Business context and reporting period
This is Social Capital Hedosophia Holdings Corp.’s unaudited Form 10-Q for the quarter ended June 30, 2019—not an operating-company 10-Q from Virgin Galactic. The registrant was a blank-check company pursuing a proposed Virgin Galactic business combination. It reported no operating revenue; its income primarily came from interest on trust assets.
Financial results and liquidity
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Revenue | None | None |
| Operating costs | $2.664 million | $2.797 million |
| Trust interest income | $4.360 million | $8.554 million |
| Net income | $1.444 million | $5.487 million |
| Basic and diluted loss per ordinary share | $(0.12) | $(0.12) |
The reported positive net income includes trust-account earnings attributable to redeemable shares; after excluding that amount, the filing reports adjusted net losses of $2.480 million for the quarter and $2.425 million for the six-month period. Operating margins are not meaningful because the company had no operating revenue.
At June 30, 2019, cash outside the trust was $274,295, while trust-account securities totaled $712.535 million. The filing reports a $2.872 million working-capital deficit. Current liabilities were $3.226 million, including $2.467 million of accounts payable and accrued expenses and $759,414 of non-interest-bearing, due-on-demand related-party advances. Deferred underwriting fees were $24.150 million, payable upon a business combination. The company reported no long-term debt. Six-month operating cash use was $565,606; financing provided $377,739, and cash declined by $187,867.
Changes versus the prior comparable period
Second-quarter operating costs rose to $2.664 million from $525,012 in 2018; net income declined to $1.444 million from $2.441 million, as higher costs more than offset increased trust interest. For the six months, operating costs rose to $2.797 million from $991,317, while net income increased to $5.487 million from $4.199 million, reflecting trust interest growth. Six-month operating cash use improved to $565,606 from $756,880.
Outlook, risks and notable events
- On July 9, 2019, after quarter-end, the company entered into a merger agreement for the Virgin Galactic transaction. The agreement contemplated issuing 130 million shares to exchange for the VG companies, subject to closing conditions.
- The transaction included a potential repurchase from V10 of up to $200 million of shares at $10 per share if available cash exceeded $500 million, at V10’s election. A separate purchase agreement contemplated a $100 million investment by Chamath Palihapitiya for up to 10 million shares, subject to its terms.
- The company filed a preliminary proxy statement to extend its business-combination deadline from September 18 to December 18, 2019; the merger agreement contemplated a further extension to April 18, 2020 if required and approved.
- Management stated that the company expected no operating revenue until after a business combination. It warned that limited cash outside the trust and a working-capital deficit could require additional financing or cost reductions. The filing says these conditions raised substantial doubt about the company’s ability to continue as a going concern through the scheduled September 18, 2019 liquidation date.
- Management reported disclosure controls were effective and no material change in internal control during the quarter. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the merger’s closing status, final terms, required approvals, and any subsequent amendments; the agreement was only a post-quarter-end development in this filing.
- Check whether the deadline extension was approved and whether the business combination was completed before the applicable deadline.
- Verify available cash, redemption levels, financing needs, and the treatment of the $24.150 million deferred underwriting fee at closing.
- Distinguish the SPAC’s trust interest and net income from Virgin Galactic’s operating performance; this filing does not provide Virgin Galactic operating results.