Shares of genetic testing company Invitae (NVTA +0.00%) have surged more than 40% over the past month, a combination of improving investor sentiment toward growth stocks as well as the company's preliminary release of financial results for 2022. The company has seemingly made considerable progress in strategic plans to reduce losses and push the business toward profitability.
However, 2024 remains an important date for management that it may not be ready for yet. Investors need to know about this upcoming event and consider the potential ramifications before buying shares. Here is what you need to know.
OTC: NVTA
Key Data Points
Credit where credit is due
Earlier this past summer, Invitae's management announced plans to exit non-core businesses to push the company toward positive cash flow. A couple of quarters later -- so far, so good. You can see in the chart below that free-cash-flow losses have stabilized and begun falling.
The company released preliminary financials for 2022 last month, which indicated continued improvement. The company burned just under $80 million in the fourth quarter -- yet another step in the right direction. Management disclosed about $555 million in cash and equivalents at year end, which means it can fund the company through all of 2023 if cash burn maintains its Q4 pace.
NVTA Free Cash Flow (Quarterly) data by YCharts.
Since cash losses were approaching $200 million per quarter a year ago, this is a nice turnaround and something for which management deserves credit. While this new emphasis on efficiency could serve long-term investors well, the company's existing debt structure won't do it any favors with 2024 on the horizon.
What's going on in 2024?
Invitae has a $350 million convertible bond coming due next year. A convertible bond gives creditors flexibility; they can choose to convert the debt into common shares at a predetermined conversion rate or hold it to maturity and receive its face value.
This specific bond has a maturity date of Sept. 1, 2024. The bondholder can't redeem the bond until after March 1, 2024 unless some exceptions are met. It has a conversion rate of 33.6 shares per $1,000 of principal amount, or $29.74 per share. In other words, you can consider that price the bond holder's break-even point, and it would only make sense to redeem the bond for common shares if the share price was higher than $29.74.
Considering Invitae's share price today is under $3 per share, it's doubtful that the bondholder will redeem the note, barring hundreds of percentage gains in shares between now and then. The bondholders will likely let the bond mature next September.
The potential ramifications
This puts Invitae in a tight spot; even as cash losses improve, it will be a tall order to pay back its $350 million note with its current balance sheet. The company already has nearly $1.6 billion in long-term debt, and management probably won't want to touch much of the cash it's already sitting on. The most likely option will be to issue new shares in the public market to raise the money.
You can see below that Invitae's market capitalization has shrunk to just $658 million; an equity raise would need to increase the existing share count by more than 50% to raise the $350 million owed. The company has a history of raising equity, as the ever-increasing share count below demonstrates:
NVTA Shares Outstanding data by YCharts.
Invitae's improving financials deserve credit from investors. However, the upcoming convertible bond due next year is a tough pill to swallow. Unfortunately, shareholders may be forced to foot the bill for it. Investors interested in the stock should consider waiting to see how the company's cash burn progresses over the coming quarters and look for clarity on how management might resolve this pending problem.
