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Virgin Galactic Holdings, Inc. (SPCE) CEO George Whitesides on Q4 2019 Results – Earnings Call Transcript

Virgin Galactic Holdings, Inc. (NYSE:SPCE) Q4 2019 Earnings Conference Call February 25, 2020 5:00 PM ET

Company Participants

Michelle Kley – Executive Vice President, General Counsel and Secretary

George Whitesides – Chief Executive Officer

Jon Campagna – Chief Financial Officer

Enrico Palermo – Chief Operating Officer

Conference Call Participants

Adam Jonas – Morgan Stanley

Robert Spingarn – Credit Suisse

Darryl Genovesi – Vertical Research Partners

Operator

Good afternoon. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic Fourth Quarter and Full-Year 2019 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. [Operator Instructions]

Hosting today’s conference call will be Michelle Kley, Executive Vice President, General Counsel and Secretary at Virgin Galactic. As a reminder, today’s call is being recorded.

I would now like to turn the conference over to Ms. Kley. Please go ahead.

Michelle Kley

Thank you, and good afternoon, everyone. Welcome to Virgin Galactic’s fourth quarter and full-year 2019 earnings conference call. With me today are George Whitesides, Chief Executive Officer; and Jon Campagna, Chief Financial Officer, who will provide prepared remarks. Also with me is Enrico Palermo, Chief Operating Officer who will be available along with George and Jon to answer questions during the Q&A portion of the call.

Earlier today, we issued a press release and made a slide presentation available on our Investor Relations website, which provides an overview of our business and financial highlights for the fourth quarter and full-year 2019.

During today’s call, we will make certain forward-looking statements within the meaning of federal securities laws. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication.

For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the earnings press release we issued today as well as the Risk Factors section of the Annual Report on Form 10-K that we will file with the Securities and Exchange Commission in addition to the Company’s subsequent filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements.

With that, I’d like to turn the call over to George Whitesides.

George Whitesides

Thank you, Michelle. Good afternoon, everyone. I am delighted to be hosting our first earnings call as a public company, now that we have completed our transaction with Social Capital Hedosophia and are listed on the New York Stock Exchange. Both of these events are major steps forward and our mission to open space for everyone and we continue to make great progress towards reaching that goal.

I would like to start by providing an overview of our business, what we have achieved so far and our strategy to drive growth going forward. I will then turn to our fourth quarter activity and also provide detail on our current areas of focus. Jon will then take you through the financial highlights.

Starting with our investment thesis on Slide 3. Virgin Galactic is the world’s first and only public company focused on Commercial Human Spaceflight. We believe the commercial exploration of space represents one of the most exciting and significant technology initiatives of our time, and our mission is to broaden access to space and enable routine consistent and affordable travel.

Significant market opportunity exists to provide high net worth individuals with a unique horizontal launch spaceflight experience at a fraction of the expense incurred by other private individuals to-date. There is already significant demand for high-end luxury experiences, particularly out-of-home experiences, which outpaced the broader segment growth by 7% for 2018. Our customer base is highly engaged and we have seen sustained interest in our product offering since our founding.

We have over 600 reservations and approximately $80 million in deposits, representing over $120 million of potential revenue. Registrations of interest continue to grow at a rapid pace and currently stand at 7,957 as of February 23, 2020, more than doubling since our last update in 2019.

We believe our business model is attractive and highly efficient, underpinned by the reusable, scalable design of our spaceships. The design features meaningfully reduce the operational cost of each spaceflight over time, delivering strong unit economics.

Importantly, we have a strong competitive position in the commercial spaceflight industry with more than $1 billion of investment behind the Company. We expect to benefit greatly from our first-mover advantage, which is reinforced by significant barriers to entry for potential new competitors supported by the substantial investment we have made in our technology and the progress we have achieved to-date. In addition, we are confident in the financial strength of our business.

I will talk later about our important announcement today of the One Small Step initiative, through which we will start to validate the huge interest we are seeing from people signing up to our future flyer list. The One Small Step program marks an important milestone to reactivate our sales engine. We’ve seen approximately 8,000 people register interest to fly since our December spaceflight, which is very exciting to see.

What One Small Step will provide us is a means to qualify new prospects and bring new people into the Galactic community, while enabling those prospects to be first in line to purchase a ticket once we have seats available.

As we move past commercial launch and increase our flight rate through bringing more spaceships online, our business will really gain momentum. 2021 is when we expect to see the ramp up in our revenue and cash flows. Over time, we expect to benefit from operating and build efficiencies to drive our profitability. We are in a strong cash position today as a result of the transaction with Social Capital Hedosophia and we have no debt on our balance sheet. Jon will go into more detail on the financials later.

Finally, we have a strong management and flight operations team in place with decades of experience in the Space and Aviation sectors. Let me now share some key milestones we have achieved over the past 15 months that demonstrate our progress and pace thus far.

Turning to Slide 5. On December 13, 2018, we successfully launched the first commercial space vehicle to put humans into space. This was a historic step and was the first crewed space launch from U.S. soil since 2011, the retirement of the Space Shuttle. Our pilots who flew this flight were subsequently awarded their official astronaut wings by the U.S. Secretary of Transportation in January.

Turning to Slide 6. We follow this up by having the first non-pilot crew member flown on a commercial space vehicle on February 22, 2019. Beth Moses, our Chief Astronaut Instructor completed her first successful spaceflight becoming the first non-pilot crew member to fly on a commercial space vehicle, fly at faster than Mach 3 and unstrap and float freely in space in a commercial space vehicle.

Beth and the two pilots for this flight were also awarded their official astronaut wings this time by Associate Administrator Wayne Monteith, who runs the FAAs space transportation division.

Turning to Slide 7. On May 10, 2019, we initiated the move to our operational headquarters at Spaceport America in Southern New Mexico. Spaceport America is the world’s first purpose-built commercial spaceport and home to our Virgin Galactic Gateway to Space terminal for which we have exclusive use. The spaceport offers unparalleled operational advantages.

Most importantly, it is within the restricted airspace of the White Sands Missile Range, meaning that we will not disturb surrounding commercial air traffic during our missions, enabling a higher ultimate operational tempo. It also offers great weather for operations year-round and beautiful natural surroundings.

We made this announcement at the New Mexico State Capitol with Governor, Lujan Grisham and it was a significant moment for the Company as it meant the relocation of dozens of employees from our manufacturing base in Mojave, California.

Turning to Slide 8. On August 15, 2019, we relocated our carrier aircraft called VMS Eve to New Mexico, at which point Spaceport America became operationally functional. Specifically, we activated our mission control, our telemetry and tracking systems and a wide range of additional systems and processes.

Turning to Slide 9. On October 8, 2019, we announced that we had entered into a strategic partnership with Boeing and received $20 million in strategic investment from Boeing’s HorizonX Ventures. We are excited about this partnership and its potential to support our mission to open access to the world and space in a safe and responsible way.

It also supports our focus on developing high-speed global mobility technology. I’ll provide a bit more detail on our high-speed efforts later in this presentation and we will provide information on specific projects as our partnership with Boeing ramps up.

Turning to Slide 10. On October 16, 2019, we announced our collaboration with Under Armour and unveiled the flight suits that our future astronauts will wear in flight. Under Armour deployed their latest garment and footwear technologies to provide our future astronauts with suits that will be comfortable, flexible, safe, and increase their enjoyment of the entire flight experience.

Turning to Slide 11. On October 25, 2019, we completed our merger with Social Capital Hedosophia, creating the world’s first and only publicly traded company focused on commercial spaceflight. This was a hugely exciting and transformational day for us all and we appreciate the support from many of you on the phone prior to and since our public listing.

Turning to Slide 12. In connection with completing our merger with Social Capital Hedosophia and becoming a publicly traded company, we installed a world-class Board of Directors. We believe each of our directors brings significant and complimentary expertise and experience to our team. We’ve listed out our Board’s experience on Slide 12 of today’s presentation.

You will see experience from the world’s leading aerospace mission assurance organization as well as some of the top airlines of the world and the leading investment firms in the world. This thoughtful collection of leaders will serve the company and its shareholders well as we establish commercial space operations while looking forward towards high-speed mobility.

Turning to Slide 13. On November 15, 2019, we kicked off our Astronaut Readiness Program, the process of preparing future astronaut customers for their flights to space at the Under Armour Global Headquarters in Baltimore, including undertaking a number of flight preparation activities. This enabled some of our earliest customers to be fitted for their flight suits, do their medicals, receive training on health and wellness advice as well as continue the paperwork process for their flights.

Turning to Slide 14. On January 8, 2020, we announced that the second spaceship in our fleet had completed a major build milestone and achieved Weight on Wheels where all major structural elements of the vehicle were assembled and the vehicle deployed its main landing gear and carried its own weight for the first time.

We achieved Weight on Wheels faster and more efficiently both in terms of process efficiencies and incompleteness of the build then our first spaceship, allowing us to reach the Weight on Wheels milestone approximately nine months faster than our first ship, largely through the use of modular build processes as well as experience curve benefits.

Turning to Slide 15. A few weeks ago, on February 13, 2020, we relocated our first spaceship VSS Unity from Mojave, California to Spaceport America in New Mexico. This captive carry flight provided a valuable opportunity for engineers to evaluate VSS Unity for over three hours at high altitude and cold temperatures, a longer period of time and is experienced during missions to space. This milestone was a significant accomplishment for us and I am really proud of our team.

Turning to Slide 16. Now I would like to provide some detail on the FAA approval process. We already have our commercial launch license, which allows Virgin Galactic to conduct spaceflight missions. We have already conducted all of our rocket-powered flights under this license.

What we are doing now is going through the final process to fly paying customers by providing the FAA with data that verifies and validates elements of our commercial license. We have already cleared 20 out of 29 of the verification and validation elements, 10 of which were completed in Q1 2020. We are working hard on the remaining V&V elements and we will provide updates as appropriate.

Turning to Slide 17. We continue to focus on our top priority of the year, which is to fly Richard Branson into space on a commercial flight. It will be a powerful signal to the world that the next phase of commercial human spaceflight is beginning and it will be a transformative moment for the company and its employees, customers and stakeholders.

We are pleased that we have now reached the next milestone in achieving that goal, the relocation of our Spaceship Unity to Spaceport America in New Mexico. This new milestone is significant because it sets us up to conduct test flights from our permanent base of operations, building experience and familiarity with all the various aspects of mission execution, ground facilities, staff support, airspace coordination, external interfaces and services, hosting and hospitality.

While we have come far and are excited by the tremendous progress to-date, we still have significant important work to accomplish before that can occur. And we will not forget that our most important objective is to conduct our spaceflight operations safely and successfully.

That work will have three main areas of focus: finishing the test flight program, testing and optimizing the end-to-end customer experience, readying the vehicles for long-term high rate service. I would like to discuss each of these in turn.

First, finishing the flight test program. For this area, we need to complete our glide flight program, which will enable us to check out the aspects of our new operating location, gain valuable piloting experience and gather additional performance data that maybe incorporated into our design.

We will then complete our powered flight program, which will enable us to evaluate the spaceships performance throughout the entire range of its flight profile and to further validate the spaceflight system. This phase will also continue the evaluation of the onboard spaceflight experience that we will be providing to our customers, optimizing our spacecraft interior as well as the training program that will be used to prepare our future astronauts for their journey.

With each flight performed in the flight test program, we gather additional data, evaluate flight performance, and perform additional work on the vehicle to improve the flight profile for performance and repeatability.

Next, testing the end-to-end customer experience. This goes beyond just the experience in the cabin of the spaceship during a spaceflight. It includes the training our customers will receive prior to their flight, both during their time at Spaceport America as well as earlier in their journey as they get prepared to take their flight.

It includes the hospitality experience customers will receive on the ground, at the Spaceport, at the hotel and throughout their entire stay. This is not just limited to the people flying to space, but extends to their invited family and friends as well. It also extends further back in time to cover the pre-arrival experience, preliminary training and preparation and the issuance of tickets.

Third, readying the vehicles for long-term high rate service. This work will have several key focal points. First, ensuring that the spaceship and carrier aircraft have the proper resiliency in their systems and structures and are well prepared for the ability to quickly be inspected and readied for their next flight.

Second, ensuring that the vehicles flight controls, performance and handling qualities are well suited to a variety of flight conditions as we look to a future of geographic expansion.

Third, continuing to make enhancements and upgrades to the spaceship and carrier aircraft that enhance safety, performance, lifetime and flight rate. One note, everyone should keep in mind that our manufacturing base remains in Mojave and due to its extensive and comprehensive capabilities, it is possible that we bring the spaceship back to Mojave one or two times before the start of regular commercial service.

We intend to provide periodic updates as we achieve the significant milestones necessary to fly Richard Branson into space and commence commercialization. While we would like to have some initial commercial revenue this year, the main focus for this year from a company and engineering perspective is working to get the vehicles and our operations prepared for long-term regular commercial service.

Turning to Slide 19. I want to provide a bit more context about the market we operate in. Over the past decade, several trends have converged to invigorate the commercial space industry, rapidly advancing technologies, decreasing costs, open innovation models with improved access to technology and greater availability of capital have driven significant growth in the commercial space market.

According to an October, 2018 article from the U.S. Chamber of Commerce, the commercial space market is expected to grow 6% per year to at least $1.5 trillion by 2040, reaching 5% of the U.S. gross domestic product. We expect the sector to be boosted further by the current administration’s recent launch of the U.S. Space Force. We believe we are at the forefront of these trends and are well positioned to capitalize on them by bringing human spaceflight to a broad global population that dreams of traveling to space.

Turning to Slide 20. Private commercial space travel has historically been limited to a select group of individuals who are able to reach space generally only at great personal expense and risk. Historically, the only option for private individuals to travel to space has been with orbital providers funded by national governments, charging tens of millions of dollars and requiring many months of training. What we are offering is significantly more affordable by two orders of magnitude and can allow a much greater portion of humanity to access space.

We view our offering as a luxury out-of-home experience. The growth of this segment of the luxury goods and experienced market has outpaced the broader segment by approximately 7% in 2018 and our research indicates this trend is expected to continue.

The demand for our product is supported by more than 600 reservations and approximately $80 million of deposits we have received and also by the approximately 8,000 registrations of interest in reservations we have received since our first spaceflight in December, 2018. We expect to see this grow with the launch of our One Small Step initiative announced today that I will talk about in more detail shortly.

Turning to Slide 21. Going into a bit more detail on our key demographic right now. Research shows that in 2018, there were approximately 1.8 million high net worth individuals globally with a net worth greater than $10 million. This group of individuals is expected to grow at a compound annual growth rate of approximately 6% through 2023.

We actually believe our target market to be greater than this group as we know that many of our current customers have a net worth that is below this figure. Further, our business model only contemplates that we serve a very small percentage of this group, so we expect to be very well protected against any macroeconomic headwinds.

Turning to Slide 22. We currently have one spaceship entering its final test phase before commercial launch. As I touched on earlier, our second spaceship reached a major milestone Weight on Wheels last month. We plan to expand the fleet to have five spaceships in service by the end of 2023, which should allow us to significantly increase our flight rate.

In addition to human space travel, we are also working with research and education customers to conduct research payload trips. A good example of this is the new contract we entered into with the Italian Air Force in the fourth quarter of 2019 for a human tended research flight during which Italian researchers will actively conduct experiments while they are in space.

Multiple government agencies and research institutions have expressed interest in working with us to develop research payloads to space and to conduct suborbital experiments. We have flown eight payloads for research-related missions and we expect research missions to form an important part of our launch manifest in the future.

Turning to Slide 23 and looking ahead. We believe that by leveraging our technology and operations to drive efficiencies and reduce costs, we will be able to lower ticket prices, allowing us to greatly expand our total addressable market to individuals with a lower net worth than we are currently modeling to have the capacity to meet our ticket prices.

We are also working hard to drive efficiencies in our existing capabilities in an effort to decrease the manufacturing cost per spaceship and we are already making good progress. For example, our second spaceship reached the Weight on Wheels milestone approximately nine months faster than our first ship, largely through the use of modular build processes as well as experience curve benefits.

Finally, we are pursuing growth opportunities abroad, including by potentially opening additional spaceports or entering into other arrangements with different international government agencies. We are already in discussions with Italy and the United Arab Emirates and have also had preliminary conversations with other countries.

Turning to Slide 24. While our primary focus is on commercializing human spaceflight, we believe that we can leverage our robust platform of advanced technologies, significant design, engineering and manufacturing experience and extensive past and future flight data to develop additional aerospace applications, most notably centered on high-speed global mobility.

High-speed global mobility technology is already a key focus for military and other government applications, particularly in the missile space. We see huge opportunities to apply high-speed global mobility to the commercial aviation market to drastically reduce travel time, such as the example we have here that shows how a hypersonic vehicle could reduce the L.A. to Tokyo flight time by nine hours. Even supersonic flight could have a dramatic impact on global markets, enabling new activities and connecting the world more closely.

Turning to Slide 25. Virgin Galactic is already well positioned today to develop this technology and we believe we are significantly ahead of our potential peers. Ours is the only team designing, building and flying a commercial crewed vehicle today that can travel at supersonic speeds, which we believe gives us an immense first-mover advantage.

We are further bolstered by our partnership with Boeing, which we believe will enable us to further develop our high-speed technology. Our team also benefits from our co-located vertically integrated design and manufacturing stack. In addition, our flight system, a winged system with a horizontal launch and landing architecture means that we are compatible with the existing airport infrastructures around the world capable of being sequenced into existing airport patterns and local air networks.

We have a focused and experienced project team dedicated to developing and applying high-speed global mobility technology and we are looking to build this team out further.

Finally, we can leverage the experience and insight from Virgin Group’s other airlines. In this respect, we are pleased to have the experience of former Virgin Atlantic CEO, Craig Krieger on our Board of Directors.

So looking ahead, our vision is to have a customer-driven, environmentally sustainable fleet of commercially viable vehicles with premium end-to-end service with rapid global reach saving a precious resource, time. We believe a fleet of winged, high-speed vehicles would easily integrate into existing aerospace and airport infrastructure for accelerated adoption and create value for operators who would be accessing significant new market opportunities.

As a foundation for this work, we are focused on creating IP and material science, analysis tools, propulsion, sustainable fuels, manufacturing, guidance and navigation, and other supporting technologies for high-speed applications with aero-derivative technologies developed that can provide direct benefit to all.

Turning to Slide 26. Our high-speed initiative is enabled in part by the Spaceship Company, our vertically integrated end-to-end aerospace manufacturer within Virgin Galactic, headquartered at the Mojave Air & Space Port in California. The spaceship companies extensive capabilities covered the full range of design, manufacturing, ground testing, flight testing, and post-delivery support.

The breadth and depth of our capabilities and the quality of our team that is designing, building and testing our spaceships is what you might expect of a major aerospace contractor. However, we do this with a passionate, lean and nimble team and a low-cost structure with a true entrepreneurial spirit.

Our capabilities are vertically integrated, allowing us to design, analyze, build, and test the vast majority of our entire spaceflight system, including all of the engineering disciplines necessary to analyze and design high-performance vehicles as well as the full stack of avionics development including software programming, hardware development and avionics hardware integration.

Ours is the only team in the world designing, building, and flying a crewed commercial winged supersonic vehicle today. In Mojave, California, we have an extensive campus with over 200,000 square feet of operational areas that supports our team of over 700 employees and contractors at the Spaceship Company. Our Mojave campus includes a test site for our innovative hybrid rocket motor as well as advanced testing laboratories for qualifying the structures and systems used on our vehicles.

Turning to Slide 27. VMS Eve serves as our mothership for SpaceShipTwo, but also has the capability to deliver other payloads. Leveraging our existing intellectual property and advanced development and manufacturing capabilities in Mojave, we are exploring the significant interest received to-date to leverage this platform for other markets and uses.

Turning to Slide 28. Other potential applications of our technology include high-speed test beds for defense applications, captive carry and launch services, research and development of future mothership configurations, urban air mobility, and high-altitude long-endurance vehicles.

Now, while our primary focus for the foreseeable future will be on commencing and managing our commercial human spaceflight operations, we expect to continue to explore and evaluate the application of our technologies into these, and other potential uses.

We are well positioned for opportunities like these stemming from our experience garnered and lessons learned from a challenging development program. We are already flying a crewed commercial winged vehicle at over Mach 3. We’ve assembled the best talent in the world and our team has already achieved a lot of firsts and we have built a company and importantly a culture that takes time to replicate. This allows us to deploy capital efficiently to new efforts.

Turning to Slide 29. Now I’d like to turn to the specific achievements we accomplished in the fourth quarter. I am pleased that we continue to build on our strong momentum and achieved number of key operational and business milestones. Many of these we disclosed at the time, so I won’t go into great detail on all of them, but to highlight just a few.

We achieved key operational milestones at Spaceport America through 2019, including exercising our new mission control, ground operational elements, and external agreements and communications that were required for flights of VMS Eve and other aircraft types.

We transitioned a total of 70 Virgin Galactic operations personnel from Mojave, California to New Mexico by the year-end, bringing our current total staff number in New Mexico to 145 following the interior build out of two floors at Spaceport America earlier in the year.

We achieved critical design and build milestones on our second spaceship during the quarter, and also achieved 50% completion of our third spaceships structure and systems. We activated key elements of our higher rate rocket motor production facility. We continued to clear FAA Verification and Validation provisos in the quarter.

We assembled our public company board and continued to build out our executive team, hiring Michelle Kley as our General Counsel. And while not in Q4, we also announced earlier this year that Enrico Palermo, President of TSC has become Chief Operating Officer of Virgin Galactic Holdings in a newly created role.

All of these achievements demonstrate the critical progress we continue to make as we prepare for commercial launch, and I would like to thank all of our employees for their commitment and dedication to our mission.

Of course, one thing not listed here is our transaction with Social Capital Hedosophia. So I’d now like to turn the call over to our Chief Financial Officer, Jon Campagna, who will provide some additional detail about the transaction as well as our fourth quarter and full-year financial results.

Jon Campagna

Thanks, George. Turning to Slide 30. On October 25, 2019, we completed our merger with Social Capital Hedosophia, creating the world’s first and only publicly traded company focused on commercial spaceflight. This transaction provided us with $452 million of cash on our balance sheet and put us in a strong cash position as we continue to progress towards commercial launch.

As a result of the transaction, we incurred one-time cost of $48 million, including underwriting, legal, accounting, and other fees. Following the close of the transaction, our ownership structure consisted of 59% ownership by rollover equity holders, 27% public ownership, 13% ownership by the SPAC sponsors, and 1% Boeing ownership via the $20 million investment.

We recently filed our amended S-1 registration statement for the purpose of registering the shares issuable upon exercise of approximately 31 million outstanding warrants. We are working closely with the SEC to make that registration statement effective as quickly as possible.

While we have not yet met requirements to mandatorily redeem the outstanding public warrants and have not made any decisions as to whether we would redeem the warrants if we meet such requirements, our current intention is to wait until the S-1 is effective before making such decision.

Turning to Slide 31. We are pleased with our fourth quarter results, which reflect our ongoing progress towards commercial launch and our transition during the quarter to become a public company. As George said earlier, we have received 7,957 registrations of interest in flight reservations as of February 23, 2020, up 124% from 3,557 as of September 30, 2019.

We ended the quarter with cash and cash equivalence of $480 million on our balance sheet as of December 31, 2019. Revenue for the quarter was $529,000, which we generated by providing engineering services.

Net loss for the quarter was $73 million, including applicable transaction costs from our merger with Social Capital Hedosophia, and on a non-GAAP basis, adjusted EBITDA totaled negative $55 million in the fourth quarter. Capital expenditures totaled $6 million in the fourth quarter, which comprised primarily of investments in Spaceport America and vehicle tooling costs.

Looking at the year overall, revenue for fiscal year 2019 was $4 million, which we generated by transporting scientific payloads and providing engineering services. Net loss for the fiscal year was $211 million, including applicable transaction costs from our merger with Social Capital Hedosophia, and on a non-GAAP basis, adjusted EBITDA totaled negative $187 million for 2019. Capital expenditures totaled $19 million for 2019, which was primarily attributable to investments in support of operational readiness at Spaceport America.

Turning to Slide 32. We use adjusted EBITDA as a key measure of our performance. You may refer to the appendix of our earnings press release issued today for a complete reconciliation of adjusted EBITDA to GAAP net loss. Adjusted EBITDA excludes stock-based compensation and non-recurring transaction costs.

To provide a bit more context on our expense increase for the fourth quarter 2019, this primarily relates to our efforts in connection with becoming a public company including audit, Sarbanes-Oxley 404, and internal audit costs as well as legal and Investor Relations services and insurance.

Our expenses for the quarter also include cost associated with the employee, vehicle and equipment relocations as well as cabin and interior work for VSS Unity. We will be able to capitalize our build costs for SpaceShipTwo’s and WhiteKnightTwo’s in the future upon achievement of technological feasibility, which we anticipate achieving later in 2020. As we get closer to commercial launch and begin to book ticketed revenue, we expect to report more detailed financial results.

I will now turn the call back over to George.

George Whitesides

Thanks, Jon. Turning to Slide 33. As you may have seen from the press release issued earlier today, we have announced a new initiative called One Small Step as we reactivate our sales engine and prepare to release our next tranche of seats for sale to the general public.

This is the latest planned step in a commercial strategy, which was initiated in December 2018 by a formal close to new sales, immediately following our historic first spaceflight. Our objective in the meantime has been to create optimal conditions and a strong sales pipeline in preparation for reopening the doors to new business at higher price points.

During 2019, we rolled out a regular cadence of milestone updates including our second spaceflight and the reveals of the spaceport interior and customer spacesuits emphasizing the significant progress we have been making towards commercial service. This program was supported by successful campaigns in traditional and social media. The ambition behind this program was to create a pool of prospects for spaceflight sales and as we went through 2019, we use the news flow to encourage those potentially interested in flying with us to register online.

We have been delighted with the response and are extremely pleased that flight reservation registrants now number approximately 8,000. Our direct sales funnel is now strong in each of the leads, prospects, and future astronaut stages. With the One Small Step initiative, we are now building additional structure that will establish a pool of qualified prospects, and in doing so, augment the direct channel sales funnel structure in readiness for a return to sales and in support of future growth.

Turning to Slide 34. Today’s announcement of our One Small Step initiative marks a significant milestone as we prepare to reopen ticket sales. Online registrants will pay a $1,000 refundable deposit to secure their place at the front of the line for future ticket reservations, when ticket sales reopen. We will then apply the $1,000 Small Step deposit to the price of a future spaceflight reservation.

The One Small Step program offers advantages to both our customers and to the company. Once the new seats are released, they will be offered first to One Small Step registrants. One Small Step registrants will also enjoy an enhanced relationship with Virgin Galactic in terms of communications and other dedicated initiatives on the customer journey to becoming astronauts.

For the company, this program augments the direct sales funnel and allows us to begin establishing relationships with future customers. It also provides us with a pool of qualified prospects for conversion via One Giant Leap to a confirmed spaceflight reservation and full Future Astronaut status.

Our direct sales qualified prospect pool will also be augmented by alternative sales channels, including Virgin Galactic global network of accredited space agents. The launch of One Small Step is an exciting development in response to the unprecedented reservation interest we continue to see for our spaceflights and also serves as a qualifying method for the approximately 8,000 registrations of interest we have received.

Before we turn to Q&A, I would like to take this opportunity to thank the fantastic team at Virgin Galactic and the Spaceship Company. Our achievements today reflect the daily hard work of each and every team member. We are entering the most exciting chapter of our story and we are all committed to continuing our success while opening up access to space.

We hope to have investors who are here for the long-term and who can appreciate the tremendous opportunities within the commercial space and high-speed transportation sectors and the need to progress at a pace that keeps safety at the forefront. We look forward to sharing more with you as our progress continues.

Question-and-Answer Session

Operator

At this time, we will begin our Q&A. [Operator Instructions] Your first question comes from the line of Adam Jonas from Morgan Stanley. Your line is open.

Adam Jonas

Thanks everybody. And George, question for you. Just kind of upfront, what do you think of the share price here?

George Whitesides

Hi, Adam, and hi, everybody. Nice to be with you. And I think we’re just going to keep executing and that’s really what we’re focused on, run our team full of space engineers, and what we’re best at is just keeping our heads down and focused on the engineering. So that’s basically what I think.

Adam Jonas

Okay. I appreciate that. I asked because you clearly established you got a lot of cash on the balance sheet and there’s some items that could kind of continue that moving up, whether it’s the One Small Step program and then potentially the items related to the S-1.

But as I saying that sometimes the best time to raise capital is when you don’t need it, you don’t need it. But given the enormity of the opportunity that you’ve established in this really excellent presentation, some investors might wonder, given volatile market conditions and an opportunity to really exercise that first-mover advantage, what is the logic for not raising more capital here? And I’m referring specifically beyond the warrants related to potential transaction. Can you tell us why you don’t need – don’t want to use a potential opportunity to raise even more?

George Whitesides

Adam, I mean I think the thing that is exciting about Galactic is that we have in front of us an initial market opportunity that we believe is strong and highly profitable. But what’s even more exciting in some ways is that the technology that we are developing as part of that first phase can lead into a future phase that can really transform the global transportation market. And that’s something that we have a team thinking about right now. That is some of the smartest folks that I’ve ever met. And they’re working really hard on this subject back in Mojave, California and in other places.

And so I think we’re going to take a staged approach to this. We’re really going to be thinking carefully about how we roll it out. I look forward to sharing more information with the market as we go forward in our thinking process and our design process. But I’ve been gratified by the excitement that I think people have felt about this opportunity to like, really transform how we move around the planet. And I think that we’re gratified by the share price, and as always, we’ll look at the entire situation and keep monitoring. But right now, we’re really focused on the engineering.

Operator

Your next question comes from the line of [Daryl Spingarn] from Credit Suisse. Your line is open.

Robert Spingarn

Hi, good afternoon. It’s Rob Spingarn.

George Whitesides

Hey, Rob.

Robert Spingarn

Hey, George, and Jon. I got a couple of questions for both of you.

George Whitesides

Yes.

Robert Spingarn

I wanted to start George with the One Small Step and I ask you how large that next tranche of seats that you’re planning to release would be and what kind of pricing you’re thinking about?

George Whitesides

Yes. So that’s a very important question. And I mean, I think, we will be sharing more information on both our premium pricing strategy and the number of seats that we will be releasing over the course of the year. Right now, we’re very focused on the rollout of the Small Step program.

And what I like to say is, really think of our approach to the market as a sort of a funnel, right? So if you have it up at the top, you have around 2 million, a little bit less than 2 million folks who have over $10 million of net worth. And then we’ve had this 8,000 – roughly 8,000 folks who’ve now expressed a desire to buy a ticket with us, which by the way, I mean I think, frankly that to me was the great surprise that we’ve been looking forward to sharing with folks today, because it was sort of ticking up by a few hundred and then recently it’s just a – it started going up by leaps and bounds. And that’s just a really exciting validation of what we’re trying to do and what we’re trying to build.

So if you sort of think, okay, well first level is this large group of people that can afford it, the next group is the number of people who sort of said that they want to buy it. And then if you go down to the bottom of the funnel, you have these 600 folks who’ve already put down either a full or substantial deposit representing $80 million of deposits and about $120 million, $130 million of future business.

What that Small Step allows us to do, which is what we’re announcing today and we’ll open tomorrow, is a chance for us to start to really identify the folks who are most eager to jump in on that next tranche of flights. And as we go forward, we may even see another tranche in there. But basically what we’re trying to do is to just help our customers and our prospects move through the sales funnel because it’s a tremendous amount of people, obviously we think and we’ve expressed to the street, in the past that we think we’re going to be a supply constraint business for a while just because even if we build these five ships, it’s not adding too much capacity in our market. And so we really want to make sure we’re focused on folks.

Now in terms of the premium pricing, this is – as many of the folks on the phone know, we do plan on going back into the market with a higher price point. We think that that’s justified by the extreme interest that we’re seeing as well as the great product that we’ll be offering and Beth Moses validated last year. So we’ll be talking more about that over the course of the year. And we know that there’s a lot of interest in that. Today, we’re really focused on Small Step getting that right, rolling it out and having a great introduction of that and connecting with these thousands of people who have said that they’re interested in buying a ticket.

Robert Spingarn

Okay. And if I’m still in the queue here, I wanted to ask you if we could go back to…

George Whitesides

Fairly, you are.

Robert Spingarn

Okay, good. I have a couple more.

George Whitesides

Okay.

Robert Spingarn

If we go back to the Slide 17, you talked about the three areas.

George Whitesides

Yes.

Robert Spingarn

And when you’re updating the test program, so the flight test and customer experience and readying the vehicles, what are the key gating items among those three that you need to get through to get to this first commercial flight? And are you still on schedule for mid-summer, it sounded before like the schedules influx a little bit as you get everything as perfect as you need it.

George Whitesides

Yes. Well, as you know, our number one priority is to fly safely, and not just Sir Richard, but anybody we fly, whether it’s the pilots that we fly or employees that we might fly in the late test flight program. That’s our number one priority. What we’re affirming today, as you know, that were our number one priority is to fly Richard Branson into space on a commercial flight in 2020. That’s what our entire organization is really – they know that’s the top priority.

I don’t mind breaking out a little bit more detail in terms of these three areas. I did talk about it a little bit during those remarks. In terms of the finishing the test flight program, you’re going to be needing to do some glide flights and some rocket-powered flights obviously in terms of the end-to-end customer experience. It’s not just the in-flight experience, it’s also the on the ground experience. It’s even the – before you get to spaceport experience, we really are working really hard on all of those phases. But obviously a lot of – there’s going to be a lot of focus on the cabin experience and the seats and the suits and the [indiscernible] between all of those things.

And then the third thing is readying the vehicles for long-term high rate service. I talked a little bit about that in my comments. So we really want to make that a big focus because we know ultimately the amount of revenue that we generate in 2020 is really not a thing that’s going to make this company a great success. What’s going to make it a great success is having a vehicle that we can turn around relatively rapidly and do that on a consistent basis, and then build a fleet of them, so that we can add more capacity into the market. So those are the things that we’re really going to be focused on as we go forward.

And as we’ve have to-date, we look forward to communicating progress on key milestones. We’re going to keep people updated as we go through that, both with the test program, but also the build program in Mojave and the Spaceport America operational readiness. I will say one thing, moving Unity our first spaceship down to New Mexico was a big deal. It was a big deal on a technical basis, getting that vehicle down there. We had a great flight down. We’re able to do some test points on the way down because it was a three hour.

We had three hours of cold soak on the way, but also a big deal for the team, particularly the team in New Mexico who have – now had, I think around 70 folks have relocated, joining a team already there building up. So it’s a big milestone to have both vehicles down in New Mexico. And what I’m really focused on next is, the next glide flight, where we’ll be able to see Spaceship Unity flying free above New Mexico sky.

Operator

Your next question comes from the line of Darryl Genovesi from Vertical Research. Your line is open.

Darryl Genovesi

Hi guys. Thanks for the time.

George Whitesides

Hey, Darryl.

Jon Campagna

Hey, Darryl.

Darryl Genovesi

Hey. George or if Steven is in the room, when I look at your chart where you show the progression of the addressable market from the $10 million plus to the 1% to 5%, I guess, I can’t help, but think of how you plan to sort of test elasticity around sort of initial price points and how you ultimately make the decision as to whether or not you want to proceed down that path?

Do you have any thoughts around how to get – you said you’re going to give us some more comments on pricing as we progress through the year, but just wondering how you’re sort of thinking about the forward progression specifically?

George Whitesides

Yes. I mean you’re probably aware that there’s a variety of ways both private and public that then you can use to test market pricing and elasticity. Obviously, we’re very focused on it. We have some of the best advisers in the world on this stuff. And so we’re using a few different methods.

I think what is clear is that there’s a huge desire to get in on early flights, however you define that. There is a desire to fly with a special people. The number of people who love to fly with Richard is large, but there are other people who will be flying with us. And then there’s – we even see a fair amount of folks who want to fly by themselves. They’re like a couples or charter flights, things like that.

And so there’s going to be a variety of ways that we layer in different types of experiences. This won’t be like sort of a single experience thing, where we maybe able to add premium pricing packages that I think will be really great for the customers, but also good for the company as well.

The other thing that is exciting is obviously, the pricing that we’re seeing in the research market is great. Even if pricing that is very good for us, it’s still hugely cheaper than trying to send something up to an orbital facility. And so I think we’re going to be able to make good progress on that as well. And of course, NASA is talking about human tended – funding human-tended flights on – they are considering that. They put out some kind of document on that. So I think there’s a lot of interesting opportunities for premium pricing.

Operator

At this time, we would like to thank everyone for joining Virgin Galactic’s fourth quarter and full-year 2019 earnings conference call. This concludes today’s conference call. You may now disconnect.

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