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Virgin Galactic Holdings Inc (NYSE:SPCE)
Q3 2021 Earnings Call
Nov 8, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 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. [Operator Instructions] 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 would now like to turn the conference over to Mr. Zaslow. Please go ahead.

Seth Zaslow -- Vice President, Investor Relations

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 Doug 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 is the slide presentation that will accompany today's remarks. Let me refer you to slide two 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 to the most comparable GAAP measures in our earnings press release.

With that, I would now like to turn the call over to Michael.

Michael Colglazier -- CEO

Thanks, Seth. Good afternoon, everyone. This has been an incredibly busy and important quarter for us. In July, we flew our first base flight with a full crew in the cabin. It was 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 space flights exclusively to our Spacefarer community, the group of early hand raisers who had reserved 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 three 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 I'll talk about today, have placed us on the correct path to launch commercial operations and achieve our long-term vision.

We are building a new industry from the ground-up. All of you on the call who follow this sector know that aerospace is a complex endeavor, and to grow to 400 flights per year and multiple space ports we must manufacturer and operate efficiently and predictably. And while unexpected setbacks are a normal part of aerospace, we can and will do more to anticipate them and lessen their impact on our timeline.

I focused the Company on three primary work efforts and they all ladder up to commercial service at scale, fleet readiness, fleet expansion and commercial strategy and execution. On fleet readiness, we are beginning our vehicle enhancement program. This will be a game changer in terms of predictability, durability and flight rate capability. More on that in a moment. At the same time, we are planning for the expansion of our fleet with our Delta Class spaceships and next generation motherships to be known demand [Phonetic] for our product to support our global ambitions. And we're developing our customer base for commercial service, maintaining a strong and engaged pipeline of future astronauts or continuing to refine our consumer experience.

We are executing on all three strategic pillars simultaneously. The work has been done to align our organization, strengthen our balance sheet and ensure we have the right leaders in place will enable us to execute successfully.

The coming months will continue to be busy for our Company and for commercial space more broadly. Our peers like us continue to pass important milestones. And as I said before, this is good for us. It fuels demand and it normalizes the concept of space travel. At the same time, we are building something very different. We fly spaceships, they are visually amazing, they are purpose designed for safety and experience and they are distinctly different. Our experience is different. We focus on the journey and the memory, not just on the ride. Our future astronaut community is different and all of these differences enables us to build a business for the long term.

Turning to slide four, I'm going to start with an update on commercial sales. I will follow with an overview of our enhancement program and near term timelines, and close with our fleet expansion plan. And then I'll turn the call over to Doug who will provide a financial update.

Moving to slide five and our commercial sales efforts. We have opened sales to our early hand raisers and we are selling tickets ahead of the pace we've planned. The pricing strategy we announced last quarter has been well received. Our privatize Ascot [Phonetic] sales process is effective and efficient, and it is architected to be scaled. Given the newness of our product, we start by broadly showcasing the awe-inspiring aspirational value of our experience and we capture top of the funnel interest with leading CRM tools.

Unity 22 accomplished this in brilliant fashion and brought tens of thousands of requests or information on our products. After filtering this large demand and the highly qualified sales leads, we converted these into signed contracts via one-on-one sales discussions. We then on-boarded our new customers into our unique future astronaut community.

With regard to sales pace, we plan to on-board new future astronauts ahead of but in conjunction with the growth of our fleet. For the current sales cycle, we are targeting to have our first 1,000 future astronauts confirmed by the start of commercial service. We've tested our sales process over the last 2.5 months with our Spacefarer community. As a reminder, this is a group of early hand raisers who in 2020 placed a modest, fully refundable deposit of $1,000 to reserve the right to be offered reservations when they first became available. It's worth noting that these deposits were made before we announced our updated ticket price.

The early sales indicators from this Spacefarer group have been strong. Since September, Spacefarer have purchased approximately 100 seats at our new pricing of $450,000 per seat. Each contract includes a $150,000 deposit, $25,000 of which is non-refundable. We believe these results from a relatively small group that had little pre-qualification showed the incredible strength and appeal of our flight and our membership community. They also indicate the significant value that people recognized in our product at current price points.

We plan to close out sales efforts with our initial Spacefarer group and other early hand raisers before the holidays. Beginning in early Q1, using a similar filtering process with the more than 60,000 people who recently inquired about flight information, we will offer the remaining slots to become one of our first 1,000 astronauts. The overflowing demand from this group will be channeled into a new Spacefarer program, whose members will be given first access to the next tranche of space flights when they are made available.

As we've said many times, we know that traveling to space is perhaps the most meaningful journey that can be experienced. Preparation and anticipation substantially deepen the impact of transformational experience, which is why Virgin Galactic focuses on the entirety of the journey, not just the spaceflight. This distinctly Virgin approach offers future astronaut community with access to unique and exclusive experiences.

Let's start at the moment of sale continued during the buildup to the flight and then extended long after. Our intention is to always have a committed group of future astronaut that exceeds our near-term capacity with a vetted list of Spacefarers at the ready to convert ahead new tranches of tickets becoming available.

Our private astronaut market all the most visible is one of three markets we are built to serve. The others, the microgravity research and suborbital training for professional astronauts. The pricing strategy we announced last quarter reflects this diverse offering and has proven effective across all markets. We continue to field inquiries for reservations across the world, including from governments and scientific researchers.

Shifting now from our flight test and ship enhancement programs on slide six, the Unity 22 flight was important for testing our customers' experience. It was important to jump-starting our commercial sales process. And perhaps most importantly, it allowed us to sell the dream. The photos of Sirisha, Colin, Beth and Richard cheering down at earth. That look of awe on their faces said it all. So, it's clear that it was a transformative experience for them and proved to me that the products we are offering are unmatched.

The flight was watched by tens of millions of people around the world who wanted to share in the experience through our live stream. That's the power of what we're doing. Following the flight, there is a significant amount of media coverage on an FAA investigation into an airspace deviation that we failed to communicate in real time. We were in a flight-test program and testified as design for constant learnings and improvements. We learned, we addressed the learnings and we moved forward, as we've done in this case.

Since much of the coverage of this topic had the potential to be misconstrued, I want to address it as clearly and concisely as I can. Our pilots anticipate, plan and train for a range of flight conditions and acceptable flight to take our ships to space and back safely. Flight conditions during Unity 22 led to a flight that in line with our training and procedures, that reached basis planned but with a less steep climb to space.

On the glide back to the runway, our spaceship briefly left our previously permitted airspace. This is a scenario that requires notification to the FAA. While the FAA is always in our control room during flights, our flight test procedures did not have a specific protocol for mission-control to communicate the situation to air traffic control in real time. And this required rectification.

We worked diligently and in full partnership with the FAA to identify a solution that was approved by the FAA in September and which concluded the investigation. As depicted on slide seven, the solution included the expansion of the protected airspace for future flights, providing room for a variety of future flight trajectories including the trajectory that was flown by Unity 22.

We also implemented enhanced communication protocols, specific to our space flights, to ensure mission control related notifications to FAA air traffic control in real time. These updates to our airspace and notification protocols have strengthened our preparations for the commercial launch of our space by experience.

Moving to slide eight and our planned modifications for event Unity, these enhancements are designed primarily to meaningfully increase the flight rate capability of our original ships. These changes will favorably impact the business for years, as they allow us to work through our backlog of demand and unlock the routine access to space as part of our value proposition and business model. I want to take a moment to talk through the enhancements being made to each vehicle.

The majority of modifications will be performed on our mothership, Eve. We recently flew Eve from spaceport America in New Mexico to our manufacturing facility in the Mojave where work has already begun. And just as an aside, the picture you see here on slide eight is a real shot that was taken with a long lens by a Company fan watching this recent flight from New Mexico back to Mojave. It's a beautiful reminder of just how elegant and aspirational our spaceflight system is.

As shown on slide nine, Eve's enhancements will focus on three areas. First, we're modifying the center wing and launch pilot. This area is challenging to inspect, so we are changing the design to a more robust structure that will greatly reduce the frequency of required inspections. Second, we plan to replace the horizontal stabilizers or H-Stabs located at the back of the vehicle. Third is the bodywork to upgrade our avionics and mechanical systems and strengthen various areas across the ship to reduce the volume of regular inspections and increased flight rates [Phonetic]. These modifications will increase the service life of the vehicle overall.

The combination of these efforts, subject to testing and verification, will see us target Eve to complete 100 flights between major maintenance inspections, up from the current interval of 10 flights between inspections. While Eve is not flying, we're taking the opportunity to enhance VSS Unity with the same goals in mind. Programming work is designed to reduce the amount of unplanned maintenance by reinforcing, upgrading and replacing various joints and components located throughout the ship by reducing how often we need to inspect these parts, as we believe the combination of these efforts will be improved flight frequency, less maintenance and longer service life. Subject to testing and verification, our goal is a 4-week to 5-week turnaround for Unity. Once our enhancement program is complete, we will validate the upgraded vehicles through appropriate testing and begin commercial service.

Slide 10 depicts our expected flight schedule following the enhancement program. We'll first fly Eve solo to validate the enhancements made to the ship. In the second half of 2022, eve will then carry VSS Imagine to its permanent home at Spaceport America. This is going to be an exciting milestone that will mark the first time we have two active spaceships in service.

Unity should begin revenue flights starting with research flights and adding private astronaut flights in the fourth quarter. VSS Imagine will begin its flight test program in 2022 with glide flights. And we expect Imagine to begin revenue space flights in the first quarter of 2023. Imagine will start with research payloads and then proceed to join Unity with private astronaut flights.

As previously announced, we recently reordered our schedule and moved our research flight with the Italian Air Force to follow the enhancement program. Although this change does not have a material impact on the revenues or timing of commercial service, I'd like to touch on the reasons for the schedule shift.

Our preparations for the enhancement program include durability testing our materials used within our vehicles to better understand and enhance their service life and readiness for commercial service. As part of this, we've been conducting lab-based test to expand our database on material properties. These tests help assess how certain structures could behave over their lifetime with an aim to improve flight rates by increasing the time between major inspections.

One particular test, quite a possible reduction in the strength margin of materials used to modify some specific joint. For clarity, we have not observed any damage on our ships. However, the test is flagged and may even further analyze these joints to determine what if any enhancements will be needed to further increase their strength and enable the flight interval objectives we are targeting. Given the time needed to complete this work, it was logical and beneficial to avoid delay of the enhancement program by choosing to complete this work in parallel. We expect the required analysis and if necessary any follow-on modifications will be completed within the schedule of the overall enhancement program.

Turning to slide 11 and fleet expansion, as we said, we are targeting a flight game for 400 flights per year per spaceport. To get there, we need to efficiently expand our fleet and that means growing both our talent base and our footprint. To start, we're investing in a new engineering design and collaboration center. Our design and engineering team has been located at our facility at Mojave. We've strong roots at Mojave. It's a great facility for us and we will been a great facility for us and we will continue to maintain our presence there. But we also recognize that growing the business requires us to be in locations where we can access additional talent at scale.

We've made the decision to locate our Center for Design and Engineering in the southern LA Basin where there is a strong aerospace quarter, ranging from El Saputo all the way to San Diego. Just recently, we leased a location in the heart of this aerospace quarter that will serve as the primary hub for R&D and the design and engineering of our new vehicles specifically the Delta Class spaceships and our next generation of motherships. We expect to ramp up engineering and support team talent against these programs over the coming three quarters.

I want to take a moment to talk about these next-generation vehicles, starting with the Delta Class. This is our production model spaceship, which is being designed to fly once per week. Over time, we anticipate Delta Class vehicles will constitute the bulk of our flight capacity. We are in the concept design phase of this work, which is the most critical from an investment standpoint.

On the concept days it's typically only 10% to 15% of the program's overall effort. The work in this space usually determines around 70% of the total cost base. Getting key design and manufacturing efficiencies built in now is absolutely critical for the success of the program over the long-term. These decisions are being made by a cross-functional team of leaders including engineers manufacturing and maintenance experts and pilots.

In addition to the conceptual design work, we've been exploring options to house our Delta Class station facilities as we will need more space than is available at our Mojave factory. We've been in contact with multiple municipalities about locations and have received interest from at least three states. We expect interest to grow as we estimate we'll be creating more than 1,000 new jobs. We are looking forward to the new opportunities and community relationships that our expanded footprint will bring.

As we add new spaceships, we will need additional motherships beyond Eve. Since the mothership relies primarily on airplane technology, which is industry standard, there's opportunity for us to benefit from third-party expertise for the majority of parts and fabrication. This will allow us to increase our speed-to-market and realize meaningful cost efficiencies without sacrificing quality or performance. We're in advanced negotiations on a strategic relationship for the production of our new motherships. And we will provide updates on our progress on both the Delta Class and next-gen motherships from future calls.

Regarding our second SpaceShip III vehicle, VSS Inspire, we're continuing to evaluate the most efficient path forward. Our priority is commercial service and scale, and in the immediate term we are directing our resources toward Eve, Unity and Imagine, while simultaneously expanding our engineering team for the development of the Delta Class and next-gen mothership. We'll update you on Inspire in future earnings calls.

I will now turn the call over to Doug for our financial update.

Doug Ahrens -- CFO

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, the 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 the 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 marketable securities of approximately $1 billion as of the end of the third quarter. Going forward, we will continue to evaluate opportunities to raise capital as we grow and scale our business. We plan to use a combination of cash-on-hand, revenue from commercial space flights, as well as future inflows of capital to fund our strategic objectives.

Let's review our results for the third quarter. Free cash flow was negative $53 million compared to negative $59 million in the prior-year period and our guidance of approximately negative $65 million for the third quarter. The variance to guidance was primarily due to a shift in the timing of the Unity 23 flight as well as the start of the enhancement program, both of which resulted in lower spending than previously forecast. We also received higher-than-expected cash inflows from the sale of private astronaut reservations following the reopening of ticket sales.

Looking ahead, we anticipate fourth quarter free cash flow in the range of negative $85 million to $95 million. The increase in spending relative to the third quarter is expected to be driven primarily by the increased activity I mentioned related to the enhancement period, as well as the work we're performing on the Delta Class in mothership programs. Consistent with prior years, we also expect to incur certain public company costs in the quarter.

Turning to slide 13 and the income statement, we generated revenue of $2.6 million in the quarter related to sponsorship activity from the Unity 22 space flight in July as well as revenue earned under government contracts from progress on the completion of certain technical milestones related to payload services.

Total GAAP operating expenses for the third quarter were $85 million compared to $77 million in the prior-year period. The increase in expenses was primarily due to marketing-related costs attributable to the Unity 22 spaceflight and the reopening of ticket sales, as well as an increase in employee costs and non-cash stock-based compensation expenses. These increases were partially offset by a decrease in contract labor and material costs associated with the development of our spaceflight system.

Total non-GAAP operating expenses were $70 million compared to $66 million in the prior-year period. GAAP net loss for the third quarter was $48 million compared to a loss of $92 million in the third quarter of 2020. The decrease in net loss was attributable to the change in the fair value of warrants, partially offset by an increase in stock-based compensation expense. Adjusted EBITDA was negative $68 million compared to negative $66 million in the prior-year period.

I'd like to now hand the call back to Michael.

Michael Colglazier -- CEO

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 this sector. What others are doing is helpful and 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 [Phonetic] 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 community, as evidenced by our ability to convert our followers into future astronauts.

It's an exciting time for the Company. Our long-term vision is strong. Our goals are clear. We are making meaningful progress. So with that, let's turn to questions. Operator, we're ready to begin the question-and-answer portion of the call.

Questions and Answers:

Operator

Certainly. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Oliver Chen with Cowen. You may proceed.

Oliver Chen -- Cowen -- Analyst

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 -- some of the bigger challenges/opportunities you have as you formulate and construct a really robust supply chain and capabilities there?

And on the -- there is a 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're -- your you'll incorporate friends and family and as well as thinking more broadly about pricing and opportunities? Thank you.

Michael Colglazier -- CEO

Thanks, Oliver. To the first one on supply chain, I think there is -- we have three components of our spaceflight system, there is the mothership, 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 and advance the engineering and tooling development as well as be then manufacturing and assembly of that piece. Our motherships, as you're aware, are more of a standard aircraft piece. It's unique clearly, but we can leverage supply chain really 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 sub-components 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 has really ramped-up and jump-started our efforts here.

As to the kind of magic and the logic, we were very encouraged with the response from our Spacefarer 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 pre-qualifications for that group. And so to be kind of around 100 spaceflight reservations from that group at the new price points we just thought really showed the value of what we're doing.

Now, you're talking about where we going on the consumer experience. We didn't bring much to talk about today, but we are parallel-passing the -- we're generally looking at it as kind of a word of the astronaut campus, that we will be developing as a place where as we start to scale up with multiple flights in quick succession, where will the people will be preparing in the number of days before and the day after their flight. That work is very exciting. We'll be bringing that forward in future earnings calls.

And embedded within that work, Oliver, is parallel experienced tracks for friends and family to come in. We do expect the astronauts to bring friends and family. We do expect that, that is kind of incorporated into the price point as they come along the way, so that $450,000 price point includes the ability to bring some friends and family. And we think that is a smart business strategy as well, not only just to make the experience for the astronauts stronger, I think this is going to be the first people raising their arms saying I'd like to go next -- is having been through and seem what's happening up close and having the most of that. So good progress on that one and more to come in future calls.

Oliver Chen -- Cowen -- Analyst

Thank you. Best regards.

Michael Colglazier -- CEO

Thanks. Oliver.

Operator

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

Michael Colglazier -- CEO

Hi, Doug.

Doug Harned -- Bernstein -- Analyst

I wanted -- hi. I wanted to first make sure I understood the demand side. So you had 600 originally and then you've added a 100 since you went to the higher price point of $450,000. 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 that you could get immediately to that 1,000 level?

Michael Colglazier -- CEO

Well, I will -- first let me kind of clarify the numbers 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 1,000, which will be our first 1,000 for commercial service. So, the first thing we did was, as promised, go back to Spacefarer community, this is under a 1,000 pretty low pre-qualifications as we discussed. And we effectively used that, not quite beta test, but used it to test our sales process, right. We have CRM tools that we brought to bear against this. And on a fairly small audience population, we tested 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 one-on-one sales calls that 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 liked 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 Spacefarer 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. And we had around 60,000 say yes, please give me information about your product, your spaceflight, I'm interested in flying to space. We think many of those people will 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 aspirational astronauts, they'll want to go in the future somewhere down the road.

So this is -- now that we've used the Spacefarer group to assess journey through the CRM mechanism, we can now apply that effectively at the 60,000 to bring back high-quality candidates to put the effort of our individual calls on. So, that's how we're doing that.

The reason we are being purposeful in the pace is each one of these people we on-board into our future astronaut community, that's very, very important because this is where people will spend the time mentally and kind of emotionally preparing for this space spaceflight and we have the time to do it. We know we've got this 8 months to 9 months expansion or enhancement program in front of us and we know we'll be starting to fly out the conversion service in the fourth quarter. That's what we're expecting. So, we have time to do this well. That's why we started with this first group of Spacefarers.

I will say what we do expect, to your point, is the 60,000 people going to likely have much more demand versus the remaining 300 or so since we have left in our first 1,000 and we will then take the overflow of that 60,000 demand and funnel into a new Spacefarer group and that's the group we will give first access to the next project ticket. So, we're always going to stay active at the top of the funnel but then release tickets in tranches so that we can put dedicated sales effort to get steps and always stay ahead of the pace.

Doug Harned -- Bernstein -- Analyst

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 had been to do about 36 flights in 2023 and then have the Delta Class ready before 2024. Given the change in schedule that you've talked about and also some of the things in the new development center, it seems like you've got a lot to do here. How does that schedule change fall if at -- if at all?

Michael Colglazier -- CEO

So, couple of things I'd say. Well, there is clearly work to do as we grow our commercial business, as I kind of set out at the beginning of the call. That's where 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 additional resources that we brought in at the leadership level, now as 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 to very specific and purposeful programs that accumulate value over the long term. So, we're ready for the amount of work that is coming.

As to 2023, what we try to give is we expect Unity which will be coming on board for commercial service in the end of 2002. 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 2023. 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 2023, 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 2-week basis. So, that gives you some ability to do some calculating on flight rated 23.

We have not provided 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 are moving at pace. That's why you see us pulling down a new design center down in the southern LA Basin. That's why you'll see us ramping up our engineering resources. It's 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.

Doug Harned -- Bernstein -- Analyst

Okay, very good. Thank you.

Michael Colglazier -- CEO

Thank you, Doug.

Operator

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

Michael Colglazier -- CEO

Hi, Kristine. Kristine are you there? Maybe you are 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.

Operator

Certainly. The next question is from the line of -- oh, Kristine has joined the queue again, so Kristine, your line is now open.

Michael Colglazier -- CEO

Hi, Kristine.

Kristine Liwag -- Morgan Stanley -- Analyst

Hi, can you guys hear me? Hello?

Michael Colglazier -- CEO

Yes, Kristine.

Kristine Liwag -- Morgan Stanley -- Analyst

Oh, great, thanks. Sorry about that. Michael, with the planned fleet expansion, can you discuss the cash investment requirements for the Eve enhancement and the Unity enhancement, and the timeline of that cash cost?

Michael Colglazier -- CEO

So, I'll give just a note on what we're doing and maybe let Doug pick up any specifics behind it, but you're seeing our spend going to a larger amount in the fourth quarter, is the kind of guidance we're giving. And that makes sense, right. We're working on multiple ships as we go into this enhancement program. And that enhancement program is going to carry itself out kind of in the manufacturing facility all the way through 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 2022. And then as that's happening, we're of course also building up our design efforts, moving into tooling, moving into kind of early ways in which we are going to get the Delta and the mothership programs kind of 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 share. Doug?

Doug Ahrens -- CFO

Yeah, I think it's important to think about the phasing of this work. And we're really excited to be moving in this next chapter here with the expansion of our fleet with the new mothership in the Delta Class. Yeah, at the front end, you've got the investment in NRE, right, that's the initial part which is -- it's geared toward that first -- sort of back there in the fleet and you see that investment that we then get to leverage as we go forward because we now have invested that time and the design and then we make copies basically as we roll forward.

So, you've got sort of that front-end investment that pays dividends for years. But as Michael mentioned, you've got the NRE phase, engineering phase, the tooling gets going and you start to get into supply chain development and then leading into the parts fabrication and assembly. So, we'll phase in that traditional order, but the front end will be mostly focused on the NRE.

Kristine Liwag -- Morgan Stanley -- Analyst

I see. 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?

Michael Colglazier -- CEO

Sure. So we have about 85% of the parts of Inspire have been completed and the priority for us is to get to commercial service and scale it, that's our clear priority. And so, you see our focus first in two areas, getting through this enhancement program so we can bring Unity, Imagine with the mothership Eve, which will have greater capacity with it now, up and into service. So, that's one clear focus. The Delta Class ships will be, as Doug mentioned, while we're going to go through an NRE period here, then we're going to be making copies, right. That's a production model space that will be less expensive to build and to operate on a spacewide basis and at a much higher rate of service, so we'll get more throughput on it. That was a -- that along with the new mothership that will carry that Delta program of ships, 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 three legacy ships as well as the future fleet with Delta and the next mothership program.

Kristine Liwag -- Morgan Stanley -- Analyst

Great, thank you very much.

Michael Colglazier -- CEO

Thanks, Kristine.

Operator

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

Michael Colglazier -- CEO

Hi, Ron.

Ron Epstein -- Bank of America -- Analyst

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

Michael Colglazier -- CEO

Sure, I'll take that. Ron, so thanks for the question. So we're headed into an important phase of activity here, which is I think going to provide some great catalyst for our Company. We've got the enhancement program going on getting us ready for commercial service. We've also got Delta and [Indecipherable] mothership, work going on to expand our fleet. So, I do expect those to be a good catalyst for our Company as we move forward. Now keeping in mind we have $1 billion of cash and equivalents and so on, on the balance sheet, so that gives us a great runway for this work.

I know we're got spaceflight revenue starting to kick in already, there are deposits coming in and that will continue. And so then, that leaves us with opportunistically looking at the capital markets as needed. But again, we've got a good runway here before we need to do that, but we have options, right. There are 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.

Ron Epstein -- Bank of America -- Analyst

Got it. And then, maybe just follow-on to the supply chain, how do you think you're managing that? I mean as you guys want to ramp up production, we're going to be probably in a phase where all of civil aerospace will be ramping up, the big OEMs will be ramping, the business jet manufacturers will be ramping. How are you didn't manage that because typically -- I mean like any business, the big guys try and get first at the trough. So, how do you think about that and how do you manage that risk?

Michael Colglazier -- CEO

Well, 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 what we're doing versus somebody who just really needs to focus on giant volume of commercial air. So -- but there is a wide ecosystem, as you're well aware, in that category. Now in the management of that ecosystem, 2e 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 parts fabrication and things like that.

And -- but we think there is going to be a great response. We've seen great response in the supply chain for what we are looking to do and the volumes in which we are doing it there. But we just will 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, is there just going to be no capacity in the aerospace supply area, we do think the economy is coming back, we do see aerospace coming back, but we still see plenty of supply and partners who are interested in working for us.

Ron Epstein -- Bank of America -- Analyst

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?

Michael Colglazier -- CEO

So the key to that will be really the ramp of the Delta Class and that's what our focus is on. So when you start to see the volume of ships ramp there and the passenger quantities ramp, now that provides a real significant increase in our cash inflows, which -- that's kind of the point in time to think about.

Ron Epstein -- Bank of America -- Analyst

Got it. Okay, thank you guys.

Michael Colglazier -- CEO

Thanks, Ron.

Operator

Thank you, Mr. Epstein. The next question comes from the line of Scott Forbes with Jefferies. You may proceed.

Scott Forbes -- Jefferies -- Analyst

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

Michael Colglazier -- CEO

Let's see. First on delay, we have not seen, I would 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 from the beginning of the enhancement period to the end, so that one flight has. I'd say, a multi-month shift. The actual shift on our overall program is de minimis. So we -- Imagine we'll come on-board. The Delta Class isn't impacted by this change in what Unity 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.

Scott Forbes -- Jefferies -- Analyst

Just the change in demographics of customers, if there has been any?

Michael Colglazier -- CEO

We are still early. We've had 100 people come in from the Spacefarer 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, we'll have to go through and sort the demographics so that, that probably is more relevant, as we then go through this next 60,000 to kind of close out the first 1,000 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, we can do that too. Good question.

Scott Forbes -- Jefferies -- Analyst

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

Michael Colglazier -- CEO

This is, as I put kind of -- I think even on the front slide at the beginning here, this is a really important period for us and we talked about it, it's going from a prototyping space innovator, which is where this Company has been and really a powerful and audacious has been completed. And now, we're going to become a global scale commercial enterprise and that comes along with a bit of a bit of -- comes along with the requirement to be able to plan, predict, deliver in a more focused and more predictable fashion. You see the work we've done over the last 9 months has been building toward this. We've focused the Company down on commercial scale. So whereas -- as a prototyper, the Company is really organized around milestones. Let's get to the next flight, let's get to the next singular flight and everything kind of running on that milestone.

What you're seeing now is just a very good example. We're taking a multi-month period here to take these ships to where they can be bolstered to where they are able to fly without inspections on a flight-by-flight basis. And that moves our key income [Phonetic], right. Those are long-term decisions. All of our focus is trying to move the decision-making in the Company to create value for the long term. And then we've taken that focus added really strong leadership coming in, we have incredible engineering and manufacturing talent, we're now adding to that.

So, this is the period where we are moving to commercial because we feel very confident in the technical underpinnings of our spaceflight system. That was what that big first chapter was is getting that technical risk work through and put into a place where we're now ready to commercialize it. So, we feel very confident in how we're moving forward now at this phase and that's why you're seeing us take longer time periods to basically kind of lock it in and take 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 could really grow the business.

Scott Forbes -- Jefferies -- Analyst

Thank you.

Michael Colglazier -- CEO

Thanks, Scott.

Operator

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

Michael Ciarmoli -- Truist Securities -- Analyst

Hey, good evening guys. Thanks for taking the question. Maybe just to follow-up on Ron...

Michael Colglazier -- CEO

Hi, Michael.

Michael Ciarmoli -- Truist Securities -- Analyst

How are you? On Ron's line of questioning, on the supply chain and securing commercial partners, I think earlier you mentioned some NRE costs or are you guys bearing all of these in NRE costs? And just how are you may be negotiating contracts with some of the potential suppliers? I mean are you basically farming out build to print work or are you asking supply chain to potentially take on some risk?

Michael Colglazier -- CEO

So I think there is -- we have some options in that approach and it varies by component of the program. So with the mothership which again is kind of more things in common with classical aerospace or airframe technology, there is 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 and simply and all that. So, that's on that one.

On the spaceships, that is really a core technology that we are really pleased to have. We love the fact that we fly wing-based [Phonetic] planes and we will maintain the engineering and design of that ourselves. But then there are all sorts of opportunity around parts and sub-assemblies with that, and we will explore even to the options we have around kind of assembly as you carry that toward 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 kind of design and kind of completion of that with a lot in the middle that we'll use for supply chain.

And then...

Michael Ciarmoli -- Truist Securities -- Analyst

Got it.

Michael Colglazier -- CEO

...in the propulsion system we have, I'd say, probably in between those two things.

Michael Ciarmoli -- Truist Securities -- Analyst

Got it. Helpful. And then just last I think, Michael, you mentioned 400 flights per year. Even assuming the next class of ships, I mean how many -- I mean it seems like you need over a dozen ships to get there. I mean, do you have a time frame in mind of when we get to 400 flights per year?

Michael Colglazier -- CEO

Yeah, we've said -- generally I think to reach that level, we're going to need, I think the words I have been using is high single digits, low double-digits and that's obviously depending upon the churn of those ships. We still expect the Delta Class to be two pilots plus six seats in the cabin. 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 feeding into that line where we have multiple ships moving in parallel. And so...

Michael Ciarmoli -- Truist Securities -- Analyst

Got it.

Michael Colglazier -- CEO

...getting the -- that started, as we said, I think we'll be on par with the rapid aircraft development program and that gives kind of a grounding of what that looks like. But at that point, we will be moving multiple ships through -- in parallel some months apart as opposed to one ship at a time. And that will allow us to scale up reasonably quickly as that starts.

Michael Ciarmoli -- Truist Securities -- Analyst

Okay, perfect. Thanks a lot guys.

Michael Colglazier -- CEO

Thank you.

Operator

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

Michael Colglazier -- CEO

Hi. Austin.

Austin Moeller -- Canaccord -- Analyst

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

Michael Colglazier -- CEO

So, I think there's going to be some fun things to watch when we start doing our space flights with SpaceShip III VSS Imagine. If you look at Unity, right, as it moves through, it was the trailblazer ship for us. And each time we flew Unity and expanded the flight envelope, we would make some adjustments along the way. And as is typical in a flight test program like that, you end up not getting the structural components and 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 need it and then you end up adding some structural heft to areas that you didn't have originally.

And so, Unity kicks up a little weight over time as it happens with one agent [Phonetic]. That's Unity because that did our flight test. Imagine was able to take the learnings of that and put the strength in the places where we knew we needed it. So, I'd say, to your question around apogee, I think it'll be pretty interesting to watch as Imagine goes. And then the Delta Class is our taking all of that knowledge into play in the design phase of that, so it will only get better from there.

Austin Moeller -- Canaccord -- Analyst

Okay, that's very interesting. And just a second 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 propellants before engaging in reentry ascertain [Phonetic] an un-powered glide descent factor into the decision to continue to burn, just did not have unspent propellant in the vehicle as you try to land?

Michael Colglazier -- CEO

Yeah, so our Unity 22 flight flew on an acceptable, perfectly working path to space and back again safely, as you all saw. As I mentioned earlier up here, our pilots train, plan and prepare for of light a variety of flight paths. The flight conditions on that day sent it at a less vertical angle as it went up. And so, it went further toward the edge of the glide cone coming back. The way our avionic 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 they'd 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 astral [Phonetic] 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 aerospace in an area of protection that the 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'll be willing to fly that trajectory again if needed.

Austin Moeller -- Canaccord -- Analyst

Okay, great. Thank you, guys.

Seth Zaslow -- Vice President, Investor Relations

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

Operator

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

Pete Skibitski -- Alembic Global -- Analyst

Hey, good afternoon, everyone. Thanks. Do you hear me? Do you hear me, guys? Okay, great.

Michael Colglazier -- CEO

Yeah, we can hear you.

Pete Skibitski -- Alembic Global -- Analyst

Yeah, no, thanks everyone. Sorry about that. Let me pick up the handset. Quick question for Doug. I guess with the elevated SG&A spend in the quarter, are we going to head back to a more normalized, I don't know, $40 million a quarter type spend, as you head into 2022, or could the spend even decline next year given the focus on R&D and capex through the enhancement period?

Doug Ahrens -- CFO

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 liabilities around some flights, like the Omeyas [Phonetic] flight that we did and things like that, that don't reoccur. And so, some of the things you wouldn't see again. But there will 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 anomalies in there in the third quarter, but it's not going to dramatically change the profile.

Pete Skibitski -- Alembic Global -- Analyst

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

Doug Ahrens -- CFO

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 150K for those. But those have been over Q3 and then the first part of this quarter. So, what you're seeing on our, 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 to think about timing a little bit.

Pete Skibitski -- Alembic Global -- Analyst

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

Doug Ahrens -- CFO

Yeah, it'll keep going because we're going to keep selling these space flights. And we take in a 150K per flight.

Pete Skibitski -- Alembic Global -- Analyst

Okay, great. Thank you.

Operator

Thank you, Mr. Skibitski.

Seth Zaslow -- Vice President, Investor Relations

All right, well, at this point, we'd like to thank everyone for your interest in Virgin Galactic and for joining today's call. Operator, you can now conclude the call.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Seth Zaslow -- Vice President, Investor Relations

Michael Colglazier -- CEO

Doug Ahrens -- CFO

Oliver Chen -- Cowen -- Analyst

Doug Harned -- Bernstein -- Analyst

Kristine Liwag -- Morgan Stanley -- Analyst

Ron Epstein -- Bank of America -- Analyst

Scott Forbes -- Jefferies -- Analyst

Michael Ciarmoli -- Truist Securities -- Analyst

Austin Moeller -- Canaccord -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

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