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, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-38202


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


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


~~166 North Roadrunner Parkway, Suite 1C~~1700 Flight Way ~~Las Cruces New Mexico~~Tustin California						~~88011~~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, ~~2021,~~2022, there were ~~257,260,827~~258,715,178 shares of the Company’s common stock, par value $0.0001, issued and outstanding.

Table of Contents

VIRGIN GALACTIC HOLDINGS, INC.

TABLE OF CONTENTS


		Page
	Cautionary Note Regarding Forward-Looking Statements	2
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss	5
	Condensed Consolidated Statements of Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2730
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3741
Item 4.	Controls and Procedures	3742
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	3943
Item 1A.	Risk Factors	3943
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3943
Item 3.	Defaults Upon Senior Securities	3943
Item 4.	Mine Safety Disclosures	3943
Item 5.	Other Information	3943
Item 6.	Exhibits	3944
Signatures		4246

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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," “aim,~~“achieve,” “anticipate,” “believe,” ~~"can,"~~“can,” “continue,” “could,” ~~"drive,"~~ “estimate,” “expect,” ~~“forecast,”~~ “future,” ~~"grow," "improve," "increase,"~~“grow,” “increase,” “intend,” “may,” ~~“outlook,~~“opportunity,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “strategy,” “target,” “will,” ~~“would”~~“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 ~~ability to achieve or maintain profitability;~~spaceflight fleet, which is comprised of our SpaceShipTwo spaceships, VSS Unity and VSS Imagine, and our mothership carrier aircraft, VMS Eve;

•our ability to ~~effectively market and sell human spaceflights;~~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;

•any delay in completing the flight test program and final development of our spaceflight system, which is comprised of our SpaceShipTwo Spaceship, VSS Unity, and our mothership carrier aircraft, VMS Eve;

•our ability to ~~operate our spaceflight system after commercial launch;~~

•~~the impact of the COVID-19 pandemic on us, our operations, our future financial or operational results,~~effectively market and ~~our access to additional financing;~~

•~~the safety of our spaceflight systems;~~sell human spaceflights;

•our ability to convert our backlog or inbound inquiries into revenue;

•our ~~ability to conduct test flights;~~anticipated full passenger capacity;

•our ~~anticipated full passenger capacity;~~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, including in accounting~~personnel;

•the impact of the COVID-19 pandemic on us, our operations, our future financial or operational results, and ~~finance roles;~~our access to additional financing;

•extensive and evolving government regulation that impact the way we operate;

•risks associated with international expansion;

•our ability to ~~timely and effectively remediate material weaknesses and~~ 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.

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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 ~~Amendment No. 2 to~~ our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021 (the ~~“Amendment No. 2 to~~“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

~~Table of Contents~~

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.

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PART I. FINANCIAL INFORMATION

VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share data)
June 30, 2021 December 31, 2020
(Unaudited) (As Restated)
Assets
Current assets
Cash and cash equivalents $ 551,624 $ 665,924
Restricted cash 13,031 13,031
Inventories 29,965 30,483
Prepaid expenses and other current assets 14,990 18,489
Total current assets 609,610 727,927
Property, plant, and equipment, net 48,870 53,148
Other non-current assets 25,536 22,915
Total assets $ 684,016 $ 803,990
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,587 $ 5,998
Accrued liabilities 24,364 22,982
Customer deposits 81,960 83,211
Other current liabilities 2,627 2,830
Total current liabilities 112,538 115,021
Non-current liabilities:
Warrant liability 100,347 135,440
Other long-term liabilities 25,908 26,451
Total liabilities $ 238,793 $ 276,912
Commitments and contingencies (Note 15)
0 0
Stockholders' Equity
Preferred stock, $0.0001 par value; 10,000,000 authorized; 0ne issued and outstanding $ 0 0
Common stock, $0.0001 par value; 700,000,000 shares authorized; 240,937,540 and 236,123,659 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively 23 23
Additional paid-in capital 1,439,667 1,297,794
Accumulated deficit (994,478) (770,744)
Accumulated other comprehensive income 11 5
Total stockholders' equity 445,223 527,078
Total liabilities and stockholders' equity $ 684,016 $ 803,990



	June 30, 2022		December 31, 2021
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	329,857	$	524,481
Restricted cash	40,207		25,549
Marketable securities, short-term	587,716		79,418
Inventories	33,804		29,668
Prepaid expenses and other current assets	18,576		19,476
Total current assets	1,010,160		678,592
Marketable securities, long-term	164,777		301,463
Property, plant, and equipment, net	49,183		47,498
Other non-current assets	44,356		41,281
Total assets	$	1,268,476	$	1,068,834
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	12,768	$	9,237
Accrued liabilities	36,707		28,787
Customer deposits	104,596		90,863
Other current liabilities	2,803		2,636
Total current liabilities	156,874		131,523
Non-current liabilities
Convertible senior notes, net	414,563		—
Other long-term liabilities	46,464		43,047
Total liabilities	617,901		174,570
Commitments and contingencies (Note 17)	0		0
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 capital	1,987,614		2,019,750
Accumulated deficit	(1,327,421)		(1,123,643)
Accumulated other comprehensive income	(9,644)		(1,869)
Total stockholders' equity	650,575		894,264
Total liabilities and stockholders' equity	$	1,268,476	$	1,068,834

See accompanying notes to condensed consolidated financial statements.

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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,
2021 2020 2021 2020
(As restated) (As restated)
Revenue $ 571 $ 0 $ 571 $ 238
Cost of revenue 63 0 63 173
Gross profit 508 0 508 65
Selling, general, and administrative expenses 38,503 26,047 83,417 52,802
Research and development expenses 35,903 37,009 72,266 71,201
Operating loss (73,898) (63,056) (155,175) (123,938)
Change in fair value of warrants (20,363) (9,596) (69,082) (326,492)
Interest income, net 214 498 532 1,666
Other income, net 13 221 40 49
Loss before income taxes (94,034) (71,933) (223,685) (448,715)
Income tax (expense) benefit (6) (40) (49) 6
Net loss (94,040) (71,973) (223,734) (448,709)
Other comprehensive loss:
Foreign currency translation adjustment (19) 0 8 (54)
Total comprehensive loss $ (94,059) $ (71,973) $ (223,726) $ (448,763)
Net loss per share:
Basic and diluted $ (0.39) $ (0.34) $ (0.94) $ (2.17)
Weighted-average shares outstanding:
Basic and diluted 240,733,497 211,784,541 238,774,515 207,097,047


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

Revenue	$	357	$	571	$	676	$	571

Operating expenses:
Customer experience	122		63		147		63
Selling, general, and administrative	44,700		36,916		81,707		80,235
Research and development	62,340		34,619		114,167		69,708
Depreciation and amortization	2,915		2,871		5,767		5,740
Total operating expenses	110,077		74,469		201,788		155,746

Operating loss	(109,720)		(73,898)		(201,112)		(155,175)

Interest income	1,985		220		2,803		545
Interest expense	(3,157)		(6)		(5,631)		(13)
Change in fair value of warrants	—		(20,363)		—		(69,082)
Other income, net	194		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 diluted	258,589,270		240,733,497		258,439,051		238,774,515

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Statements of Equity

(In thousands except for per unit and share data)

(Unaudited)

(~~As restated for~~For the ~~six months~~period ended June 30, ~~2020)~~2021)


	Preferred Stock			Common Stock
	# of Shares	Par Value		# of Shares	Par Value		Additional Paid-In Capital		Accumulated Deficit		Accumulated 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

Preferred Stock Common Stock
# of Shares Par Value # of Shares Par Value Additional paid-in capital Accumulated Deficit Accumulated
Other Comprehensive
Income (Loss) Total
Balance as of December 31, 2019 0 $ 0 196,001,038 $ 20 $ 469,008 $ (125,857) $ 59 $ 343,230
Net loss — — — — — (376,736) — (376,736)
Other comprehensive income (loss) — — — — — — (54) (54)
Common stock issued related to warrants exercised — — 13,239,934 1 341,000 — — 341,001
Stock-based compensation — — — — 4,425 — — 4,425
Balance as of March 31, 2020 0 0 209,240,972 21 814,433 (502,593) 5 311,866
Net loss — — — — — (71,973) — (71,973)
Common stock issued related to warrants exercised — — 1,162,884 — 19,741 — — 19,741
Stock-based compensation — — — — 5,525 — — 5,525
Transaction costs — — — — (770) — — (770)
Balance as of June 30, 2020 0 0 210,403,856 21 838,929 (574,566) 5 264,389

notes

to condensed consolidated financial statements.

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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 Stock			Common Stock												Preferred Stock			Common Stock
		# of Shares	Par Value		# of Shares	Par Value		Additional paid-in capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total			# of Shares	Par Value		# of Shares	Par Value		Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total
Balance as of December 31, 2020		0	$	0	236,123,659	$	23	$	1,297,794	$	(770,744)	$	5	$	527,078
Balance as of December 31, 2021																Balance as of December 31, 2021	—	$	—	258,166,417	$	26	$	2,019,750	$	(1,123,643)	$	(1,869)	$	894,264
Net loss	Net loss	—	—		—	—		—		(129,694)		—		(129,694)		Net loss	—	—		—	—				(93,057)		—		(93,057)
Other comprehensive loss	Other comprehensive loss	—	—		—	—		—		—		26		26		Other comprehensive loss	—	—		—	—				—		(5,805)		(5,805)
Stock-based compensation	Stock-based compensation	—	—		—	—		22,111		—		—		22,111		Stock-based compensation	—	—		—	—		10,895		—		—		10,895
Issuance of common stock pursuant to stock-based compensation, net of withholding taxes	Issuance of common stock pursuant to stock-based compensation, net of withholding taxes	—	—		1,150,771	—		323		—		—		323		Issuance of common stock pursuant to stock-based compensation, net of withholding taxes	—	—		307,471	—		(1,882)		—		—		(1,882)
Balance as of March 31, 2021		0	0		237,274,430	23		1,320,228		(900,438)		31		419,844
Purchase of capped calls																Purchase of capped calls	—	—		—	—		(52,318)		—		—		(52,318)

Balance as of March 31, 2022																Balance as of March 31, 2022	—	—		258,473,888	26		1,976,445		(1,216,700)		(7,674)		752,097
Net loss	Net loss	—	—		—	—		—		(94,040)		—		(94,040)		Net loss	—	—			—				(110,721)				(110,721)
Other comprehensive income (loss)		—	—		—	—		—		—		(20)		(20)
Other comprehensive loss																Other comprehensive loss	—	—			—				—		(1,970)		(1,970)
Stock-based compensation	Stock-based compensation	—	—		—	—		14,423		—		—		14,423		Stock-based compensation	—	—			—		12,083		—				12,083
Issuance of common stock pursuant to stock-based awards, 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		0	0		240,937,540	23		1,439,667		(994,478)		11		445,223
Issuance of common stock pursuant to stock-based compensation, net of withholding taxes																Issuance of common stock pursuant to stock-based compensation, net of withholding taxes	—	—		216,758	—		(914)		—				(914)

Balance as of June 30, 2022																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.

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VIRGIN GALACTIC HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


		Six Months Ended June 30,
			2021		2020			Six Months Ended June 30,
			(As restated)					2022	2021
Cash flows from operating activities	Cash flows from operating activities						Cash flows from operating activities
Net loss	Net loss		$	(223,734)	$	(448,709)	Net loss		$	(203,778)	$	(223,734)
Stock-based compensation	Stock-based compensation		36,535		9,950		Stock-based compensation		22,978		36,535
Depreciation and amortization	Depreciation and amortization		5,740		4,489		Depreciation and amortization		5,767		5,740
Change in fair value of warrant liability			69,082		326,492
Amortization of debt issuance costs							Amortization of debt issuance costs		841		—
Change in fair value of warrants							Change in fair value of warrants		—		69,082
Other operating activities, net	Other operating activities, net		(17)		67		Other operating activities, net		241		(17)
Change in assets and liabilities	Change in assets and liabilities						Change in assets and liabilities
Inventories	Inventories		518		(1,987)		Inventories		(4,136)		518
Other current and non-current assets	Other current and non-current assets		319		3,261		Other current and non-current assets		1,410		319
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities		(751)		(914)		Accounts payable and accrued liabilities		10,109		(751)
Customer deposits	Customer deposits		(1,252)		(1,628)		Customer deposits		13,733		(1,252)
Other current and non-current liabilities	Other current and non-current liabilities		88		892		Other current and non-current liabilities		(125)		88
Net cash used in operating activities	Net cash used in operating activities		(113,472)		(108,087)		Net cash used in operating activities		(152,960)		(113,472)
Cash flows from investing activity	Cash flows from investing activity						Cash flows from investing activity
Capital expenditures	Capital expenditures		(1,647)		(9,940)		Capital expenditures		(6,293)		(1,647)
Purchases of marketable securities							Purchases of marketable securities		(379,254)		—
Cash used in investing activity	Cash used in investing activity		(1,647)		(9,940)		Cash used in investing activity		(385,547)		(1,647)
Cash flows from financing activities	Cash flows from financing activities						Cash flows from financing activities
Payments of finance lease obligations			(69)		(49)

Payments of lease obligations							Payments of lease obligations		(66)		(69)
Proceeds from convertible senior notes							Proceeds from convertible senior notes		425,000		—
Debt issuance costs							Debt issuance costs		(11,278)		—
Capped call premium							Capped call premium		(52,318)		—
Proceeds from issuance of common stock pursuant to stock options exercised	Proceeds from issuance of common stock pursuant to stock options exercised		12,965		0		Proceeds from issuance of common stock pursuant to stock options exercised		49		12,965
Transaction costs	Transaction costs		(274)		(1,467)		Transaction costs		—		(274)
Withholding taxes paid on behalf of employees on net settled stock-based awards	Withholding taxes paid on behalf of employees on net settled stock-based awards		(11,803)		0		Withholding taxes paid on behalf of employees on net settled stock-based awards		(2,846)		(11,803)
Net cash provided by (used in) financing activities			819		(1,516)
Net cash provided by financing activities							Net cash provided by financing activities		358,541		819
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents		(114,300)		(119,543)		Net decrease in cash and cash equivalents		(179,966)		(114,300)
Cash, cash equivalents and restricted cash at beginning of period			678,955		492,721
Cash, cash equivalents and restricted cash at end of period			$	564,655	$	373,178
Cash, cash equivalents and restricted cash at beginning of year							Cash, cash equivalents and restricted cash at beginning of year		550,030		678,955
Cash, cash equivalents and restricted cash ending balances							Cash, cash equivalents and restricted cash ending balances		$	370,064	$	564,655

Cash and cash equivalents	Cash and cash equivalents		$	551,624	$	359,912	Cash and cash equivalents		$	329,857	$	551,624
Restricted cash	Restricted cash		13,031		13,266		Restricted cash		40,207		13,031
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash		$	564,655	$	373,178	Cash, cash equivalents and restricted cash		$	370,064	$	564,655

See accompanying notes to condensed consolidated financial statements.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Organization and its wholly owned subsidiaries ("VGH, Inc.")

Virgin Galactic Holdings, Inc. and its wholly owned subsidiaries ("VGH, Inc."), 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.

~~Global Pandemic~~

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

Consistent with the actions taken by governmental authorities, including US Federal, California, New Mexico and the United Kingdom, where most of our workforce is located, we have taken appropriately cautious steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, we initially reduced and then temporarily suspended on-site operations at our facilities in Mojave, California and Spaceport America, New Mexico in March 2020. Starting late March 2020, approximately two-thirds of our employees and contractors were able to complete their duties from home, which enabled much critical work to continue, including engineering analysis and drawing releases for VSS Unity, VMS Eve and the second SpaceShipTwo vehicle, process documentation updates, as well as workforce training and education. The remaining one-third of our workforce was unable to perform their normal duties from home. In April 2020, in accordance with our classification within the critical infrastructure designation, we resumed limited operations under revised operational and manufacturing plans that conformed to the COVID-19 health precautions at that time. This included universal facial covering requirements, rearranging facilities to follow social distancing protocols, conducting active daily temperature checks and undertaking regular and thorough disinfecting of surfaces and tools. We also tested employees and contractors for COVID-19 on a regular basis. As the pandemic has evolved, we have continued to follow US Federal, State and UK guidance, as applicable to our sites. However, the COVID-19 pandemic and the continued precautionary actions taken related to COVID-19 have adversely impacted, and are expected to continue to adversely impact, our operations, including the completion of the development of our spaceflight systems and our scheduled spaceflight test programs.

As of the date of this quarterly report on Form 10-Q, all our employees whose work requires them to be in our facilities are now back on-site, but we have experienced, and expect to continue to experience, reductions in operational efficiency due to illness from COVID-19 and precautionary actions taken related to COVID-19. For the time being, we are encouraging those employees who are able to work from home to continue doing so.

The COVID-19 pandemic and the protocols and procedures we have implemented in response to the pandemic have caused some delays in operational and maintenance activities, including delays in our test flight program. The full impact of the COVID-19 pandemic on our business and results of operations subsequent to June 30, 2021 will depend on future developments, such as the ultimate duration and scope of the pandemic and its impact on our operations necessary to complete the development of our spaceflight systems, our scheduled spaceflight test programs and commencement of our commercial flights. In addition to existing travel restrictions, countries may continue to maintain or reimpose closed borders, impose prolonged quarantines, or further restrict travel. We believe our cash and cash equivalents on hand at June 30, 2021, 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.

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~~VIRGIN GALACTIC HOLDINGS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~Restatement of Previously Issued Financial Statements~~

~~Warrant liability~~

As previously disclosed in Amendment No. 2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "Amendment No. 2 to Form 10-K"), the Company has restated its financial statements as of December 31, 2020 and 2019, for the years ended December 31, 2020 and 2019, as well as the summarized unaudited quarterly financial data for each of the quarterly periods from March 31, 2019 through December 31, 2020, to correct misstatements in those prior periods related to the accounting for warrants, under the guidance of Accounting Standards Codification (“ASC”) 815-40, Contracts in Entity’s Own Equity. The following tables represent the estimated fair value of the Company’s public and private warrant liabilities recorded on our balance sheet along with changes in fair value which are recorded as other income and expense on our statement of operations and the fair value of common stock issued on the date of exercise, which were recorded as additional paid in capital.

Public Warrants Private Placement Warrants Total
(In thousands)
Warranty Liability at December 31, 2019 77,050 47,280 124,330
Redemption/Exercise of Warrants (341,001) 0 (341,001)
Change in Fair Value 283,296 33,600 316,896
Warrant Liability at March 31, 2020 19,345 80,880 100,225
Redemption/Exercise of Warrants (19,741) 0 (19,741)
Change in Fair Value 396 9,200 9,596
Warrant Liability at June 30, 2020 0 90,080 90,080
Warranty Liability at December 31, 2020 0 135,440 135,440
Change in Fair Value 0 48,719 48,719
Warrant Liability at March 31, 2021 0 184,159 184,159
Redemption/Exercise of Warrants 0 (104,175) (104,175)
Change in Fair Value 0 20,363 20,363
Warrant Liability at June 30, 2021 0 100,347 100,347

(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”~~("SEC"). All intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

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~~VIRGIN GALACTIC HOLDINGS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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, ~~cost of revenue,~~ contract assets, contract liabilities, useful lives of property, plant and equipment, ~~net,~~fair value of investments, accrued liabilities, income taxes including deferred tax assets and liabilities and impairment valuation, warrants, stock-based awards and contingencies.

~~(c) Revenue Recognition~~

We recognize revenue when control of the promised service is transferred to our customers in an amount that reflects the consideration we expect to receive based on the contracted amount for those services.~~Our contracts generally include spaceflight operations and other revenue and engineering services revenue.~~

~~Spaceflight operations and other revenue~~

Spaceflight operations and other revenue is recognized for providing human spaceflights and carrying payload cargo into space, or a combination of the two. In addition, we have various sponsorship arrangements for which revenue is recognized over the sponsorship term.

~~Human spaceflight services are those services provided to the majority of our customers. Spaceflight service revenue is recognized at a point in time upon successful completion of a spaceflight.~~

Payload cargo services generally include performance obligations in which control is transferred over time. We recognize revenue on these fixed fee contracts, over time, using the proportion of actual costs incurred to the total costs expected to complete the performance obligations.

In contracts which include a combination of services, the Company assesses and accounts for individual services separately if they are distinct performance obligations, which often requires judgment based upon knowledge of the services and structure of the sales contract. We allocate the contract price to each performance obligation based on the estimated standalone selling price using observable pricing from our contracts with single performance obligations.

~~Engineering services revenue~~

Engineering services revenue is recognized for providing services for the research, design, development, manufacture, integration and sustainment of advanced technology aerospace systems, products and services. We have arrangements as a subcontractor to the primary contractor of a long-term contract with the U.S. Government and perform the specified work on a time-and-materials basis subject to a guaranteed maximum price. Our engineering services revenue contract obligates us to provide services that together are one distinct performance obligation; the delivery of engineering services. The Company elected to apply the ‘as-invoiced’ practical expedient to such revenues, and as a result, will bypass estimating the variable transaction price. Revenue is recognized as control of the performance obligation is transferred over time to the customer.

~~Variable consideration~~

We generally estimate variable consideration and refund liabilities at the most likely amount to which we expect to be entitled or owed and in certain cases based on the expected value, which requires judgment. Estimated variable consideration amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty

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~~VIRGIN GALACTIC HOLDINGS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

associated with the variable consideration is resolved. Estimated refund liability amounts are excluded in the transaction price to the extent it is probable that they are payable to the customer. Our estimates of variable consideration and refund liabilities, and determination of whether to include the estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information that is reasonably available to us.

~~Disaggregation of revenue~~

~~The Company does not disaggregate revenue for purposes of disclosure.~~

~~Contract balances~~

Contract assets are comprised of billed accounts receivable and unbilled receivables, which is the result of timing of revenue recognition, billings and cash collections. The Company records accounts receivable when it has an unconditional right to consideration.

Contract liabilities relate to spaceflight operations and other revenue contracts and are recorded when cash payments are received or due in advance of performance. Cash payments for spaceflight services are classified as customer deposits until enforceable rights and obligations exist, when such deposits also become nonrefundable. Customer deposits become nonrefundable and are recorded as deferred revenue following the Company's delivery of the conditions of carriage to the customer and execution of an informed consent. As of June 30, 2021 and December 31, 2020, our contract liabilities are 82.0 million and $83.2 million, respectively. As of June 30, 2021, the contract liabilities are comprised of customer deposits for our spaceflight services of $81.7 million and $0.3 million for our payload contracts. As of December 31, 2020, the contract liabilities are comprised of customer deposits for our spaceflight services of $82.7 million and $0.6 million for our payload contracts.

~~Contract fulfillment costs~~

The Company evaluates whether or not we should capitalize the costs of fulfilling a contract. Such costs would be capitalized when they are not within the scope of other standards and: (1) are directly related to a contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered.

~~Significant financing component~~

In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money when the timing of payments provides it with a significant benefit of financing the transfers of goods or services to the customer. In those circumstances, the contract contains a significant financing component. When adjusting the promised amount of consideration for a significant financing component, the Company uses the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception and recognizes the revenue amount on a straight-line basis over the term of the Customer Agreement, and interest expense using the effective interest rate method. When the time period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service is not more than one year, the Company applies the significant financing component practical expedient and do not adjust the promised amount of consideration.

~~Remaining performance obligations~~

We do not disclose information about remaining performance obligations for (a) contracts with an original expected length of one year or less, (b) revenues recognized at the amount at which we have the right to invoice for services performed, or (c) variable consideration allocated to wholly unsatisfied performance obligations.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

On January 1, 2022, the Company adopted ASU 2020-06,

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity

~~(d) Warrant~~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 ~~classifies its public~~analyzed the provisions of the notes and ~~private placement warrants~~did not identify any material embedded features which would require bifurcation from the host debt. As such, the notes are accounted for entirely as ~~liabilities in accordance with ASC 815 (Derivatives and Hedging).~~a liability net of unamortized issuance costs. The ~~warrant~~carrying amount of the liability is ~~recorded on~~classified as long-term as the ~~consolidated~~instrument does not mature within one year of the balance sheet ~~at fair value on~~date and the ~~issue date, with subsequent changes in their fair value recognized in the consolidated statement of operations at each reporting date.~~

~~The Company determined the fair value of its public warrants, which traded in active markets, using quoted market prices for identical instruments. The Company determines the fair value~~holder is not permitted to demand repayment of the ~~private placement warrants using a Black-Scholes option model and the quoted price~~principal within one year of the ~~Company’s common stock~~balance sheet date. However, if conditions to convertibility are met as described further in ~~an active market, a Level 3 measurement. Volatility is based on~~Note 11, the ~~actual market activity~~Company may be required to reclassify the carrying amount of the ~~Company’s peer group~~liability to current. The embedded conversion features are not remeasured as ~~well~~long as they do not meet the ~~Company's historical volatility since~~separation requirement of a derivative. Issuance costs are amortized on a straight-line basis, which approximates the ~~Virgin Galactic Business Combination. The expected life is based on~~effective interest rate method, to interest expense over the ~~remaining contractual~~ term of the ~~warrants, and~~notes. Additionally, ASU 2020-06 requires the ~~risk free interest rate is based~~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 ~~implied yield available on U.S. Treasury Securities with a maturity equivalent to~~current quarter as the ~~warrants’ expected life.~~convertible instruments were anti-dilutive.

~~(e) Reclassification~~(d) Capped Call Transactions

~~Certain amounts~~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 ~~accompanying~~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 ~~and accompanying notes have been reclassified to be consistent with~~included elsewhere in this Quarterly Report on Form 10-Q for additional information on the current period presentation. We reclassified a portion of our property, plant and equipment in machinery and equipment to inventory, as part of our standardization of accounting policies across entities, for inventory and property, plant and equipment. These reclassifications impacted our condensed consolidated balance sheet, condensed consolidated statement of operations and comprehensive loss and condensed consolidated statements of cash flows.2027 Capped Calls.

~~(f)~~(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 ~~Amendment No. 2 to~~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 ~~Amendment No. 2 to~~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”).

~~(a)~~ See ~~Issued Accounting Standard Updates Not Yet Adopted~~

~~In August 2020, the FASB issued ASU 2020-06,~~ Note 2~~Accounting~~ in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for ~~Convertible Instruments and Contracts in an Entity’s Own Equity~~, which simplifies and clarifies certain calculation and presentation matters related to convertible and equity and debt instruments. Specifically, ASU-2020-06 removes requirements to separately account for conversion features as a derivative under ASC Topic 815 and removing the requirement to account for beneficial conversion featuresadditional information on such instruments. Accounting Standards Update 2020-06 also provides clearer guidance surrounding disclosure of such instruments and provides specific guidance for how such instruments are to be incorporated in the calculation of Diluted EPS. The guidance under ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 to its financial statements.recently adopted accounting pronouncements.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~In January 2021, the FASB issued ASU 2021-01 -~~ ~~Reference Rate Reform~~, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounted transition. This update is effective immediately. We have evaluated and determined the update has no impact to the Company's condensed consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, Earning Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarified and reduced diversity in an issuer's accounting for modifications of exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This update is effective for all entities for fiscal years beginning after December 15, 2021. We are currently evaluating the impact of ASU 2021-04 to our condensed consolidated financial statements.

~~(b) Adopted Accounting Standard Updates~~

~~In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740)~~, which affects general principles within Topic 740, and are meant to simplify and reduce the cost of accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and simplifies areas including franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, the incremental approach for intraperiod tax allocation, interim period income tax accounting for year-to-date losses that exceed anticipated losses and enacted changes in tax laws in interim periods. The Company adopted the new guidance effective January 1, 2021. The adoption of the new guidance did not have a material impact to the Company's condensed consolidated financial statements.

(4) Related Party Transactions

The Company licenses its brand name from certain entities affiliated with Virgin Enterprises Limited (“VEL”), a company incorporated in England. VEL is an affiliate of the Company. Under the trademark license, the Company has the exclusive right to operate under the brand name “Virgin Galactic” worldwide. Royalty payables, excluding sponsorship royalties, for the use of license are the greater of 1% of revenue or $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 ~~and $40,000~~ for each of the three months ended June 30, ~~2021~~2022 and ~~2020, respectively.~~2021. We paid license and royalty fees of $80,000 ~~and $95,000~~ for each of the six months ended June 30, ~~2021~~2022 and ~~2020, respectively~~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 GVGalactic 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 ~~$31,000~~$34,000 and ~~$99,000 of~~$31,000 operating expenses, net, from VOH for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. We were allocated ~~$71,000~~$34,000 and ~~$236,000~~$71,000 of operating expenses, net from VOH for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company has a receivable ~~(payable)~~ from VOH of ~~$2,000~~$47,000 and ~~$85,000~~$43,000 as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~(5) Inventory~~

As(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, ~~2021~~2022 and December 31, ~~2020, inventory is comprised of the following:~~2021 were as follows:


	As of June 30, 2022
	Amortized Cost		Gross Unrealized Losses		Fair Value
	(In thousands)
Cash, restricted cash and cash equivalents
Cash and restricted cash	$	71,797	$	—	$	71,797
Money market	206,870		—		206,870
Certificate of deposits	91,397		—		91,397
Marketable securities
US treasuries	209,596		(345)		209,251
Corporate debt securities	552,541		(9,299)		543,242
Total cash, cash equivalents and marketable securities	$	1,132,201	$	(9,644)	$	1,122,557

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Notes to Condensed Consolidated Financial Statements

(Unaudited)


	As of December 31, 2021
	Amortized Cost		Gross Unrealized Losses		Fair Value
	(In thousands)
Cash, restricted cash and cash equivalents
Cash and restricted cash	$	55,592	$	—	$	55,592
Money market	402,889		—		402,889
Certificate of deposits	91,549		—		91,549
Marketable securities
Corporate debt securities	382,884		(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.

As of
June 30, 2021 December 31, 2020
(Unaudited)
(In thousands)
Raw Materials $ 21,938 $ 22,963
Spare parts 8,027 7,520
Total inventory $ 29,965 $ 30,483

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, ~~2021~~2022 and June 2021, the Company did not recognize any material gross realized gains and losses. For the six months ended June 30, ~~2020, we wrote off~~2022, the Company recognized $0.1 million ~~and $0.1 million of inventory due to excess and obsolescence, respectively.~~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, ~~2020,~~2022:


	As of June 30, 2022
	Amortized Cost		Estimated Fair Value
	(In thousands)
Matures within one year	$	592,992	$	587,716
Matures between one to two years	169,145		164,776
Total	$	762,137	$	752,492

(6) Inventory

As of June 30, 2022 and December 31, 2021, inventory is comprised of the following:

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	As of
	June 30, 2022		December 31, 2021
	(Unaudited)
	(In thousands)
Raw materials	$	24,651	$	21,127
Spare parts	9,153		8,541
Total inventory	$	33,804	$	29,668

For the three months and six months ended June 30, 2022 and 2021, we ~~wrote off $0.2 million and $1.1 million~~did not have any material write-offs of inventory due to excess and ~~obsolescence, respectively.~~obsolescence.

~~(6)~~(7) Property, Plant, and Equipment, net

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, property, plant, and equipment, net consisted of the following:


			As of						As of
			June 30, 2021		December 31, 2020				June 30, 2022		December 31, 2021
			(Unaudited)						(Unaudited)
		(In thousands)						(In thousands)
Land							Land		$	401	$	—
Buildings	Buildings		$	9,117	$	9,142	Buildings		9,117		9,117
Leasehold improvements	Leasehold improvements		28,914		28,744		Leasehold improvements		29,306		29,155
Aircraft	Aircraft		195		195		Aircraft		195		195
Machinery and equipment	Machinery and equipment		35,709		34,330		Machinery and equipment		39,718		37,002
IT software and equipment	IT software and equipment		23,011		22,042		IT software and equipment		26,719		23,523
Construction in progress	Construction in progress		655		1,780		Construction in progress		3,816		2,901
			97,601		96,233				109,272		101,893
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization		(48,731)		(43,085)		Less accumulated depreciation and amortization		(60,089)		(54,395)
Property, plant, and equipment, net	Property, plant, and equipment, net		$	48,870	$	53,148	Property, plant, and equipment, net		$	49,183	$	47,498

~~Total~~The following table sets forth the summary of depreciation and amortization expense for ~~the three months ended June 30, 2021~~property, plant and 2020 was $2.9 million and $2.5 million, respectively, of which $1.3 million and $1.1 million was recorded in research and development expense, respectively. Total depreciation and amortization for the six months ended June 30, 2021 and 2020 was $5.7 million and $4.5 million, respectively, of which $2.6 million and $2.1 million was recorded in research and development expense, respectively.equipment, net:


		Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021
		(Unaudited)
	(In thousands)
Customer experience		$	—	$	—	$	—	$	—
Selling, general, and administrative		1,667		1,284		3,266		2,558
Research and development		1,248		1,587		2,502		3,182
		$	2,915	$	2,871	$	5,767	$	5,740

~~(7)~~

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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 ~~Amendment No. 2 to~~Annual Report on Form 10-K.

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~~VIRGIN GALACTIC HOLDINGS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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


		Three Months Ended June 30,					Three Months Ended June 30,
		2021		2020			2022		2021
		(Unaudited and in thousands)					(Unaudited and in thousands)
Lease Cost:	Lease Cost:					Lease Cost:
Operating lease expense	Operating lease expense	$	1,254	$	1,010	Operating lease expense	$	2,092	$	1,254
Short-term lease expense	Short-term lease expense	8		26		Short-term lease expense	—		8

Finance Lease Cost:	Finance Lease Cost:					Finance Lease Cost:
Amortization of right-of-use assets	Amortization of right-of-use assets	35		28		Amortization of right-of-use assets	29		35
Interest on lease liabilities	Interest on lease liabilities	7		8		Interest on lease liabilities	4		7
Total finance lease cost	Total finance lease cost	42		36		Total finance lease cost	33		42

Variable lease cost	Variable lease cost	1,372		427		Variable lease cost	2,106		1,372
Total lease cost	Total lease cost	$	2,676	$	1,499	Total lease cost	$	4,231	$	2,676


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
		(Unaudited and in thousands)					(Unaudited and in thousands)
Lease Cost:	Lease Cost:					Lease Cost:
Operating lease expense	Operating lease expense	$	2,514	$	2,162	Operating lease expense	$	4,069	$	2,514
Short-term lease expense	Short-term lease expense	20		123		Short-term lease expense	—		20

Finance Lease Cost:	Finance Lease Cost:					Finance Lease Cost:
Amortization of right-of-use assets	Amortization of right-of-use assets	69		55		Amortization of right-of-use assets	58		69
Interest on lease liabilities	Interest on lease liabilities	14		17		Interest on lease liabilities	9		14
Total finance lease cost	Total finance lease cost	83		72		Total finance lease cost	67		83

Variable lease cost	Variable lease cost	2,710		775		Variable lease cost	3,316		2,710
Total lease cost	Total lease cost	$	5,327	$	3,132	Total lease cost	$	7,452	$	5,327

The components of supplemental cash flow information related to leases for the period are as follows:

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Six Months Ended June 30,
	2022			2021
	(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)	11.18			12.37
Finance leases (in years)	1.71			2.49

Weighted average discount rates:
Operating leases	11.68		%	11.65		%
Finance leases	8.12		%	8.26		%

Six Months Ended June 30,
2021 2020
(In thousands, except term and rate data)
Cash flow information:
Operating cash flows for operating leases $ 2,712 $ 2,545
Operating cash flows for finance leases $ 14 $ 18
Financing cash flows for finance leases $ 69 $ 49
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
Operating leases $ 501 $ 34
Finance Leases $ 19 $ 48
Other Information:
Weighted average remaining lease term:
Operating leases (in years) 12.37 13.20
Finance leases (in years) 2.49 3.47
Weighted average discount rates:
Operating leases 11.65 % 11.77 %
Finance leases 8.26 % 8.92 %

The supplemental balance sheet information related to leases for the period is as follows:
As of
June 30, 2021 December 31, 2020
(Unaudited)
(In thousands)
Operating leases
Long-term right-of-use assets $ 19,055 $ 19,555
Short-term operating lease liabilities $ 2,138 $ 2,384
Long-term operating lease liabilities 23,701 24,148
Total operating lease liabilities $ 25,839 $ 26,532


	As of
	June 30, 2022		December 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 liabilities	43,509		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.

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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, ~~2021~~2022 are as follows:
Operating Leases Finance
Leases
(In thousands)
2021 (for the remaining period) $ 4,948 $ 157
2022 4,001 119
2023 3,969 79
2024 3,891 0
2025 3,833 0
Thereafter 28,936 0
Total lease payments $ 49,578 $ 355
Less:
Imputed interest/present value discount (23,739) $ (33)
Present value of lease liabilities $ 25,839 $ 322


	Operating Leases		Finance Leases
	(In thousands)
2022 (for the remaining period)	$	3,580	$	62
2023	7,079		106
2024	7,357		30
2025	7,282		—
2026	7,386		—
Thereafter	52,274		—
Total lease payments	$	84,958	$	198
Less:
Imputed interest/present value discount	$	(39,065)	$	(13)
Present value of lease liabilities	$	45,893	$	185

~~(8)~~(9) Accrued Expenses

A summary of the components of accrued liabilities are as follows:
As of
June 30, 2021 December 31, 2020
(Unaudited)
(In thousands)
Accrued bonus 6,258 6,892
Other accrued expenses 18,106 16,090
Total accrued expenses $ 24,364 $ 22,982


	As of
	June 30, 2022		December 31, 2021
	(Unaudited)
	(In thousands)
Accrued payroll	$	3,447	$	4,214
Accrued vacation	6,218		5,372
Accrued bonus	10,433		12,218
Accrued interest expense	4,781		—
Other accrued expenses	11,828		6,983
Total accrued expenses	$	36,707	$	28,787

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(10) Commercial Loan

~~(9) Long-term Debt~~

As of
June 30, 2021 December 31, 2020
(Unaudited)
(In thousands)
Commercial loan $ 620 $ 620
620 620
Less: Current portion (310) (310)
Non-current portion $ 310 $ 310

~~Aggregate maturities of long-term debt as of June 30, 2021 are as follows:~~

(In thousands)
2021 (for the remaining period) $ 310
2022 310
$ 620


	As of
	June 30, 2022		December 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 3 equal annual ~~installment~~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.

~~(10)~~(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:

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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 5 consecutive business days immediately after any 10 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

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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 ~~$6,000~~$23,000 and ~~40,000~~$6,000 for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Income tax ~~(expense) benefit~~expense was ~~$(49,000)~~$48,000 and ~~$6,000~~$49,000 for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The effective income tax rate was ~~NaN~~nil for three months ended June 30, ~~2021~~2022 and ~~2020.~~2021. The effective income tax rate was ~~NaN~~nil for six months ended June 30, ~~2021~~2022 and ~~2020.~~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.

~~(11)~~(13) Stockholders' Equity

There have been no significant changes from the Stockholders' Equity disclosed in Note 1112 of the “Stockholders Equity” included in ~~the Amendment No. 2~~our Annual Report on Form ~~10-K other than the issuance of common stock and redemption of warrants as noted below.~~10-K.

Stockholders' Agreement

In connection with the closing of the Virgin Galactic ~~Business Combination,~~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)~~("VIL") is entitled to designate two directors to the Company’s Board

~~Table of Contents~~

~~VIRGIN GALACTIC HOLDINGS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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.

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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 ~~SCH's~~Social Capital Hedosophia Holdings Corp.'s ("SCH") initial public offering in 2017 and assumed upon the ~~consummation~~consumption of the Business Combination. As of June 30, 2022, and December 31, 2021, there were 0no public warrants outstanding. As of June 30, 2021 and December 31, 2020, there were 2,666,667 and 8,000,000 warrants outstanding, respectively, that were issued in a private placement simultaneously with the Company’s initial public offering (the “private placement warrants”). All remaining outstanding warrants were redeemed through cashless exercise in July 2021.

Under the terms of the warrant agreement (the “Warrant Agreement”) between us and Continental Stock Transfer & Trust Company, as warrant agent, the public warrants became exercisable on a cashless basis on January 27, 2020, based on the exchange ratio as calculated under the Warrant Agreement at the time of the exercise. On March 13, 2020 and pursuant to the terms of the Warrant Agreement, we announced that all public warrants that remained unexercised immediately after 5:00 p.m. New York City time on April 13, 2020 (the “Redemption Date”) would be redeemed for $0.01 per warrant. Warrant holders could exercise their public warrants at any time from March 13, 2020 and prior to the Redemption Date on a cashless basis, and receive 0.5073 shares of common stock per public warrant surrendered for exercise. Immediately after the Redemption Date, 295,305 public warrants remained unexercised and were redeemed at a redemption price of $0.01 per public warrant in accordance with the terms of the Warrant Agreement. Theor private placement warrants ~~were not subject to the redemption and remain outstanding as of June 30, 2021.~~outstanding.

The Company ~~determined that both the public warrants and the private placement warrants (the "Warrants") should be classified as a liability in accordance with ASC 480. The Company remeasures~~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 ~~and $9.6 million~~ for the three months ended June 30, 2021 and ~~2020, respectively, and~~ $69.1 ~~million and $326.5~~ million for the six months ended June 30, 2021 and 2020, respectively. The fair value of the warrant liability is approximately $100.3 million and $135.4 million as of June 30, 2021 and December 31, 2020, respectively. The private placement warrants are classified as Level 3 financial instruments. See ~~Note 14. Fair Value Measurements~~.2021.

~~(12 ) Earnings per Share~~At The Market Offering

~~The following table presents net loss~~

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, ~~and related information:~~
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(As Restated) (As Restated)
(In thousands, except for share and per share data)
Basic and diluted:
     Net loss $ (94,040) $ (71,973) $ (223,734) $ (448,709)
     Weighted average shares of common stock outstanding 240,733,497 211,784,541 238,774,515 207,097,047
     Basic and diluted net loss per share $ (0.39) $ (0.34) $ (0.94) $ (2.17)

~~As of June 30, 2021 and June 30, 2020,~~through an "at the market offering" program ("ATM"), from time to time by the Company ~~has excluded~~through the ~~potential effect~~Agents, acting as the Company’s sales agents, or directly to one or more of ~~warrants to purchase~~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 totaling 2,666,667 and 8,000,000, respectively, shares and the dilutive effect of outstanding stock options and unvested restricted stock units, as described in Note 12 of the “Notes to Consolidated Financial Statements” included in the 2020 Amendment No. 2 to Form 10-K, in the calculation of diluted loss per share, as the effect would be anti-dilutive due to losses incurred.stock.

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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,
	2022		2021		2022		2021

	(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 outstanding	258,589,270		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,
	2022	2021

Issued and outstanding stock options	4,156	5,194
Issued and outstanding performance stock options	406	—
Unvested restricted stock units issued and outstanding	4,488	4,018
Unvested performance stock units issued and outstanding	367	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.

~~(13)~~

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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 1314 of the "Notes to Consolidated Financial Statements" ~~in the Amendment No. 2 to~~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 ("~~RSU"~~RSUs") to employees, directors and other service providers. Performance stock units ("~~PSU"~~PSUs") are RSUs that vest based on ~~the~~ 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 ~~dates~~date first anniversary, ~~and will~~with the remaining options vesting ratably ~~vest monthly~~ over the ~~next~~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.

~~Stock Option Units~~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.

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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, ~~2021~~2022 under the 2019 Plan (dollars in thousands except per share data):


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value(1)	Weighted Average Grant Date Fair Value ($)
Options outstanding at December 31, 2021	4,253,767	$	14.09	7.60	6,187	—
Granted	303,030	7.99				4.95
Exercised	(4,182)	11.79
Forfeited options	(396,160)	18.21
Options outstanding at June 30, 2022	4,156,455	$	13.26	7.06	—	—

Options exercisable at June 30, 2022	2,182,805	$	12.99	6.67	—	—

Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
Options outstanding at December 31, 2020 6,796,045 $ 13.59 8.64 68,888
Granted 0 0
Exercised (1,013,402) 13.01
Forfeited options (588,999) 13.93
Options outstanding at June 30, 2021 5,193,644 $ 13.67 7.53 167,604
Options exercisable at June 30, 2021 1,916,745 $ 13.49 7.34 62,305

(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.

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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 Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value(1)	Weighted Average Grant Date Fair Value ($)
PSOs outstanding at December 31, 2021	—	$	—	0.00	—
Granted	405,680	8.99				4.93
Exercised	—	—
Forfeited options	—	—
PSOs outstanding at June 30, 2022	405,680	$	8.99	9.71	—

PSOs exercisable at s June 30, 2022	—	$	—	0.00	—

Restricted Stock Units

The RSUs vest over four years with 25% cliff vest at the first year anniversary of the grant date, ~~and~~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, ~~2021~~2022 under the 2019 Plan (dollars in thousands except per share data):
Shares Weighted Average Fair Value
Outstanding at December 31, 2020 4,760,784 $ 19.63
Granted 680,784 40.41
Vested (709,404) 16.20
Forfeited (713,766) 16.72
Outstanding at June 30, 2021 4,018,398 $ 24.21


	Shares	Weighted Average Fair Value
Outstanding at December 31, 2021	2,396,732	$	27.89
Granted	3,215,868	8.75
Vested	(846,876)	21.36
Forfeited	(278,134)	18.59
Outstanding at June 30, 2022	4,487,590	$	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 20 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.

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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.

~~Performance Stock Units~~

In March 2021, the Company granted a total of 84,626 PSUs to our executive officers. Between 25% and 200% of the PSUs are eligible to vest based on the achievement of certain performance goals by specified target dates. The fair value of these PSUs is calculated based on the market value of the Company's common stock on the grant date. These PSUs are amortized over the requisite service period in which it is probable that the performance goal is achieved. The following table ~~summarizes~~sets forth the ~~details~~summary of PSUs activity under the ~~performance stock units:~~2019 Plan (dollars in thousands except per share data):

Shares Weighted Average Fair Value
PSUs outstanding at December 31, 2020 0 $ 0
Granted 84,626 29.88
PSUs outstanding at June 30, 2021 84,626 $ 29.88


	Shares	Weighted Average Fair Value
PSUs outstanding at December 31, 2021	89,839	$	26.47
Granted	277,552	14.62
Forfeited	—	—
PSUs outstanding at June 30, 2022	367,391	$	18.19

~~Stock options, RSUs and PSUs expenses are included~~Stock-based compensation expense was recorded in ~~selling, general and administrative and research and development~~the following expense categories in the ~~Condensed Consolidated Statements~~condensed consolidated statements of ~~Operations~~operations and ~~Comprehensive Loss~~comprehensive loss ~~as follows:~~:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Stock option expense
   Selling, General & Administrative 1,870 1,880 10,856 3,944
   Research & Development 825 1,017 1,668 2,056
      Total stock option expense 2,695 2,897 12,524 6,000
RSU expense
   Selling, General & Administrative 7,982 1,666 17,035 2,473
   Research & Development 3,172 962 6,402 1,477
      Total RSU expense 11,154 2,628 23,437 3,950
PSU expense
Selling, General & Administrative $ 574 $ 0 $ 574 $ 0
Total PSU expense $ 574 $ 0 $ 574 $ 0
      Total stock-based compensation expense $ 14,423 $ 5,525 $ 36,535 $ 9,950


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Stock option and PSO expense

Selling, general and administrative	2,192		1,870		3,917		10,856
Research and development	731		825		1,416		1,668
Total stock option and PSO expense	2,923		2,695		5,333		12,524

RSU and PSU expense

Selling, general and administrative	6,458		8,556		12,025		17,609
Research and development	2,702		3,172		5,620		6,402
Total RSU and PSU expense	9,160		11,728		17,645		24,011
Total stock-based compensation expense	$	12,083	$	14,423	$	22,978	$	36,535

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of June 30, ~~2021,~~2022, the unrecognized stock-based compensation related to stock options and PSOs was ~~$28.9~~$20.3 million, and is expected to be recognized over a weighted-average period of ~~2.7~~1.9 years. At June 30, ~~2021,~~2022, the unrecognized stock-based compensation related to RSUs and PSUs was ~~$99.5~~$93.8 million, and is expected to be recognized over a weighted-average period of ~~3.1 years. As of June 30, 2021, the unrecognized stock-based compensation related to PSUs was $2.0 million and is expected to recognized over a weighted-average period of 0.9~~2.8 years.

~~(14)~~(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

~~Table of Contents~~

~~VIRGIN GALACTIC HOLDINGS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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 fair value of the warrant liability was determined using the Black-Scholes valuation methodology and the quoted price of the Company’s common stock in an active market, a Level 3 measurement. Volatility was based on the actual market activity of the Company’s peer group as well as the Company's historical volatility since the Virgin Galactic Business Combination. The expected life was based on the remaining contractual term of the warrants, and the risk free interest rate was based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life.

~~The Company calculated the estimated fair value of warrants using the following assumptions:~~


									~~As of~~
									~~June 30, 2021~~
~~Risk-free interest rate~~									~~0.53%~~
~~Contractual term~~									~~3.33 years~~
~~Expected volatility~~									~~85%~~


									~~As of~~
									~~December 31, 2020~~
~~Risk-free interest rate~~									~~0.25%~~
~~Contractual term~~									~~3.82 years~~
~~Expected volatility~~									~~80%~~

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, ~~2021~~2022 and December 31, ~~2020~~2021 at fair value on a recurring basis:


Fair Value Measurements as of June 30, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money market	$	206,870	$	—	$	—	$	206,870
Certificate of deposit	91,397		—		—		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.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Fair Value Measurements as of June 30, 2021
Level 1 Level 2 Level 3
(In thousands)
Assets:
Money Market $ 244,657 $ 0 $ 0
Certificate of Deposit 70,838 0 0
Cash Equivalents 200,364 0 0
Total assets at fair value $ 515,859 $ 0 $ 0
Liabilities:
Warrant Liability $ 0 $ 0 $ 100,347
Total Liabilities $ 0 $ 0 $ 100,347

Fair Value Measurements as of December 31, 2020
Level 1 Level 2 Level 3
(In thousands)
Assets:
Money Market $ 357,463 $ 0 $ 0
Certificate of Deposit 93,802 0 0
Cash Equivalents 200,364 0 0
Total asset at fair value $ 651,629 $ 0 $ 0
Liabilities:
Warrant Liability $ 0 $ 0 $ 135,440
Total Liabilities $ 0 $ 0 $ 135,440


Fair Value Measurements as of December 31, 2021
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Money Market	$	402,889	$	—	$	—	$	402,889
Certificate of Deposit	91,549		—		—		91,549
Corporate debt securities	—		380,881		—		380,881
Total assets at fair value	$	494,438	$	380,881	$	—	$	875,319

~~(15)~~(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, ~~2021,~~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 ~~2018, a~~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 ~~contractor employed through a third party staffing agency, alleged~~officers and directors on behalf of ~~himself~~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 ~~aggrieved employees~~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, 2 alleged shareholders filed separate derivative complaints purportedly on behalf of the ~~staffing agency, purportedly violated California state~~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.

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VIRGIN GALACTIC HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Shareholder Litigation Demand

~~wage and hour laws. In March 2020,~~On April 4, 2022, the Company ~~agreed to settle this matter for $1.9 million. For the three months ended June 30, 2021 and 2020,~~received a litigation demand from an alleged shareholder requesting that the Company ~~did 0t record additional~~take legal ~~settlement expense. There was 0 additional legal settlement expense recorded~~action against certain of our current and former officers and directors for ~~the six months ended June 30, 2021. For the six months ended June 30, 2020, the Company recorded an additional legal settlement expense~~breach of ~~approximately $0.2 million, which was recorded in selling, general~~fiduciary duty and ~~administrative expenses~~insider trading arising from substantially similar allegations as those contained in the ~~Condensed Consolidated Statements of Operations and Comprehensive Loss. As of June 30, 2021,~~securities class action described above. The Company is evaluating the ~~Company has an outstanding $1.9 million payable pending final court motions that has been delayed due to COVID-19. The settlement payment was made in full in July 2021.~~litigation demand.

~~(16)~~(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 ~~$1.5~~$1.1 million and ~~$1.0~~$1.5 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Defined contributions were $2.6 million and ~~$2.0~~$2.6 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

~~(17)~~(19) Supplemental Cash Flow Information
Six Months Ended June 30,
2021 2020
(As Restated)
(in thousands)
Supplemental disclosure
Cash payments for:
Income tax paid $ 58 $ 34
$ 58 $ 34
Schedule for noncash investing activities:
Unpaid property, plant, and equipment received $ 270 $ 1,287
$ 270 $ 1,287
Schedule for noncash financing activities:
Issuance of common stock through "cashless" warrants exercised $ 104,176 $ 360,742
Issuance of common stock through restricted stock units vested 27,320 0
Long-term debt 0 930
Unpaid deferred transaction costs 250 0
$ 131,746 $ 361,672


	Six Months Ended June 30,
	2022		2021

	(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 vested	7,440		27,320
Unpaid deferred transaction costs	—		250
	$	7,440	$	131,746

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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

~~(18) Subsequent Events~~

On July ~~12, 2021, we~~14, 2022, the Company entered into ~~a distribution agency~~an agreement ~~(the “Distribution Agency Agreement”) with Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC~~to lease 151,096 square feet of manufacturing and ~~Goldman Sachs & Co. LLC (each,~~operations facilities in Mesa, Arizona consisting of 2 hangars ("Hangar C" and "Hangar B").

The lease has an ~~“Agent”~~initial term of approximately ten years and ~~collectively,~~five months after the ~~“Agents”) providing for~~commencement date applicable to Hangar C or Hangar B, whichever is later, and is expected to commence ten months following the ~~offer and sale of up to $500.0 million of shares~~date of the ~~Company’s common stock, par value $0.0001 per share, through an "at~~agreement was entered into with respect to Hangar C and fifteen months following 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~~date of the ~~Agents, acting as principal.~~

~~On July 16, 2021, we completed~~agreement was entered into for Hangar B. The average annual base rent under the ~~ATM, generating $500.0 million in gross proceeds, before deducting $6.2 million in underwriting discounts and commissions, and other expenses payable by~~lease is approximately $3.0 million. The Company has 4 options to extend the ~~Company, through~~term of the ~~sale of 13,740,433 shares of common stock We intend to use the net proceeds generated from the ATM~~lease, each for general corporate purposes, including working capital, general and administrative matters and capital expenditures for our manufacturing capabilities, development of our spaceship fleet and other infrastructure improvements.

~~On July 19, 2021, the Company paid the $1.9 million legal settlement related to a former contractor employed through a third party staffing agency, as noted in~~ ~~15. Commitments and Contingencies~~.an additional five years.

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

Unless the context otherwise requires, all references in this section to the “Company,” "Virgin Galactic," “we,” “us,” or “our” refer to ~~the business of the Virgin Galactic Companies and their subsidiaries prior to the consummation of the Virgin Galactic Business Combination and~~ Virgin Galactic Holdings, Inc. and its subsidiaries after consummation of the Virgin Galactic Business Combination. Prior to the Virgin Galactic Business Combination and prior to the series of Vieco 10 reorganization steps, Galactic Ventures, LLC ("GV"), a wholly-owned subsidiary of Vieco 10, was the direct parent of the Virgin Galactic Companies.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 ~~Amendment No. 2 to~~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

~~Amendment No. 2 to~~ 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. ~~Less than 600~~Approximately 630 humans have ever traveled above the Earth’s atmosphere into ~~space to become officially recognized as astronauts, cosmonauts or taikonauts.~~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 ~~provide~~providing the foundation for a myriad of exciting new industries.

We are ~~a vertically integrated business built on top of~~ 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 ~~and~~to space in order to conduct experiments for scientific and ~~education~~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 ~~not only~~ has a desert climate with relatively predictable weather conditions preferable to support our spaceflights and it also has airspace that is restricted for surrounding ~~commercial~~general air traffic ~~that~~which facilitates frequent and consistent flight scheduling.

Our ~~primary mission~~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 ~~scientific~~ research experiments as part of NASA’s Flight Opportunities Program. This iswas the third time Virgin Galactic has flown technology experiments in the cabin on a spaceflight. This flight also completed the data submission to the ~~Federal Aviation Administration (“FAA”)~~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.

~~Table of Contents~~

Our flight in July ~~flight~~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.

Table of Contents

We believe that the market for commercial human spaceflight is significant and untapped. ~~We have~~As of June 30, 2022, we received reservations for approximately ~~600~~800 spaceflight tickets and collected ~~more than $80.0~~approximately $104.8 million in deposits from future astronaut deposits as of June 30, 2021. In February 2020, we launched our One Small Step campaign which allows interested individuals to place a $1,000 refundable registration deposit towards the cost of a future ticket once we reopen ticket sales and, as of June 30, 2021, there were approximately 1,000 participants in our One Small Step program from 66 countries. We retired the "One Small Step" program on December 31, 2020.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~~spaceship is a vehicle with the capacity to carry pilots and private astronauts, research experiments, orand researchers that travel with their experiments for human tended research flights into space and return them safely to Earth. ~~Fundamentally, the Spaceship is a rocket-powered aerospace vehicle that operates more like a plane than a traditional vertically launched rocket.~~ 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. ~~Spaceship’s~~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 mothership is a twin-fuselage, custom-built aircraft designed to carry 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 Spaceship does not have to rocket its way through the higher density atmosphere closest to the Earth’s surface as well as being a fully reusable spaceflight system.

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. ~~Prior to Virgin Galactic’s offering, researchers~~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 ~~per flight~~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. ~~VSS Unity~~Our spaceflight system is intended to provide the scientific research community access to space for affordable and repeatable ~~high-quality~~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 ~~as part of our contract with NASA under its~~through NASA's Flight Opportunities Program, and our flight in July ~~flight~~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 ~~future astronauts,~~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 ~~the section~~Part 1, Item 1A. of our ~~Amendment No. 2 to~~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

~~Table of Contents~~

We are in the final phases of developing our commercial spaceflight program. Prior to ~~commercialization,~~launch of commercial service, we must complete our test flight program, which includes a rigorous series of ground and flight tests, including our baseline spaceflight metrics, flight paths and safety protocol that will be used throughout our spaceflight program. Specifically, we are working towards a third test flight later this year which will be a revenue-generating flight with the Italian Air Force. We then expect to enter a period of planned maintenance and enhancements to the vehicles, ~~before we~~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.

We recently became 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.

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, ~~2021,~~2022, we had reservations for space flights for approximately ~~600~~800 future astronauts. In ~~February 2020,~~August 2021, following Sir Richard Branson's successful test flight, we ~~launched our One Small Step campaign which allowed interested individuals to place a $1,000 refundable registration deposit towards the cost of a future ticket once we reopen~~reopened ticket sales to a select group and asincreased the pricing of ~~December 31, 2020,~~our consumer offerings to a base price of $450,000 per seat. In February 2022, we ~~had received approximately 1,000 One Small Step deposits for approximately $1,000 from 66 countries before we retired the "One Small Step" program on December 31, 2020, but expect to reopen~~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 ~~2021.~~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 ~~face constraints of resources and competing demand for our human spaceflights. We~~ expect to commence commercial operations with a single ~~Spaceship,~~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 ~~various stages~~mid-2023, and private astronaut service as soon as the fourth quarter of ~~designing,~~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 ~~manufacturing two additional Spaceship vehicles.~~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 ~~problems,~~risks, such as manufacturing and design issues, ~~pilot~~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.

~~Impact of COVID-19~~

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

Consistent with the actions taken by governmental authorities, including US Federal, California, New Mexico and the United Kingdom, where most of our workforce is located, we have taken appropriately cautious steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, we initially reduced and then temporarily suspended on-site operations at our facilities in Mojave, California and Spaceport America, New Mexico and in our London office location in late March 2020. Starting March 2020, approximately two-thirds of our employees and contractors were able to complete their duties from home, which enabled much critical work to continue, including engineering analysis and drawing releases for VSS Unity, VMS Eve and the second Spaceship vehicle, process documentation updates, as well as workforce training and education. The remaining one-third of our workforce was unable to perform their normal duties from home. In April 2020, in accordance with our classification within the critical infrastructure designation, we resumed limited operations and under revised operational and manufacturing plans that conformed to the latest COVID-19 health precautions, at that time. Such actions included, although were not limited to universal facial covering requirements, rearranging facilities to follow social distancing protocols, conducting active daily temperature checks and undertaking regular

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and thorough disinfecting of work surfaces, tools and equipment. We also offered testing to employees and contractors for COVID-19 on a regular basis. As the pandemic has evolved, we have continued to follow US Federal, State and UK guidance, as applicable to our sites. However, the COVID-19 pandemic and the continued precautionary actions taken throughout 2020 and thus far during 2021 related to COVID-19 have adversely impacted, and are expected to continue to adversely impact, our operations, including the completion of the development of our spaceflight systems and our scheduled spaceflight test programs.

Beginning in the summer of 2020, all of our employees whose work requires them to be in our facilities returned back on-site, and we continue to follow Federal, State and international guidance as applicable, to ensure employee safety. We have, however, experienced, and expect to continue to experience, reductions in operational efficiency due to illness from COVID-19 and precautionary actions taken related to COVID-19. For the time being, we are encouraging those employees who are not required onsite and are able to work from home to continue doing.

The COVID-19 pandemic and the protocols and procedures we have implemented in response to the pandemic have caused and continue to cause delays to our business and operations, which has led to accumulated impacts to both schedule and cost efficiency and some delays in operational and maintenance activities, including delays in our test flight program. We expect this to continue. The full impact of the COVID-19 pandemic on our business and results of our future operations will depend on future developments, such as the ultimate duration and scope of the pandemic and its impact on our operations necessary to complete the development of our spaceflight systems, our scheduled spaceflight test programs and commencement of our commercial flights. In addition to existing travel restrictions, countries may continue to maintain or reimpose closed borders, impose prolonged quarantines, and/or further restrict travel. We believe our cash and cash equivalents on hand at June 30, 2021 and management's operating plan, will provide sufficient liquidity to fund our operations for at least the next twelve months from the issuance of the financial statements included in this Quarterly Report on Form 10-Q. If the pandemic worsens and we experience an additional delay, we may take additional actions, such as further reducing costs.

Component of Results of Operations

Revenue

To date, we have primarily generated revenue by transporting scientific commercial research and development payloads using our spaceflight systems and by providing engineering ~~services as a subcontractor to the primary contractor of a long-term contract with the U.S. government.~~services. We also have generated revenues from a sponsorship ~~arrangement.~~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.~~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.

~~Cost of Revenue~~Customer Experience

~~Costs of revenue~~Customer experience expenses related to ~~spaceflights includes costs 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, and maintenance. Cost of revenue~~crew. Customer experience expenses related to the payload ~~and~~cargo services, as well as engineering services, ~~consists~~consist of ~~expenses related to~~ materials and human capital, such as payroll and ~~benefits. Once we have completed~~benefits, to perform these services. Additionally, customer experience expenses include costs associated with maintaining and growing our ~~test flight program~~Future Astronaut community, as well as hospitality, medical, safety, security, training, and ~~commenced commercial operations, we will capitalize~~facility costs that are for the cost to construct any additional Spaceship vehicles. Cost of revenue will include vehicle depreciation once those spaceships are placed into service. We have not capitalized any spaceship development costs to date.

~~Gross Profit and Gross Margin~~

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

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; ~~depreciation expense and~~ rent relating to facilities, including a portion of the lease with Spaceport America, and equipment; professional fees; and other general corporate costs. Human

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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 ~~depreciation of facilities and equipment and~~ other overhead expenses allocated to the research and development departments.

As of June 30, ~~2021,~~2022, our current primary research and development objectives focus on the development of our ~~Mothership~~mothership and ~~Spaceship~~spaceship vehicles for commercial spaceflights and developing our ~~RocketMotor,~~rocket motor, a hybrid rocket propulsion system that will be used to propel our ~~Spaceship~~spaceship vehicles into space. The successful development of ~~Mothership, Spaceship~~mothership, spaceship and ~~RocketMotor~~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;~~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 ~~Spaceship and RocketMotor,~~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~~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 ~~Business Combination~~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.

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Interest Income ~~net~~

Interest income ~~net consists~~ primarily ofincludes interest earned on our cash and cash equivalents ~~held by us in~~and marketable securities.

Interest Expense

Interest expense consists of amortization of debt issuance costs and contractual interest ~~bearing demand deposit accounts and cash equivalents,~~expense for our 2027 Notes, as well as interest expense related to our finance lease obligations.

Other Income ~~net~~

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,
2021 2020 2021 2020
(In thousands)
Revenue $ 571 $ — $ 571 $ 238
Cost of revenue 63 — 63 173
Gross profit 508 — 508 65
Operating expenses:
Selling, general and administrative expenses 38,503 26,047 83,417 52,802
Research and development expenses 35,903 37,009 72,266 71,201
Operating loss (73,898) (63,056) (155,175) (123,938)
Change in fair value of warrants (20,363) (9,596) (69,082) (326,492)
Interest income, net 214 498 532 1,666
Other income 13 221 40 49
Loss before income taxes (94,034) (71,933) (223,685) (448,715)
Income tax benefit (expense) (6) (40) (49) 6
Net loss $ (94,040) $ (71,973) $ (223,734) $ (448,709)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Revenue	$	357	$	571	$	676	$	571

Operating expenses:
Customer experience	122		63		147		63
Selling, general and administrative	44,700		36,916		81,707		80,235
Research and development	62,340		34,619		114,167		69,708
Depreciation and amortization	2,915		2,871		5,767		5,740
Total operating expenses	110,077		74,469		201,788		155,746

Operating loss	(109,720)		(73,898)		(201,112)		(155,175)

Interest income	1,985		220		2,803		545
Interest expense	(3,157)		(6)		(5,631)		(13)
Change in fair value of warrants	—		(20,363)		—		(69,082)
Other income, net	194		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, ~~2021~~2022 Compared to the Three and Six Months Ended June 30, ~~2020~~2021

Revenue
Three Months Ended June 30, $
Change %
Change Six Months Ended June 30, $
Change %
Change
2021 2020 2021 2020
(In thousands, except %)
Revenue $ 571 $ — $ 571 100 % $ 571 $ 238 $ 333 140 %


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

We recorded ~~$0.6~~$0.4 million of revenue for the three months ended June 30, ~~2021,~~2022, compared to ~~no revenue~~$0.6 million for the three months ended June 30, ~~2020.~~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.

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We recorded ~~$0.6~~$0.7 million of revenue for the six months ended June 30, ~~2021,~~2022, compared to ~~$0.2~~$0.6 million revenue for the six months ended June 30, ~~2020.~~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. ~~Revenue recorded for the six months ended June 30, 2020 was related to engineering services provided under long-term U.S. government contracts that ended in early 2020.~~

~~Cost~~Table of ~~Revenue and Gross Profit~~Contents
Three Months Ended June 30, $
Change %
Change Six Months Ended June 30, $
Change %
Change
2021 2020 2021 2020
(In thousands, except %)
Cost of revenue $ 63 $ — $ 63 100 % $ 63 $ 173 $ (110) (64) %
Gross profit $ 508 $ — $ 508 100 % $ 508 $ 65 $ 443 682 %
Gross margin 89 % — % 89 % 27 %

Customer Experience


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	(In thousands, except %)
Customer experience	$	122	$	63	$	59	94	%	$	147	$	63	$	84	133	%

We recorded $0.1 million ~~cost~~ of ~~revenue~~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 ~~compared~~was primarily attributable to no cost of revenue for the three months ended June 30, 2020. We recorded $0.1 million cost of revenue for the six months ended June 30, 2021, compared to $0.2 million cost of revenue for the six months ended June 30, 2020. Cost of revenue primarily relates to the incremental costs related to the completion of payload services and labor costs provided for engineering services under long-term U.S. government contracts.

~~Gross profit increased by $0.5~~We recorded $0.1 million ~~or 100%,~~of customer experience expenses for the ~~three~~six months ended June 30, ~~2021, compared to~~2022 and 2021. Customer experience expenses for the ~~three~~six months ended June 30, ~~2020. Gross margin~~2022 was primarily attributable to costs to maintain our Future Astronaut community and labor costs provided for ~~the three months ended June 30, 2021 increased 100% compared to the three months ended June 30, 2020.~~

~~Gross profit increased by $0.4 million, or 682% to $0.5 million~~engineering services. Customer experience expenses for the six months ended June 30, 2021 ~~from $0.1 for the six months ended June 30, 2020. Gross margin for the six months ended June 30, 2021 increased 226% compared~~was primarily attributable to incremental costs related to the ~~six months ended June 30, 2020.~~completion of payload services and labor costs provided for engineering services under long-term U.S. government contracts.

Selling, General and Administrative ~~Expenses~~
Three Months Ended June 30, $
Change %
Change Six Months Ended June 30, $
Change %
Change
2021 2020 2021 2020
(In thousands, except %)
Selling, general and administrative expenses $ 38,503 $ 26,047 $ 12,456 48 % $ 83,417 $ 52,802 $ 30,615 58 %


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	(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 ~~$12.5~~$7.8 million, or ~~48%~~21%, to ~~$38.5~~$44.7 million for the three months ended June 30, ~~2021~~2022 from ~~$26.0~~$36.9 million for the three months ended June 30, ~~2020.~~2021. This increase was primarily due to a ~~$6.9 million increase in stock-based compensation and a $3.5~~$6.0 million increase in salary, bonus, and other employee benefits. In addition, there was a ~~$2.0~~$1.6 million increase in ~~marketing related~~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 ~~$30.6~~$1.5 million, or ~~58%~~2%, to ~~$83.4~~$81.7 million for the six months ended June 30, ~~2021~~2022 from ~~$52.8~~$80.2 million for the six months ended June 30, ~~2020.~~2021. This increase was primarily due to a ~~$22.0 million increase in stock-based compensation and a $9.4~~$7.4 million increase in salary, bonus, and other employee benefits. In addition there was a ~~$2.0~~$4.6 million increase in ~~marketing related~~consulting and legal fees, and a $1.8 million increase in software licensing and IT expenses. These increases were ~~partially~~ offset ~~with decreases of $2.9~~by a $12.5 million ~~of professional and legal fees.~~decrease in stock-based compensation.

Research and Development


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	(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~~
Three Months Ended June 30, $
Change %
Change Six Months Ended June 30, $
Change %
Change
2021 2020 2021 2020
(In thousands, except %)
Research and development expenses $ 35,903 $ 37,009 $ (1,106) (3) % $ 72,266 $ 71,201 $ 1,065 1 %

Research and development expenses ~~decreased~~increased by ~~$1.1~~$44.5 million, or 3%64%, to ~~$35.9~~$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
	2022	2021					2022	2021
	($ in thousands)						(In thousands, except %)
Depreciation and amortization	2,915	2,871	$	44	2	%	5,767	5,740	$	27	—	%

Depreciation and amortization expense was $2.9 million for the three months ended June 30, ~~2021 from $37.0~~2022, an increase of less than $0.1 million for the three months ended June 30, 2020. The decrease was primarily due a $5.0 million decrease in contract labor associated with the development our spaceflight system. This decrease was partially offset by increases of $2.0 million of stock-based compensation and $2.0 million in salaries, bonus and other benefits both primarily driven by the addition of key executive leadership.when compared to 2021.

~~Research~~Depreciation and ~~development expenses increased by $1.1 million, or 1%, to $72.3~~amortization expense was $5.8 million for the six months ended June 30, ~~2021 from $71.2~~2022, an increase of less than $0.1 million ~~for the six months ended June 30, 2020. The increase was primarily due~~when compared to a $6.0 million increase in salaries, bonus, and other benefits and a $4.5 million increase in stock-based compensation both primarily driven by the addition of key executive leadership. These increases were partially offset by a decrease of $11.0 million in contract labor associated with the development our spaceflight system.2021.

Change in the Fair Value of Warrants

Three Months Ended June 30, $
Change %
Change Six Months Ended June 30, $
Change %
Change
2021 2020 2021 2020
($ in thousands) (In thousands, except %)
Change in fair value of warrants $ (20,363) $ (9,596) $ (10,767) 112 % $ (69,082) $ (326,492) $ 257,410 (79) %


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	($ 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. ~~Certain~~No warrants ~~issued as part of~~were outstanding during the ~~Company's initial public offering in 2017~~three and assumed upon the consummation of 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.six month period ended June 30, 2022.

Interest Income ~~net~~
Three Months Ended June 30, $
Change %
Change Six Months Ended June 30, $
Change %
Change
2021 2020 2021 2020
(In thousands, except %)
Interest income, net $ 214 $ 498 $ (284) (57) % $ 532 $ 1,666 $ (1,134) (68) %


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	(In thousands, except %)
Interest income	$	1,985	$	220	$	1,765	802	%	$	2,803	$	545	$	2,258	414	%

Interest income ~~decreased~~increased by ~~$0.3~~$1.8 million, or ~~57%~~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 from $0.5 million for the three months ended June 30, 2020.~~2021.

Interest income ~~decreased~~increased by ~~$1.1~~$2.3 million, or ~~68%~~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 from $1.7 million for the six months ended June 30, 2020.~~2021.

~~The decrease was~~These increases are primarily due to ~~significant reductions in~~ interest ~~rates offered for cash, cash equivalents and restricted cash being held in interest-bearing accounts.~~earned on marketable securities.

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~~Other Income, net~~Interest Expense

~~The changes in other income~~


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	(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 ~~and~~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, ~~2021~~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
	2022		2021						2022		2021
	($ 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, ~~2020 were not material and were primarily attributable~~2022, an increase of less than $1.0 million when compared to ~~the net unrealized losses on marketable securities.~~2021.

Income Tax ~~(Expense) Benefit~~Expense


	Three Months Ended June 30,				$ Change		% Change		Six Months Ended June 30,				$ Change		% Change
	2022		2021						2022		2021
	($ in thousands)								(In thousands, except %)
Income tax expense	$	23	$	6	$	17	283	%	$	48	$	49	$	(1)	(2)	%

Income tax ~~(expense) benefit~~expense was immaterial for the three and six months ended June 30, ~~2021~~2022 and ~~2020.~~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

Prior to the consummation of the Virgin Galactic Business Combination, our operations historically participated in cash management and funding arrangements managed by Vieco 10 and GV. Only cash and cash equivalents held in bank accounts legally owned by entities dedicated to us are reflected in the ~~Condensed Consolidated Balance Sheets~~. Cash and cash equivalents held in bank accounts legally owned by Vieco 10 and GV were not directly attributable to us for any of the periods presented. Transfers of cash, both to and from Vieco 10 and GV by us have been reflected as a component of net parent investment and membership equity in the ~~Condensed Consolidated Balance Sheets~~ ~~and as a financing activity on the accompanying~~ ~~Condensed Consolidated Statements of Cash Flows~~.

As of June 30, ~~2021,~~2022, we had cash, cash equivalents and restricted cash of ~~$565 million. From the time of our inception to~~$370.1 million and $752.5 million in marketable securities. Since the consummation of ~~the Virgin Galactic Business Combination, we financed~~ our ~~operations and capital expenditures through cash flows financed by Vieco 10 and GV. Our~~business combination transaction in 2019, our principal sources of liquidity ~~following the Virgin Galactic Business Combination~~ have ~~been~~come from ~~the October 2019 investment by an entity affiliated with the Boeing Company and~~our sales of our common ~~stock.~~stock and offering of convertible senior notes ("2027 Notes").

~~As noted~~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 1811 in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q ~~we completed~~for additional information on the ~~ATM, generating $493.7 million in net proceeds, through the sale~~2027 Capped Calls.

Table of 13,740,433 shares of common stock. We intend to use the net proceeds generated from the ATM for general corporate purposes, including working capital, general and administrative matters and capital expenditures for our manufacturing capabilities, development of our spaceship fleet and other infrastructure improvements.Contents

Historical Cash Flows


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
				(As restated)
		(In thousands)					(In thousands)
Net cash (used in) provided by	Net cash (used in) provided by					Net cash (used in) provided by
Operating activities	Operating activities	(113,472)		$	(108,087)	Operating activities	$	(152,960)	$	(113,472)
Investing activities	Investing activities	(1,647)		(9,940)		Investing activities	(385,547)		(1,647)
Financing activities	Financing activities	819		(1,516)		Financing activities	358,541		819
Net change in cash and cash equivalents and restricted cash	Net change in cash and cash equivalents and restricted cash	$	(114,300)	$	(119,543)	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 ~~consisting~~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 ~~$1.1 million of cash consumed by working capital.~~

Net cash used in operating activities was $108.1 million for the six months ended June 30, 2020, primarily consisting of $448.7 million of net losses, adjusted for non-cash items, which primarily included depreciation and amortization expense of

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~~$4.5 million, stock based compensation expense of $10.0 million, and change in fair value of warrants of $326.5 million, as well as~~ a ~~$0.4~~$1.1 million increase in cash consumed by working capital.

Investing Activities

Net cash used in investing activities was ~~$1.6~~$385.5 million for the six months ended June 30, ~~2021,~~2022, which primarily ~~consisting~~consisted of ~~the completion of construction activities at the Gateway to Space facility and~~$379.3 million purchases of ~~IT infrastructure and tooling and manufacturing equipment.~~marketable securities, as well as $6.3 million in capital expenditures.

Net cash used in investing activities was ~~$9.9~~$1.6 million for the six months ended June 30, ~~2020,~~2021, which primarily ~~consisting~~consisted of ~~construction activities at the Gateway to Space facility, IT infrastructure purchases, and the purchase of tooling and manufacturing equipment.~~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, ~~consisting~~which primarily consisted of net cash proceeds from issuance of common stock, offset by tax withholdings for stock options exercised.

Net cash used in financing activities was $1.5 million for the six months ended June 30, 2020, consisting primarily of cash consumed by professional and other fees related to financing transaction costs.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue to advance the development of our spaceflight system and the commercialization of our human spaceflight operations. In addition, we expect ~~cost of revenue~~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 ~~supersonic and hypersonic~~on point-to-point travel;

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•hire additional personnel in research and development, manufacturing operations, testing programs, maintenance operations and ~~maintenance~~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 ~~a period of time,~~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,~~spaceship, we currently have ~~two~~ additional ~~Spaceship~~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 ~~have achieved~~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.”

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Contractual Obligations and Commitments

Except as set forth in Note 1517, 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 ~~Amendment No. 2 to~~Annual Report on Form ~~10-K~~10-K. Additionally, in some cases, we have entered arrangements with third-party providers for services, such as the ~~year ended December 31, 2020, filed~~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 ~~SEC on May 10, 2021.~~applicable counterparty, are subject to future negotiations and cannot be estimated with reasonable certainty.

~~Off-Balance Sheet Arrangements~~

We do not engage in any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities.

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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 ~~report.~~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 ~~warrant liability.~~2027 Notes. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Risk

~~Cash,~~We had cash, cash equivalents and ~~restricted~~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 ~~consist solely of~~and cash equivalents are held ~~in depository accounts~~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 ~~as such~~our investment portfolio are ~~not affected by either an increase or decrease~~subject to market risk due to changes in interest rates. ~~We consider~~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 ~~highly liquid investments~~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 ~~maturity~~fixed annual interest rate of ~~three months or less as cash equivalents.~~ 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, 2021, we had $565 million deposits held primarily in cash, cash equivalents and restricted cash, which includes $552 million in cash equivalents. Cash equivalents are short term investments and would not be significantly impacted by changes in the interest rates. We believe that2022, a ~~10% increase or decrease~~hypothetical 100 basis point change in interest rates would not have had a material ~~effect~~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 ~~or expense.~~(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

~~Remediation of Material Weakness in Internal Control~~

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As of the filing of this Quarterly Report on Form 10-Q, management has completed the implementation of our remediation efforts of the material weakness related to accounting for warrants issued as part of the Virgin Galactic Business Combination as previously reported. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Our remediation efforts included requiring the formalized consideration of obtaining additional technical guidance prior to concluding on significant or unusual transactions. These additional considerations include items such as obtaining additional accounting pronouncements or performing consultations with third party accounting specialists, authoritative bodies or regulators.

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~~Chief Executive Officer and ~~chief financial officer, has~~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 ~~the information described above in this Item 4, our chief executive officer and chief financial officer~~Chief Financial Officer concluded that, as of June 30, ~~2021,~~2022, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

~~Other than described above in this~~ ~~Item 4, there has been~~There were no ~~change~~changes in our internal control over financial reporting ~~(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)~~ during the three months ended June 30, ~~2021~~2022 that ~~has~~have materially affected, or isare 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, ~~including the matter described under~~ ~~Item 1A., Risk~~ ~~Factors in this Quarterly Report,~~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, ~~in addition to the risk factor included below,~~ see the risk factors previously disclosed in Part I, Item 1. “Business,” Part I, Item 1A. ~~"Risk Factors"~~“Risk Factors,” and Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" of our ~~Amended~~ Annual Report on Form ~~10-K/A, which risk factor section is incorporated herein by reference.~~

~~Litigation~~10-K and in ~~which we are or may become involved may materially adversely affect us.~~

~~From time to time, we may become involved~~Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in ~~various legal proceedings relating to matters incidental~~this Quarterly Report on Form 10-Q. There have been no material changes to the ~~ordinary course of~~risk factors disclosed our business, including intellectual property, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. In May 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, alleging, among other things, that we made false and misleading statements regarding the accounting treatment of warrants to purchase shares of our common stock, which resulted in the restatement of our financial statements as of and for the years ended December 31, 2020 and 2019. This matter or other such matters may be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability or require us to change our business practices, even if we believe the claims asserted against us are without merit. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effectAnnual Report on ~~our business.~~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 Description Form File No. Exhibit Filing Date Filed/Furnished Herewith
2.1(1)
Agreement and Plan of Merger, dated July 9, 2019, by and among the Registrant, Vieco 10 Limited, Foundation Sub 1, Inc., Foundation Sub 2, Inc., Foundation Sub LLC, TSC Vehicle Holdings, Inc., Virgin Galactic Vehicle Holdings, Inc. and Virgin Galactic Holdings, LLC
8-K/A 001-38202 2.1 07/11/2019
2.1(a)(1)
Amendment No. 1 to Agreement and Plan of Merger, dated October 2, 2019, by and among the Registrant, Vieco 10 Limited, Foundation Sub 1, Inc., Foundation Sub 2, Inc., Foundation Sub LLC, TSC Vehicle Holdings, Inc., Virgin Galactic Vehicle Holdings, Inc., Virgin Galactic Holdings, LLC and Vieco USA, Inc.
S-4 333-233098 2.1(a) 10/03/2019
3.1
Certificate of Incorporation of the Registrant
8-K 001-38202 3.1 10/29/2019
3.2
By-Laws of the Registrant
8-K 001-38202 3.2 10/29/2019
4.1
Specimen Common Stock Certificate of the Registrant
8-K 001-38202 4.2 10/29/2019
10.1
Amended No. 2 Non-Employee Director Compensation Program
10-Q 001-38202 10.2 05/10/2021
10.2
Form of Director Restricted Stock Unit Award (Annual Award)
10-Q 001-38202 10.4 05/10/2021
10.3
Letter Agreement to Amend Facilities Lease, dated December 21, 2018, by and between Virgin Galactic, LLC and New Mexico Spaceport Authority.
10-Q 001-38202 10.5 05/10/2021
31.1
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
31.2
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**
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 *
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) *

Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/Furnished Herewith

2.1(1)

Agreement and Plan of Merger, dated July 9, 2019, by and among the Registrant, Vieco 10 Limited, Foundation Sub 1, Inc., Foundation Sub 2, Inc., Foundation Sub LLC, TSC Vehicle Holdings, Inc., Virgin Galactic Vehicle Holdings, Inc. and Virgin Galactic Holdings, LLC

8-K/A

001-38202

2.1

07/11/2019

2.1(a)(1)

Amendment No. 1 to Agreement and Plan of Merger, dated October 2, 2019, by and among the Registrant, Vieco 10 Limited, Foundation Sub 1, Inc., Foundation Sub 2, Inc., Foundation Sub LLC, TSC Vehicle Holdings, Inc., Virgin Galactic Vehicle Holdings, Inc., Virgin Galactic Holdings, LLC and Vieco USA, Inc.

S-4

333-233098

2.1(a)

10/03/2019

3.1

Certificate of Incorporation of the Registrant

8-K

001-38202

3.1

10/29/2019

3.2

By-Laws of the Registrant

8-K

001-38202

3.2

10/29/2019

10.1(2)(3)

Master Agreement, dated July 5, 2022, by and between the Registrant and Aurora Flight Sciences Corporation

31.1

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

**Furnished herewith.

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**~~Furnished herewith.~~

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

(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 ~~5, 2021~~4, 2022		/s/ Michael Colglazier
	Name:	Michael Colglazier
	Title:	Chief Executive Officer (Principal Executive Officer)

Date: August ~~5, 2021~~4, 2022		/s/ Douglas Ahrens
	Name:	Douglas Ahrens
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

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	Public Warrants	Private Placement Warrants	Total
	(In thousands)
Warranty Liability at December 31, 2019	77,050	47,280	124,330
Redemption/Exercise of Warrants	(341,001)	0	(341,001)
Change in Fair Value	283,296	33,600	316,896
Warrant Liability at March 31, 2020	19,345	80,880	100,225
Redemption/Exercise of Warrants	(19,741)	0	(19,741)
Change in Fair Value	396	9,200	9,596
Warrant Liability at June 30, 2020	0	90,080	90,080

Warranty Liability at December 31, 2020	0	135,440	135,440
Change in Fair Value	0	48,719	48,719
Warrant Liability at March 31, 2021	0	184,159	184,159
Redemption/Exercise of Warrants	0	(104,175)	(104,175)
Change in Fair Value	0	20,363	20,363
Warrant Liability at June 30, 2021	0	100,347	100,347


	Operating Leases		Finance Leases
	(In thousands)
2021 (for the remaining period)	$	4,948	$	157
2022	4,001		119
2023	3,969		79
2024	3,891		0
2025	3,833		0
Thereafter	28,936		0
Total lease payments	$	49,578	$	355
Less:
Imputed interest/present value discount	(23,739)		$	(33)
Present value of lease liabilities	$	25,839	$	322


	Shares	Weighted Average Fair Value
Outstanding at December 31, 2020	4,760,784	$	19.63
Granted	680,784	40.41
Vested	(709,404)	16.20
Forfeited	(713,766)	16.72
Outstanding at June 30, 2021	4,018,398	$	24.21


	Shares	Weighted Average Fair Value
PSUs outstanding at December 31, 2020	0	$	0
Granted	84,626	29.88
PSUs outstanding at June 30, 2021	84,626	$	29.88