ARKK - Invitae Investors Face More Dilution

Summary

• Invitae announces debt transaction to refinance 2024 notes.
• Q4 results decent as ongoing restructuring continues.
• 2023 guidance could have been better.

After the bell on Tuesday, we received fourth quarter results from genetics company Invitae ( NVTA ). Shares of the company have lost more than 90% from their late 2020 peak as growth has failed to materialize and management was forced to enact a major restructuring plan. While Q4 results came in okay, guidance for this year wasn't that great and a new debt deal was announced that will result in more dilution for shareholders.

For the quarter, revenue came in at $122.45 million, which beat street estimates by about a million and a half dollars. Unfortunately, investors had to watch expectations come down dramatically over the past year, as the company was forced to halt its growth plans to avoid running out of cash. A year ago, the street was looking for $185 million in revenues for the final period of 2022. The reported number for Q4 was down a couple of percent over its prior year counterpart.

The company is working to get its cost base down, but it's still losing a lot of money. The operating loss in Q4, when including restructuring expenses and a one-time sale gain, came in at $132 million. That was less than half of the nearly $215 million lost in Q4 2021. The non-GAAP per share loss of $0.34 beat the street by almost 20 cents. For the year, the operating loss excluding special items was a bit over $710 million.

The large ongoing losses for Invitae have resulted in significant dilution over time , primarily through equity sales. In Q4 2022, the diluted share count was nearly 244 million, up more than 17 million shares in a year. That number was just over 75 million if we go back to the final quarter of 2018. Excluding one-time items, cash burn would have been $77.0 million in the period. While that's still not good, it was the best result of any quarter in 2022. While management continues to make progress on its massive restructuring, the team continues to expect its cash runway will last through the end of 2024.

Along with the Q4 results, the company issued a separate press release to detail a major debt transaction. While this will take care of a major debt maturity that was scheduled for next year, it does dilute investors a bit more and will result in a higher interest rate for the company. The key financial details of this deal are as follows:

The privately negotiated agreements with the Investors' holdings of the Company's outstanding 2.00% Convertible Senior Notes due 2024 (the "Old Notes") calls for the exchange of approximately $306 million aggregate principal amount of the Old Notes into approximately $275 million aggregate principal amount of new 4.50% Series A Convertible Senior Secured Notes due 2028 (the "New Notes"), along with approximately 14.3 million shares of the Company's common stock (the "Shares"). Invitae will also sell $30 million of New Notes to the Investors for cash.

The company's balance sheet remains in poor shape at the moment. Invitae finished last year with $557 million in cash, cash equivalents, and marketable securities. However, there was also nearly $1.6 billion in total debt on the books, almost all of which was convertible debt that features conversion prices well above where shares are trading now. A small portion of the debt pile was a term loan of around $130 million, which the company has paid back already in Q1. The good news is that the company doesn't have a lot of debt due until 2028 now, but there's not a lot of financial flexibility here.

The company has exited certain businesses as part of its restructuring plan. Invitae ended last year with annualized revenue of approximately $450 million for its remaining business. Management is expecting 2023 revenue to be over $500 million, which would represent low double digit growth compared to 2022 pro forma revenue. The street went into Tuesday expecting $518 million for 2023 total sales, so this forecast seems a little light at first glance.

Invitae shares closed Tuesday at $2.15. The stock has bounced a bit from its multi-year low of $1.67, but it was trading into the $50s a few years ago. The average price target on the street was $2.51 going into this report. However, I think that number may come down a little here to account for the slightly weak guidance along with the added shares from the debt deal. Cathie Wood and Ark Invest have been a major believer in this name, even with the stock crashing from its highs. The ARK Innovation ETF ( ARKK ) and ARK Genomic Revolution ETF ( ARKG ) combined to own about 11% of Invitae's outstanding shares at the end of last year, based on holdings data .

In the end, Invitae is making some progress, but the name is still a long way from being out of the woods. Revenue expectations have been cut dramatically as the company looks to avoid bankruptcy. While losses and cash burn have improved, they are still rather significant, and the name could need another capital infusion by the end of next year. At best, the name is a speculative hold right now, but I can see a case made for the short side as investors continue to face significant dilution over time.

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