Good afternoon. My name is Tania and I will be your Conference Operator today. At this time, I would like to welcome everyone to the Virgin Galactic's Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. . Thank you. Hosting today's conference call will be Seth Zaslow, Vice President of Investor Relations. As a reminder, today's call is being recorded. I will now like to turn the conference over to Mr. Zaslow. Please go ahead.

Thank you. And good afternoon, everyone. Welcome to Virgin Galactic's third quarter 2021 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer. And Douglas Ahrens, Chief Financial Officer. Following prepared remarks from Michael and Doug, we will open the call for questions. Our press release was issued about an hour ago and is available on our Investor Relations website. As this slide presentation that will acCompany today's remarks. Let me refer you to slide 2 of the presentation, which contains our Safe Harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions. And as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors section of the Company's Form 10-K filed with the Securities and Exchange Commission and other documents filed by Virgin Galactic from time to time. Readers are cautioned not to put undue reliance on forward-looking statements, and the Company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Please also note that we will refer to certain non-GAAP financial information on today's call. You can find reconciliations of the non-GAAP financial measures for the most comparable GAAP measures in our earnings press release. With that, I would now like to turn the call over to Michael.

Thanks, Seth. Good afternoon, everyone. This has been an incredibly busy and important quarter for us. In July, we threw our first phase flight with a full crew in the cabinet. There's a great achievement for Virgin Galactic and a global cultural moment with tens of millions tuning in from around the world. In August, we began selling spaceflights exclusively to our space fair community. A group of early hand-raisers, that reserve the right to be first in line. Response from this group has been fantastic. And in October, we began our fleet enhancement period, to meaningfully improve the durability, reliability and predictability of our vehicles and enable high cadence commercial service. Before I walk you through the details on these updates and other important developments during the past 3 months, I'd like to take a step back. I've been CEO for a little over a year now, and I've spent that time listening, analyzing, and identifying the adjustments needed for us to progress against our long-term goals. We've made several changes over the last 9 months in this regard. We've aligned people and processes to focus our efforts on long-term scale and profitability, and this new focus is enabling our transition from a prototyping space innovator to the global-scaled commercial operation we are becoming. I made key strategic hires, including a new CFO, a new president of aerospace, and new heads of engineering, people, and IT. All to ensure we have the right leaders and systems in place to realize our vision. And over the past year, we strengthened our Balance Sheet with two capital raises, giving us approximately $1 billion on hand to design and execute our long-term plan. I'm confident that these changes and those will talk about today have placed us on the correct path to…

Thanks, Michael. And good afternoon, everyone. Turning to slide 12. Before I review the financial results for the quarter, I'd like to begin with a few comments on our broader financial strategy. As you heard from Michael, we continue to see enormous demand for our spaceflight services. To begin to address that demand, our objective is to expand our fleet efficiently. In the short-term, enhancement period is a critical element of that strategy. Increasing the flight rates and extending the service life of our current fleet, will provide meaningful benefits for years to come. We are pleased to be embarking on this essential phase of work as it brings us closer to the start of commercial service next year. In addition, during this phase, we are completing the preparation of VSS Imagine, thereby adding a second spaceship to our fleet. In connection with the enhancement period, you'll see a noticeable increase in the Company's expenditures next quarter. As we will be actively working on multiple shifts concurrently, looking further out, we expect that the elevated activity level will extend into 2022 as we complete our planned enhancements. An elevated level of spending is also expected to continue in the second half of 2022 as we focus on expansion of our fleet, namely the development of the Delta Class and next-generation mothership. We plan to scale our engineering teams, engage in supply chain, and develop tooling for these new vehicles. We are excited to be transitioning to this important phase in our Company's overall journey to scale up our capacity to meet the tremendous demand for our space flight services. We expect to share more details on these programs on future calls. Our Balance Sheet remains an area of strength for us. We are well capitalized with cash, cash equivalents, and…

Thanks, Doug. Before moving to Q&A, I want to leave you with a few observations about our industry that reinforce why I'm so confident on our future. First, demand for space travel will outstrip supply for the foreseeable future. Second, we are truly differentiated in the sector. What others are doing is helpful, their success is good for the industry overall. But we have a different approach, not just to space flight, but to the entire consumer experience, right from the moment of sale. And finally, we're selling much more than a chance to hear from space. For that and alone is remarkable. We've created a meaningful community and we continue to find that there's strong desire to join this continuing, as evidenced by our ability to convert our followers into future astronaut. It's an exciting time for the Company, Our long-term vision is strong. Our goals are clear, are making meaningful progress. With that, let's turn to questions. Operator, we're ready to begin the question-and-answer portion of the call.

Certainly. We will now begin the question-and-answer session. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question is from the line of Oliver Chen with Cowen. You may proceed.

Hi, Thank you. Michael, as we look ahead, the supply-chain will be very important. What are some key aspects in terms of the priorities there and the the some of the bigger challenges flash opportunities you have as you formulate and construct a really robust supply chain and capabilities there. And on the balance of magic and logic here, on the magic side and the consumer experience, it sounds like the ticket sales were very well-received. What are your thoughts going forward as you think about the more broad consumer experience and how you will incorporate friends and family as well as thinking more broadly about pricing and opportunities? Thank you.

Thanks Oliver. To the first one on supply chain, I think there's 3 components of our space flight system. There's the mother ship, the spaceship, and our propulsion system. And our approach to each of those will heavily integrate the aerospace supply chain -- aerospace organizations within the supply chain. But in different ways. So for the mothership, we are actively pursuing a strategic relationship, both to kind of accelerate in advance the engineering and tooling development as well as the then manufacturing and assembly of that piece. Our mothership's as you are aware, are more of a standard aircraft piece. It's unique, clearly, but we can leverage supply-chain very well there. So that will be taking heavy advantage of the supply chain there and we're very pleased with the progress we've been making on that. With our spaceships, we, as we scale now, have more opportunity to go into the aerospace supply system with greater volume. And that allows us to do more leveraging the supply chain, both for parts and for sub-assemblies and for -- some of those can be very large sub-assemblies along the way as it goes. So spaceships will also take heavy advantage there. And then propulsion, same thing. There's a deep material base and subcomponents in our propulsion system. We brought in a new leader of our supply chain business, Lisa. She's fantastic, great experience, started with Honeywell and has gone through aerospace supply chain for quite some time and she's really ramped -up and jump-started our efforts here. As to the magic and the logic, we were very encouraged with the response from our space fair community. Like I said, they are wonderful people, who been along with us just for a little bit. But reasonably, little work on our part to do…

Thank you. Best regards.

Thanks, Oliver.

Thank you, Mr. Chen. The next question comes from the line of Doug Harned with Bernstein. You may proceed.

Hi, Doug.

I wanted -- Hi. I wanted to first make sure I understood the demand side. So you had 600 originally and then you've added 100 since you went to the higher price point of 450K. But you said you've got about 60,000 expressions of interest. It seems, perhaps naively, it seems that, well, you could have filled up those last 300 slots pretty easily out of that. How does that work? Why is that not the case?

And how to think about each of them. And then generally, I agree with you. We are very positive and optimistic on filling the last thousand, which will be our first thousand versus service. So, the first thing we did was -- as promised, go back to a space, fair community,this is?100? qualifications as we discussed. And we effectively use that, not quite beta test. They used it to test our sales process, right? We have CRM Fools that we brought to bear against this. And on a fairly small audience population we test the kind of customer journey we would use to take that group into very highly qualified leads. And with those leads is where we've invested the time for -- are reasonably lengthy but still able to move in a fairly efficient path. The conversion rates from the sales calls to actually committed space flight reservations was very strong. Another thing that we are pleased about along the way, so we like how our CRM mechanisms did the right level of filtering. And we saw that to great conversion from that going forward. Now, separate from that spacefare group, following Unity 22, we opened up kind of our interest list, just that. Just kind of raise your hand if you're interested in learning about the products, your spaceflight, I'm interested in flying to space. We think many of those people want to actually make the trip with all of what's involved. But some of them, as they learn about the information, will probably be the customer journey through the CRM mechanism, we can now apply that effectively at the 60,000 and bring back high-quality candidates to put the effort of our individual . So that's how we're doing that. The reason we are being purposeful on the…

And then if I can on the schedule, you've talked about for the next mothership for the Delta Class, Now, as I understood it before, the intent has been to do about 36 flights in 2023 and then have the Delta Class ready before 2024. Given the change in schedule that you you've talked about and also some of the things the new development center, it seems like you've got a lot to do here. How has that schedule changed default.

Here we've really spent the last 9 months positioning the Company to be able to handle that work, both in the focus of the Company with now it's we're prioritizing building up the teams to go after this, all of which is done in a way that we can move off of a, maybe a milestone focus, which is done during the prototyping phase value over the long-term. So we're ready for the amount of work that is coming. As to '23, what we've tried to give is, we expect Unity, which will be coming onboard for commercial service in the end of '22. We expect it to fly basically on a monthly basis. And then with Imagine, it will start its flight test program in the first quarter of '23. That will be using -- those will be revenue-generating is what we expect. But with research flights and then as we get into the second half of '23, we will flip Imagine over from research into private astronaut flights. So -- and we think Imagine, we expect to run on kind of a twice a month, every two-week basis. So that gives you some ability to do some calculating on flight rate in?'23? providing guidance on the timing on the Delta Class. But what I would tell you is we expect the Delta program to be on par with other rapid aircraft development programs, same with the mothership there. So we're moving at pace. That's why you see us pulling down in new design center down in the Southern la basin out it's what's why you will see us ramping up our engineering resources. Why you see us expanding our supply chain with some strategic relationships right off the bat. All of these are to get this work going and done in strong order.

Okay, very good. Thank you.

Thank you, Doug.

Thank you, Mr. Harned. The next question comes from the line of Kristine Liwag with Morgan Stanley. You may proceed.

Hi, Kristine. Kristine, are you there? Maybe you're on mute. Operator, why don't we go to the next question and if Kristine comes back into the queue, we can come back to her.

Certainly. The next question is on the line. Kristine has joined the queue again, so Kristine, your line is now open.

Hi, Kristine.

Hi, can you guys hear me?

Yes, we can.

Hello? Michael, with the planned fleet expansion, can you just discuss the cash investment requirements for the Eve enhancement and the Unity enhancement, and the timeline of that cash cost?

So I'll give just a note on what we're doing and maybe let Doug tick up any specifics behind it. But your seeing our spend going to a larger amount in the fourth quarter is kind of guidance we're giving. And that makes sense, right? We're working on multiple shifts as we go into this enhancement program. That enhancement program's going to carry itself out kind of in the manufacturing facility all the way to the first half of the next year. So that's where you heard Doug sharing that we expect that elevated level of spend to continue into '22 and then as that's happening, we're of course also building up our design efforts, moving into tooling, moving into the early ways in which we're going to gut the Delta and the Mothership programs, have accelerated beyond concept and design and into those later paces. So that was the structural piece. I'll let Doug maybe talk anything further from a specific standpoint, you'd want to share, Doug.

I think it's important to think about the phasing of this work and we're really excited to be moving into this next chapter here with expansion of our fleet with the new Mothership and the Delta Class. But, yes, at the front end you've got the investment in NRE. That's the initial part, which is it's geared towards that first artifact there in the fleet and you see that investment that we then get average as we go forward because we now have invested that time in the design and then we make copies basically, as we roll forward. So you've got sort of that front-end investments that pays dividends for years, but as Michael mentioned you got the NRE phase engineering base. The tooling gets going and you start to get into supply-chain development and then leading into the parts fabrication and assembly. So phase in that traditional order, but the front end will be mostly focused on reentry.

I see. And maybe following up on VSS Inspire. From what I understood, you guys have the parts to build that spaceship already. What would make you -- what was the decision tree here in terms of building that or maybe going straight from Imagine to Delta?

Sure. So we have about 85% of the parts of Inspire have been completed. And the priority for us is to get to commercial, that's our clear priority and first, in two areas: getting through this enhancement program, Imagine with the Mothership Eve, which will have greater capacity with it now. So that's one clear focus. Will be, as Doug mentioned, while we begun to go through an in our period here, then we're going to be making copies, right. That's a production model space. And at a much higher rate of on it, that was our Along with the new Mothership that will carry that those are the main priorities right now. And so then Inspire allows us an optionality. And so we're taking our time to assess when and where and how to go forward with Inspire. But we are clearly putting our efforts right now into those 3 legacy ships, as well as the future fleet.

Great. Thank you very much.

Thanks, Kristine.

Thank you, Ms. Liwag. The next question comes from the line of Ron Epstein with Bank of America. You may proceed.

So just a -- maybe a follow-on to some of the prepared remarks. You guys mentioned potential future inflows like capital to help finance all those. How are you thinking about that? Convert? I mean, what are you thinking about?

I'll take that, Ron, so thanks for the question. So we're headed into an important phase of activity. Which is, I think going to provide some great catalyst for our Company. And we've got the enhancement program going on, getting us ready for commercial service. You've also got Delta and next-gen Mothership work going on to expand our fleet. So do you expect those to be good catalyst for our Company as we move forward. Like now, keeping in mind, we have a billion dollars of cash and equivalents and so on, on the Balance Sheet. So that gives us a great runway for this work. I know you've got spaceflight revenue starting to kick in already, the deposits before we need to do that. But we have options. There's multiple ways to go about that, whether it's equity or debt, those are all available to us and we'll look at those more closely as we get to that point.

And then maybe just a follow on the supply chain. How are you managing that. In your production we're gonna be probably in a phase where all of similars basis will be ramping up or your hands will be ramping the business chip. Manufacturers with the ramping. How are you didn't manage? that does typically -- like any business, the big guys trying to get first dibs at the trough. So how do you think about that and how do you manage that risk?

But I think it's a lot of that goes to selecting your supply chain partners thoughtfully. And with supply chain partners that are excited and looking forward to diversify their business with things of what we're doing versus somebody who just really needs to focus on giant volume of commercial air. But there's a wide ecosystem as you're well aware in that category. Now in the management of that ecosystem, we intend to be extremely active. And as with most supply chain efforts, ensuring the quality and the partnership with those partners is really, really critical. So we will be building our supply chain team to be present, both with the suppliers when they're large major pieces, as well as very intensive quality efforts on things that are more. We've seen great response in the supply chain for what we're looking to do and the volumes in which we're doing it there. But we just we'll be thoughtful and we have enough different options in front of us that we're not concerned I think to the question you're raising or Is they're just going to be no capacity in the aerospace supply area. We do think the economy's coming back. We do see aerospace coming back, but we still see plenty of supply and partners who are interested in working for us.

Got it. And then maybe just one last one. Given all the changes in the programmatics and what's going on, when do you expect to be cash flow positive?

So the key to that will be really the ramp of the Delta Class the real significant increase in our cash inflows, which that's kind of the point in time to think about.

Got it.

The next question comes from the line of Scott Forbes with Jefferies. You may proceed.

Hi. Thank you. Just to kind of -- to circle back to the demand side. You talked about some positive feedback around updated pricing, but has there been any impact or conversion from the flight delay and have you seen any meaningful change in the demographics of your customers?

Let's see. First on delay, we have not seen -- I will call it any impact to our demand or really even to our existing base of future astronauts from the shift in schedule. And we're just in the movement of Unity 23, just for clarity, while we move the Unity 23 flight, that one individual flight, multi-month shift. The actual shift our overall program is deminimis. So we -- the Imagine will come onboard. The Delta Class isn't impacted by this when Unity 23 is. So our actual building up of real flight capacity and movement of the future astronauts isn't impacted by this much at all. So we haven't seen an impact from that standpoint. And then, I'm sorry, Scott, one was -- what was the second part of your question there? We are -- we're so early. We've had 100 people come in from the space fair group, and this was a group that was, I'd say on board and hand raising even before Unity 22 and our next outreach. So I will have to go through and sort the demographics of it, but it probably is more relevant as we then go through this next 60000 to kind of close out the first 1000 people. That's where I think we'll start to have enough data in front and we can bring some of that data back on future calls. So I think it's a good question.

And then one quick follow-up. I mean, you've been able to largely navigate through these issues as they arise pretty well and development phase. But from a overarching risk perspective, where do you see yourself on the learning curve as you kind of move towards unlocking this full-flight potential.

This is, as I put, I think, even on the front slide at the beginning here, this is a really important period for us. And we talked about it as going from a prototyping space innovator, which is where this Company has been. And really a global scale commercial enterprise, with a bit of comes along with the requirements to deliver in a more focused and more predictable fashion. You see the work we've done over the last 9 months.

So it's been building towards this. We focused the Company down on commercial scale. So, whereas as a prototype or -- the Company's really organized just a very good example. We're taking a multi-month period here to take these ships to where they can be both inspections off flight-by-flight basis. And that moves our up, right? Those are long-term decisions. All of our focus is trying to move to decision-making on the Company to create value for the long term. And then we've taken that focus, added really strong leadership coming in. We have -- we're now adding to that. So, this is the period where we're moving to commercial because we feel very confident in the technical underpinnings of our baseline system that was what that big first chapter was is getting that technical risk worked through. We feel very confident in how we're moving forward now at this phase. And that's time periods to basically kind of longer time periods to get the design of the Delta Class that we can now deliver those on cost effective basis that allow flow-through to happen on cash side so that we can really grow the business.

Thank you.

Thanks, Scott.

Thank you, Mr. Forbes. The next question comes from the line of Michael Ciarmoli with Truist. You may proceed.

Hey, good evening, guys. Thanks for taking the question. Maybe just a follow-up on Ron's line of questioning. On the supply chain and securing commercial partners, I think earlier you mentioned some NRE costs. Are you guys bearing all of these NRE costs and just how are you maybe negotiating contracts with some of these potential suppliers? I mean, are you basically farming out to potentially take on some risk?

So I think there is -- we have some options in that approach and there's some choices there, and some of the supply chain can help accelerate our design. In that part, it is a unique Mothership. It does unique functionality. But it is less the core of our intellectual property around our spaceflight system. And so, we can take advantage of engineering partners, as well as tooling manufacturers, parts manufacturers, fabrication, assembly and all that, so that's on that one. On the spaceships, that is really core technology that we are really pleased to have. We love the fact that we fly wings-based planes and we will maintain the engineering and design of that ourselves. But then, there's all sorts of opportunity around parts and sub-assemblies with that, and we will explore, even to the -- there are options we have around assembly as you carry that towards the final ends of the program. So a lot of choices in that, but the spaceship itself, I think you'll see us hold on to kind of the core IP around that through designed and In the propulsion system, we have, I'd say probably in between those 2 things.

Got it. That's helpful. And then just -- I think Mike, you'd mentioned 400 flights per year. Assuming the next class of ships. I mean, how many -- It seems like you need over a dozen ships to get there. Do you have a time frame in mind of when we get to 400 flights per year?

We've said, generally, I think to reach that level we're going to need, like the words I've been using is, high single-digit, low double-digits. And that's obviously depending upon the turn of those ships. But we still expect the Delta Class to be 2 pilots plus 6 seats in the cabin.

Okay.

So that's the number we need when we are building the Delta Class program. We are planning to create the production line of that, if you will, with a large supply chain eating into that line, where we have multiple ships moving in parallel. And so,

Got it.

Getting the started as we -- do you know what that looks like. But at that point, we will be moving multiple shifts through in parallel or some months apart as opposed to one ship at a time. And that will allow us to scale up reasonably quickly. That starts.

Okay. Thanks a lot, guys.

Thank you, Mr. Ciarmoli. The next question is from the line of Austin Moeller with Canaccord. You may proceed.

Hi, Austin.

Good evening, everyone. Considering that the Delta Class is intended to be the production series spacecraft, is there any planning going into that regarding upgrading the RocketMotor to raise the apogee above the Karman line or to increase the amount of time that you're actually in microgravity for the customers?

I think there's going to be some fun things to watch when we start doing our spaceflights flights with spaceship 3B, right as it move through it. It was the trailblazers ship for us. And each time we flew Unity and expanded the flight envelope, we would make some of the adjustments along the way. And as is typical in flight test program like that, you end up not getting the structural components in the strength in exactly the place you want from the original design so that you end up over bolstering some areas of the ship that didn't necessarily -- get to areas that you didn't have originally. And so Unity kicks up a little weight over time as test. Imagine was able to take the strength in the places where we knew we needed question around apogee, I think will be pretty interesting to watch as Imagine goes. And then, taking all of that knowledge in too, it will only get better from there.

Okay. That's very question on the glide cone warning during Unity 22. Was part of the decision, just given how late it was into the engine burn to proceed with ascent even with the glide cone warning, did the interest in burning up all the propellant before engaging in reentry and essentially in an unpowered glide descent, propellant in the vehicle as you try to ?

So our Unity 22 flight flew on a acceptable, perfectly working path to space and back again safely as you all saw. As I mentioned earlier up here, our pilots train a variety of flight pass. The flight conditions on that day ascended at a less vertical angle as it went up and so went further towards the edge of the glide cone coming back. The way our avionics systems work is, the lights come on to provide visual signals for the pilots, who are monitoring a variety of energy states of the ship all the way through, provide visual signals that -- their need to act. The particular light that came on that you're talking about was at the very end of the rocket burn and almost basically within the response time that you would be expecting, the last 3 seconds or so. And so it was -- the pilots had already made the energy conditions and the trajectory modifications they wanted to make at that time and that took it successfully up to space, hit its apogee above the astronaut line and came back safely. As we tried to call out in the slide with the FAA, as we came down, we had not cleared the airspace in an area of section that the glide -- or that the ship came through at the end. And that was something that we needed to respond up with the FAA, which we have now done. But we were happy with the trajectory, we'd be willing to fly that trajectory again if needed.

Okay, great. Thank you, guys.

Operator, why don't we take one last question, please?

Certainly. Our last question comes from the line of Peter Skibitski with Alembic Global. You may proceed.

Good afternoon, everyone. Thanks. Can you hear me? Can you hear me, guys? Okay. Great.

We can hear you.

No, thanks, everyone. Sorry about that. Let me pick up the handset. Quick question for Doug. The elevated SG&A spend in the quarter, are we going to head back to a more normalized $40 million a quarter type spend as you head into 2022 or can the spend even decline next year, given the focus on R&D and CapEx through the enhancement period?

If we look at the most recent quarter, we did have some things in there that don't necessarily reoccur, like we did have some marketing costs around that Unity 22 flight. We also booked some that don't reoccur and so some of those things you wouldn't see again. But there would be some growth in G&A into the future as we scale the rest of the business, but certainly not at the same rate. But I think you saw a couple of it's not going to dramatically change the profile.

Okay. I appreciate the color. If I could sneak one last one in. Just so we don't get too far out ahead of our skis on customer deposits, it looked like you guys in the quarter are just booking the $25,000 non-refundable deposit, so should we expect backlog basically to remain pretty flattish until we get to late 2022 or late 2023? Is that kind of the expectation?

Let me just clarify about the deposit. So we talked about the approximately 100 seats or space flights we sold reservations for. And then the deposits come in at $150,000 for those. But those have been over Q3 and then the first part of this quarter. So what you're seeing on our Balance Sheet just reflects what came in as of September, and there is a little bit of a lag from when we contract with somebody when the cash appears so you just have --

So we should expect a bigger jump in the fourth quarter?

Yeah. It'll keep going because we're going to keep selling these spaceflights and we take in $150,000 per flight.

Okay. Great. Thank you.

Thank you, Mr. Skibitski.

At this point, we'd like to thank everyone for your interest in Virgin Galactic and for joining today's call.

third quarter 2021 Earnings Conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.