Companies like Virgin Galactic (SPCE 3.15%) are boldly taking on space travel. It is exciting stuff, as the world and Wall Street watch public companies launch rockets that were once largely only possible with the scale and financial heft of government backing.
The problem is that governments don't have to worry as much about balance sheets, since they can always raise additional tax revenue. Virgin Galactic doesn't have that luxury.
A big step
On May 25, 2023, Virgin Galactic proudly issued a news release with the headline: "VIRGIN GALACTIC COMPLETES SUCCESSFUL SPACEFLIGHT." It was in all caps for emphasis, and rightly so. This was a big and important achievement for the company, which is looking to commercialize space travel. Equally important, however, was the sentence, "The Company will now prepare for commercial spaceline operations beginning with the 'Galactic 01' mission planned for late June."
Image source: Getty Images.
Basically, the company isn't yet up and running with the whole commercial space travel thing. In fact, it noted that the most recent successful flight was helping it "...[evaluate] the end-to-end astronaut training and spaceflight experience." Breaking out of the Earth's atmosphere is a lot harder than catching a flight to Miami for the weekend.
Financially speaking this is a problem for Virgin Galactic. In the first quarter of 2023, the company generated a grand total of $392,000 worth of revenue against operating expenses of $163.8 million. The bottom of the company's earnings statement shows a loss of $0.57 per share, up from a loss of $0.36 in the prior year.
While it is true that Virgin Galactic has been building its business and appears to be on the cusp of getting to full operating status, it will need to generate a lot of revenue to get to break even. It could take years.
The end date
The problem with all of this is that Virgin Galactic has an Achilles' heel. And it will become a very big issue on Feb. 1, 2027. How can that date be so exact? Take a look at the company's balance sheet, which is where you'll see that it has a convertible note outstanding worth around $416 million. Dig a little deeper into the 10-Q and you'll find some additional details on the convertibles, including that they come due on the first day of February in, you guessed it, 2027.
Right now the notes aren't a huge problem, given that they carry a fairly low interest rate of 2.5%. Paying those interest costs isn't helping on the profitability front, but neither is it terribly onerous. What will likely be much harder is paying off the balance when it comes due.
That said, the note is a convertible, so it is possible that the noteholders will take stock instead of cash. It is also possible that the company's business improves enough that it can simply get a new loan, effectively rolling over the debt. That would probably mean paying higher interest rates, given the rise in rates over the past year or so. But if the company is generating materially more cash, that probably won't be too big a deal.
There's also the option of issuing additional shares to raise the cash, but with the stock down over 90% from its high-water mark in 2021, that's not the most shareholder-friendly option right now. It's also an impediment to the conversion option noted above. This, too, could change if the business starts to generate meaningful revenue.
Every story here, however, is keyed to one day: Feb. 1, 2027. If things don't materially improve by that date, Virgin Galactic and its shareholders could be in for trouble.
The top line and the balance sheet
Revenue and earnings get a disproportionate amount of attention on Wall Street. However, in the case of Virgin Galactic, investors should be paying just as much attention to the balance sheet. Basically, Virgin Galactic appears soundly on the path to commercial space flight, but it has to get that business sustainably profitable by 2027 or the whole company may come crashing down.
