VRAY - ViewRay: Near-Term Bankruptcy Filing Might Be In The Cards - Sell

2023-07-07 03:23:29 ET

Summary

• Shares of MRI-guided radiation therapy system provider ViewRay have dropped nearly 80% following a severe revenue and cash flow warning three months ago.
• After experiencing negative free cash flow of $54.8 million in Q1, the company ended the quarter with $81.3 million in unrestricted cash and cash equivalents and $78.5 million in outstanding.
• In addition, the company decided to pull recently revised guidance and announced the surprise resignation of CFO William P. "Bill" Burke just four months after his appointment.
• VRAY's quarterly report on Form 10-Q revealed a previously undisclosed dispute with lender MidCap Financial which required ViewRay to enter into a standstill agreement.
• At this point, it's hard to envision a path for an outright acquisition of the ailing company outside of Chapter 11. In addition, given the company's substantial liquidity needs, a recovery for common shareholders looks unlikely. Investors should avoid ViewRay's common shares or consider selling existing positions.

Note:

I have covered ViewRay, Inc. ( VRAY ) previously, so investors should view this as an update to my earlier article on the company.

Shares of magnetic resonance imaging ("MRI") guided radiation therapy system provider ViewRay, Inc. or "ViewRay" are down by almost 80% since the company's severe revenue and cash flow warning three months ago.

In May, ViewRay reported Q1/2023 results largely in line with the April pre-announcement and introduced a cost reduction program with expected annual savings of $19 million to $23 million:

The program includes a reduction in discretionary spending and a workforce reduction of approximately 11%. We expect to incur restructuring charges of approximately $1.8 million associated with the workforce reduction. We are prepared to take further cost measures if necessary.

After experiencing negative free cash flow of $54.8 million in Q1, the company ended the quarter with $81.3 million in unrestricted cash and cash equivalents and $78.5 million in outstanding debt principal.

In addition, the company announced the surprise resignation of CFO William P. "Bill" Burke just four months after his appointment .

Adding insult to injury, on the conference call management perplexed analysts with its decision to withdraw revised guidance provided just four weeks ago:

Jason Bednar

(...) I'd just like to understand what's changed in just the last few weeks that caused us to go from revised guidance on revenue and EBITDA to no guidance whatsoever.

I mean, why not just pull the guidance entirely to begin with. It doesn't sound like anything today is an indication of further deterioration in revenue recognition process or the backlog. So I guess, if you could do it over, would you have pulled guidance, to begin with, rather than going through this like stage process of guiding down and then pulling it entirely?

Scott Drake

(...) things have changed pretty rapidly, right? If you look at the end of last year, we saw a signal of how our distributors' behavior was changing, how customarily prior to that, we would ship a system to them and they would send cash quickly, relieving the working capital requirements on the business. Then we saw these inflated construction costs that really happened very quickly early in this year, which is what led to our pre-announcement.

Monday morning quarterback, could have we done some things different. I'm certain of that. But we made a very measured decision at the time with the facts that we had in hand, and we have had -- I can't tell you how many conversations with customers in the intervening period and very thoughtfully, again, contemplated whether this was the right move here in light of the fact that we have not lost any orders. But we think with the facts and circumstances, it is appropriate today, and the prudent move to suspend guidance.

But the bad news doesn't stop here as the company's quarterly report on form 10-Q revealed a previously undisclosed dispute with lender MidCap Financial ( MFIC ) or "MidCap" which required ViewRay to enter into a standstill agreement (emphasis added by author):

On May 2 2023, we received notice from MidCap asserting failure by the Company to comply with certain obligations under the Company's Credit Agreement. While we believe such assertions are without merit, on May 10, 2023, the Company entered into a Standstill Agreement with MidCap as discussed further below. As a result of this notice, the subjective acceleration clause was triggered and the Company reclassified its debt to current as of March 31, 2023.

Effective May 10, 2023 the Company entered into a Standstill Agreement with MidCap and First-Citizens as successor to SVB, (collectively "Lender"), pursuant to which the Company agreed to: (i) a prepayment of the term loan in the principal amount of $17,500,000 and the revolving credit facility in a principal amount of $3,540,480 , respectively; and (ii) certain information rights regarding the status and prospects for completion by the Company of a strategic transaction. Lender agreed to refrain from exercising certain of their rights and remedies against the Company during a standstill period from May 10, 2023 through August 31, 2023, or longer if the Company has received sufficient additional funding following consummation of a strategic transaction, subject to additional covenants concerning: (i) achievement of strategic transaction milestones and (ii) maintenance of a minimum cash balance. The Company paid the $17,500,000 term loan amount and $3,540,480 revolving credit facility amount on May 10, 2023.

Assuming $35 million in cash used in operating activities during Q2 and considering the $21 million in debt repayments made in accordance with the terms of the standstill agreement, ViewRay's remaining unrestricted cash and cash equivalents would be approximately $25 million as of today, dangerously close to the $22 million minimum unrestricted cash threshold set forth in the standstill agreement.

Not surprisingly, management was required to include a going concern warning in the 10-Q:

If we are unable to obtain additional capital or engage in a strategic alternative, we will assess our capital resources and may be required to delay, pivot, reduce the scope of, or eliminate some or all of our operations, or downsize our organization, any of which may have a material adverse effect on our business, financial condition, results of operations, and ability to operate as a going concern.

Although we have been reviewing a number of potential alternatives to improve our working capital, such alternatives may not be achievable under favorable conditions, or at all, and therefore we may be unable to meet our obligations as they become due within twelve months after the date that our financial statements as of and for the period ended March 31, 2023 are issued, or at all, and these conditions and events in the aggregate raise substantial doubt regarding our ability to continue as a going concern within twelve months after the date that such financial statements are issued.

Given the liquidity estimate provided by me above, ViewRay might actually be just weeks away from a potential bankruptcy filing.

In this case, I would expect Goldman Sachs ( GS ), the company's financial advisor, to have lined up a stalking horse bid for a likely court-supervised auction pursuant to section 363 of the U.S. Bankruptcy Code.

With just $60 million in outstanding debt principal, one might come to the conclusion that some sort of recovery for common shareholders might be in the cards but given the business' massive liquidity needs, I would be surprised to see sufficient bids emerge.

Considering ViewRay's limited liquidity runway and apparent need for a substantial working capital infusion, I don't see a path for an outright acquisition of the company outside of chapter 11.

Even with shares trading at all-time lows, ViewRay's market capitalization still calculates to approximately $62 million, a rather high number for a company that appears to be at the verge of bankruptcy.

Bottom Line

With unrestricted cash balances likely to soon fall below the minimum liquidity covenant agreed to in the recent standstill agreement with creditors, ViewRay is running out of time and options.

Even assuming creditors abstain from declaring an event of default, ViewRay is likely to burn through its remaining cash in the current quarter.

At this point, it's hard to envision a path for an outright acquisition of the ailing company outside of chapter 11.

In addition, given the company's substantial liquidity needs, a recovery for common shareholders under chapter 11 looks unlikely.

Given the issues discussed above, investors should avoid ViewRay's common shares or consider selling existing positions.

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