Virgin Galactic 2019 De-SPAC (Social Capital Hedosophia Holdings Corp.)

Scope and status

This is an integrated analysis of a single transaction that began with the formation and initial public offering of a special purpose acquisition company in 2017 and ended with the completion of a business combination in 2019. Under the repository’s coverage policy, the SPAC IPO does not receive a separate page.

The record is built from the SPAC’s IPO prospectus, the Form S-4 and the SEC staff’s review of it, the definitive proxy statement, the Form 8-K reporting the extraordinary general meeting, the Form 8-K reporting completion of the business combination, the annual reports and their amendments, the SEC’s XBRL company facts and a daily closing price series.

Transaction snapshot

Transaction perimeter and entity history

The registrant is a single continuous entity. Social Capital Hedosophia Holdings Corp. was incorporated as a Cayman Islands exempted company and registered with the SEC under CIK 0001706946; following the business combination the same registrant was renamed Virgin Galactic Holdings, Inc. The EDGAR submissions record shows the former name in effect from May 25, 2017 to October 23, 2019.

This continuity is why the transaction is analysed as one event. The securities that public investors bought in 2017 were securities of the SPAC; the same securities converted into securities of the operating company at closing, on a one-for-one basis for Class A ordinary shares.

Stage one: the SPAC initial public offering

Social Capital Hedosophia Holdings Corp. sold units at $10.00 per unit in an offering that closed in September 2017. The prospectus cover offered 60,000,000 units for $600,000,000, with an over-allotment option. Each unit comprised one Class A ordinary share and one-third of one redeemable warrant, each whole warrant exercisable at $11.50 per share.

Determining the final offering size

The completion Form 8-K reports 30,999,997 warrants outstanding immediately after the transactions. Because public warrants were issued at one-third per unit and the sponsor separately purchased 8,000,000 private placement warrants, that total is consistent with 69,000,000 units having been sold, that is, with the 9,000,000-unit over-allotment option exercised in full. The arithmetic implies 31,000,000 warrants; the three-warrant difference reflects rounding of fractional warrants.

This is an inference from the warrant count. The underwriting closing disclosure confirming the over-allotment exercise directly has not been reviewed, and that verification remains an open item.

Trust funding and the sponsor’s position

The prospectus states that the initial shareholders would collectively own 20% of the issued and outstanding shares after the offering. Sized against a fully exercised over-allotment, that corresponds to 17,250,000 founder shares, or 25% of the public share count.

Deferred underwriting commissions were 3.5% of gross IPO proceeds and were payable only on completion of a business combination. [C002]

Stage two: the business combination

The Merger Agreement was dated July 9, 2019 and was amended on October 2, 2019. The counterparties were Vieco 10 Limited, a British Virgin Islands company, and Vieco USA, Inc., a Delaware subsidiary of Vieco 10. [S005, Item 5.07]

At the extraordinary general meeting, holders of 61,352,156 ordinary shares were represented in person or by proxy, constituting 74.39% of the shares outstanding and entitled to vote as of the September 16, 2019 record date. Shareholders approved the business combination.

The transaction closed on October 25, 2019, the date of earliest event reported in the completion Form 8-K. [S006, cover page and Introductory Note]

Redemptions

The completion Form 8-K does not state redemptions. The fiscal 2019 Form 10-K does. Holders of 15,877,288 Class A public shares exercised redemption rights, in two tranches:

That is 23.0% of the 69,000,000 public shares, leaving approximately $525.2 million of the $690.0 million trust.

The two-tranche structure is worth noting for anyone reading redemption data across de-SPACs. The September tranche preceded the October shareholder vote, so a redemption figure taken only from the vote date would understate the total by 3,771,178 shares.

Consideration

All outstanding equity of the Virgin Galactic companies was cancelled in exchange for the right to receive 130,000,000 shares of Virgin Galactic Holdings common stock at a deemed value of $10.00 per share, an aggregate merger consideration of $1.3 billion.

The deemed value is a contractual reference price used to denominate the share consideration. It is not a market price, and it is not evidence that the operating businesses were worth $1.3 billion.

Concurrent transactions at closing

Three transactions occurred alongside the merger, and they are economically distinct from one another:

Two features of that table warrant comment.

The purchase by SCH’s chief executive officer was a secondary purchase. Chamath Palihapitiya, the chief executive officer of SCH, purchased 10,000,000 shares of Virgin Galactic Holdings common stock from Vieco US at $10.00 per share in cash, concurrently with the mergers, under a purchase agreement supplemented by an Assignment, Consent and Waiver Agreement dated October 2, 2019. The consideration was paid to Vieco US as selling shareholder. The company received no proceeds from that purchase. [S006, Introductory Note] [C012]

The issuance to an affiliate of The Boeing Company was primary. Immediately following consummation, an affiliate of Boeing purchased 1,924,402 newly issued shares for aggregate consideration of $20.0 million, in a transaction exempt from registration under Section 4(a)(2). The implied price was $10.39 per share, above the $10.00 deemed value used for the merger consideration.

Capitalization at closing

Immediately after giving effect to the transactions, the repurchase, the purchase agreement transactions and the Boeing issuance, there were 195,587,552 shares of common stock and 30,999,997 warrants outstanding. [S006, Introductory Note]

The share reserve under the 2019 Plan, inclusive of shares subject to options granted under it, was 21,205,644. [S006, Item 5.02]

Sponsor economics

The sponsor’s position is separable into the two instruments it acquired and the outcome at conversion.

Two observations follow directly from these figures.

First, the founder shares and the private placement warrants are different instruments with different risk profiles. The $25,000 founder share subscription was nominal relative to the value of the shares it converted into; the $12,000,000 warrant purchase was capital that would have been lost had no business combination been completed. Presenting the promote against the $25,000 alone overstates the asymmetry, and presenting it against the combined $12,025,000 is the more complete comparison. Both are given above.

Second, the sponsor received 15,750,000 shares on conversion, not the 17,250,000 founder shares implied by a fully exercised over-allotment. [S006, Introductory Note] The proxy reconciles the difference. Its ownership tables state that shares held by the sponsor exclude the 1,500,000 shares underlying the Director RSU Awards, restricted stock units granted to certain members of the SCH board in connection with the business combination.

The beneficial ownership table allocates that 1,500,000 across four SCH directors, each footnoted as shares underlying the Director RSU Awards.

The awards vest at closing and settle into shares on a date selected by the company between January 1 and December 31 of the year following closing, so they are outside the 15,750,000 reported at closing. Grant and vesting were conditioned on completion of the business combination, shareholder approval of the 2019 Plan and continued board service through closing.

The founder share count itself is the result of two prior adjustments. The sponsor bought 14,375,000 Class B ordinary shares for $25,000 in May 2017, after a surrender of shares for no value on May 18, 2017 and a share capitalization on August 23, 2017. A pro rata share capitalization on September 13, 2017 raised the count to 17,250,000 to hold the sponsor at 20% of shares outstanding on completion of the IPO.

Dilution of the public SPAC shareholder

A public shareholder who subscribed at $10.00 per unit held one share backed by $10.00 in trust before the combination. The same share was one of 195,587,552 outstanding immediately after it.

Basic shares outstanding at closing were 0.7893 times the fully diluted count. [C040] Exercising every warrant would deliver $356,499,966 to the company, since the warrants are exercisable for cash at $11.50. [C041]

Three points of method. The 1,500,000 shares underlying the Director RSU Awards are inside the 2019 Plan reserve and are not added again. Warrants become exercisable only if the share price supports it, so treating them as certain dilution overstates the effect at any price below $11.50. And the $24,150,000 of deferred underwriting commissions payable on completion is a cash cost borne after the trust was released, so it reduces cash rather than the share count.

Subsequent trading performance

Prices are unadjusted official closing prices unless a distribution or split requires adjusted prices. Where a target date is not a trading day, the next trading day is used.

Prices are stated as traded. Virgin Galactic effected a 1-for-20 reverse stock split on June 17, 2024, so consumer price series restate the whole pre-split history: the same October 25, 2019 close appears as $235.80 in an unadjusted lookup against the $11.79 at which the shares actually changed hands. Every figure above reverses that factor. The split is disclosed below. [S008, split event 2024-06-17]

The shares closed the first post-combination session at $11.79, 17.9% above the $10.00 trust value per public share, and were 83.2% above it twelve months later. Over the same twelve months the S&P 500 returned 12.5%. [S008, daily closing series]

Outcome to date

The table above measures the first twelve months. The combination closed six years and nine months before this analysis date, so the first year is a small part of the record. The figures below run to the close on July 31, 2026, the latest completed session.

Prices in this section are on the split-adjusted basis throughout, because a continuous holder’s return has to be measured on one share basis across the June 2024 reverse split. On that basis the $10.00 paid for one pre-split share corresponds to an entry price of $200.00, and the October 25, 2019 close of $11.79 corresponds to $235.80.

The redemption decision

A public SPAC shareholder faced a binary choice at the vote: redeem at approximately $10.00 plus interest, or hold. Holders of 15,877,288 shares redeemed, 23.01% of the public float. [C018] The two branches can now be valued.

The comparison is not a claim that redeeming holders bought the index. It states what the redemption right was worth against the passive alternative, which is the benchmark the decision is naturally measured against. On this transaction the 23.01% who redeemed preserved roughly 194 times what the 77% who stayed retained per share.

Dilution since closing

The share count is stated on the closing-date basis so the two are comparable: 100,683,438 shares outstanding today, multiplied by twenty to reverse the split. A holder who neither redeemed nor sold holds the same shares and a tenth of the proportional interest.

The dilution and the price decline are separate effects that compound. The price fell 98.73% per share while the share count grew tenfold, so the equity value attributable to the shares outstanding at closing fell further than the per-share figure alone indicates.

What funded the burn

The tenfold growth in the share count has a single explanation, and it is visible in the cash flow statements.

Financing inflows over the six years were 1.1186 times the operating outflows. [C057] The company raised 3.9560 times the $533,075,000 the transaction itself delivered.

The dilution is therefore the funding mechanism, not a side effect of it. Cash at year end fell only from $665.9 million in 2020 to $144.7 million in 2025 while operations consumed $1,885.2 million, because equity issuance replaced almost all of what operations consumed.

This is also the clearest measure of how the projection performed. The proxy projected EBITDA turning positive in 2021 and cumulative capital expenditure of $225 million over 2020 through 2023, which together describe a business that funds itself from operations after the first year. The reported outcome is $1,885.2 million of cash consumed by operations over six years, met by continuous recourse to the equity market.

Market capitalization against the cash the transaction delivered

The combined company retained $533,075,000 of cash at closing after redemptions, deferred underwriting and the concurrent equity. Its equity is now worth $256,742,762, which is 0.4816 times that. [C051] [C052]

That comparison is a valuation observation, not a cash-tracing one. It does not assert that the closing cash was consumed, and the company has raised further capital since, which the share count growth above reflects. What it states is that the market now values the whole equity below half the cash the transaction placed on the balance sheet.

Post-closing operating results

The condensed statements below are the reported figures on the company’s current basis, traced per line to the filing each came from. They start with the year of the combination and run to the most recent completed year.

Reported revenue did not exceed $7.1 million in any year from 2019 through 2025, against the $1.3 billion aggregate merger consideration at which the operating businesses were acquired, and the company reported a net loss in every one of those years. [S009, FY2019-FY2025 revenue and net income]

Two figures in the table are restatements. Net loss for 2019 was restated from $210,935,000 to $215,115,000, and for 2020 from $273,035,000 to $644,887,000. The XBRL record preserves both the original and revised values. [S009, FY2019 and FY2020 net income, prior reports]

The cause is the SPAC warrant reclassification. On April 12, 2021 the Acting Director of the SEC’s Division of Corporation Finance and the Acting Chief Accountant issued a Staff Statement on accounting for warrants issued by SPACs. It addressed settlement terms and tender-offer provisions of the kind in the SCH warrants, and warrant instruments that do not meet the criteria to be considered indexed to an entity’s own stock. The company filed an amended annual report on May 10, 2021 restating the years ended December 31, 2020 and 2019 and the quarters from December 31, 2019 through December 31, 2020. [S012, Explanatory Note, Background of Restatement]

The restatement moved the warrants from equity to liabilities, which brings their fair-value remeasurement through earnings. It changes reported net loss without changing cash, and it affected a large number of de-SPACs in the same period.

Projected financial information in the proxy, and what followed

The definitive proxy statement/prospectus disclosed projections that management of the VG Companies prepared and provided to SCH, covering 2020 through 2023. The projections assume commercial operations commencing in June 2020.

The stated operational assumptions were five vehicles in service by 2023, monthly flight rates reaching approximately five flights per vehicle per month by 2022, and five or six customers per flight by 2021. [S010, Projected Financial Information, p. 129]

Revenue against projection

Reported revenue was below 2% of projection in each of the four years. Cumulative reported revenue for 2020 through 2023 was $12.6 million against a cumulative projection of $1,229 million.

The projections were conditioned on a June 2020 commencement of commercial operations. Establishing when commercial service actually began, and reconciling that date to the projection’s premise, is required before the variance can be attributed and is an open item.

Gross profit, EBITDA and capital expenditure against projection

The proxy projects three lines besides revenue. None of them is defined in the proxy, and the proxy reconciles none of them to a GAAP measure. Each comparison below therefore states the basis on which the reported figure is constructed.

Gross profit is revenue less cost of revenue as reported.

Cumulative reported gross profit was $891.2 million below the cumulative projection. [C028] Cost of revenue exceeded revenue in 2023, when reported cost of revenue was $50.5 million against revenue of $6.8 million, so reported gross profit for that year is negative.

EBITDA is stated here as operating loss plus depreciation, depletion and amortization. That basis excludes the warrant fair-value remeasurement, so it is unaffected by the 2021 restatement described above, which changed net loss and left operating loss unchanged.

Cumulative EBITDA on this basis was $1,908.5 million below the cumulative projection. [C026] The projection has EBITDA turning positive in 2021; the reported measure is negative in every year and the annual loss widens across the period.

Capital expenditure is payments to acquire property, plant and equipment as reported in the statements of cash flows. [S009, FY2020-FY2023 payments to acquire property, plant and equipment]

Reported capital expenditure was 36.73% of the cumulative projection. [C030] Spending below plan is consistent with the projection’s premise, commercial operations from June 2020, not being met, since the projected outlay supports a fleet of five vehicles by 2023.

SEC review of the Form S-4

The registration statement was filed on August 7, 2019 and amended four times before it was declared effective. The staff of the Division of Corporation Finance issued two comment letters, dated September 3 and September 23, 2019, and the registrant responded to each on filing the next amendment. [S007] The response letters set out each staff comment in full, so the substance of the review is on the public record.

Two comments bear directly on the projections.

The first asked the registrant to disclose and quantify the material assumptions underlying the projections, noting that the investor presentation furnished on Form 8-K in July 2019 contained assumptions as to numbers of vehicles, total flights and passengers that appeared to underlie the revenue projections but were absent from the registration statement. The registrant revised its disclosure in response.

The vehicle, flight-rate and passenger assumptions set out earlier on this page are therefore disclosure the staff required, not disclosure the registrant volunteered.

The second went to the valuation. The staff asked the registrant to disclose the cash flow projections on which SCH management had based its valuation of the VG Companies. The registrant replied that the term “aggregate potential cash flows” in its disclosure referred to a comparison of projected EBITDA against projected capital expenditures, and that no other material projections of cash flow were used in evaluating the VG Companies.

SCH’s valuation was therefore not a discounted cash flow analysis. Both inputs to the comparison it did use are covered by the projection variance set out above: reported EBITDA on the stated basis was negative in every year against a projection turning positive in 2021, and reported capital expenditure was 36.73% of projection.

The staff also asked for the registrant’s conclusions about, and the steps taken to address, the causes of the October 31, 2014 in-flight incident, and for an estimate of the capital required to expand the fleet to five SpaceShipTwo vehicles by the end of 2023. Both produced added disclosure.

Satisfaction of the 80% test

The Cayman constitutional documents required that any business acquired by SCH have a fair market value of at least 80% of the trust balance at the time a definitive agreement was executed. The board determined the requirement was met. The proxy records that the board considered it appropriate to base that valuation in part on qualitative factors, naming management strength and depth, competitive positioning, customer relationships and technical skills, alongside quantitative factors.

The 80% threshold tests fair market value at the time the definitive agreement was executed.

No third party valuation was obtained. The proxy states that neither the SCH board of directors nor any committee of it obtained one in determining whether to pursue the business combination, and that neither was required to obtain an opinion from an independent investment banking or accounting firm that the price being paid for the VG Companies was fair from a financial point of view.

The valuation basis the board did use is the projected EBITDA against projected capital expenditure comparison described in the SEC review section above.

Matters not yet examined

The following are material to a complete analysis and are not addressed above.

Transaction expenses other than the deferred underwriting commissions are not disclosed in the filings reviewed, so a complete net-cash reconciliation is not yet possible and none is asserted.

The disposition of shares by the sponsor and by the selling shareholder is not established. Neither appears in the 2026 definitive proxy statement, which names every holder of more than 5% and every director and executive officer, so both are below that threshold; the proxy does not state when or at what prices they went below it. The Forms 4 and Schedules 13D and 13G would be needed.

The capital raises behind the tenfold growth in the share count since closing are not itemised here. The outcome of the 30,999,997 warrants, which exercise at $11.50 against a split-adjusted price far below it, is likewise not established.