Some things I have learned about Nuvectra
So first of all, on Tuesday night Nuvectra announced they are entering Chapter 11 bankruptcy. My portfolio took a bath.
Second, most companies entering Chapter 11 bankruptcy see their stocks go to zero. That is a probable scenario here, at least from past experience you are betting against the odds, so do not take this post as anything other than information. As my blog is private, it will won’t be read by many, which is probably for the best. I actually find it a little embarrassing writing about this, but if I am going to track my follies, I felt I should be up to date.
I think that the company went into bankruptcy to get out of the contract they have with Integer for manufacturing Algovita devices. The Integer (formerly GreatBatch, also the company they spun off of) manufacturing contract has always seemed out of whack to me. Nuvectra should have higher gross margins than they do (they are only around 50%) and the reason they don’t is because of the manufacturing deal they have with Integer. Some comments today from the Medtechy board, which seems to be populated with employees and former employees of the company (as they refer to staff by first name and with a familiarity no one else would have), would back this up:
Margins have to be high for another company or investor to take on this market… Integer spun Nuvectra off as a standalone, saddled with a high cost of production and low probability of profitability…. Simply put, Integer’s contract doomed Nuvectra…Chapter 11 was the only way out of it… Selling the product wasn’t the problem…. Making a profit with the high cost of production was the issue…
The manufacturing agreement was part of the spin-off of Nuvectra from Integer. There are other comments on the medtechy board saying everyone knew this deal was taking too much margin away from Nuvectra.
There was a rumor that Chapter 11 was forced by a prospective acquirer. If that is true, I would bet any prospective acquirer wanted to get out of the manufacturing contract first.
Also, based on Linkedin posts I am fairly sure that Nuvectra laid off most or all of the sales staff yesterday. For example:
Finally, the bankruptcy report released showed only a little over $5 million of unsecured creditors and almost all of that are due to the two manufacturers, Integer/Greatbatch and Minnetronix.
I have very little idea of whether this means there will be leftovers for shareholders. We don’t know the current cash position. I can only guess about what the plan is.
It was a bit odd that in the bankruptcy announcement 8-K filing they said they were filing for a default on $10 million, which is less than the debt they had outstanding from Silicon Bank and Oxford (which is about $40 million) and not equal to any of the individual tranches of that debt.
The filing of the Bankruptcy Petition constituted an event of default under the Company’s Loan and Security Agreement, dated as of March 18, 2016, as amended, with Oxford Finance LLC and Silicon Valley Bank (the “Loan Agreement”), resulting in the acceleration of the Company’s obligations under the Loan Agreement. Thus, all outstanding debt under the Loan Agreement (among other obligations) is in default and accelerated, but subject to stay under the Bankruptcy Code. The outstanding principal amount of such debt is currently $10.0 million.
One interesting and maybe irrelevant point is that Michael Burry took a position in Nuvectra in the third quarter. It’s at least nice to know I have been wrong in good company. Burry was famous for his bankruptcy picks, so it would be interesting to know what he is doing now.
My guess (this is a total guess and could simply be dissonance), is that a complicated 3-way deal needs to happen between a potential acquirer, Integer and Nuvectra. These parties have to come to an arrangement that lets the acquirer out of the manufacturing contract and compensates Integer in some way for it. I would also guess that getting to an agreement was not going to be fast outside of bankruptcy. It may have even been clear it would drag on and Nuvectra would continue to hemorrhage cash. So the board said lets let the courts help us figure this out.
Supporting my view that the company has chosen bankruptcy to complete the 3-way deal is that they announced they are still exploring a sale in the press release, saying they “are exploring a range of options, including a sale of the Company as a whole, of the Algovita Spinal Cord Stimulation System (“Algovita”), of Virtis® or of specified assets.”
With that said, I held my shares and even added to my position in Nuvectra yesterday. I am fully aware that I could lose the rest of my investment in the stock and I have reconciled myself with a 100% loss if it occurs (fwiw most of that loss already has occurred). While it is quite possible I am displaying some form of dissonance, there are too many things that don’t add up to me here, and I am inclined to believe, at least on the evidence I have, that there is more than $4 million of value in this company once all the debts are paid.
Also, if you have nothing to comment on but snark or to tell me why you didn’t buy the stock and how smart you are because of it, please don’t bother. I won’t post it anyway.
Eh. You win some, you lose some. You might lose everything yet but I think your buying of additional shares makes sense here.
And not that you’re looking for any Canadian oil names, but if you were, I’d suggest HME–Hemisphere. It appears to be that rare beast, a sensibly run oil junior that is not too capital-constrained and has a management team willing and able to live not too dangerously. Very low GAAP PE (it has E! Amazing!) and even loading in capex looks like it may have excess cash soon to reduce debt and further increase production. Next few quarters will be telling, and while I can imagine a host of concerns–size, takeaway, leverage–makes this uninvestable for many, management seems to have figured out their best bet is to keep things as simple as possible. FWIW…