liability
8

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




is classified as long-term as the instrument does not mature within one year of the balance sheet date and the holder is not permitted to demand repayment of the principal within one year of the balance sheet date. However, if conditions to convertibility are met as described further in Note 11, the Company may be required to reclassify the carrying amount of the liability to current. The embedded conversion features are not remeasured as long as they do not meet the separation requirement of a derivative. Issuance costs are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share, however there was no impact during the current quarter as the convertible instruments were anti-dilutive.
(d)     Capped Call Transactions

In connection with the pricing of our Convertible Senior Notes, the Company entered into capped call transactions with respect to its common stock (the "2027 Capped Calls"). The 2027 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2027 Notes. The Company's capped call transactions are accounted for as separate transactions from the convertible senior notes and are classified as equity instruments as a reduction to additional paid-in capital in the condensed consolidated balance sheets. The instruments are initially recorded at fair value and not subsequently remeasured so long as they continue to qualify for equity classification. The capped call transactions have the effect of reducing the number of shares outstanding if exercised. Therefore, the capped call transactions are anti-dilutive and not included in the calculation of diluted shares outstanding for the purposes of diluted net loss per share. See Note 11 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the 2027 Capped Calls.
(e)     Other Summary of Significant Accounting Policies
There have been no other significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the Company's 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. 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”). See Note 2 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on recently adopted accounting pronouncements.
(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 sponsorship revenue. We paid license and royalty fees of $0.04 million and $0.04 million for the three months ended March 31, 2022 and 2021, respectively.

9

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




The Company has a Transition Services Agreement ("TSA") with Virgin Orbit, LLC ("VO") based on an allocation methodology that considers our headcount, unless directly attributable to the business. The Company is allocated operating expenses from VO Holdings, Inc. and its subsidiaries (“VOH”), a majority-owned company of 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, pilot services, and other general administrative expenses. We were allocated no operating expenses, net, from VOH for the three months ended March 31, 2022. We were allocated $40,000 of operating expenses, net, from VOH for the three months ended March 31, 2021. The Company has a receivable from VOH of $52,000 and $43,000 as of March 31, 2022 and December 31, 2021, respectively.


(5)    Cash, Restricted Cash, Cash Equivalents and Marketable Securities

The amortized cost, unrealized gain (loss) and estimated fair value of the Company's cash equivalents and marketable securities as of March 31, 2022 and December 31, 2021 were as follows:

As of March 31, 2022
Amortized CostGross Unrealized Gains (Losses)Fair Value
(In thousands)
Cash, restricted cash and cash equivalents
Cash and restricted cash$67,161 $— $67,161 
   Money market478,049 — 478,049 
   Certificate of deposits91,615 — 91,615 
Marketable securities
US treasuries 29,990 3 29,993 
   Corporate debt securities557,792 (7,786)550,006 
Total cash, cash equivalents and marketable securities$1,224,607 $(7,783)$1,216,824 

As of December 31, 2021
Amortized CostGross Unrealized Gains (Losses)Fair Value
(In thousands)
Cash, restricted cash and cash equivalents
Cash and restricted cash$55,592 $— $55,592 
   Money market402,889 — 402,889 
   Certificate of deposits91,549 — 91,549 
Marketable securities
   Corporate debt securities382,884 (2,003)380,881 
Total cash, cash equivalents and marketable securities$932,914 $(2,003)$930,911 

The Company included $3.1 million and $2.3 million of interest receivable in prepaid expenses and other current assets as of March 31, 2022 and December 31, 2021, respectively.
10

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




The Company recognized $2.2 million in amortization expense for marketable securities within interest income, net for the three months ended March 31, 2022. The Company did not recognize any amortization expense for the three months ended March 31, 2021.
The following table presents the contractual maturities of the Company's marketable securities as of March 31, 2022:
As of March 31, 2022
Amortized CostEstimated Fair Value
(In thousands)
Matures within one year$267,551 $265,857 
Matures between one to two years320,231 314,142 
Total$587,782 $579,999 
(6)    Inventory
As of March 31, 2022 and December 31, 2021, inventory is comprised of the following:
As of
March 31, 2022December 31, 2021
(Unaudited)
(In thousands)
Raw Materials$20,648 $21,127 
Spare parts8,819 8,541 
Total inventory
$29,467 $29,668 

For the three months ended March 31, 2022 and March 31, 2021, we wrote off $0.3 million and $0.1 million of inventory due to excess and obsolescence, respectively.
11

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




(7)    Property, Plant, and Equipment, net
As of March 31, 2022 and December 31, 2021, property, plant, and equipment, net consisted of the following:
As of
March 31, 2022December 31, 2021
(Unaudited)
(In thousands)
Land$401 $ 
Buildings9,117 9,117 
Leasehold improvements29,228 29,155 
Aircraft195 195 
Machinery and equipment38,189 37,002 
IT software and equipment25,370 23,523 
Construction in progress2,189 2,901 
104,689 101,893 
Less accumulated depreciation and amortization
(57,213)(54,395)
Property, plant, and equipment, net
$47,476 $47,498 
The following table sets forth the summary of depreciation and amortization expense for property, plant and equipment, net:

Three Months Ended
March 31,
20222021
(Unaudited)
(In thousands)
Customer experience$ $ 
Selling, general, and administrative1,599 1,595 
Research and development1,253 1,274 
$2,852 $2,869 
(8)     Leases
The Company's leases are more fully described in Note 8 of the "Notes to Consolidated Financial Statements" to its Annual Report on Form 10-K.

12

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




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

Three Months Ended
March 31,
20222021
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $1,975 $1,260 
Short-term lease expense 12 
Finance Lease Cost:
Amortization of right-of-use assets
29 34 
Interest on lease liabilities5 7 
Total finance lease cost34 41 
Variable lease cost1,249 1,338 
Total lease cost$3,258 $2,651 

13

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




The components of supplemental cash flow information related to leases for the period are as follows:
Three Months Ended March 31,
20222021
(In thousands, except term and rate data)
Cash flow information:
Operating cash flows for operating leases$1,758 $1,310 
Operating cash flows for finance leases$5 $7 
Financing cash flows for finance leases
$34 $34 
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
Operating leases$502 $180 
Other Information:
Weighted average remaining lease term:
Operating leases (in years)11.4612.53
Finance leases (in years)1.902.66
Weighted average discount rates:
Operating leases11.67 %11.68 %
Finance leases8.13 %8.40 %
The supplemental balance sheet information related to leases for the period is as follows:
As of
March 31, 2022December 31, 2021
(Unaudited)
(In thousands)
Operating leases
Long-term right-of-use assets$35,178 $35,486 
    Short-term operating lease liabilities$2,104 $2,204 
    Long-term operating lease liabilities39,974 39,965 
Total operating lease liabilities$42,078 $42,169 

Commitments
The Company has certain non-cancelable 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.

14

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




Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum finance lease payments as of March 31, 2022 are as follows:
Operating LeasesFinance
Leases
(In thousands)
2022 (for the remaining period)$4,810 $98 
20236,435 106 
20246,766 31 
20256,675  
20266,760  
Thereafter47,710  
Total lease payments$79,156 $235 
Less:
Imputed interest/present value discount$(37,078)$(17)
Present value of lease liabilities$42,078 $218 
(9)    Accrued Expenses
A summary of the components of accrued liabilities are as follows:

As of
March 31, 2022December 31, 2021
(Unaudited)
(In thousands)
Accrued payroll$6,084 $4,214 
Accrued vacation5,556 5,372 
Accrued bonus5,226 12,218 
Accrued interest expense2,067  
Other accrued expenses11,619 6,983 
Total accrued expenses$30,552 $28,787 

15

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




(10)    Commercial Loan
As of
March 31, 2022December 31, 2021
(Unaudited)
(In thousands)
Commercial loan$310 $310 
     Less: Current portion(310)(310)
Non-current portion$ $ 
Commercial Loan

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 installments 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 outstanding balance is recorded in other current-liabilities on the condensed consolidated balance sheets.

The imputed interest of this loan was immaterial.
(11)    Convertible Senior Notes

2027 Convertible Senior Notes

On January 19, 2022, the Company completed an offering of $425 million aggregate principal amount of convertible senior notes (the "2027 Notes"). The 2027 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 2.50% per year. Interest is payable in cash semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2022. The 2027 Notes mature on February 1, 2027 unless earlier repurchased, redeemed or converted.

The terms of the 2027 Notes are governed by an Indenture by and between the Company and UBS, as Trustee (the "2027 Indenture"). Upon conversion, the 2027 Notes may be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, par value $0.0001 per share (the “common stock”), at our election, based on the conversion rate.

The 2027 Notes are convertible at an initial conversion rate of 78.1968 shares of common stock per $1,000 principal amount of the 2027 Notes, which is equal to an initial conversion price of approximately $12.79 per share of common stock, subject to adjustment upon the occurrence of certain events. Noteholders will have the right to convert their notes during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on June 30, 2022, under the following circumstances:

during any calendar quarter after June 30, 2022 (and only during such calendar quarter) if the closing price of the Company's common stock for at least 20 trading days in a period of 30 consecutive trading days ending
16

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




on and including the last trading day of the preceding calendar quarter is more than 130% of the then applicable conversion price for the Notes per share of common stock;

during the five business days immediately after any ten consecutive trading day period in which the trading price per $1,000 principal amount of 2027 Notes for each day of that period was less than 98% of the product of the closing price of our common stock and the then applicable conversion rate;

the Company calls any or all of the 2027 Notes for redemption, holders may convert all or any portion of their notes at any time prior to the close of business on the scheduled trading day prior to the redemption date, even if the 2027 Notes are not otherwise convertible at such time; or

specified distributions to holders of our common stock are made or specified corporate events occur, as described in the 2027 Indenture.

On and after November 1, 2026, noteholders will have the right to convert their notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. During the three months ended March 31, 2022, the conditions allowing holders of the 2027 Notes to convert during the three months ending March 31, 2022 were not met, and as a result, the 2027 Notes were classified as noncurrent liabilities as of March 31, 2022.

The 2027 Notes will be redeemable, in whole or in part (subject to certain limitations), for cash at the Company's option at any time, and from time to time, on or after February 6, 2025 and on or before the 20th scheduled trading day immediately before the maturity date, but only if the last reported sale price per share of the Company's common stock exceeds 130% of the conversion price for a specified period of time and certain liquidity conditions have been satisfied. The redemption price will be equal to the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. During the three months ended March 31, 2022, the Company did not redeem any of the 2027 Notes.

Holders of the 2027 Notes who convert their 2027 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2027 Indenture) or in connection with the Company's issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2027 Indenture), holders of the 2027 Notes may require the Company to repurchase all or a portion of their 2027 Notes at a price equal to 100% of the principal amount of the 2027 Notes being repurchased, plus any accrued and unpaid interest.

The 2027 Notes, net consisted of the following (in thousands):

As of
March 31, 2022
(Unaudited)
Principal$425,000 
     Less: unamortized debt issuance costs(10,845)
Net carrying amount$414,155 

As of March 31, 2022, we recorded $2.1 million of accrued interest expense on our 2027 Notes within accrued expenses. For the three months ended March 31, 2022, we recognized 2.5 million of total interest expense on our 2027 Notes, including $0.4 million of amortized debt issuance costs.

Capped Call Transactions

17

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




In connection with the pricing of the 2027 Notes, the Company entered into capped call transactions with respect to its common stock. The 2027 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2027 Notes, approximately 33 million shares of its common stock for approximately $12.79 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2027 Notes, exercisable upon conversion of the 2027 Notes. The 2027 Capped Calls have initial cap prices of $20.06 per share (subject to adjustment), which represents a premium of 100% over the closing price of the Company's common stock on January 13, 2022, and will expire in 2027, if not exercised earlier. The 2027 Capped Calls are intended to offset potential dilution to the Company's common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2027 Notes under certain circumstances. The 2027 Capped Calls are separate transactions and are not part of the terms of the 2027 Notes.

The Company paid an aggregate amount of $52.3 million for the 2027 Capped Calls. As these transactions meet certain accounting criteria, the amount paid for the 2027 Capped Calls was recorded as a reduction to additional paid-in capital in the condensed consolidated balance sheets. The fair value of the 2027 Capped Calls is not remeasured each reporting period so long as they continue to qualify for equity classification, which they did for the current period.
(12)    Income Taxes
Income tax expense was $0.03 million and $0.04 million for the three months ended March 31, 2022 and 2021, respectively. The effective income tax rate was nil for three months ended March 31, 2022 and 2021. 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.
(13)    Stockholders' Equity

There have been no significant changes from the Stockholders' Equity disclosed in Note 12 of the “Stockholders Equity” included in our Annual Report on Form 10-K.

Stockholders' Agreement

In connection with the closing of the Virgin Galactic Business Combination, the Company entered into a stockholders’ agreement with certain of the Company’s investors. Pursuant to the terms of the Stockholders’ Agreement, as long as Virgin Investments Limited ("VIL") is entitled to designate two directors to the Company’s Board of Directors, the Company must obtain VIL’s prior written consent to engage in certain corporate transactions and management functions such as business combinations, disposals, acquisitions, incurring indebtedness, and engagement of professional advisors, among others.

Warrants and Warrant Redemption
Public and private placement warrants were initially issued as part of Social Capital Hedosophia Holdings Corp.'s ("SCH") initial public offering in 2017 and assumed upon the consumption of the Business Combination. As of March 31, 2022, and December 31, 2021, there were no public or private placement warrants outstanding.

The Company remeasured the fair value of the Warrants at each reporting date with changes recorded in earnings. In connection with the Company's remeasurement of the Warrants to fair value, the Company recorded expense of approximately $(48.7) million for the three months ended March 31, 2021.

At The Market Offering

On July 12, 2021, the Company entered into a distribution agency agreement with Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC (each, an “Agent” and collectively, the “Agents”) providing for the offer and sale of up to $500.0 million of shares of the Company’s common stock, par
18

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




value $0.0001 per share, through an "at the market offering" program ("ATM"), from time to time by the Company through the Agents, acting as the Company’s sales agents, or directly to one or more of the Agents, acting as principal.
On July 16, 2021, we completed the ATM, generating $500.0 million in gross proceeds, before deducting $6.2 million in underwriting discounts and commissions, and other expenses payable by the Company, through the sale of 13,740,433 shares of common stock.
(14)     Net Loss Per Share
The following table presents net loss per share and related information:
Three Months Ended March 31,
20222021
(In thousands, except for share and per share data)
Basic and diluted:
     Net loss$(93,057)$(129,694)
     Weighted average shares of common stock outstanding258,287,847 234,191,636 
     Basic and diluted net loss per share$(0.36)$(0.55)
Basic and diluted loss per share is computed using the weighted-average number of common shares of common stock outstanding during the period. Basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculation because they would be anti-dilutive were as follows (in thousands):

As of March 31,
20222021
Issued and outstanding stock options4,242 5,430 
Issued and outstanding performance stock options406  
Unvested restricted stock units issued and outstanding3,906 4,158 
Unvested performance stock units issued and outstanding367  
Shares related to the 2027 Notes (1)
33,234  
Warrants to purchase shares of common stock 8,000 
42,155 17,588 

(1) The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the 2027 Notes on diluted net loss per share, if applicable.
(15)    Stock-Based Compensation
The Company's 2019 Incentive Award Plan ("2019 Plan") is more fully described in Note 14 of the "Notes to Consolidated Financial Statements" on Form 10-K. Under the 2019 Plan, the Company has the ability to grant incentive stock options, non-qualified stock options and restricted stock units ("RSUs") to employees, directors and other service providers. Performance stock units ("PSUs") are RSUs that vest based on achievement of specified
19

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




performance criteria. Performance stock options ("PSOs") are stock options that vest based on achievement of specified performance criteria.

Stock Options

Twenty five percent of such stock options cliff vest at the grant date first anniversary and will vest ratably 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.

In 2022, we issued stock options as incentive compensation for certain key employees. The fair values of these stock options were estimated using a Black-Scholes model with the following assumptions:

2022
Expected life (in years)(1)
6.11
Expected volatility(2)
69.0 %
Risk free interest rate(3)
2.19 %
Dividend yield(4)
 %

(1) The expected life is the period of time that participants are expected to hold their options before exercised using the "simplified method" as described in Staff Accounting Bulletin No. 107.
(2) The expected volatility is a measure of the amount by which a stock price is expected to fluctuate based primarily on our and our peers' historical data.
(3) The risk-free interest rate for the periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.
(4) The Company does not currently pay dividends nor has announced plans to begin paying dividends.

20

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)
Weighted Average Grant Date Fair Value ($)
Options outstanding at December 31, 20214,253,767 $14.09 7.60$6,187 
Granted303,030 7.99 4.95 
Exercised(4,182)11.79 
Forfeited options(310,586)19.98 
Options outstanding at March 31, 20224,242,029 $13.23 7.79$1,238 
Options exercisable at March 31, 20221,957,167 $12.94 7.49$348 
__________________
(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.

Performance Stock Options

Compensation expense on the PSOs will be recognized over the period between the grant date and the estimated vest date. The number of PSOs that will vest depends on the attainment of certain stock price goals. 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.

In 2022, we issued PSOs as incentive compensation for certain key employees. The fair values of these stock options were estimated using a Monte-Carlo simulation with the following assumptions:

Expected exercise behavior(1)
75.0 %
Expected Volatility(2)
58.0 %
Risk free interest rate(3)
2.19 %
Dividend yield(4)
 %

(1) PSOs are expected to be exercised after 75% of the period between the vest date and the end of the contractual term has lapsed.
(2) The expected volatility is a measure of the amount by which a stock price is expected to fluctuate based primarily on our and our peers' historical data.
(3) The risk-free interest rate for the periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.
(4) The Company does not currently pay dividends nor has announced plans to begin paying dividends.

21

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




The following table sets forth the summary of PSO 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)
Weighted Average Grant Date Fair Value ($)
PSOs outstanding at December 31, 2021 $ 0.0$ 
Granted405,680 8.99 4.93 
Exercised  
Forfeited options  
PSOs outstanding at March 31, 2022405,680 $8.99 9.96$361 
PSOs exercisable at March 31, 2022 $ 0.0$ 
__________________
(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.
Restricted Stock Units
The RSUs primarily vest over four years with 25% cliff vest at the first year anniversary of the grant date and ratably over the next three years.

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 December 31, 20212,396,732 $27.89 
Granted2,121,020 8.79 
Vested(497,699)21.96 
Forfeited(114,494)20.77 
Outstanding at March 31, 20223,905,559 $16.26 

Performance Stock Units
Between 25% and 200% of the PSUs are eligible to vest based on the achievement of certain performance-based goals or market-based goals by specified target dates, subject to continued service through the applicable vesting date. PSUs with performance-based goals are amortized over the requisite service period in which it is probable that the performance goal is achieved. PSUs with market-based goals will vest based on the Company's common stock performance following the end of the three year performance measurement period based on the highest closing price over twenty consecutive trading days during the performance measurement period. PSUs with market-based goals cannot vest before the end of the performance measurement period, thus the requisite service period is three years.

22

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




In 2022, we issued PSUs as incentive compensation for certain key employees. The fair values of these stock units were estimated using a Monte-Carlo simulation with the following assumptions:

Expected volatility(1)
95.0 %
Risk free interest rate(2)
2.13 %
Dividend yield(3)
 %

(1) The expected volatility is a measure of the amount by which a stock price is expected to fluctuate based primarily on our and our peers' historical data.
(2) The risk-free interest rate for the periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.
(3) The Company does not currently pay dividends nor has announced plans to begin paying dividends.

The following table summarizes the details of the PSUs:
SharesWeighted Average Fair Value
PSUs outstanding at December 31, 202189,839 $26.47 
Granted277,552 14.62 
Forfeited  
PSUs outstanding at March 31, 2022
367,391 $18.19 

Stock-based compensation expense was recorded in the following expense categories in the condensed consolidated statements of operations and comprehensive loss:
Three Months Ended March 31,
20222021
(in thousands)
Stock option expense
Customer experience$ $ 
   Selling, general and administrative