GeneDx Holdings Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted. Results are unaudited.
Business context
GeneDx provides genomic diagnostic and information services, with its continuing business focused on pediatric and rare-disease testing, including whole-exome and whole-genome sequencing. The company discontinued Legacy Sema4 reproductive and women’s health and somatic oncology testing activities by the end of Q1 2023; its remaining Legacy Sema4 data business continues. Comparisons with 2022 are affected by the April 2022 GeneDx acquisition and the discontinued Sema4 testing businesses.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $53.3m | $83.2m | $145.1m | $173.3m |
| Gross profit (loss) | $25.3m | $13.5m | $59.3m | $(10.4)m |
| GAAP gross margin | 47% | 16% | 41% | (6)% |
| Net loss | $(42.3)m | $(77.6)m | $(150.0)m | $(240.2)m |
| Adjusted gross margin (non-GAAP) | 51% | 26% | 42% | 4% |
| Adjusted EBITDA (non-GAAP) | $(22.4)m | $(70.0)m | $(111.1)m | $(244.0)m |
- Q3 diagnostic test revenue was $52.0m, down 36% year over year. Management attributed the decline mainly to $36.1m less revenue from discontinued Sema4 testing, partly offset by GeneDx growth. GeneDx whole-exome and whole-genome sequencing revenue rose 42%, supported by 71% higher test volume; lower average exome reimbursement and declines in other tests partly offset growth.
- For the nine-month period, 165,339 tests were resulted, versus approximately 276,171 in the 2022 period. The filing attributes much of the reduction to discontinued Sema4 testing.
- Q3 and nine-month GAAP losses narrowed, while gross margins improved. Management cited the exit of lower-margin discontinued operations and a more favorable mix of higher-margin GeneDx sequencing tests. Cost reductions also contributed; the comparisons include restructuring, stock-compensation reversals and other unusual items.
- Operating cash outflow was $150.3m for the first nine months, compared with $254.5m in 2022. Investing cash outflow was $38.9m and financing cash inflow was $139.1m. Cash, cash equivalents and restricted cash totaled $88.3m at September 30; cash and cash equivalents were $87.4m, with $26.9m of marketable securities. Together, cash, cash equivalents and marketable securities were $114.3m.
- At September 30, long-term debt was $6.3m, including $0.2m current. Total current assets were $171.8m and current liabilities $68.4m. Stockholders’ equity was $254.3m.
Material changes, outlook and unusual items
- In January 2023, the company completed public and registered direct offerings with approximately $150m gross proceeds; net proceeds were $143.0m. Shares outstanding increased substantially during the period. A 1-for-33 reverse stock split took effect in May 2023.
- On October 27, 2023, after quarter-end, GeneDx borrowed an initial $50m under a senior secured Perceptive term facility, receiving approximately $49m net proceeds. An additional $25m tranche is available subject to conditions, including a revenue milestone. The loan bears interest at Term SOFR plus 7.5%, has an October 2028 maturity, and is secured by substantially all assets. The filing states management believed available liquidity, including the initial tranche, was sufficient for at least 12 months from the filing date.
- On October 30, 2023, the company announced further workforce reductions and cost-saving initiatives expected to yield approximately $40m in annual cost reductions. This is a post-quarter announcement, not a reported Q3 result.
- A $42m settlement with a third-party payor provides for installment payments through June 2026. The first $15m installment was paid in December 2022; a further $5m was due in December 2023. Recorded third-party-payor liabilities were $32.2m at September 30. Payor denials, recoupments and changes in reimbursement remain material business risks.
- The acquisition agreement provides for a second GeneDx revenue-based milestone payment of up to $37.5m if 2023 revenue reaches $219m, with partial payment possible from 90% of the target. Its recorded fair value was zero at September 30; the filing does not establish the final milestone outcome.
- The company recorded $10.4m of impairment loss for the first nine months, including $8.3m in Q3, related to assets and leases. Other notable items included a $2.8m DECD loan forgiveness gain, a $2.7m repayment of Employee Retention Credit funds, restructuring charges, and a prior-year gain from changes in warrant and earn-out liability fair values.
- No formal revenue or profitability guidance is provided. Management describes a strategic focus on pediatric and rare-disease diagnostics and expects cost efficiencies, but cautions that actual results may differ materially.
Risks, contingencies and controls
- Disclosure controls and procedures were assessed as ineffective at September 30 because previously identified material weaknesses in internal control over financial reporting had not been fully remediated. Management nevertheless stated the financial statements were fairly stated in all material respects.
- The filing identifies reimbursement and payor recoupment exposure, ongoing operating losses and cash use, dependence on adoption and reimbursement of tests, competition and execution risks, and reliance on third-party suppliers and service providers.
- The Perceptive facility imposes covenants, including a minimum $5m unrestricted-cash requirement and quarterly core-revenue thresholds. Covenant breaches could trigger default and acceleration; the loan is secured.
- A shareholder securities class action against the company and certain current and former officers was pending on a motion to dismiss. A separate Delaware stockholder action names former CMLS directors and others, not GeneDx; the company may have advancement and indemnification obligations. Management says it believes the claims are without merit.
Investor verification priorities
- Track GeneDx test volumes, sequencing mix, reimbursement rates and revenue growth separately from discontinued Sema4 operations.
- Assess whether reported margin improvement and announced annual savings are sustainable, including the effects of restructuring and other nonrecurring items.
- Reconcile cash burn and liquidity against the Perceptive loan’s interest, covenants, collateral and conditions for the additional tranche.
- Monitor settlement installments, the $32.2m payor-related liability and any new reimbursement disputes or reserve changes.
- Verify the 2023 acquisition milestone outcome and the status of internal-control remediation and pending litigation.