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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  
Commission File No. 001-38202
Virgin Galactic Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
85-3608069
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
166 North Roadrunner Parkway, Suite 1C
Las Cruces, New Mexico
88011
(Address of Principal Executive Offices)(Zip Code)
(575) 424-2100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No
As of May 5, 2021, there were 240,712,527 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


1

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PART I. FINANCIAL INFORMATION

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

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements (including within the meaning of the Private Securities Litigation Reform Act of 1995) concerning us and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of management, as well as assumptions made by, and information currently available to management. Forward-looking statements may be accompanied by words such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or similar words, phrases or expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:
our ability to achieve or maintain profitability;
our ability to effectively market and sell human spaceflights;
the development of the markets for commercial human spaceflight and commercial research and development payloads;
any delay in completing the flight test program and final development of our spaceflight system, which is comprised of our SpaceShipTwo Spaceship, VSS Unity, and our 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, and our access to additional financing;
the safety of our spaceflight systems;
our ability to convert our backlog or inbound inquiries into revenue;
our ability to conduct test flights;
our anticipated full passenger capacity;
delay in development or the manufacture of spaceflight systems;
our ability to supply our technology to additional market opportunities;
our expected capital requirements and the availability of additional financing;
our ability to attract or retain highly qualified personnel, including in accounting and finance roles;
extensive and evolving government regulation that impact the way we operate;
risks associated with international expansion;
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 (the “Amended Annual Report on Form 10-K/A”) and in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited, and we cannot guarantee future results. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
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VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
March 31, 2021December 31, 2020
(Unaudited)(As Restated)
Assets
Current assets
Cash and cash equivalents$616,625 $665,924 
Restricted cash13,031 13,031 
Inventories30,187 30,483 
Prepaid expenses and other current assets14,486 18,489 
Total current assets674,329 727,927 
Property, plant, and equipment, net50,936 53,148 
Other non-current assets22,762 22,915 
Total assets$748,027 $803,990 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$3,738 $5,998 
Accrued liabilities28,351 22,982 
Customer deposits83,015 83,211 
Other current liabilities2,981 2,830 
Total current liabilities118,085 115,021 
Non-current liabilities:
Warrant liability184,159 135,440 
Other long-term liabilities25,939 26,451 
Total liabilities$328,183 $276,912 
Commitments and contingencies (Note 16)
Stockholders' Equity
Preferred stock, $0.0001 par value; 10,000,000 authorized; none issued and outstanding
$  
Common stock, $0.0001 par value; 700,000,000 shares authorized; 237,274,430 and 236,123,659 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
23 23 
Additional paid-in capital1,320,228 1,297,794 
Accumulated deficit(900,438)(770,744)
Accumulated other comprehensive income31 5 
Total stockholders' equity419,844 527,078 
Total liabilities and stockholders' equity$748,027 $803,990 

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 March 31,
20212020
(As restated)
Revenue$ $238 
Cost of revenue 173 
Gross profit 65 
Selling, general, and administrative expenses44,914 26,755 
Research and development expenses36,363 34,282 
Operating loss(81,277)(60,972)
Change in fair value of warrants(48,719)(316,896)
Interest income (expense), net318 1,168 
Other income (expense), net27 (172)
Loss before income taxes(129,651)(376,872)
Income tax benefit (expense)(43)46 
Net loss(129,694)(376,826)
Other comprehensive loss:
Foreign currency translation adjustment27 (54)
Total comprehensive loss$(129,667)$(376,880)
Net loss per share:
Basic and diluted$(0.55)$(1.86)
Weighted-average shares outstanding:
Basic and diluted234,191,636 202,409,552 

See accompanying notes to condensed consolidated financial statements.
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Table of Contents
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(In thousands except for per unit and share data)
(Unaudited)
(As restated for the period ended March 31, 2020)
Member's EquityPreferred StockCommon Stock
Net Parent
Investment
UnitsMember's Capital# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2019$  $  $ 196,001,038 $20 $469,008 $(125,857)$59 $343,230 
Net loss— — — — — — — — (376,826)— (376,826)
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     209,240,972 21 814,433 (502,683)5 311,776 

Member's EquityPreferred StockCommon Stock
Net Parent
Investment
UnitsMember's Capital# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2020$  $  $ 236,123,659 $23 $1,297,794 $(770,744)$5 $527,078 
Net loss— — — — — — — — (129,694)— (129,694)
Other comprehensive loss— — — — — — — — — 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 

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)
Three Months Ended March 31,
20212020
(As restated)
Cash flows from operating activities
Net loss$(129,694)$(376,826)
Stock-based compensation22,111 4,425 
Depreciation and amortization2,869 2,105 
Change in fair value of warrant liability48,719 316,896 
Other operating activities, net10 1 
Change in assets and liabilities
Inventories296 (1,980)
Other current and non-current assets3,692 2,142 
Accounts payable and accrued liabilities3,322 (2,978)
Customer deposits(196)(98)
Other current and non-current liabilities102  
Net cash used in operating activities(48,769)(56,313)
Cash flows from investing activity
Capital expenditures(819)(4,036)
Cash used in investing activity(819)(4,036)
Cash flows from financing activities
Payments of finance lease obligations(34)(23)
Proceeds from issuance of common stock pursuant to stock options exercised10,837  
Transaction costs (697)
Withholding taxes paid on behalf of employees on net settled stock-based awards(10,514) 
Net cash provided by (used in) financing activities289 (720)
Net decrease in cash and cash equivalents(49,299)(61,069)
Cash, cash equivalents and restricted cash at beginning of period678,955 492,721 
Cash, cash equivalents and restricted cash at end of period$629,656 $431,652 
Cash and cash equivalents$616,625 $419,374 
Restricted cash13,031 12,278 
Cash, cash equivalents and restricted cash$629,656 $431,652 

See accompanying notes to condensed consolidated financial statements.
7

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





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

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

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

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

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




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 March 31, 2021 will depend on future developments, such as the ultimate duration and scope of the outbreak and its impact on our operations necessary to complete the development of our spaceflight systems, our scheduled spaceflight test programs and commencement of our commercial flights. In addition to existing travel restrictions, countries may continue to maintain or reimpose closed borders, impose prolonged quarantines, or further restrict travel. We believe our cash and cash equivalents on hand at March 31, 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.

Restatement of Previously Issued Financial Statements

As previously disclosed in Amendment No. 2 to our Annual Report on Form 10-K/A for the year ended December 31, 2020, 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 unaudited condensed financial statements for the three month period ended March 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 WarrantsTotal
(In thousands)
Warrant Liability at December 31, 2019$77,050 $47,280 $124,330 
Redemption/Exercises of Warrants(341,001) (341,001)
Change in Fair Value283,296 33,600 316,896 
Total liability at fair value as of March 31, 2020$19,345 $80,880 $100,225 

Public Warrants Private Placement WarrantsTotal
(In thousands)
Warrant Liability at December 31, 2020$ $135,440 $135,440 
Change in Fair Value 48,719 48,719 
Total liability at fair value as of March 31, 2021$ $184,159 $184,159 
(2)     Summary of Significant Accounting Policies

(a)    Basis of Presentation
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




These condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the 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.
(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 cost of revenue, useful lives of property, plant and equipment, net, accrued liabilities, income taxes including deferred tax assets and liabilities and impairment valuation, warrants, stock-based awards and contingencies.
(c)     Other Summary of Significant Accounting Policies
There have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the Company's Amendment No. 2 to its Annual Report on Form 10-K/A.
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 its Annual Report on Form 10-K/A for the year ended December 31, 2020. Interim results are not necessarily indicative of the results for a full year.
(3)    Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”).

The Company considers the applicability and impact of all ASUs and continues to monitor new accounting pronouncements issued by the FASB. We do not believe any accounting pronouncements issued through the date of this report will 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 $0.04 million per quarter, prior to the
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




commercial launch date. Sponsorship royalties payable are 25% of sponsorship revenue. We paid license and royalty fees of $0.04 million and $0.06 million for the three months ended March 31, 2021 and 2020, respectively.

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 GV for operations-related functions based on an allocation methodology that considers our headcount, unless directly attributable to the business. Operating expense allocations include use of machinery and equipment, pilot services, and other general administrative expenses. We were allocated $0.04 million and $0.14 million of operating expenses, net, from VOH for the three months ended March 31, 2021 and 2020, respectively. The Company has a receivable (payable) to VOH of $ million and $(0.8) million as of March 31, 2021 and December 31, 2020, respectively.
(5)    Inventory
As of March 31, 2021 and December 31, 2020, inventory is comprised of the following:
As of
March 31, 2021December 31, 2020
(Unaudited)
(In thousands)
Raw Materials$22,514 $22,963 
Spare parts7,673 7,520 
Total inventory
$30,187 $30,483 

For the three months ended March 31, 2021 and March 31, 2020, we wrote off $0.1 million and $1.1 million of inventory due to excess and obsolescence, respectively.
(6)    Property, Plant, and Equipment, net
As of March 31, 2021 and December 31, 2020, property, plant, and equipment, net consists of the following:
As of
March 31, 2021December 31, 2020
(Unaudited)
(In thousands)
Buildings$9,118 $9,142 
Leasehold improvements28,808 28,744 
Aircraft195 195 
Machinery and equipment35,287 34,330 
IT software and equipment22,446 22,042 
Construction in progress977 1,780 
96,831 96,233 
Less accumulated depreciation and amortization
(45,895)(43,085)
Property, plant, and equipment, net
$50,936 $53,148 

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




Total depreciation and amortization for the three months ended March 31, 2021 and 2020 was $2.9 million and $2.1 million, respectively, of which $1.3 million and $0.9 million was recorded in research and development expense, respectively.

(7)     Leases
The Company's leases are more fully described in Note 8 of the "Notes to Consolidated Financial Statements" to its Annual Report on Form 10-K/A Amendment No. 2.

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

Three Months Ended
March 31,
20212020
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $1,260 $1,152 
Short-term lease expense12 97 
Finance Lease Cost:
Amortization of right-of-use assets
34 27 
Interest on lease liabilities7 9 
Total finance lease cost41 36 
Variable lease cost1,338 348 
Total lease cost$2,651 $1,633 

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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of supplemental cash flow information related to leases for the period are as follows:
Three Months Ended March 31,
20212020
(In thousands, except term and rate data)
Cash flow information:
Operating cash flows for operating leases$1,310 $1,312 
Operating cash flows for finance leases$7 $9 
Financing cash flows for finance leases
$34 $23 
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
Operating leases$180 $1,658 
Finance Leases$ $23 
Other Information:
Weighted average remaining lease term:
Operating leases (in years)12.5312.75
Finance leases (in years)2.663.71
Weighted average discount rates:
Operating leases11.68 %11.65 %
Finance leases8.40 %9.11 %
The supplemental balance sheet information related to leases for the period is as follows:
As of
March 31, 2021December 31, 2020
(Unaudited)
(In thousands)
Operating leases
Long-term right-of-use assets$19,240 $19,555 
    Short-term operating lease liabilities$2,461 $2,384 
    Long-term operating lease liabilities23,713 24,148 
Total operating lease liabilities$26,174 $26,532 

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 March 31, 2021 are as follows:
Operating LeasesFinance
Leases
(In thousands)
2021 (for the remaining period)$5,331 $157 
20223,880 121 
20233,836 91 
20243,833 7 
20253,833  
Thereafter29,894  
Total lease payments$50,607 $376 
Less:
Imputed interest/present value discount(24,434)$(37)
Present value of lease liabilities$26,173 $339 
(8) Other Current and Non-current Assets
A summary of the components of other assets are as follows:
As of
March 31, 2021December 31, 2020
(Unaudited)
(In thousands)
Prepaid expense $13,657 $17,949 
Accounts receivable829 470 
Other current assets 70 
    Total other current assets$14,486 $18,489 
Right-of-use assets$19,565 $19,914 
Other non-current assets3,197 3,001 
    Total other non-current assets $22,762 $22,915 

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




(9)    Accrued Expenses
A summary of the components of accrued liabilities are as follows:
As of
March 31, 2021December 31, 2020
(Unaudited)
(In thousands)
Accrued payroll$7,082 $4,060 
Accrued vacation5,000 4,624 
Accrued bonus9,646 6,892 
Accrued inventory436 950 
Other accrued expenses6,187 6,456 
Total accrued expenses$28,351 $22,982 

(10)    Long-term Debt
As of
March 31, 2021December 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 March 31, 2021 are as follows:
(In thousands)
2021 (for the remaining period)310 
2022310 
$620 

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

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




(11)    Income Taxes
Income tax expense (benefit) was $(0.04) million and 0.05 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate was nil for three months ended March 31, 2021 and 2020. 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.
(12)    Stockholders' Equity

There have been no significant changes from the Stockholders' Equity disclosed in Note 11 of the “Stockholders Equity” included in the Amendment No. 2 to our Annual Report on Form 10-K/A other than the issuance of common stock and redemption of warrants as noted below.

Issuance of Common Stock

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

Stockholders' Agreement

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

Warrants and Warrant Redemption
Public warrants were initially issued as part of SCH's initial public offering in 2017 and assumed upon the consummation of the Business Combination. As of March 31, 2021, and December 31, 2020, there were no public warrants outstanding. As of both March 31, 2021 and December 31, 2020, there were 8,000,000 warrants outstanding that were issued in a private placement simultaneously with the Company’s initial public offering (the “private placement warrants”).

Under the terms of the warrant agreement (the “Warrant Agreement”) between us and Continental Stock     Transfer & Trust Company, as warrant agent, the public warrants became exercisable on a cashless basis on January 27, 2020, based on the exchange ratio as calculated under the Warrant Agreement at the time of the exercise. On March 13, 2020 and pursuant to the terms of the Warrant Agreement, we announced that all public warrants that remained unexercised immediately after 5:00 p.m. New York City time on April 13, 2020 (the “Redemption Date”) would be redeemed for $0.01 per warrant. Warrant holders could exercise their public warrants at any time from March 13, 2020 and prior to the Redemption Date on a cashless basis, and receive 0.5073 shares of common stock per public warrant surrendered for exercise. Immediately after the Redemption Date, 295,305 public warrants remained unexercised and were redeemed at a redemption price of $0.01 per public warrant in accordance with the terms of the Warrant Agreement. The private placement warrants were not subject to the redemption and remain outstanding as of March 31, 2021.

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 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 income (expense) of approximately $(48.7) million and (316.9) million
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




for the three months ended March 31, 2021 and 2020, respectively. The fair value of the warrant liability is approximately $184.2 million and $135.4 million as of March 31, 2021 and December 31, 2020, respectively. The private placement warrants are classified as Level 3 financial instruments. See Note 15. Fair Value Measurements.

(13 )     Earnings per Share
The following table presents net loss per share and related information:
Three Months Ended March 31,
20212020
(As Restated)
(In thousands, except for share and per share data)
Basic and diluted:
     Net loss$(129,694)$(376,826)
     Weighted average shares of common stock outstanding234,191,636 202,409,552 
     Basic and diluted net loss per share$(0.55)$(1.86)
As of March 31, 2021 and March 31, 2020, the Company has excluded the potential effect of warrants to purchase shares of common stock totaling 8,000,000 and 10,419,699, 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 our Annual Report on Form 10-K/A, in the calculation of diluted loss per share, as the effect would be anti-dilutive due to losses incurred.
(14)    Stock-Based Compensation
The Company's 2019 Incentive Award Plan ("2019 Plan") is more fully described in Note 13 of the "Notes to Consolidated Financial Statements" in the 2019 Annual Report on Form 10-K. Under the 2019 Plan, the Company has the ability to grant incentive stock options, non-qualified stock options and RSUs to employees, directors and other service providers. Twenty five percent of such stock options cliff vest at the grant dates first anniversary and will ratably vest monthly over the next three years, subject to continued employment on each vesting date. Vested options will be exercisable at any time until ten years from the grant date, subject to earlier expiration under certain terminations of service and other conditions. The stock options granted have an exercise price equal to the closing stock price of our common stock on the grant date.

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




The following table sets forth the summary of options activity under the 2019 Plan (dollars in thousands except per share data):
Number of SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
Options outstanding at December 31, 20206,796,045 $13.59 8.6468,888 
Granted  
Exercised(832,880)13.01 
Forfeited options(532,866)13.93 
Options outstanding at March 31, 20215,430,299 $13.65 8.8892,212 
Options exercisable at March 31, 20211,811,328 $13.47 7.4131,082 
__________________
(1) Aggregate intrinsic value is calculated based on the difference between our closing stock price at period end and the     exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised all their options on the period end date.


Restricted Stock Units
The RSUs vest over four years with 25% cliff vest at the first year anniversary of the grant date and ratably over the next three years.

RSU activity during the year ended December 31, 2020 was as follows:

The following table sets forth the summary of RSUs activity under the 2019 Plan (dollars in thousands except per share data):
SharesWeighted Average Fair Value
Outstanding at December 31, 20204,760,784 $19.63 
Granted567,255 41.74 
Vested(570,936)16.72 
Forfeited(598,982)16.42 
Outstanding at March 31, 20214,158,121 $23.51 

Stock options and RSUs expenses are included in selling, general and administrative and research and development expense in the condensed consolidated statements of operations and comprehensive loss, related to stock
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




options and RSUs is as follows:
Three Months Ended March 31,
20212020
Stock option expense
   Selling, General & Administrative8,986 2,064 
   Research & Development843 1,040 
      Total stock option expense9,829 3,104 
RSU expense
   Selling, General & Administrative9,052 806 
   Research & Development3,230 515 
      Total RSU expense12,282 1,321 
      Total stock-based compensation expense$22,111 $4,425 

As of March 31, 2021, the unrecognized stock-based compensation related to these options was $32.0 million and is expected to be recognized over a weighted-average period of 3.1 years. At March 31, 2021, the unrecognized stock-based compensation related to RSUs was $106.6 million and is expected to be recognized over a weighted-average period of 3.3 years.
(15)     Fair Value Measurements
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We estimate fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which is categorized in one of the following levels:
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the
reporting entity at the measurement date;
Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

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




As of
March 31, 2021
Risk-free interest rate
0.51%
Contractual term3.58 years
Expected volatility80%

As of
December 31, 2020
Risk-free interest rate
0.25%
Contractual term3.82 years
Expected volatility80%

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 March 31, 2021 and December 31, 2020 at fair value on a recurring basis:
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Fair Value Measurements as of March 31, 2021
Level 1Level 2Level 3
(In thousands)
Assets:
Money Market$306,704 $ $ 
Certificate of Deposit91,838   
Cash Equivalents200,364   
Total assets at fair value$598,906 $ $ 
Liabilities:
Warrant Liability$ $ $184,159 
Total Liabilities$ $ $184,159 
Fair Value Measurements as of December 31, 2020
Level 1Level 2Level 3
(In thousands)
Assets
Money Market$357,463 $ $ 
Certificate of Deposit93,802   
Cash Equivalents200,364   
Total asset at fair value$651,629 $ $ 
Liabilities:
Warrant Liability$ $ $135,440 
Total Liabilities$ $ $135,440 

(16)    Commitments and Contingencies
Legal Proceedings
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company applies accounting for contingencies to determine when and how much to accrue for and disclose related to legal and other contingencies. Accordingly, the Company discloses contingencies deemed to be reasonably possible and accrues loss contingencies when, in consultation with legal advisors, it is concluded that a loss is probable and reasonably estimable. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is 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 March 31, 2021, 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.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)





In September 2018, a former contractor employed through a third party staffing agency, alleged on behalf of himself and other aggrieved employees that the Company and the staffing agency, purportedly violated California state wage and hour laws. In March 2020, the Company agreed to settle this matter for $1.9 million. As of March 31, 2021, the Company has an outstanding $1.9 million payable pending final court motions that has been delayed due to COVID-19.
(17)    Employee Benefit Plan
The Company has defined contribution plans, under which the Company pays fixed contributions into a separate entity, and additional contributions to the plans are based upon a percentage of the employees’ elected contributions. The Company will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized within selling, general, and administrative expenses and research and development in the condensed consolidated statements of operations and comprehensive loss, as incurred. Defined contributions were $1.1 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

(18)    Supplemental Cash Flow Information
Three Months Ended
March 30,
20212020
(As Restated)
(in thousands)
Supplemental disclosure
Cash payments for:
Income tax paid$(52)$(46)
$(52)$(46)
Schedule for noncash investing activities
Unpaid property, plant, and equipment received$186 $1,091 
$186 $1,091 
Schedule for noncash financing activities
Issuance of common stock through "cashless" warrants exercised$ $341,001 
Issuance of common stock through restricted stock units vested22,825  
$22,825 $341,001 

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

Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” or “our” refer to the business of the 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.

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 Amended Annual
Report on Form 10-K/A. 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
Amended Annual Report on Form 10-K/A 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 the commercial exploration of space with reusable spaceflight systems. We believe the commercial exploration of space represents one of the most exciting and important technology initiatives of our time. This industry has begun growing dramatically due to new products, new sources of private and government funding, and new technologies. Demand is emerging from new sectors and demographics. As government space agencies have retired or reduced their own capacity to send humans into space, private companies are beginning to make crucial inroads into the fields of human space exploration. We have embarked into this commercial exploration journey with a mission to put humans into space and return them safely to Earth on a routine and consistent basis. We believe the success of this mission will provide the foundation for a myriad of exciting new industries.
We are a vertically integrated aerospace company pioneering human spaceflight for private individuals and researchers. Our spaceship operations consist of commercial human spaceflight and flying commercial research and development payloads into space. Our operations also include the design and development, manufacturing, ground and flight testing, and post-flight maintenance of our spaceflight vehicles. We focus our efforts in spaceflights using our reusable technology for human tourism and for research and education. We intend to offer our customers, a unique, multi-day experience culminating in a spaceflight that includes several minutes of weightlessness and views of Earth from space. As part of our commercial operations, we have exclusive access to the Gateway to Space facility at Spaceport America located in New Mexico. Spaceport America is the world’s first purpose built commercial spaceport and will be the site of our initial commercial spaceflight operations. We believe the site provides us with a competitive advantage when creating our spaceflight plans as it not only has a desert climate with relatively predictable weather conditions preferable to support our spaceflights, it also has airspace that is restricted for surrounding commercial air traffic that facilitates frequent and consistent flight scheduling.

Our primary mission is to launch the first commercial program for human spaceflight. In December 2018, we made history by flying our groundbreaking spaceship, VSS Unity, to space. This represented the first flight of a spaceflight system built for commercial service to take humans into space. Shortly thereafter, we flew our second spaceflight in VSS Unity in February 2019, and, in addition to the two pilots, carried a crew member in the cabin. We have received reservations for approximately 600 spaceflight tickets and collected more than $80.0 million in future astronaut deposits as of March 31, 2021. Additionally, in February 2020, we launched our One Small Step campaign which allows interested individuals to place a $1,000 refundable registration deposit towards the cost of a future ticket once we reopen ticket sales and, as of March 31, 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, but plan on reopening ticket sales following Sir Richard Branson's flight expected in 2021. With each ticket purchased, future astronauts will experience a multi-day journey that includes a tour of the spaceport, flight suit fitting, spaceflight training and culminating with a trip to space on the final day.

We have also developed an extensive set of vertically integrated aerospace development capabilities encompassing preliminary vehicle design and analysis, detail design, manufacturing, ground testing, flight testing, and maintenance of our spaceflight system. Our spaceflight system consists of three primary components: our carrier aircraft, the mothership; our spaceship, SpaceShipTwo; and our hybrid rocket motor.
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SpaceShip is a spaceship with the capacity to carry pilots and future astronauts, or commercial research and development payloads, into space and return them safely to Earth. Fundamentally, SpaceShip is a rocket-powered aerospace vehicle that operates more like a plane than a traditional rocket. SpaceShip is powered by a hybrid rocket propulsion system, which we refer to as "RocketMotor", which propels the spaceship on a trajectory into space. 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 the future astronauts 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 the spaceship 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.

Our team is currently in various stages of designing, testing and manufacturing additional spaceships and rocket motors in order to meet the expected demand for human spaceflight experiences. Concurrently, we are researching and developing new products and technologies to grow our company.

Our operations also include efforts in spaceflight opportunities for research and education. For example, researchers have utilized parabolic aircraft and drop towers to create moments of microgravity and conduct significant research activities. In most cases, these solutions offer only seconds of microgravity per flight and do not offer access to the upper atmosphere or space. Other researchers have conducted experiments on sounding rockets or satellites. These opportunities are expensive, infrequent and may impose highly limiting operational constraints. We believe that research experiments will benefit from prolonged exposure to space conditions and yield better results aboard SpaceShip due to the large cabin, gentler loading during flight, relatively low cost, advantageous operational parameters, and frequent flights. As such, researchers and educators are able to conduct critical experiments and obtain important data without having to sacrifice time and resources. Our commitment to advancing research and science was present in our December 2018 and February 2019 spaceflights as we transported payloads into space for research purposes under a NASA flight contract.

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

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

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

Customer Demand
While not yet in commercial service for human spaceflight, we have already received significant interest from potential future astronauts. Going forward, we expect the size of our backlog and the number of future astronauts that have flown to space on our spaceflight system to be an important indicator of our future performance. As of March 31, 2021, we had reservations for SpaceShip flights for approximately 600 future astronauts. In February 2020, we launched our One Small Step campaign which allows interested individuals to place a $1,000 refundable registration deposit towards the cost of a future ticket once we reopen ticket sales and, as of December 31, 2020, we had received approximately 1,000 One Small Step deposits from 66 countries. We retired the "One Small Step" program on December 31, 2020, but plan on reopening ticket sales following Sir Richard Branson's flight expected in 2021.

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Available Capacity and Annual Flight Rate
We face constraints of resources and competing demand for our human spaceflights. We expect to commence commercial operations with a single 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 in various stages of designing, testing and manufacturing two additional SpaceShip vehicles. We believe that expanding the fleet will allow us to increase our annual flight rate once commercialization is achieved.

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

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

Consistent with the actions taken by governmental authorities, including California, New Mexico and the United Kingdom, where most of our workforce is located, we have taken appropriately cautious steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, we initially reduced and then temporarily suspended on-site operations at our facilities in Mojave, California and Spaceport America, New Mexico and in our London office location in late March 2020. Starting late March 2020, approximately two-thirds of our employees and contractors were able to complete their duties from home, which enabled much critical work to continue, including engineering analysis and drawing releases for VSS Unity, VMS Eve and the second 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 conform to the latest COVID-19 health precautions. 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 and thorough disinfecting of work surfaces, tools and equipment. We offered testing to employees and contractors for COVID-19 on a regular basis. 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 with our implemented and established strict protocols to ensure employee safety, including enforcing staggered shifts to lower on-site density and re-working communications processes with engineers who are primarily working from home. We have, however, experienced, and expect to continue to experience, reductions in operational efficiency due to illness from COVID-19 and precautionary actions taken related to COVID-19. For the time being, we are encouraging those employees who are able to work from home to continue doing so until case levels are lowered and vaccinations are more readily available.

The COVID-19 pandemic and the protocols and procedures we have implemented in response to the pandemic have caused and continue to cause delays to our business and operations, which has led to accumulated impacts to both schedule and cost efficiency and some delays in operational and maintenance activities, including delays in our test flight program. We expect this to continue through well into 2021. 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 outbreak and its impact on our operations necessary to complete the development of our spaceflight systems, our scheduled spaceflight test programs and commencement of our commercial flights. In addition to existing travel restrictions, countries may continue to maintain or
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reimpose closed borders, impose prolonged quarantines, and/or further restrict travel. We believe our cash and cash equivalents on hand at March 31, 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 we experience a significant delay due to our workforce getting ill or if the pandemic worsens, we may take additional actions, such as further reducing costs.
Component of Results of Operations
Revenue
To date, we have primarily generated revenue by transporting scientific commercial research and development payloads using our spaceflight systems and by providing engineering services as a subcontractor to the primary contractor of a long-term contract with the U.S. government. We also have generated revenues from a sponsorship arrangement.

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

Cost of Revenue
Costs of revenue related to spaceflights include costs related to the consumption of a rocket motor, fuel, payroll and benefits for our pilots and ground crew, and maintenance. Cost of revenue related to the engineering services consist of expenses related to materials and human capital, such as payroll and benefits. Once we have completed our test flight program and commenced commercial operations, we will capitalize the cost to construct any additional 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 commercialization of our spaceflights, we expect our gross profit and gross margin may continue to vary as we scale our fleet of spaceflight systems.

Selling, General and Administrative
Selling, general and administrative expenses consist of human capital related expenses for employees involved in general corporate functions, including executive management and administration, accounting, finance, tax, legal, information technology, marketing and 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 capital expenses primarily include salaries, cash bonuses and benefits. As we continue to grow as a company, we expect that our selling, general and administrative costs will increase on an absolute dollar basis.

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

Research and Development
Research and development expense represents costs incurred to support activities that advance our human spaceflight towards commercialization, including basic research, applied research, concept formulation studies, design, development, and related testing activities. Research and development costs consist primarily of the following costs for developing our spaceflight systems:
flight testing programs, including rocket motors, fuel, and payroll and benefits for pilots and ground crew performing test flights;
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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 March 31, 2021, our current primary research and development objectives focus on the development of our SpaceShip vehicles for commercial spaceflights and developing our RocketMotor, a hybrid rocket propulsion system that will be used to propel our SpaceShip vehicles into space. The successful development of SpaceShip and RocketMotor involves many uncertainties, including:
timing in finalizing spaceflight systems design and specifications;
successful completion of flight test programs, including flight safety tests;
our ability to obtain additional applicable approvals, licenses or certifications from regulatory agencies, if required, and maintaining current approvals, licenses or certifications;
performance of our manufacturing facilities despite risks that disrupt productions, such as natural disasters and hazardous materials;
performance of a limited number of suppliers for certain raw materials and components;
performance of our third-party contractors that support our research and development activities;
our ability to maintain rights from third parties for intellectual properties critical to research and development activities;
our ability to continue funding and 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, which in turn could impact when we are able to commence our human spaceflights.

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

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 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.

Interest Income, net
Interest income, net consists primarily of interest earned on cash and cash equivalents held by us in interest bearing demand deposit accounts and cash equivalents, as well as interest expense related to our finance lease obligations.

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

Income Tax Provision
We are subject to income taxes in the United States and the United Kingdom. Our income tax provision consists of an estimate of federal, state, and foreign income taxes based on enacted federal, state, and foreign tax rates, as adjusted for
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allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.
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
March 31,
20212020
(In thousands)
Revenue$— $238 
Cost of revenue— 173 
Gross profit— 65 
Operating expenses:
Selling, general and administrative expenses44,914 26,755 
Research and development expenses36,363 34,282 
Operating loss(81,277)(60,972)
Change in fair value of warrants(48,719)(316,896)
Interest income, net318