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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 June 30, 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 July 30, 2022, there were 258,715,178 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 successfully develop our next generation vehicles, and the time and costs associated with doing so;
•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.
2
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 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)
June 30, 2022December 31, 2021
(Unaudited)
Assets
Current assets
Cash and cash equivalents$329,857 $524,481 
Restricted cash40,207 25,549 
Marketable securities, short-term587,716 79,418 
Inventories33,804 29,668 
Prepaid expenses and other current assets18,576 19,476 
Total current assets1,010,160 678,592 
Marketable securities, long-term164,777 301,463 
Property, plant, and equipment, net49,183 47,498 
Other non-current assets44,356 41,281 
Total assets$1,268,476 $1,068,834 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable$12,768 $9,237 
Accrued liabilities36,707 28,787 
Customer deposits104,596 90,863 
Other current liabilities2,803 2,636 
Total current liabilities156,874 131,523 
Non-current liabilities
Convertible senior notes, net414,563 — 
Other long-term liabilities46,464 43,047 
Total liabilities617,901 174,570 
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; 258,690,646 and 258,166,417 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
26 26 
Additional paid-in capital1,987,614 2,019,750 
Accumulated deficit(1,327,421)(1,123,643)
Accumulated other comprehensive income(9,644)(1,869)
Total stockholders' equity650,575 894,264 
Total liabilities and stockholders' equity$1,268,476 $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 June 30,Six Months Ended June 30,
2022202120222021
Revenue$357 $571 $676 $571 
Operating expenses:
Customer experience122 63 147 63 
Selling, general, and administrative44,700 36,916 81,707 80,235 
Research and development62,340 34,619 114,167 69,708 
Depreciation and amortization2,915 2,871 5,767 5,740 
Total operating expenses110,077 74,469 201,788 155,746 
Operating loss(109,720)(73,898)(201,112)(155,175)
Interest income1,985 220 2,803 545 
Interest expense(3,157)(6)(5,631)(13)
Change in fair value of warrants— (20,363)— (69,082)
Other income, net194 13 210 40 
Loss before income taxes(110,698)(94,034)(203,730)(223,685)
Income tax expense(23)(6)(48)(49)
Net loss(110,721)(94,040)(203,778)(223,734)
Other comprehensive income (loss):
Foreign currency translation adjustment(108)(19)(133)8 
Unrealized loss on marketable securities(1,862)— (7,642)— 
Total comprehensive loss$(112,691)$(94,059)$(211,553)$(223,726)
Net loss per share:
Basic and diluted$(0.43)$(0.39)$(0.79)$(0.94)
Weighted-average shares outstanding:
Basic and diluted258,589,270 240,733,497 258,439,051 238,774,515 

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 period ended June 30, 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 withholding taxes— — 1,150,771 — 323 — — 323 
Balance as of March 31, 2021— — 237,274,430 23 1,320,228 (900,438)31 419,844 
Net loss— — — — — (94,040)— (94,040)
Other comprehensive loss— — — — — — (20)(20)
Stock-based compensation— — — — 14,423 — — 14,423 
Issuance of common stock pursuant to stock-based compensation, net of withholding taxes— — 275,283 — 840 — — 840 
Common stock issued related to warrants exercised— — 3,387,827 — 104,176 — — 104,176 
Balance as of June 30, 2021— $— 240,937,540 $23 $1,439,667 $(994,478)$11 $445,223 

See accompanying notes to condensed consolidated financial statements.











6
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(In thousands except for per unit and share data)
(Unaudited)
(For the period ended June 30, 2022)

Preferred StockCommon Stock
# of SharesPar Value# of SharesPar ValueAdditional Paid-In CapitalAccumulated DeficitAccumulated
Other Comprehensive
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 
Net loss— — — (110,721)(110,721)
Other comprehensive loss— — — — (1,970)(1,970)
Stock-based compensation— — — 12,083 — 12,083 
Issuance of common stock pursuant to stock-based compensation, net of withholding taxes— — 216,758 — (914)— (914)
Balance as of June 30, 2022— $— 258,690,646 $26 $1,987,614 $(1,327,421)$(9,644)$650,575 

See accompanying notes to condensed consolidated financial statements.
7
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30,
20222021
Cash flows from operating activities
Net loss$(203,778)$(223,734)
Stock-based compensation22,978 36,535 
Depreciation and amortization5,767 5,740 
Amortization of debt issuance costs841 — 
Change in fair value of warrants— 69,082 
Other operating activities, net241 (17)
Change in assets and liabilities
Inventories(4,136)518 
Other current and non-current assets1,410 319 
Accounts payable and accrued liabilities10,109 (751)
Customer deposits13,733 (1,252)
Other current and non-current liabilities(125)88 
Net cash used in operating activities(152,960)(113,472)
Cash flows from investing activity
Capital expenditures(6,293)(1,647)
Purchases of marketable securities(379,254)— 
Cash used in investing activity(385,547)(1,647)
Cash flows from financing activities
Payments of lease obligations(66)(69)
Proceeds from convertible senior notes425,000 — 
Debt issuance costs(11,278)— 
Capped call premium(52,318)— 
Proceeds from issuance of common stock pursuant to stock options exercised49 12,965 
Transaction costs— (274)
Withholding taxes paid on behalf of employees on net settled stock-based awards(2,846)(11,803)
Net cash provided by financing activities358,541 819 
Net decrease in cash and cash equivalents(179,966)(114,300)
Cash, cash equivalents and restricted cash at beginning of year550,030 678,955 
Cash, cash equivalents and restricted cash ending balances$370,064 $564,655 
Cash and cash equivalents$329,857 $551,624 
Restricted cash40,207 13,031 
Cash, cash equivalents and restricted cash$370,064 $564,655 

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."), 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 for the three and six month period ended June 30, 2021 have been made to the comparable prior period in the condensed consolidated statements of operations and comprehensive loss to conform to the same current period presentations. 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.
9
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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 requiring bifurcation were identified. The convertible senior notes (the "2027 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 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 2027 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 2027 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.
10
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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 $40,000 per quarter, prior to the commercial launch date. Sponsorship royalties payable are 25% of sponsorship revenue. We paid license and royalty fees of $40,000 for each of the three months ended June 30, 2022 and 2021. We paid license and royalty fees of $80,000 for each of the six months ended June 30, 2022 and 2021.

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 expense from VO Holdings, Inc. and its subsidiaries (“VOH”), a majority owned company of Galactic Ventures, LLC ("GV"), a wholly-owned subsidiary of Vieco 10, was the direct parent of the Virgin Galactic Companies. 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 $34,000 and $31,000 operating expenses, net, from VOH for the three months ended June 30, 2022 and 2021, respectively. We were allocated $34,000 and $71,000 of operating expenses, net from VOH for the six months ended June 30, 2022 and 2021, respectively. The Company has a receivable from VOH of $47,000 and $43,000 as of June 30, 2022 and December 31, 2021, respectively.

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

The amortized cost, unrealized loss and estimated fair value of the Company's cash equivalents and marketable securities as of June 30, 2022 and December 31, 2021 were as follows:

As of June 30, 2022
Amortized CostGross Unrealized LossesFair Value
(In thousands)
Cash, restricted cash and cash equivalents
Cash and restricted cash$71,797 $— $71,797 
Money market206,870 — 206,870 
Certificate of deposits91,397 — 91,397 
Marketable securities
US treasuries209,596 (345)209,251 
Corporate debt securities552,541 (9,299)543,242 
Total cash, cash equivalents and marketable securities$1,132,201 $(9,644)$1,122,557 

11
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of December 31, 2021
Amortized CostGross Unrealized LossesFair 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 $3.6 million and $2.3 million of interest receivable in prepaid expenses and other current assets as of June 30, 2022 and December 31, 2021, respectively.
The Company recognized $1.8 million in amortization and accretion of purchase premiums and discounts on our marketable securities within interest income, net for the three months ended June 30, 2022. The Company did not recognize any amortization expense for the three months ended June 30, 2021. The Company recognized $4.0 million in amortization expense for marketable securities within interest income, net for the six months ended June 30, 2022. The Company did not recognize any amortization expense for the six months ended June 30, 2021.
We record gross realized gains and losses as a component of other income, net in the consolidated statements of operations. For the three months ended June 30, 2022 and June 2021, the Company did not recognize any material gross realized gains and losses. For the six months ended June 30, 2022, the Company recognized $0.1 million loss in other income, net. For the six months ended June 30, 2021, the Company did not recognize any material gross realized gains and losses.
The following table presents the contractual maturities of the Company's marketable securities as of June 30, 2022:
As of June 30, 2022
Amortized CostEstimated Fair Value
(In thousands)
Matures within one year$592,992 $587,716 
Matures between one to two years169,145 164,776 
Total$762,137 $752,492 
(6)    Inventory
As of June 30, 2022 and December 31, 2021, inventory is comprised of the following:
12
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of
June 30, 2022December 31, 2021
(Unaudited)
(In thousands)
Raw materials$24,651 $21,127 
Spare parts9,153 8,541 
Total inventory$33,804 $29,668 
For the three months and six months ended June 30, 2022 and 2021, we did not have any material write-offs of inventory due to excess and obsolescence.
(7)    Property, Plant, and Equipment, net
As of June 30, 2022 and December 31, 2021, property, plant, and equipment, net consisted of the following:
As of
June 30, 2022December 31, 2021
(Unaudited)
(In thousands)
Land$401 $— 
Buildings9,117 9,117 
Leasehold improvements29,306 29,155 
Aircraft195 195 
Machinery and equipment39,718 37,002 
IT software and equipment26,719 23,523 
Construction in progress3,816 2,901 
109,272 101,893 
Less accumulated depreciation and amortization
(60,089)(54,395)
Property, plant, and equipment, net
$49,183 $47,498 

The following table sets forth the summary of depreciation and amortization expense for property, plant and equipment, net:

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
(Unaudited)
(In thousands)
Customer experience$— $— $— $— 
Selling, general, and administrative1,667 1,284 3,266 2,558 
Research and development1,248 1,587 2,502 3,182 
$2,915 $2,871 $5,767 $5,740 

13
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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.

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

Three Months Ended
June 30,
20222021
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $2,092 $1,254 
Short-term lease expense— 8 
Finance Lease Cost:
Amortization of right-of-use assets
29 35 
Interest on lease liabilities4 7 
Total finance lease cost33 42 
Variable lease cost2,106 1,372 
Total lease cost$4,231 $2,676 

Six Months Ended
June 30,
20222021
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $4,069 $2,514 
Short-term lease expense— 20 
Finance Lease Cost:
Amortization of right-of-use assets
58 69 
Interest on lease liabilities9 14 
Total finance lease cost67 83 
Variable lease cost3,316 2,710 
Total lease cost$7,452 $5,327 


The components of supplemental cash flow information related to leases for the period are as follows:
14
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30,
20222021
(In thousands, except term and rate data)
Cash flow information:
Operating cash flows for operating leases$5,087 $2,712 
Operating cash flows for finance leases$9 $14 
Financing cash flows for finance leases
$66 $69 
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
Operating leases$4,924 $501 
Finance Leases$— $19 
Other Information:
Weighted average remaining lease term:
Operating leases (in years)11.1812.37
Finance leases (in years)1.712.49
Weighted average discount rates:
Operating leases11.68 %11.65 %
Finance leases8.12 %8.26 %

The supplemental balance sheet information related to leases for the period is as follows:
As of
June 30, 2022December 31, 2021
(Unaudited)
(In thousands)
Operating leases
Long-term right-of-use assets$38,776 $35,486 
    Short-term operating lease liabilities$2,384 $2,204 
    Long-term operating lease liabilities43,509 39,965 
Total operating lease liabilities$45,893 $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.

15
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 June 30, 2022 are as follows:
Operating LeasesFinance Leases
(In thousands)
2022 (for the remaining period)$3,580 $62 
20237,079 106 
20247,357 30 
20257,282 — 
20267,386 — 
Thereafter52,274 — 
Total lease payments$84,958 $198 
Less:
Imputed interest/present value discount$(39,065)$(13)
Present value of lease liabilities$45,893 $185 
(9)    Accrued Expenses
A summary of the components of accrued liabilities are as follows:
As of
June 30, 2022December 31, 2021
(Unaudited)
(In thousands)
Accrued payroll$3,447 $4,214 
Accrued vacation6,218 5,372 
Accrued bonus10,433 12,218 
Accrued interest expense4,781 — 
Other accrued expenses11,828 6,983 
Total accrued expenses$36,707 $28,787 

16
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(10)    Commercial Loan
As of
June 30, 2022December 31, 2021
(Unaudited)
(In thousands)
Commercial loan$310 $310 
     Less: Current portion(310)(310)
Non-current portion$— $— 

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 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 U.S. Bank National Associations, as Trustee (the "2027 Indenture"). Upon conversion by the noteholders, 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:
17
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

•during any calendar quarter after June 30, 2022 (and only during such calendar quarter) if the last reported sale price of the Company's common stock for each of at least 20 trading days in a period of 30 consecutive trading days ending 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 consecutive 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 last reported sale 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. The Company will have the right to elect to settle conversions in cash, in shares of its common stock or in a combination of cash and shares of its common stock. During the three and six months ended June 30, 2022, the conditions allowing holders of the 2027 Notes to convert were not met, and as a result, the 2027 Notes were classified as noncurrent liabilities as of June 30, 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 and six months ended June 30, 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 the principal amount of the 2027 Notes being repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.

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

As of
June 30, 2022
(Unaudited)
Principal$425,000 
     Less: unamortized debt issuance costs(10,437)
Net carrying amount$414,563 

18
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of June 30, 2022, we recorded $4.8 million of accrued interest expense on our 2027 Notes within accrued expenses. For the three months ended June 30, 2022, we recognized $3.2 million of total interest expense on our 2027 Notes, including $0.4 million of amortized debt issuance costs. For the six months ended June 30, 2022, we recognized $5.6 million of total interest expense on our 2027 Notes, including $0.8 million of amortized debt issuance cost.


Capped Call Transactions

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 reduce potential dilution to the Company's common stock upon any conversion of the 2027 Notes 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, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the 2027 Capped Call transactions. The 2027 Capped Calls are separate transactions, each between the Company and the applicable option counterparty, and are not part of the terms of the 2027 Notes and will not affect any holder's rights under the 2027 Notes or the 2027 Indenture. Holders of the 2027 Notes will not have any rights with respect to the 2027 Capped Call transactions.

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 $23,000 and $6,000 for the three months ended June 30, 2022 and 2021, respectively. Income tax expense was $48,000 and $49,000 for the six months ended June 30, 2022 and 2021, respectively. The effective income tax rate was nil for three months ended June 30, 2022 and 2021. The effective income tax rate was nil for six months ended June 30, 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 in October 2019 (the "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.


19
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 June 30, 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 $20.4 million for the three months ended June 30, 2021 and $69.1 million for the six months ended June 30, 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 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 $6.2 million in underwriting discounts and commissions, and other expenses payable by the Company, through the sale of 13,740,433 shares of common stock.
20
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(14)     Net Loss Per Share
The following table presents net loss per share and related information:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
(In thousands, except for share and per share data)
Basic and diluted:
     Net loss$(110,721)$(94,040)$(203,778)$(223,734)
     Weighted average shares of common stock outstanding258,589,270 240,733,497 258,439,051 238,774,515 
     Basic and diluted net loss per share$(0.43)$(0.39)$(0.79)$(0.94)

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 June 30,
20222021
Issued and outstanding stock options4,156 5,194 
Issued and outstanding performance stock options406 — 
Unvested restricted stock units issued and outstanding4,488 4,018 
Unvested performance stock units issued and outstanding367 85 
Shares related to the 2027 Notes (1)
33,234 — 
Warrants to purchase shares of common stock— 8,000 
42,651 17,297 

(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.
21
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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 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, with the remaining options vesting ratably over the following 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.
22
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table sets forth the summary of options activity for the six month ended June 30, 2022 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 7.606,187 — 
Granted303,030 7.99 4.95 
Exercised(4,182)11.79 
Forfeited options(396,160)18.21 
Options outstanding at June 30, 20224,156,455 $13.26 7.06— — 
Options exercisable at June 30, 20222,182,805 $12.99 6.67— — 

(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:
2022
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.
23
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— $— 0.00— 
Granted405,680 8.99 4.93 
Exercised— — 
Forfeited options— — 
PSOs outstanding at June 30, 2022405,680 $8.99 9.71— 
PSOs exercisable at s June 30, 2022— $— 0.00— 
(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 vest over four years with 25% cliff vest at the first year anniversary of the grant date, with the remaining vesting ratably over the next three years.

The following table sets forth the summary of RSUs activity during the six months ended June 30, 2022 under the 2019 Plan (dollars in thousands except per share data):
SharesWeighted Average Fair Value
Outstanding at December 31, 20212,396,732 $27.89 
Granted3,215,868 8.75 
Vested(846,876)21.36 
Forfeited(278,134)18.59 
Outstanding at June 30, 20224,487,590 $21.91 
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.

24
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:

2022
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 sets forth the summary of PSUs activity under the 2019 Plan (dollars in thousands except per share data):

SharesWeighted Average Fair Value
PSUs outstanding at December 31, 202189,839 $26.47 
Granted277,552 14.62 
Forfeited— — 
PSUs outstanding at June 30, 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 June 30,Six Months Ended June 30,
2022202120222021
(in thousands)
Stock option and PSO expense
   Selling, general and administrative2,192 1,870 3,917 10,856 
   Research and development731 825 1,416 1,668 
      Total stock option and PSO expense2,923 2,695 5,333 12,524 
RSU and PSU expense
   Selling, general and administrative6,458 8,556 12,025 17,609 
   Research and development2,702 3,172 5,620 6,402 
      Total RSU and PSU expense9,160 11,728 17,645 24,011 
      Total stock-based compensation expense$12,083 $14,423 $22,978 $36,535 

25
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of June 30, 2022, the unrecognized stock-based compensation related to stock options and PSOs was $20.3 million, and is expected to be recognized over a weighted-average period of 1.9 years. At June 30, 2022, the unrecognized stock-based compensation related to RSUs and PSUs was $93.8 million, and is expected to be recognized over a weighted-average period of 2.8 years.
(16)     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 June 30, 2022 and December 31, 2021 at fair value on a recurring basis:
Fair Value Measurements as of June 30, 2022
Level 1Level 2Level 3Total
(In thousands)
Assets:
Money market$206,870 $— $— $206,870 
Certificate of deposit91,397 — — 91,397 
US treasuries
209,251 — — 209,251 
Corporate debt securities— 543,242 — 543,242 
Total assets at fair value$507,518 $543,242 $— $1,050,760 
Liabilities:
2027 Notes$— $— $271,201 $271,201 
Total liabilities at fair value$— $— $271,201 $271,201 

The estimated fair value of the 2027 Notes were determined based on the quoted bid prices of the 2027 Notes in an over-the-counter market on the last trading day of the reporting period.

26
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Fair Value Measurements as of December 31, 2021
Level 1Level 2Level 3Total
(In thousands)
Assets:
Money Market$402,889 $— $— $402,889 
Certificate of Deposit91,549 — — 91,549 
Corporate debt securities— 380,881 — 380,881 
Total assets at fair value$494,438 $380,881 $— $875,319 
(17)    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 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 June 30, 2022, 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.

Lavin v. the Company

On May 28, 2021, a class action complaint was filed against us in the Eastern District of New York captioned Lavin v. Virgin Galactic Holdings, Inc., Case No. 1:21-cv-03070. In September 2021, the Court appointed Robert Scheele and Mark Kusnier as co-lead plaintiffs for the purported class. Co-lead plaintiffs amended the complaint in December 2021, asserting violations of Sections 10(b), 20(a) and 20A of the Exchange Act of 1934 against us and certain of our current and former officers and directors on behalf of a putative class of investors who purchased our common stock between July 10, 2019 and October 14, 2021. The amended complaint alleges, among other things, that we and certain of our current and former officers and directors made false and misleading statements and failed to disclose certain information regarding the safety of its ships and success of its commercial flight program. Co-lead plaintiffs seek damages, interest, costs, expenses, attorneys' fees, and other unspecified equitable relief. Defendants filed a motion to dismiss on April 4, 2022, and that motion is now fully briefed. The Company intends to vigorously defend against this matter.

Spiteri and Grenier, derivatively on behalf of the Company vs. Certain Current and Former Officers and Directors

On February 21, 2022 and March 1, 2022, two alleged shareholders filed separate derivative complaints purportedly on behalf of the Company against certain of our current and former officers and directors in the Eastern District of New York captioned Spiteri v. Branson et al., Case No. 1:22-cv-00933, and Grenier v. Branson et al., Case No. 1:22-cv-01100, respectively. The complaints assert violations of Sections 10(b), 14(a), and 21D of the Exchange Act of 1934 and claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment arising from substantially similar allegations as those contained in the securities class action described above. The complaints seek an unspecified sum of damages, interest, restitution, expenses, attorneys’ fees and other equitable relief. The cases are at a preliminary stage.


27
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Shareholder Litigation Demand

On April 4, 2022, the Company received a litigation demand from an alleged shareholder requesting that the Company take legal action against certain of our current and former officers and directors for breach of fiduciary duty and insider trading arising from substantially similar allegations as those contained in the securities class action described above. The Company is evaluating the litigation demand.
(18)    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 $1.1 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively. Defined contributions were $2.6 million and $2.6 million for the six months ended June 30, 2022 and 2021, respectively.
(19)    Supplemental Cash Flow Information
Six Months Ended June 30,
20222021
(in thousands)
Supplemental disclosure
Cash payments and refunds for:
Income tax refund$10 $— 
Income tax paid(53)(58)
$(43)$(58)
Schedule for noncash investing activities:
Unpaid property, plant, and equipment received$1,343 $270 
$1,343 $270 
Schedule for noncash financing activities:
Issuance of common stock "cashless" warrants exercised$— $104,176 
Issuance of common stock through restricted stock units vested7,440 27,320 
Unpaid deferred transaction costs— 250 
$7,440 $131,746 

28
VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(20)    Subsequent Events

As of July 30, 2022, we have one subsequent events as noted below.

Arizona Lease Agreement

On July 14, 2022, the Company entered into an agreement to lease 151,096 square feet of manufacturing and operations facilities in Mesa, Arizona consisting of two hangars ("Hangar C" and "Hangar B").

The lease has an initial term of approximately ten years and five months after the commencement date applicable to Hangar C or Hangar B, whichever is later, and is expected to commence ten months following the date of the agreement was entered into with respect to Hangar C and fifteen months following the date of the agreement was entered into for Hangar B. The average annual base rent under the lease is approximately $3.0 million. The Company has four options to extend the term of the lease, each for an additional five years.
29
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,” "Virgin Galactic," “we,” “us,” or “our” refer to Virgin Galactic Holdings, Inc. and its subsidiaries.

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, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K. 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” section of our Annual Report on Form 10-K and under the "Cautionary Note Regarding Forward-Looking Statements" section 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 a consumer space experience using reusable spaceflight systems. We believe the commercial exploration of space represents one of the most exciting and important technological initiatives of our time. Approximately 630 humans have ever traveled above the Earth’s atmosphere into space. This industry is growing dramatically due to new products, new sources of private and government funding, and new technologies. Demand is emerging from new sectors and demographics, which we believe is broadening the total addressable market. As government space agencies have retired or reduced their capacity to send humans into space, private companies are beginning to make exciting inroads into the fields of human space exploration. We have embarked on this journey with a mission to put humans and research experiments into space and return them safely to Earth on a routine and consistent basis. We believe that opening access to space will connect the world to the wonder and awe created by space travel, offering customers a transformative experience, and providing the foundation for a myriad of exciting new industries.

We are an aerospace and space travel company offering access to space for private individuals, researchers and government agencies. Our missions include flying passengers to space as tourists, as well as flying scientific payloads and researchers to space in order to conduct experiments for scientific and educational purposes. Our operations include the design and development, manufacturing, ground and flight testing, and post-flight maintenance of our spaceflight system vehicles. Our spaceflight system is developed using our proprietary technology and processes and is focused on providing space experiences for private astronauts, researcher flights and professional astronaut training.

We intend to offer our customers a unique, multi-day experience culminating in a spaceflight that includes several minutes of weightlessness and views of Earth from space. Our elegant and distinctive spaceflight system – which takes off and lands on a runway – has been designed for optimal safety and comfort. 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 as it has a desert climate with relatively predictable weather conditions preferable to support our spaceflights and it also has airspace that is restricted for surrounding general air traffic which facilitates frequent and consistent flight scheduling.

Our near-term focus is to launch the commercial program for human spaceflight. In December 2018, we made history by flying our groundbreaking spaceship, VSS Unity, to space. This represented the first flight of a spaceflight system built for commercial service to take humans into space. In February 2019, we flew our second spaceflight with VSS Unity, which carried a crew member in the cabin in addition to the two pilots. After relocating our operations to Spaceport America, we have flown an additional two spaceflights in May and July of 2021. The May 2021 flight carried revenue-generating research experiments as part of NASA’s Flight Opportunities Program. This was the third time Virgin Galactic has flown technology experiments in the cabin on a spaceflight. This flight also completed the data submission to the FAA resulting in the approval for the expansion of our commercial space transportation operator license to allow for the carriage of space flight participants. This marked the first time the FAA licensed a spaceline to fly customers and was further validation of the inherent safety of our system.

Our flight in July 2021 was the 22nd flight of VSS Unity, the fourth rocket powered spaceflight and the first spaceflight with a full crew of four mission specialists in the cabin, including our Founder, Sir Richard Branson.

30
We believe that the market for commercial human spaceflight is significant and untapped. As of June 30, 2022, we received reservations for approximately 800 spaceflight tickets and collected approximately $104.8 million in deposits from future astronauts. With each ticket purchased, future astronauts will experience a multi-day journey to prepare their mind and body for their upcoming flight, which includes a comprehensive spaceflight training preparation program and culminates with a trip to space on the final day. Each ticket purchased after our ticket sale reopening in 2021 also includes a membership in Virgin Galactic's Future Astronaut community. This membership provides access to events and experiences, including exclusive weeks 'at home' with Virgin Galactic Astronaut 001, Sir Richard Branson.

We have developed an extensive set of integrated aerospace development capabilities encompassing preliminary vehicle design and analysis, detail design, manufacturing, ground testing, flight testing, and maintenance of our spaceflight system. Our fully reusable spaceflight system consists of two primary components: our carrier aircraft, which is called the mothership, and our spaceship.

Our mothership is a twin-fuselage, custom-built aircraft designed to carry the spaceship up to an altitude of approximately 45,000 feet where it is released for its flight into space. Using the mothership’s air launch capability, rather than a standard ground-launch, reduces the energy requirements of our spaceflight system as the spaceship does not have to ascend through the higher density atmosphere closest to the Earth’s surface. It is also a fully reusable part of our spaceflight system. The spaceship is a vehicle with the capacity to carry pilots and private astronauts, research experiments, and researchers that travel with their experiments for human tended research flights into space and return them safely to Earth. It is powered by a hybrid rocket propulsion system, which propels the spaceship on a trajectory into space. The hybrid rocket motor utilizes liquid oxidizer and solid fuel and is designed to be a simple, safe, reliable propulsion system for the spaceship. The spaceship’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 customers the ability to view the blackness of space as well as stunning views of the Earth below.

Our team is currently in various stages of designing, testing and manufacturing additional spaceships, motherships, and rocket motors in order to meet the expected demand for human spaceflight experiences. Our next generation spaceships will include the various learnings from our flight test program so we are able to design and manufacture our future spaceships to allow for greater predictability, faster turnaround time and easier maintenance. Concurrently, we are also researching and developing new products and technologies to grow our company.

Our operations also include spaceflight opportunities for research and technology development. Researchers have historically utilized parabolic aircraft and drop towers to create moments of microgravity and conduct significant research activities related to the space environment. In most cases, these solutions offer only seconds of continuous microgravity time and do not offer access to the upper atmosphere or space itself. Researchers can also conduct experiments on sounding rockets or satellites. These opportunities are expensive, infrequent and may impose highly limiting operational constraints. Our spaceflight system is intended to provide the scientific research community access to space for affordable and repeatable access to microgravity. Our suborbital platform is an end-to-end offering, which includes not only our vehicles, but also the hardware such as middeck lockers that we provide to researchers that request them, along with the processes and facilities needed for a successful campaign. The platform offers a routine, reliable and responsive service allowing for experiments to be repeated rapidly and frequently and with the opportunity to be tended in-flight by one or more researchers. This capability will enable scientific experiments as well as educational and research programs to be carried out by a broader range of individuals, organizations and institutions than ever before. Our commitment to advancing research and science has been present in all of our spaceflights to date. Most recently, in May of 2021, we carried payloads into space for research purposes through NASA's Flight Opportunities Program, and our flight in July of 2021 included research payloads from the University of Florida.

We have also leveraged our knowledge and expertise in manufacturing spaceships to occasionally perform engineering services for third parties, 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 Part 1, Item 1A. of our Annual Report on Form 10-K titled “Risk Factors.”

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Impact of COVID-19

The COVID-19 pandemic and the protocols and procedures we implemented in response to the pandemic caused delays to our business and operations, which 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. While we are no longer experiencing delays from these measures, the longevity and extent of the COVID-19 pandemic remain uncertain, including due to the emergence and impact of the COVID-19 variants. Measures we may need to take in the future and challenges that result from the pandemic could affect our operations necessary to complete the development of our spaceflight systems, our scheduled flight test programs and commencement of our commercial flights. See the section entitled Part II, Item 1A. "Risk Factors" for further discussion of the impacts of the COVID-19 pandemic on our business. We believe our cash and cash equivalents on hand at June 30, 2022, 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 included in this Quarterly Report on Form 10-Q.

Commercial Launch of Our Human Spaceflight Program
We are in the final phases of developing our commercial spaceflight program. Prior to launch of commercial service, we must complete a period of planned maintenance and enhancements to the vehicles, as well as subsequent vehicle flight testing. Commercial service is currently expected to commence in the second quarter of 2023. We continuously monitor our supply chain for potential risk associated with the delivery of materials from our suppliers, which in turn could impact the schedule for completion of the enhancement period and the start of commercial service. We have identified some areas of risk for timely delivery and continue to work on mitigating these identified risks. Any delays in successful completion of our test flight program, whether due to the supply chain, the impact of COVID-19 or otherwise, will impact our ability to generate revenue from human spaceflight.

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 June 30, 2022, we had reservations for space flights for approximately 800 future astronauts. In August 2021, following Sir Richard Branson's successful test flight, we reopened ticket sales to a select group and increased the pricing of our consumer offerings to a base price of $450,000 per seat. In February 2022, we opened ticket sales to the general public. We are reserving our first 100 ticket sales for research and scientific experiments. As of June 30, 2022, the tickets sold represent approximately $212.0 million in expected future revenue upon completion of space flights.

We are the first spaceline to receive FAA approval to carry commercial customers to space. This was through an update to our existing commercial spaceflight license which we have held since 2016.

Available Capacity and Annual Flight Rate
We expect to commence commercial operations with a single spaceship, VSS Unity, and a single mothership 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 currently developing our newest spaceship, VSS Imagine, which is expected to commence test flights in mid-2023, and private astronaut service as soon as the fourth quarter of 2023. However, given the variability inherent in-flight testing, it may be prudent for us to allow for appropriate schedule which could potentially extend Imagine's window for private astronaut service into early 2024. We intend to expand our fleet with our next generation vehicles, our Delta class spaceships and our next generation motherships, which will allow us to increase our annual flight rate. 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 risks, such as manufacturing and design issues, human 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.

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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. We also have generated revenues from sponsorship arrangements and fees related to our Future Astronaut community.
Following the commercial launch of our human spaceflight services, we expect the significant majority of our revenue to be derived from ticket sales to fly to space and related services. 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.
Customer Experience
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.
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 commercial, and human resources; rent relating to facilities, including a portion of the lease with Spaceport America, and equipment; professional fees; and other general corporate costs. Human capital expenses primarily include salaries, cash bonuses, stock-based compensation 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.
Research and Development
Research and development expense represents costs incurred to support activities that advance our human spaceflight system 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
•rent, maintenance, and other overhead expenses allocated to the research and development departments.

As of June 30, 2022, our current primary research and development objectives focus on the development of our mothership and spaceship vehicles for commercial spaceflights and developing our rocket motor, a hybrid rocket propulsion system that will be used to propel our spaceship vehicles into space. The successful development of mothership, spaceship and rocket motor involves many uncertainties, including:
•our ability to recruit and retain skilled engineering and manufacturing staff;
•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 productions, such as natural disasters and hazardous materials;
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•performance of a limited number of suppliers for certain raw materials and components;
•performance of our third-party contractors that support our manufacturing and research and development activities including the quality of components and subassemblies;
•our ability to maintain rights from third parties for intellectual properties critical to research and development activities;
•continued access to launch sites and airspace;
•our ability to continue funding and maintain 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 our motherships, spaceships, or rocket motors, 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 spaceship vehicles, built by leveraging the invested research and development, will no longer qualify as research and development activities.
Depreciation and Amortization
Depreciation of property, plant, and equipment, net is calculated using 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. Once we have completed our test flight program and commenced commercial operations, we will capitalize the cost to construct any unfinished and additional spaceships and motherships. As these additional spaceships and motherships are placed into service, the related depreciation will be included in the Depreciation and Amortization line item on the condensed consolidated statements of operations and comprehensive loss. We have not capitalized any spaceship development costs to date.

Change in Fair Value of Warrants
Change in fair value of warrants reflects the non-cash change in the fair value of warrants. Certain warrants issued as part of the Company's initial public offering in 2017 and assumed upon the consummation of the Virgin Galactic business combination in October 2019 (the "Business Combination") were recorded at their fair value on the date of the Business Combination and are remeasured as of any warrant exercise date and at the end of each reporting period. No warrants were outstanding during the three and six month period ended June 30, 2022.

Interest Income
Interest income primarily includes interest earned on our cash and cash equivalents and marketable securities.

Interest Expense
Interest expense consists of amortization of debt issuance costs and contractual interest expense for our 2027 Notes, as well as interest expense related to our finance lease obligations.

Other Income
Other income consists of miscellaneous non-operating items, such as gains on marketable securities and handling fees related to customer refunds.

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
June 30,		Six Months Ended
June 30,
2022202120222021
(In thousands)
Revenue$357 $571 $676 $571 
Operating expenses:
Customer experience122 63 147 63 
Selling, general and administrative44,700 36,916 81,707 80,235 
Research and development62,340 34,619 114,167 69,708 
Depreciation and amortization2,915 2,871 5,767 5,740 
Total operating expenses110,077 74,469 201,788 155,746 
Operating loss(109,720)(73,898)(201,112)(155,175)
Interest income1,985 220 2,803 545 
Interest expense(3,157)(6)(5,631)(13)
Change in fair value of warrants— (20,363)— (69,082)
Other income, net194 13 210 40 
Loss before income taxes(110,698)(94,034)(203,730)(223,685)
Income tax expense(23)(6)(48)(49)
Net loss$(110,721)$(94,040)$(203,778)$(223,734)

For the Three and Six Months Ended June 30, 2022 Compared to the Three and Six Months Ended June 30, 2021
Revenue
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
(In thousands, except %)
Revenue$357 $571 $(214)(37)%$676 $571 $105 18 %

We recorded $0.4 million of revenue for the three months ended June 30, 2022, compared to $0.6 million for the three months ended June 30, 2021. Revenue recorded for the three months ended June 30, 2022 was primarily attributable to membership fees related to our Future Astronaut community. Revenue recorded for the three months ended June 30, 2021 was attributable to the spaceflight of two payloads in May 2021 and revenue earned from the completion of certain technical milestones related to payload services.

We recorded $0.7 million of revenue for the six months ended June 30, 2022, compared to $0.6 million revenue for the six months ended June 30, 2021. Revenue recorded for the six months ended June 30, 2022 was primarily attributable to membership fees related to our Future Astronaut community as well as the performance of engineering services. Revenue recorded for the six months ended June 30, 2021 was attributable to the spaceflight of two payloads in May 2021 and revenue earned from the completion of certain technical milestones related to payload services.

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Customer Experience
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
(In thousands, except %)
Customer experience$122 $63 $59 94 %$147 $63 $84 133 %

We recorded $0.1 million of customer experience expenses for the three months ended June 30, 2022 and 2021. Customer experience expenses for the three months ended June 30, 2022 was primarily attributable to costs to maintain our Future Astronaut community. Customer experience expenses for the three months ended June 30, 2021 was primarily attributable to incremental costs related to the completion of payload services and labor costs provided for engineering services under long-term U.S. government contracts.

We recorded $0.1 million of customer experience expenses for the six months ended June 30, 2022 and 2021. Customer experience expenses for the six months ended June 30, 2022 was primarily attributable to costs to maintain our Future Astronaut community and labor costs provided for engineering services. Customer experience expenses for the six months ended June 30, 2021 was primarily attributable to incremental costs related to the completion of payload services and labor costs provided for engineering services under long-term U.S. government contracts.

Selling, General and Administrative
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
(In thousands, except %)
Selling, general and administrative$44,700 $36,916 $7,784 21 %$81,707 $80,235 $1,472 2 %

Selling, general and administrative expenses increased by $7.8 million, or 21%, to $44.7 million for the three months ended June 30, 2022 from $36.9 million for the three months ended June 30, 2021. This increase was primarily due to a $6.0 million increase in salary, bonus, and other employee benefits. In addition, there was a $1.6 million increase in consulting and legal fees, and a $1.1 million increase in software licensing and IT expenses. These increases were offset by a $1.7 million decrease in stock-based compensation.

Selling, general and administrative expenses increased by $1.5 million, or 2%, to $81.7 million for the six months ended June 30, 2022 from $80.2 million for the six months ended June 30, 2021. This increase was primarily due to a $7.4 million increase in salary, bonus, and other employee benefits. In addition there was a $4.6 million increase in consulting and legal fees, and a $1.8 million increase in software licensing and IT expenses. These increases were offset by a $12.5 million decrease in stock-based compensation.

Research and Development
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
(In thousands, except %)
Research and development$62,340 $34,619 $27,721 80 %$114,167 $69,708 $44,459 64 %
Research and development expenses increased by $27.7 million, or 80%, to $62.3 million for the three months ended June 30, 2022 from $34.6 million for the three months ended June 30, 2021. The increase was primarily due to costs associated with developing our spaceflight system, specifically a $21.2 million increase in contract labor and materials and a $1.3 million increase in facilities costs. In addition, there was a $4.8 million increase in salaries, bonus, and other employee benefits.
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Research and development expenses increased by $44.5 million, or 64%, to $114.2 million for the six months ended June 30, 2022 from $69.7 million for the six months ended June 30, 2021. The increase was primarily due to costs associated with developing our spaceflight system, specifically a $36.6 million increase in contract labor and materials and a $2.5 million increase in facilities costs. In addition, there was a $4.1 million increase in salaries, bonus and other employee benefits.

Depreciation and Amortization

Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
($ in thousands)(In thousands, except %)
Depreciation and amortization2,915 2,871 $44 2 %5,767 5,740 $27 — %

Depreciation and amortization expense was $2.9 million for the three months ended June 30, 2022, an increase of less than $0.1 million when compared to 2021.

Depreciation and amortization expense was $5.8 million for the six months ended June 30, 2022, an increase of less than $0.1 million when compared to 2021.
Change in the Fair Value of Warrants
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
($ in thousands)(In thousands, except %)
Change in fair value of warrants
$— $(20,363)$20,363 (100)%$— $(69,082)$69,082 (100)%
Change in fair value of warrants reflects the non-cash change in the fair value of warrants. No warrants were outstanding during the three and six month period ended June 30, 2022.

Interest Income
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
(In thousands, except %)
Interest income$1,985 $220 $1,765 802 %$2,803 $545 $2,258 414 %
Interest income increased by $1.8 million, or 802%, to $2.0 million for the three months ended June 30, 2022 from $0.2 million for the three months ended June 30, 2021.

Interest income increased by $2.3 million, or 414%, to $2.8 million for the six months ended June 30, 2022 from $0.5 million for the six months ended June 30, 2021.

These increases are primarily due to interest earned on marketable securities.

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Interest Expense

Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
(In thousands, except %)
Interest expense$3,157 $6 $3,151 52,517 %$5,631 $13 $5,618 43,215 %

Interest expense increased by $3.2 million, or 52,517%, to $3.2 million for the three months ended June 30, 2022 from less than $0.1 million for the three months ended June 30, 2021.

Interest expense increased by $5.6 million, or 43,215%, to $5.6 million for the six months ended June 30, 2022 from less than $0.1 million for the six months ended June 30, 2021.

The increase was attributable to interest expense and amortization of debt issuance costs related to our senior convertible notes in January 2022.

Other Income, net

Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
($ in thousands)(In thousands, except %)
Other income, net$194 $13 $181 1,392 %$210 $40 $170 425 %
Other income, net was $0.2 million for the three and six months ended June 30, 2022, an increase of less than $1.0 million when compared to 2021.

Income Tax Expense
Three Months Ended June 30,$
Change		%
Change		Six Months Ended June 30,$
Change		%
Change
2022202120222021
($ in thousands)(In thousands, except %)
Income tax expense$23 $6 $17 283 %$48 $49 $(1)(2)%
Income tax expense was immaterial for the three and six months ended June 30, 2022 and 2021. 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 U.S. federal and state 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.
Liquidity and Capital Resources
As of June 30, 2022, we had cash, cash equivalents and restricted cash of $370.1 million and $752.5 million in marketable securities. Since the consummation of our business combination transaction in 2019, our principal sources of liquidity have come from our sales of our common stock and offering of convertible senior notes ("2027 Notes").

In January 2022, we completed an offering of the 2027 Notes due on February 1, 2027, unless earlier repurchased, redeemed or converted, and received aggregate proceeds of $425 million, before deducting costs of issuance of $11.2 million. 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. In connection with the 2027 Notes, we entered into capped call transactions with respect to our common stock (the "2027 Capped Calls"). We paid an aggregate amount of $52.3 million for the 2027 Capped Calls. See Note 11 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the 2027 Capped Calls.
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Historical Cash Flows
Six Months Ended June 30,
20222021
(In thousands)
Net cash (used in) provided by
Operating activities$(152,960)$(113,472)
Investing activities(385,547)(1,647)
Financing activities358,541 819 
Net change in cash and cash equivalents and restricted cash$(179,966)$(114,300)
Operating Activities
Net cash used in operating activities was $153.0 million for the six months ended June 30, 2022, which primarily consisted of $203.8 million of net losses, adjusted for non-cash items, which primarily included depreciation and amortization expense of $5.8 million, stock based compensation expense of $23.0 million, amortization of debt issuance costs of $0.8 million, as well as $21.0 million of cash consumed by working capital.

Net cash used in operating activities was $113.5 million for the six months ended June 30, 2021, which primarily consisted of $223.7 million of net losses, adjusted for non-cash items, which primarily included depreciation and amortization expense of $5.7 million, stock based compensation expense of $36.5 million, and change in fair value of warrants of $69.1 million, as well as a $1.1 million increase in cash consumed by working capital.

Investing Activities
Net cash used in investing activities was $385.5 million for the six months ended June 30, 2022, which primarily consisted of $379.3 million purchases of marketable securities, as well as $6.3 million in capital expenditures.

Net cash used in investing activities was $1.6 million for the six months ended June 30, 2021, which primarily consisted of capital expenditures.

Financing Activities
Net cash provided by financing activities was $358.5 million for the six months ended June 30, 2022, which primarily consisted of the issuance of the 2027 Notes for net proceeds of $413.7 million, offset by the purchase of the 2027 Capped Calls of $52.3 million and tax withholdings for net settled stock-based awards of $2.8 million.

Net cash provided by financing activities was $0.8 million for the six months ended June 30, 2021, which primarily consisted of net cash proceeds from issuance of common stock, offset by tax withholdings for stock options exercised.

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 customer experience expenses 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 on point-to-point travel;
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•hire additional personnel in research and development, manufacturing operations, testing programs, maintenance operations and guest services 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;
•establish our astronaut campus in New Mexico; 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.

In some cases, we expect our arrangements with third-party providers, including under our Master Agreement with Aurora Flight Sciences Corporation (“Aurora), a wholly owned subsidiary of The Boeing Company, for the design and manufacture of our next generation of carrier aircraft, will require significant capital expenditures from us, but such amounts are subject to future negotiations and cannot be estimated with reasonable certainty. Although we believe that our current capital is adequate to sustain our operations for at least the next twelve months, 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 spaceship, we currently have additional spaceship vehicles under construction. 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 achieve technological feasibility with our spaceflight systems, we will not capitalize expenditures incurred to construct any additional components of our spaceflight systems and we will continue to expense these costs as incurred to research and development.

Short-term Liquidity and Capital Resources

For at least the next twelve months, we expect our principal demand for funds will be for our ongoing activities described above. We expect to meet our short-term liquidity requirements primarily through our cash, cash equivalents and marketable securities on hand. We believe we will have sufficient liquidity available to fund our business needs, commitments and contractual obligations in a timely manner for the next twelve months.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, our principal demand for funds will be to sustain our operations, including the construction of additional motherships under an agreement with a third-party contractor, and spaceship vehicles, construction of our astronaut campus, expansion of the New Mexico Spaceport, and for the payment of the principal amount of our convertible senior notes as it becomes due. We expect to begin generating revenue from our human spaceflight program, which is expected to launch in the second quarter of 2023. To the extent this source of capital as well as the sources of capital described above are insufficient to meet our needs, we may also conduct additional offerings of our securities or refinance debt. We expect these resources will be adequate to fund our ongoing operating activities.

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. Some of these risk and uncertainties are described in more detail in our Annual Report on Form 10-K under the heading Item 1A. “Risk Factors—Risks Related to Our Business.”
Contractual Obligations and Commitments
Except as set forth in Note 17, 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 Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K. Additionally, in some cases, we have entered arrangements with third-party providers for services, such as the design and manufacture of our next generation of carrier aircraft. The amounts we would pay under those arrangements will be significant but are not contractually committed until we execute specific task orders with the applicable counterparty, are subject to future negotiations and cannot be estimated with reasonable certainty.

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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, 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.
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 Quarterly Report on Form 10-Q.
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. We are also exposed to market risk from changes in our stock prices, which impact the fair value of our 2027 Notes. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Risk
We had cash, cash equivalents and marketable securities totaling $1.1 billion as of June 30, 2022, of which $0.9 billion was invested in money market funds, certificate deposits, and corporate debt securities. Our cash and cash equivalents are held for working capital purposes. Our marketable securities are held for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our investment portfolio are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our marketable securities as “available for sale,” no gains are recognized due to changes in interest rates. As losses due to changes in interest rates are generally not considered to be credit related changes, no losses in such securities are recognized due to changes in interest rates unless we intend to sell, it is more likely than not that we will be required to sell, we sell prior to maturity or we otherwise determine that all or a portion of the decline in fair value are due to credit related factors.
In January 2022, we issued the 2027 Notes in an aggregate principal amount of $425.0 million. Concurrently with the issuance of the 2027 Notes, we entered into separate capped call transactions. The 2027 Capped Calls were completed to reduce the potential dilution from the conversion of the 2027 Notes. The 2027 Notes have a fixed annual interest rate of 2.50%. Accordingly, we do not have economic interest rate exposure on the 2027 Notes. However, changes in market interest rates impact the fair value of the 2027 Notes. In addition, the fair value of the 2027 Notes fluctuates when the market price of our common stock fluctuates. The fair value was determined based on the quoted bid price of the 2027 Notes in an over-the-counter market on the last trading day of the reporting period.
As of June 30, 2022, a hypothetical 100 basis point change in interest rates would not have had a material impact on the value of our cash equivalents or investment portfolio. Fluctuations in the value of our cash equivalents and investment portfolio caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income (loss), and are realized only if we sell the underlying securities prior to maturity.

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
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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
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, 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 June 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are 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. See Note 17 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Item 1A. Risk Factors
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed 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 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. There have been no material changes to the risk factors disclosed our Annual Report on Form 10-K.
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.








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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
10.1(2)(3)
*
31.1
*
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.
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(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.
(2) Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Regulation S-K, Item 601(b)(10). Such omitted information is not material and the registrant customarily and actually treats such information as private or confidential. Additionally, schedules and attachments to this exhibit have been omitted pursuant to Regulation S-K, Items 601(a)(5).
(3) Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.

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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: August 4, 2022/s/ Michael Colglazier
Name:
Michael Colglazier
Title:
Chief Executive Officer
(Principal Executive Officer)
Date: August 4, 2022/s/ Douglas Ahrens
Name:
Douglas Ahrens
Title:
Chief Financial Officer
(Principal Financial and Accounting Officer)

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