Business context and reporting period
Virgin Galactic Holdings, Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2019; it was signed November 12, 2019. During the reporting period, the registrant was Social Capital Hedosophia Holdings Corp., a blank-check company, not the operating Virgin Galactic business. It reported no revenue or operating business activity through September 30.
On October 25, 2019, after quarter-end, the company completed its business combination with the Virgin Galactic companies and domesticated as a Delaware corporation named Virgin Galactic Holdings, Inc. The transaction issued 130 million shares to sellers at a stated $10 per share, for $1.3 billion in aggregate merger consideration. Vieco US also elected a $52.1 million share repurchase. Former CEO Chamath Palihapitiya separately purchased 10 million shares from Vieco US for $100 million; that was a secondary purchase, not company proceeds.
Financial results and position
Amounts below are U.S. dollars. Revenue and operating margins are not applicable because the registrant had no revenue.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating costs | $4.21 million | $224,827 | $7.01 million | $1.22 million |
| Net income (loss) | $(482,184) | $3.04 million | $5.01 million | $7.24 million |
| Basic and diluted loss per ordinary share | $(0.20) | $(0.00) | $(0.32) | $(0.04) |
| Net cash used in operating activities | Not separately stated for the quarter | $(1.76) million | $(798,376) |
Reported income largely reflected interest earned on trust-account securities, rather than operating performance: interest income was $3.47 million in Q3 and $12.03 million for the nine months. Q3 operating costs rose sharply year over year, and the quarter moved from net income to a net loss.
At September 30, assets were $677.29 million, including $677.17 million of marketable securities in the trust account and only $48,489 of cash outside it. The company reported a $7.08 million working capital deficit. Current liabilities were $7.21 million, including $5.48 million of accounts payable and accrued expenses and $1.73 million of related-party advances. Deferred underwriting fees were $24.15 million; there was no long-term debt. Class A shares subject to possible redemption were classified outside shareholders’ equity at $640.93 million. Trust-account securities were U.S. Treasury bills with maturities of 180 days or less.
For the nine months, investing cash inflow of $39.10 million from trust withdrawals was offset by financing cash outflow of $37.75 million, principally redemptions; operating activities used $1.76 million. Cash declined from $462,162 at year-end 2018 to $48,489. The September shareholder extension vote resulted in redemption of 3,771,178 shares for approximately $39.1 million, leaving approximately $677.2 million in the trust account.
Outlook, risks, and other notable items
The filing provides no operating forecast or quantified guidance for the post-merger Virgin Galactic business. Management described the pre-combination entity’s expenses as public-company, due-diligence, and transaction costs. It stated that substantially all trust funds, subject to applicable deductions, were used to complete the business combination. Related-party advances and the deferred underwriting commission were repaid at closing; the sponsor-affiliate administrative-services agreement ended at closing.
Management identified forward-looking statements as subject to risks and uncertainties and directed investors to the October 10, 2019 proxy statement for post-combination business risk factors. The filing reported no legal proceedings, no off-balance-sheet arrangements, and no long-term debt. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter. On November 4, 2019, the company issued 413,486 shares to a financial advisor as partial payment for transaction advisory services.
Important facts for investors to verify
- Review the October 25, 2019 closing disclosures and subsequent financial statements to assess the combined company’s actual cash, debt, and capitalization; this 10-Q largely reports the pre-combination SPAC.
- Verify how much trust-account cash remained available after redemptions, the share repurchase, underwriting and transaction costs, and other closing uses.
- Assess the operating company’s revenue, cash burn, liquidity runway, and commercial-flight plans in its post-merger filings; this report provides no operating-company results or quantified guidance.
- Consider the substantial increase in quarterly costs and the distinction between trust-account interest income and operating earnings.
- Note that the filing reports 82,478,822 common shares outstanding as of November 12, 2019; verify subsequent issuances and dilution in later filings.