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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 September 30, 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 November 1, 2021, there were 258,011,211 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

Table of Contents

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,” “anticipate,” “believe,” "can," “continue,” “could,” "drive," “estimate,” “expect,” “forecast,” “future,” "grow," "improve," "increase," “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:
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 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;
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.
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 “Amendment No. 2 to Form 10-K"), in Part II, Item IA. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly report ended June 30, 2021, and in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form
2

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.


3

Table of Contents
PART I. FINANCIAL INFORMATION
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30, 2021December 31, 2020
(Unaudited)(As Restated)
Assets
Current assets
Cash and cash equivalents$702,565 $665,924 
Restricted cash18,078 13,031 
Marketable securities, short-term29,441  
Inventories29,306 30,483 
Prepaid expenses and other current assets8,963 18,489 
Total current assets788,353 727,927 
Marketable securities, long-term256,691  
Property, plant, and equipment, net48,130 53,148 
Other non-current assets24,449 22,915 
Total assets$1,117,623 $803,990 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$7,997 $5,998 
Accrued liabilities23,298 22,982 
Customer deposits84,769 83,211 
Other current liabilities2,416 2,830 
Total current liabilities118,480 115,021 
Non-current liabilities:
Warrant liability 135,440 
Other long-term liabilities29,214 26,451 
Total liabilities$147,694 $276,912 
Commitments and contingencies (Note 15)
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; 257,397,850 and 236,123,659 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
25 23 
Additional paid-in capital2,013,171 1,297,794 
Accumulated deficit(1,042,846)(770,744)
Accumulated other comprehensive income(421)5 
Total stockholders' equity969,929 527,078 
Total liabilities and stockholders' equity$1,117,623 $803,990 



See accompanying notes to condensed consolidated financial statements.
4

Table of Contents
VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands except for per share data)
(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(As restated)(As restated)
Revenue$2,580 $ $3,151 $238 
Cost of revenue207  270 173 
Gross profit2,373  2,881 65 
Selling, general, and administrative expenses49,859 30,936 133,276 83,738 
Research and development expenses35,593 46,075 107,859 117,276 
Operating loss(83,079)(77,011)(238,254)(200,949)
Change in fair value of warrants34,432 (15,280)(34,650)(341,772)
Interest income, net234 313 766 1,979 
Other income (loss), net70 (44)110 5 
Loss before income taxes(48,343)(92,022)(272,028)(540,737)
Income tax expense(25)(40)(74)(34)
Net loss(48,368)(92,062)(272,102)(540,771)
Other comprehensive loss:
Foreign currency translation adjustment3 48 11 (6)
Unrealized loss on marketable securities(437) (437) 
Total comprehensive loss$(48,802)$(92,014)$(272,528)$(540,777)
Net loss per share:
Basic$(0.19)$(0.41)$(1.11)$(2.54)
Diluted(0.32)(0.41)(1.11)(2.54)
Weighted-average shares outstanding:
Basic254,749,195 225,253,536 244,157,923 213,193,386 
Diluted255,147,228 225,253,536 244,157,923 213,193,386 
See accompanying notes to condensed consolidated financial statements.
5

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 nine months ended September 30, 2020)


Preferred StockCommon Stock
# 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— — — — — (376,736)— (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  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  210,403,856 21 838,929 (574,566)5 264,389 
Net loss    — (92,062) (92,062)
Other comprehensive income (loss)  —  — — 48 48 
Stock-based compensation    8,625 —  8,625 
Issuance of common stock pursuant to stock-based awards, net of withholding taxes  17,647  (399)—  (399)
Issuance of common stock  23,600,000 2 460,198 —  460,200 
Transaction costs    (19,515)—  (19,515)
Balance as of September 30, 2020  234,021,503 23 1,287,838 $(666,628)$53 $621,286 








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VIRGIN GALACTIC HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(In thousands except for per unit and share data)
(Unaudited)
Preferred StockCommon Stock
# of SharesPar Value# of SharesPar ValueAdditional paid-in capitalAccumulated DeficitAccumulated
Other Comprehensive
Income (Loss)
Total
Balance as of December 31, 2020 $ 236,123,659 $23 $1,297,794 $(770,744)$5 $527,078 
Net loss— — — — — (129,694)— (129,694)
Other comprehensive loss— — — — — — 26 26 
Stock-based compensation— — — — 22,111 — — 22,111 
Issuance of common stock pursuant to stock-based awards, 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 income (loss) — — — — — (20)(20)
Stock-based compensation — — — 14,423 — — 14,423 
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
  240,937,540 23 1,439,667 (994,478)11 445,223 
Net loss — — — — (48,368)— (48,368)
Other comprehensive income (loss) — — — — — (432)(432)
Stock-based compensation — — — 12,170 — — 12,170 
Issuance of common stock pursuant to stock-based awards, net of withholding taxes — 685,487 — 1,916 — — 1,916 
Common stock issued related to warrants exercised — 2,034,390 — — 65,914 — — 65,914 
Issuance of common stock — 13,740,433 2 499,998 — — 500,000 
Transaction costs — — — (6,494)— — (6,494)
Balance as of September 30, 2021
  257,397,850 25 2,013,171 $(1,042,846)$(421)$969,929 

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)
Nine Months Ended September 30,
20212020
(As restated)
Cash flows from operating activities
Net loss$(272,102)$(540,771)
Stock-based compensation48,704 18,575 
Depreciation and amortization8,635 6,998 
Change in fair value of warrant liability34,650 341,772 
Other operating activities, net(42)75 
Change in assets and liabilities
Inventories1,178 1,195 
Other current and non-current assets6,342 6,152 
Accounts payable and accrued liabilities1,824 719 
Customer deposits2,148 (172)
Other current and non-current liabilities3,026 2,394 
Net cash used in operating activities(165,637)(163,063)
Cash flows from investing activity
Capital expenditures(2,452)(13,661)
Purchases of marketable securities(286,132) 
Cash used in investing activity(288,584)(13,661)
Cash flows from financing activities
Payments of finance lease obligations(105)(89)
Proceeds from issuance of common stock pursuant to stock options exercised18,856  
Repayment of notes payable(310) 
Proceeds from issuance of common stock500,000 $460,200 
Transaction costs(6,753)(20,866)
Withholding taxes paid on behalf of employees on net settled stock-based awards(15,779)(399)
Net cash provided by financing activities495,909 438,846 
Net increase in cash and cash equivalents41,688 262,122 
Cash, cash equivalents and restricted cash at beginning of period678,955 492,721 
Cash, cash equivalents and restricted cash at end of period$720,643 $754,843 
Cash and cash equivalents$702,565 $741,575 
Restricted cash18,078 13,268 
Cash, cash equivalents and restricted cash$720,643 $754,843 

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 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 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 U.S. 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 in 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, thorough disinfecting of surfaces and tools. We also tested employees and contractors for COVID-19 on a regular basis. Following OSHA guidance, we have since allowed fully vaccinated employees and contractors to be mask free in our facilities while continuing to require the wearing of masks for our unvaccinated population. Our unvaccinated population is also required to test weekly for COVID-19. In September 2021, the U.S. government issued Executive Order 14042, mandating that all employees of federal contractors and subcontractors be fully vaccinated against COVID-19 by December 8, 2021, unless such employees are legally entitled to an accommodation. As a federal contractor, we intend to fully comply with Executive Order 14042. As the COVID-19 pandemic has evolved, we have continued to follow U.S. 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.

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 in response 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 so.

The COVID-19 pandemic and the protocols and procedures we implemented in response to the pandemic have caused some delays in operational and maintenance activities, including delays in our test flight program. The full impact of the COVID-19 pandemic on our business and results of operations subsequent to September 30, 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
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




cash equivalents on hand at September 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.

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 WarrantsPrivate Placement WarrantsTotal
(In thousands)
Warranty Liability at December 31, 2019$77,050 $47,280 $124,330 
Redemption/Exercise of Warrants(341,001) (341,001)
Change in Fair Value283,296 33,600 316,896 
Warrant Liability at March 31, 202019,345 80,880 100,225 
Redemption/Exercise of Warrants(19,741) (19,741)
Change in Fair Value396 9,200 9,596 
Warrant Liability at June 30, 2020 90,080 90,080 
Warranty Liability at December 31, 2020 135,440 135,440 
Change in Fair Value 48,719 48,719 
Warrant Liability at March 31, 2021 184,159 184,159 
Redemption/Exercise of Warrants (104,175)(104,175)
Change in Fair Value 20,363 20,363 
Warrant Liability at June 30, 2021 100,347 100,347 
Redemption/Exercise of Warrants (65,915)(65,915)
Change in Fair Value (34,432)(34,432)
Warrant Liability at September 30, 2021$ $ $ 

(2)     Summary of Significant Accounting Policies

(a)    Basis of Presentation
These condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




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

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




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 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 September 30, 2021 and December 31, 2020, our contract liabilities are $84.8 million and $83.2 million, respectively. As of September 30, 2021, the contract liabilities were comprised of customer deposits for our spaceflight services of $84.8 million. 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
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




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.

(d)     Marketable Securities
The Company's marketable securities have been classified as debt securities and accounted for as "available-for-sale" securities. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. Marketable securities are classified as short-term and long-term based on their availability for use in current operations. The Company's marketable securities are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of accumulated other comprehensive income (loss) in the statement of equity, with the exception of unrealized losses believed to be other-than-temporary, which are reported in the Company's statement of operations and comprehensive loss in the period in which such determination is made.

(e)    Warrant liability
The Company classifies its public and private placement warrants as liabilities in accordance with ASC 815 (Derivatives and Hedging). The warrant liability is recorded on the consolidated balance sheet at fair value on 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 of the private placement warrants using a Black-Scholes option model and the quoted price of the Company’s common stock in an active market, a Level 3 measurement. Volatility is 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 is based on the remaining contractual term of the warrants, and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life.

(f)     Reclassification
Certain amounts in the accompanying condensed consolidated financial statements and accompanying notes have been reclassified to be consistent with 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.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(g)     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 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 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)Issued Accounting Standard Updates Not Yet Adopted
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 evaluated and determined that the update has had no impact on the Company's condensed consolidated financial statements after the effective date.

(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.
In August 2020, the FASB issued ASU 2020-06, Accounting 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 features 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 adoption of the new guidance did not have a material impact to the Company's condensed consolidated financial statements.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(4)    Related Party Transactions
The Company licenses its brand name from certain entities affiliated with Virgin Enterprises Limited (“VEL”), a company incorporated in England. VEL is an affiliate of the Company. Under the trademark license, the Company has the exclusive right to operate under the brand name “Virgin Galactic” worldwide. Royalty payables, excluding sponsorship royalties, for the use of license are the greater of 1% of revenue or $40,000 per quarter, prior to the commercial launch date. Sponsorship royalties payable are 25% of sponsorship revenue. We paid license and royalty fees of $390,000 and $40,000 for the three months ended September 30, 2021 and 2020, respectively. We paid license and royalty fees of $470,000 and $135,000 for the nine months ended September 30, 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 $33,000 and $131,000 of operating expenses, net, from VOH for the three months ended September 30, 2021 and 2020, respectively. We were allocated $104,000 and $367,000 of operating expenses, net, from VOH for the nine months ended September 30, 2021 and 2020, respectively. The Company has a receivable (payable) from VOH of $19,000 and $85,000 as of September 30, 2021 and December 31, 2020, respectively.
(5)    Inventory
As of September 30, 2021 and December 31, 2020, inventory is comprised of the following:
As of
September 30, 2021December 31, 2020
(Unaudited)
(In thousands)
Raw Materials$21,174 $22,963 
Spare parts8,132 7,520 
Total inventory
$29,306 $30,483 

For the three months ended September 30, 2021 and September 30, 2020, we wrote off $0.2 million and $0.1 million of inventory due to excess and obsolescence, respectively. For the nine months ended September 30, 2021 and September 30, 2020, we wrote off $0.4 million and $1.3 million of inventory due to excess and obsolescence, respectively.
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(6)    Property, Plant, and Equipment, net
As of September 30, 2021 and December 31, 2020, property, plant, and equipment, net consisted of the following:
As of
September 30, 2021December 31, 2020
(Unaudited)
(In thousands)
Buildings$9,117 $9,142 
Leasehold improvements28,986 28,744 
Aircraft195 195 
Machinery and equipment36,748 34,330 
IT software and equipment23,338 22,042 
Construction in progress1,291 1,780 
99,675 96,233 
Less accumulated depreciation and amortization
(51,545)(43,085)
Property, plant, and equipment, net
$48,130 $53,148 

Total depreciation and amortization for the three months ended September 30, 2021 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 nine months ended September 30, 2021 and 2020 was $8.6 million and $7.0 million, respectively, of which $3.9 million and $3.2 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 Amendment No. 2 to 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
September 30,
20212020
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $1,244 $1,181 
Short-term lease expense6 126 
Finance Lease Cost:
Amortization of right-of-use assets
34 40 
Interest on lease liabilities6 8 
Total finance lease cost40 48 
Variable lease cost1,475 798 
Total lease cost$2,765 $2,153 

Nine Months Ended
September 30,
20212020
(Unaudited and in thousands)
Lease Cost:
Operating lease expense $3,758 $3,343 
Short-term lease expense26 249 
Finance Lease Cost:
Amortization of right-of-use assets
103 95 
Interest on lease liabilities20 25 
Total finance lease cost123 120 
Variable lease cost4,185 1,573 
Total lease cost$8,092 $5,285 


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)




Nine Months Ended September 30,
20212020
(In thousands, except term and rate data)
Cash flow information:
Operating cash flows for operating leases$4,065 $3,763 
Operating cash flows for finance leases$20 $25 
Financing cash flows for finance leases
$105 $89 
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations
Operating leases$501 $96 
Finance Leases$19 $91 
Other Information:
Weighted average remaining lease term:
Operating leases (in years)12.3013.23
Finance leases (in years)2.293.07
Weighted average discount rates:
Operating leases11.66 %11.69 %
Finance leases8.22 %8.48 %

The supplemental balance sheet information related to leases for the period is as follows:
As of
September 30, 2021December 31, 2020
(Unaudited)
(In thousands)
Operating leases
Long-term right-of-use assets$18,549 $19,555 
    Short-term operating lease liabilities$1,827 $2,384 
    Long-term operating lease liabilities23,397 24,148 
Total operating lease liabilities$25,224 $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 September 30, 2021 are as follows:
Operating LeasesFinance
Leases
(In thousands)
2021 (for the remaining period)$1,348 $41 
20224,258 137 
20233,975 106 
20243,959 30 
20253,833  
Thereafter30,852  
Total lease payments$48,225 $314 
Less:
Imputed interest/present value discount(23,001)$(27)
Present value of lease liabilities$25,224 $287 
(8)    Accrued Expenses
A summary of the components of accrued liabilities are as follows:
As of
September 30, 2021December 31, 2020
(Unaudited)
(In thousands)
Accrued bonus$7,543 $6,892 
Other accrued expenses15,755 16,090 
Total accrued expenses$23,298 $22,982 
(9)    Long-term Debt
As of
September 30, 2021December 31, 2020
(Unaudited)
(In thousands)
Commercial loan$310 $620 
310 620 
     Less: Current portion(310)(310)
Non-current portion$ $310 

Aggregate maturities of long-term debt as of September 30, 2021 are as follows:
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VIRGIN GALACTIC HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




(In thousands)
2022310 
$310 
On June 18, 2020, we financed the purchase of software licenses through a loan totaling approximately $0.9 million. The loan amortized in three equal annual installments of approximately $0.3 million with the final payment due on October 1, 2022 with 0% interest rate. The loan is secured by a standby letter of credit issued from our financial institution and restricted cash has been recorded for the corresponding outstanding balance.

The imputed interest of this loan was immaterial.
(10)    Income Taxes
Income tax expense was $25,000 and 40,000 for the three months ended September 30, 2021 and 2020, respectively. Income tax expense was $74,000 and 34,000 for the nine months ended September 30, 2021 and 2020, respectively. The effective income tax rate was nil for three months ended September 30, 2021 and 2020. The effective income tax rate was nil for nine months ended September 30, 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.
(11)    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 Form 10-K other than the issuance of common stock and redemption of warrants as noted below.

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.