Q1 2023 ViewRay Inc Earnings Call

Participants

Jake Signoriello

Matt Harrison; Director of IR; ViewRay, Inc.

Paul Ziegler; Executive VP & Chief Commercial Officer; ViewRay, Inc.

Scott William Drake; President, CEO & Director; ViewRay, Inc.

Christopher Thomas Pasquale; Partner & Senior Research Analyst; Nephron Research LLC

Frederick Allen Wise; MD & Senior Equity Research Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

Jason M. Bednar; Director & Senior Research Analyst; Piper Sandler & Co., Research Division

Marie Yoko Thibault; MD and Medical Technology and Digital Health Analyst; BTIG, LLC, Research Division

Suraj Kalia; MD & Senior Analyst; Oppenheimer & Co. Inc., Research Division

Unidentified Analyst

Presentation

Operator

Good afternoon, and thank you for joining the ViewRay First Quarter Earnings Call. My name is Kate, and I will be the moderator for today's call.
(Operator Instructions)
I would now like to pass the call over to our host, Matt Harrison, Director of Investor Relations. You may proceed.

Matt Harrison

Thank you, Kate, and welcome to ViewRay's First Quarter Conference Call.
Joining me today are Scott Drake, our President and Chief Executive Officer; and Jake Signoriello, our Interim Chief Financial Officer.
Earlier today, ViewRay issued a press release for today's call, which is available on our website. Today's call is being broadcast and webcast live, and a replay will be available on our website for 14 days.
Before we begin, I would like to remind you that the discussion during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussion may include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure can be found in our appendix and exhibit of our current report on Form 8-K filed today with the SEC.
And with that, I will turn the call over to Scott Drake.

Scott William Drake

Good afternoon, everyone, and thank you for joining our call. Given that we preannounced our results last month, we are going to focus our remarks today around 3 areas: first, our strategic process; second, provide color around the steps we have taken to enact cost savings and cash preservation; and third, provide an update on our views on guidance.
Regarding our strategic process, we are working diligently with the Goldman team and potentially interested parties. Understandably, investors inquire about specifics relating to who and how many have engaged, expected timing and the like. As we said in April, we will not disclose specific developments, unless and until our Board approves a transaction or action.
We will communicate with investors when we have definitive news, as we seek the path that is best for shareholders. As I mentioned on prior calls, our distributors have elongated their payment cycle to preserve cash on their balance sheets, until they have received all payments from the end users. In addition, rising construction costs have delayed installation cycles for certain customers. The net effect has been delayed revenue and increased working capital demands for the company.
Our cost-saving efforts, to date, are designed to address these cash flow shortfalls, while preserving and prioritizing our R&D pipeline, clinical pipeline and customer service efforts. On the OpEx and cash preservation fronts, we have taken several important steps to reduce costs, while maintaining key research and clinical programs as well as preserving strong customer service levels.
We are enacting reductions of $19 million to $23 million, including travel, back office, commercial and other G&A expenses. We believe these actions are consistent with our strategic alternatives review process, but also maintain flexibility for the wide range of outcomes our process may yield. We want investors to know that we are clear-eyed about our need to preserve cash, yet mindful that different suitors and [parties] have different requirements and needs.
These cost savings actions taken to date allow us to maintain that flexibility, while reducing cash burn in 2023 and beyond. As part of our announced reductions, we had to make the difficult decision to ask Bill Burke to step down as CFO. Bill joined ViewRay because of the profound patient impact of MRIdian. In unison with our capable team, Bill has led extensive planning to prepare us for the potential pathways that lie ahead. I am grateful for his efforts and wish him well as he returns to retirement.
Jake Signoriello, who has served as our VP of Finance and Investor Relations has agreed to serve as CFO in an interim capacity, as we go forward.
Finally, given the range of outcomes related to our strategic review, we believe it's appropriate to suspend our guidance for the remainder of the year. While we have not had any customer orders canceled at the current time, and we continue to advance discussions with both prospective and current customers for additional systems. We are aware that our customers may be focused on the outcome of our strategic review and may delay installations until there is greater clarity.
As such, we feel it is prudent to cancel guidance until we have determined the next steps for the company. We look forward to sharing this with investors and customers at that time. Let me leave you with a couple of thoughts. Our innovation in clinical pipelines have never been stronger. Our customers are treating patients every day that have no other therapeutic options. MRIdian has treated over 30,000 patients, thousands of them with reported clinical outcomes, that according to key opinion leaders, are unmatched in the industry.
Patients and customers deserve and demand proven, highly effective, short course treatment, and this is exactly what we deliver. We currently have a sizable backlog and an increasing number of customers that desire incremental MRIdian systems. Our Board is focused on the importance of bringing clarity to the market, and we are acting with all due speed to optimize value for our investors and provide this leading product to a growing list of customers. This challenging macro environment is a reality, but one that will improve over time. What will change is the life-enhancing patient impact of our technology.
Thank you for joining us today. And with that, operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Our first question will be from the line of Rick Wise with Stifel.

Frederick Allen Wise

A couple of questions for me. Just along with your cash conservation initiatives, I wanted to be clear, in your mind, given your success in reducing G&A, et cetera, as you mentioned, what kind of cash burn do you think you're expecting? And what kind of timeline does that give you extending into next year to work out some of the strategic review and come to some conclusion there.
And maybe just as part of that, just on this financial part. Remind us, you didn't mention your SVB line of credit. I think, if I recall correctly, there was $45 million available which was tied to the company achieving certain milestones. Are you still able to draw against that credit agreement? Where does all that stand now? That would be great to get some color.

Scott William Drake

Yes. Thank you, Rick. So a couple of things I would share, and I'll invite Jake to come in over top, if I go astray here at all. Rick, we ended the quarter at somewhere between $85 million and $86 million at the end of Q1. We are being incredibly careful about our cash utilization.
As you mentioned, we have taken actions today to preserve expenses and elongate our cash runway. Our focus is on this strategic process that we're partnering with Goldman on. And most importantly to us, we have the capital to get through this process, whatever it may yield. Many different potential outcomes there from sale of company to capitalization of the company and everything in between. This is taking 100% of our time, and we have the runway to get through that.

Frederick Allen Wise

Okay. And the line of credit?

Scott William Drake

Yes. Rick, I'm going to stop there. We have suspended guidance, and we don't guide the cash. So I'm going to leave commentary there that we have the runway to get through this process which is critically important and what we're focused on at the moment.

Frederick Allen Wise

Okay. And just as a follow-up question, Scott. I know over the last several years, you've been emphatic about the quality of your backlog and removing orders that seemed uncertain and some -- I'm intrigued that you're emphasizing that no custom orders have been canceled, you're still working on new orders. And actually, I think, I'm right in saying, the backlog went up a little bit.
Can you give us more color on customer reactions? Is -- do you feel like your prior install rate, in rough terms, is still going to happen this year? What are customers saying to you? How concerned are you about sustaining the backlog at current levels and expanding it? I'll stop there.

Scott William Drake

Yes. No, thank you, Rick. I appreciate that. Yes, just to be clear, we have not lost any orders at this point out of our backlog. And Rick, to your point, we have had some success on the order and commercial front, pushing things forward. I do want to say, I think it's fair, right down in the middle here, to share that some customers are pausing to see how this plays out over the next 60, 90 days.
We had a customer -- conversation with a customer last week, I think, Rick, that is looking to buy their second system. They're somewhat conditioned, I think, might be the right word. They've seen ViewRay go through difficult times during our partnership over the past several years, and they seem to be moving forward with their process of ordering an incremental system.
Other customers, frankly, are taking a different approach and they are waiting to see what happens here, understandably, and we are in very close communication with those customers and happy to have dialogue on any front, whether it's clinical data, how is the process going, how is the company doing and the like. And I would say various customers are reacting in various ways. But I am pleased, cautiously so, that we're still able to move things forward even in the midst of a challenging time.

Operator

The next question will be from the line of Chris Pasquale with Nephron.

Christopher Thomas Pasquale

Scott, how do you think about the timeline for the headwinds you're facing to normalize? In other words, to the extent that there isn't a change of control event at the conclusion of your review, and it's something more akin to a recapitalization. How do you think about the time gap that you're attempting to bridge before you're back on solid ground again?

Scott William Drake

Yes. Chris, as I said answering the prior questions, this is 100% of our focus, literally. And we are pedaled down on every facet and form of our strategic review process. We are keenly aware that time is not our friend. Very difficult to project precise timing. But I can tell you, it is, again, 100% of our focus, and we're looking to resolve this situation quickly.

Christopher Thomas Pasquale

Okay. You characterize the cost-cutting measures is coming primarily from G&A. Given some of the comments about customers perhaps being hesitant to pull the trigger, given the uncertainty at the moment, is the sales organization still resourced to play offense and pursue new business? And is that the right level of resourcing to have for the sales piece of the business at the current moment?

Scott William Drake

Yes. Chris, I would share that there is some impact there. I think, I mentioned commercial in my prepared remarks, but we think it's rightsized for where we are today, organizationally. And we're -- we feel as though we've made prudent decisions there that are consistent with this strategic process that we're in the midst of, but also very cognizant of our need to manage expenses very carefully and preserve cash.

Operator

The next question will be from the line of Suraj Kalia with Oppenheimer.

Suraj Kalia

Scott, so let me go back to the basics and you and I have talked, offline, at least, a couple of times, you've been kind enough to try to answer at least our questions. Scott, let me just -- in this forum, just ask this question. Since the time of your pre-announcement and this public disclosure of this process, your stock has lost more than 70 -- almost 70% of its value.
So Scott, help us understand what was necessary to actually disclose this process going on because now you're -- presumably, it is on a weaker foundation that any potential suitor is going to look at. I haven't still connected the dots, Scott, as to what was the legal requirement for disclosing to everyone, hey, we are doing this process.

Scott William Drake

Yes. Suraj, we were confronted with a situation that changed pretty rapidly. We thought it was the right thing for investors to do the pre-announcement. And we debated whether it would be correct to share that we were engaged with Goldman or have investors ask questions about, hey, do you understand where you're at and you're doing nothing about it.
And we made the choice to be forthcoming and open with investors. We are very pleased with our partners at Goldman. And I would say, Suraj, we just chose the path of transparency, have the debate, understand your question, and that's where we landed.

Suraj Kalia

Scott, when do you expect this process to end? Because in your prepared remarks -- and I'm paraphrasing, you said at the end of the process, we will at least be capitalized. Forgive me if I got that wrong. I guess I'm trying to understand what do you envision as the duration of this process? How do you define being capitalized at the end of the process at a bare minimum?

Scott William Drake

Yes, of course. And thank you, Suraj. Look, I think most everybody on this call has probably been around strategic processes enough to know that they're very difficult to project from a timing perspective, things ebb and flow and M&A is a very binary game, and either -- something either happens or it does not.
So I don't think it's prudent for me to try to project a specific timeframe. But part of the overall work that we are doing is to consider capitalizing the company should that be the best path for shareholders. And we have the runway and it has 100% of our focus, and that's what we are doing.

Operator

The next question will be from the line of Marie Thibault with BTIG.

Marie Yoko Thibault

I wanted to ask a quick follow-up to Rick's question on cash runway. In April, you told us that the cash balance should get you to first quarter of next year. Are you able to confirm or reiterate that timeline, not exactly sure how the expense reduction that you mentioned here, impacts that cash runway.

Scott William Drake

Yes. Thank you, Marie. I would just kind of reiterate that we have the cash on hand to get through this process. That's what we're focused on. Given that we have taken the decision to suspend guidance. I don't think it's appropriate for us to put down new markers other than to say what we're focused on and we have the runway to get through it. So hopefully, you can appreciate that. And that's where I'd like to leave the commentary for now.

Marie Yoko Thibault

And then a quick clarification on the cost reduction that was mentioned $19 million to $23 million on an annual basis. Is it all coming out of OpEx? Or does that also include some efficiencies on working capital and things. I just want to sort of rightsize that number? And is it also a comparison to the 2022 OpEx number or prior numbers that you've given us? I just wanted to make sure what that $19 million to $23 million is coming off of.

Scott William Drake

Yes. Great question, Marie. And let me frame it up, and I'll turn it over to Jake as well. Again, I would just state, we believe the cost cuts are complementary to the process that we're in the midst of. We are preserving to the maximum possible degree. Our R&D pipeline, our clinical pipeline and customer service efforts. We are cutting more deeply in G&A, travel, some impact to commercial, as we mentioned just a little bit ago.
And we debated that look forward to '24 because we will be largely through the NRE or non-recurring engineering work of cost down, which would make the cut look about $10 million larger if we were to compare to '24, if that's part of your question. Jake, how about if you help Marie tie out the other bits of her question there?

Jake Signoriello

Sure, Scott. Marie, so the $19 million to $23 million does not include the impact for working capital. I believe that was the first part of your question. It is reduction in operating expenses.
And the way to think about the $19 million to $23 million is, that's a reduction of the run rate that we were entering into this year and will be reflected throughout the year. In the note we said that we'll realize about 65% of that savings in the current fiscal year and that the $19 million to $23 million is a run rate on a full-year basis exiting it.

Operator

The next question is from the line of Jason Bednar with Piper Sandler.

Jason M. Bednar

I wanted to start with maybe a follow-up on a prior question. I guess just with what's unfolded here over the past month since you preannounced and indicated -- hired a strategic adviser in Goldman. You said prospective orders -- earlier in this call, prospective orders are in some cases being paused.
Would you say that current customers that have systems in backlog? Are they also pausing their process on planning or site prep that would put backlog conversion at risk?
And then finally, can you speak to just maybe what the sentiment is like in the walls of ViewRay right now? I know not an easy conversation, but these topics are important here with the state of the business going forward.

Scott William Drake

Yes. Yes, happy to. Why don't I flip the order and invite Zig to chime in on the customer part. It's difficult, Jason, to be candid with you. We are very transparent as an organization. We care deeply about our mission and about our team. So it is a challenging environment. At the same time, I would tell you, our team believes so fervently on the patient impact that we're having on cancer patients every day.
They are inspired by the clinical data that our customers generate, and there's a whole bunch of positive things to look forward to in the midst of a difficult time of taking the cost-cutting actions that we have taken. From a customer perspective, I would just say broadly, our customers generally take years to make a decision to buy a MRIdian system. There are exceptions to that, it has gone faster. But generally speaking, our customers are looking at and doing diligence over a couple year period of time. So it is -- even though you might say, what do customers think at this moment, they don't take the decision likely and they have done very deep research and compared MRIdian to virtually every other technology out there.
And they're not -- in the instances that we have seen and that we're talking about here, it doesn't appear that they're very quickly turning tail on that decision, and we're in very close contact with our customer base.
Let me pause and see if Zig wants to come over top.

Paul Ziegler

Scott, I agree with that. Jason, again, we haven't lost any -- or had no cancellations within our backlog. We're certainly aware the reality is facing our customers right now, working closely with them on their installation timelines. In some instances, the timing of shipment is a bit difficult for us to forecast, and I think that's in line with us to spending guidance.

Jason M. Bednar

Okay. All right. That's helpful. Maybe just picking up on that point. With the complete pulling of guidance. Maybe I missed it and -- totally possible. But 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 William Drake

Yes. Jason, I totally get the spirit of your question. And I would just share that 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.

Jason M. Bednar

Okay. I'm going to squeeze one more in here. Just interested in asking one more, sorry. Just the -- I know the receivables here just -- since you were talking about those, there. They've been a challenge, revenue cycle management has been a challenge. Can you talk about the risk level around collections from customers and your distributors here going forward? Do you -- I guess the real question is, do you anticipate bad debts or write-offs here, rising going forward?

Scott William Drake

Yes. To that last question and Jake, I'll give you a shot here after I answer, if you want to add anything. Jason, our track record from a bad debt perspective, I think you and others probably know it well. I don't see a change in the current environment relative to that. We have always been able to gain payment from our customers. It doesn't always come as timely as we would like it to. And this is a pretty lumpy business, as you're well aware, at this current phase of our company. So I don't see any change on that front as we see things here today.

Jake Signoriello

Yes, Scott, I think you said that well. We've had minimal bad debt in past, and I would agree, we do believe that all of our receivables are collectible going forward.

Operator

The next question will be from the line of Neil Chatterji with B. Riley.

Unidentified Analyst

This is Brandon on for Neil. I understand the focus on the strategic alternatives with Goldman, but I just wanted to maybe ask some questions on the headwinds. And if any efforts are still being put towards trying to address those headwinds. Like for instance, I think you mentioned on financing, I think customers are having a trouble getting those financing, and I'm wondering if you're helping find alternative options for the financing, for instance, or if there's any other efforts being directed towards those customer-related headwinds?

Scott William Drake

Yes, Brandon, I would share that we have worked with our customers to identify third-party financing partners. We have looked to monetize our backlog. We have worked in any variety of ways to reduce the working capital needs of the business. I would say we have had very modest success on that front, candidly, over the past many months of efforts there. So we have put forward significant effort. It has not provided significant relief at this point.

Unidentified Analyst

Right, right. Yes, I understand it hasn't provided. I'm just still wondering if these efforts are still ongoing, even with the focus on strategic alternatives. And like, for instance, also can I ask about the construction costs, if there's any particular aspect with construction? Obviously, labor is going to be a significant factor there, but if there's any particular materials that have outsized effects or if there's any steps that you really can take to try to mitigate some of those factors?

Scott William Drake

Yes. That's -- it's a great question and a big part of the future of the company, and I know we've talked about this, both publicly and with you, Brandon, on our follow-up calls. The cost-down project that we are pursuing, it is one of the highest priority things that we are doing as a company. The intent of that project is to take about $1 million out of our cost of goods and concurrently make the speed and cost of installation of MRIdian, commensurate with other conventional high-end linacs out there.
That is one of the challenges that we face commercially, is the time and expense that it currently takes to put a MRIdian system in the ground, and we think we expand the opportunity meaningfully with the cost-down project. That project has been underway for some time, and we think that is a project that we will be ready to launch somewhere in the early 2026 timeframe is our best estimate.
It is a very big project. So timing is difficult to estimate, but that's how we're thinking about it. And I think it's also important for investors to know some of what we do is incredibly difficult from a software perspective. Jim Dempsey and his team are just a marvel from where I sit. This work that we're doing is component-based and it's time and engineering work. I don't mean to trivialize the difficulty in any way, but it is very straightforward engineering work.
And we think the impact that, that's going to have on our ability to compete in the market, adding all of the clinical data, all of the capability that we have and taking those barriers down, we think that changes things materially for the company.

Unidentified Analyst

Okay. Maybe just one more on the cash conservation side. I'm wondering if the levers that you pulled the $19 million to $23 million are all the levers that can be immediately implemented if there's any further levers that can be pulled in the coming quarters?

Scott William Drake

Yes. There certainly are other levers that can be pulled, Brandon, I would say here and forgive the redundancy. But the actions that we have taken, we believe, are complementary to the strategic process that we're in the midst of. We think it strikes the right balance between acknowledging the need for the company to be very focused on cash preservation and expense management and at the same time, recognize that various suitors and interested parties have different needs and different requirements.
So we are striking a balance there. We believe we have struck it. If facts and circumstances change, there are always other actions that we can take. We have done that scenario planning, and I feel as though we're poised to make those decisions, again, if facts and circumstances warrant.

Unidentified Analyst

That is all the questions that are in the queue. I will pass the call back over to Scott Drake for closing remarks.

Scott William Drake

Thank you, operator, and thanks, everybody, for joining us. We look forward to talking to you again on our Q2 call. Have a good evening.

Operator

That concludes today's call. Thank you for your participation. You may now disconnect your lines.